-----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, OD9TAgewqtHYmf3kbgh+E0GTrgwE/QYJsjqYkUDvLipXBG62qVBGje9KS1qzaWZp XQft7Tcbg5udnggpcG2+Fg== 0000717316-99-000008.txt : 19990503 0000717316-99-000008.hdr.sgml : 19990503 ACCESSION NUMBER: 0000717316-99-000008 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990430 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: 99606552 BUSINESS ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 8003218321 MAIL ADDRESS: STREET 1: 1665 CHARLESTON RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST / DATE OF NAME CHANGE: 19960815 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BENHAM CALIFORNIA TAX FREE TRUST DATE OF NAME CHANGE: 19910218 N-30D 1 SEMIANNUAL REPORTS [front cover] FEBRUARY 28, 1999 SEMIANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] AMERICAN CENTURY - --------------------------------- CALIFORNIA TAX-FREE MONEY MARKET CALIFORNIA MUNICIPAL MONEY MARKET [american century logo(reg.sm)] American Century [inside front cover] AMERICAN CENTURY KEEPS WITH TRADITION - -------------------------------------------------------------------------------- FOLLOWING BENHAM'S FOOTSTEPS On March 1, we made it easier for you to do business with us. We simplified our organizational structure by eliminating the venerable Benham and Twentieth Century names, and putting all our funds under American Century. The name change will not affect your funds' investment management--the proven Benham investment philosophy, experienced portfolio management teams, and legacy of innovation and high-quality performance remain. CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment practices that have helped our fixed-income funds perform so well over the years. In 1998, two-thirds of American Century bond funds beat their peer group average, according to Lipper, Inc. CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will continue to offer a "pure play" on their sector of the market, as they did under Benham. CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that remains the same; we've retained our core team of experienced fixed-income portfolio managers. * Experience--The more than 35 fixed-income investment professionals at American Century have an average of nine years of investment management experience. * Bigger and better--Since American Century was formed, we've doubled the size of the original Benham management team in our Mountain View, California office. TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in fixed-income fund innovation. For example, we introduced a total of four new fixed-income funds in the last three years, including the first no-load inflation-adjusted bond fund. We continue to run our fixed-income operation from our offices in Mountain View, California, which is also home to our walk-in Investor Center. We look forward to continuing to meet your fixed-income investment needs in the Benham tradition. WHAT'S NEW . . . We now classify our funds in easy-to-remember categories based on objective and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME, GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE, MODERATE, and AGGRESSIVE. This new classification system makes it easier for investors to identify which funds are right for them. Turn to the inside back cover of this report to see a list of the funds classified by objective and risk. For definitions of the fund categories, see the Glossary. Past performance is no guarantee of future results. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) - ---------------------------------- CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) - ---------------------------------- 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 six-month period ended February 28, 1999, the financial markets experienced a dramatic shift in expectations. Six months ago, the economic outlook appeared grim--financial problems in Asia, Russia, and Latin America led to expectations of an impending U.S. economic slowdown. That sent the domestic stock market reeling and pushed U.S. bond yields to record lows. But expectations began to change in the fourth quarter of 1998. The Federal Reserve cut interest rates three times in six weeks, bolstering confidence in the economy. That, in turn, brought greater stability to U.S. financial markets and eventually produced a stock market rebound. By early 1999, reports of the strongest quarterly economic surge in two years caught investors by surprise. Bond yields rose reflexively amid higher inflation expectations, but productivity gains and competitive pressures kept inflation at its lowest level in a dozen years. The resiliency of California's economy was especially surprising. With many Asian economies--including six of the state's ten biggest export markets--at a standstill, there were concerns that the economic stagnation would spread to California. However, the state's economy hardly missed a beat and is now as healthy as it has been in a decade. This economic environment has been positive for California municipal bonds. All seven of American Century's California municipal funds, ranging from money market portfolios to long-term and high-yield bond funds, produced above-average returns during the past six months, as well as over longer time periods (according to Lipper Inc.). We've been investing in the California municipal market for more than 15 years, and the consistent performance of our California funds reflects that experience. At American Century, we've recently made some changes that we hope will make it easier for you to identify and select the funds that best meet your investment needs. We reorganized our family of 71 funds based on investment goals and risk level (see the front and back inside covers of this report for more details). In addition, California municipal fund shareholders were the first to receive our new simplified prospectus. This document provides the fund information you need in clear and straightforward language, and it includes helpful tips and definitions of investment terms. We want your experience with American Century to be rewarding, and we appreciate your continued confidence in us. 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 Frequently Asked Questions ............................................. 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 ................................................ 12 Management Q&A ......................................................... 13 Portfolio Composition by Security Type .................................................... 13 Portfolio Composition by Credit Rating .................................................... 14 Schedule of Investments ................................................ 15 FINANCIAL STATEMENTS Statements of Assets and Liabilities ......................................................... 19 Statements of Operations ............................................... 20 Statements of Changes in Net Assets ....................................................... 21 Notes to Financial Statements .......................................................... 22 Financial Highlights ................................................... 24 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 - -------------------------------------------------------------------------------- CALIFORNIA TAX-FREE MONEY MARKET * The portfolio outperformed the average California tax-free money market fund for the last six months, according to Lipper Inc. * California Tax-Free Money Market's longer-term returns are also consistently better than average. * A major reason for the portfolio's solid relative returns was our lower-than-average management fee. Other things being equal, lower expenses mean higher yields and returns for our shareholders. * We continue to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities. * Yields and returns on municipal money market funds declined over the six months as a result of lower short-term interest rates, as well as less supply and greater demand for tax-free money market securities. * Looking ahead, we may increase the average maturity in April and May, if seasonal supply and demand factors cause a temporary increase in yields. CALIFORNIA MUNICIPAL MONEY MARKET * California Municipal Money Market performed well, producing better returns than the average California tax-free money market fund for the last six months, according to Lipper Inc. * California Municipal Money Market's longer-term returns are also consistently better than average. * Key reasons for the portfolio's solid relative performance were our lower-than-average management fee and large percentage of higher-yielding AMT securities. * We continue to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities. * Yields and returns on municipal money market funds declined over the six months as a result of lower short-term interest rates, as well as less supply and greater demand for tax-free money market securities. * Looking ahead, we may increase the average maturity in April and May, if seasonal supply and demand factors cause a temporary increase in yields. [left margin] CALIFORNIA TAX-FREE MONEY MARKET (BCTXX) TOTAL RETURNS: AS OF 2/28/99 6 Months 1.29%* 1 Year 2.85% NET ASSETS: $452.1 million 7-DAY CURRENT YIELD: 2.31% INCEPTION DATE: 11/9/83 CALIFORNIA MUNICIPAL MONEY MARKET (BNCXX) TOTAL RETURNS: AS OF 2/28/99 6 Months 1.35%* 1 Year 2.95% NET ASSETS: $177.0 million 7-DAY CURRENT YIELD: 2.41% INCEPTION DATE: 12/31/90 * Not annualized. See Total Returns on pages 4 and 12. Investment terms are defined in the Glossary on page 27. 2 1-800-345-2021 Money Market Funds--Frequently Asked Questions - -------------------------------------------------------------------------------- CAN I MAKE DIRECT DEPOSITS INTO MY MONEY MARKET FUND ACCOUNT? Yes. You can arrange for direct deposit of your paycheck, Social Security check, Treasury Direct interest payment, military allotment, or payments from other government agencies. Give us a call, and we will send you the necessary information to set it up. WHAT IS THE HOLDING PERIOD ON NEW DEPOSITS INTO MY ACCOUNT? 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-business-day holding period for U.S. Treasury checks, money orders, and travelers' checks. IS THERE A LIMIT ON THE NUMBER OF CHECKS I CAN WRITE ON MY MONEY MARKET ACCOUNT? No. You can write as many checks as you like at no charge, as long as each check is for $100 or more. IS THERE AN EASY WAY TO MOVE MONEY FROM MY MONEY MARKET FUND INTO A STOCK OR BOND FUND? Yes. Moving money between funds is called an exchange, and there is no limit on the number of exchanges you can make out of a money market fund account. However, there is a limit of six exchanges per calendar year out of stock and bond fund accounts. Exchanges can be made by: * visiting our Web site at www.americancentury.com* * using our Automated Information Line (1-800-345-8765)* * calling an Investor Relations Representative at 1-800-345-2021* * writing us a letter HOW DO I DECIDE WHETHER A TAXABLE MONEY MARKET FUND OR A TAX-FREE MONEY MARKET FUND IS RIGHT FOR ME? The most important factor to consider is your tax bracket. Tax-free money market funds typically offer lower yields than taxable funds, but you pay no federal income taxes on the income from a tax-free fund. If you are in one of the higher federal income tax brackets, taxes will eat up a big part of your income from a taxable money market fund, so a tax-free investment may be better for you. If you're in a lower tax bracket, then you can usually earn more in a taxable fund even after taxes are deducted. We can help you figure it out. If you give us a call and tell us what tax bracket you're in, we can tell you whether you're likely to earn more after-tax income in a tax-free or a taxable money market fund. IF YOU HAVE ANY QUESTIONS ABOUT OUR MONEY MARKET FUNDS, CALL US TOLL FREE AT 1-800-345-2021 OR E-MAIL US AT OUR WEB SITE, WWW.AMERICANCENTURY.COM. * Before an investor can make an exchange via calling an Investor Relations Representative, using our Automated Information Line, or via our Web site, the shareholder must have first provided us with authorization, in writing, to do so. [right margin] A FASTER AND EASIER WAY TO DEPOSIT MUTUAL FUND DISTRIBUTIONS If you prefer to get your fund dividend or capital gains distributions sent to you instead of reinvesting them, there are a couple of ways that you can get access to this money faster than waiting for a check in the mail: * YOU CAN HAVE DISTRIBUTIONS DEPOSITED DIRECTLY INTO YOUR MONEY MARKET ACCOUNT. The money will be deposited the same day that the distributions are paid. * DISTRIBUTIONS CAN BE SENT ELECTRONICALLY TO YOUR BANK ACCOUNT. The money will be available in your bank account within three days. Contact our Investor Relations Representatives to set up either of these options. www.americancentury.com 3 California Tax-Free Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA TAX-FREE CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 1.29% 1.19% -- 1 YEAR 2.85% 2.62% 10 OUT OF 55 =================================================================================== AVERAGE ANNUAL RETURNS =================================================================================== 3 YEARS 3.02% 2.82% 11 OUT OF 50 5 YEARS 3.03% 2.90% 10 OUT OF 43 10 YEARS 3.36% 3.34% 8 OUT OF 20
The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 26-27 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 94 91 WEIGHTED AVERAGE MATURITY 26 DAYS 34 DAYS EXPENSE RATIO 0.50%* 0.50% * Annualized. YIELDS AS OF FEBRUARY 28, 1999 7-DAY CURRENT YIELD 2.31% 7-DAY EFFECTIVE YIELD 2.33% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 3.54% 37.42% TAX BRACKET 3.69% 41.95% TAX BRACKET 3.98% 45.22% TAX BRACKET 4.22% 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. The 7-day yield more closely reflects earnings of the fund than the total return. 4 1-800-345-2021 California Tax-Free Money Market--Q&A - -------------------------------------------------------------------------------- /photo of Todd Pardula/ An interview with Todd Pardula, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA TAX-FREE MONEY MARKET PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1999? The portfolio performed well, producing a better return than the average California tax-free money market fund, according to Lipper Inc. For the six months, the portfolio's total return was 1.29%, compared with the 1.19% average return of the 55 "California Tax-Exempt Money Market Funds" tracked by Lipper. California Tax-Free Money Market's longer-term returns are similarly strong (see the Total Returns table on the previous page for additional fund performance comparisons). WHY DID CALIFORNIA TAX-FREE MONEY MARKET OUTPERFORM ITS LIPPER GROUP? A major reason for the fund's strong relative performance was our lower-than-average management fee. Other things being equal, lower expenses mean higher yields and returns for our shareholders. Another reason we outperformed the Lipper group was our ability to purchase the most attractively priced variable-rate notes, or "floaters." We work hard to develop excellent relationships with dealers that offer the best rates on floaters. For the six-month period, floaters made up about 80% of the portfolio, so if we can buy floaters with 10 additional basis points of yield (a basis point equals 0.01%, so 10 basis points equals 0.10%), we can get an extra 8 basis points of performance for the fund. That's a significant edge when total returns are in the 2% range. CALIFORNIA TAX-FREE MONEY MARKET'S RELATIVE PERFORMANCE WAS STRONG, BUT ITS TOTAL RETURN SEEMS LOW. WHY? The fund's total return is related to the general level of short-term interest rates. In the second half of 1998, the Federal Reserve (the Fed) lowered rates by 75 basis points (0.75%) because a series of global financial crises threatened U.S. economic growth. When interest rates are low, municipalities are inclined to lock in those rates by issuing more long-term bonds than short-term notes. The supply of short-term securities was also reduced by the excellent health of the California economy, which has diminished municipal borrowing needs. While these factors reduced supply, demand for short-term tax-free securities surged. The imbalance between supply and demand sent yields on tax-free money market funds in February to their lowest levels since 1994. YOU REDUCED THE PORTFOLIO'S WEIGHTED AVERAGE MATURITY FROM 34 DAYS TO 26 DAYS. WHY? We allowed the average maturity to shorten because we didn't think yields on one-year municipal securities were attractive enough to justify adding more of them to the portfolio. Instead, we used new money and cash from [right margin] "The portfolio performed well, producing a better return than the average California tax-free money market fund, according to Lipper Inc." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF FEBRUARY 28, 1999 Variable-Rate Notes 79% Put Bonds 9% Municipal Notes 5% Bonds less than 1 Year 4% Commercial Paper 3% AS OF AUGUST 31, 1998 Variable-Rate Notes 78% Put Bonds 9% Municipal Notes 6% Bonds less than 1 Year 3% Commercial Paper 4% Security types are defined on page 27. www.americancentury.com 5 California Tax-Free Money Market--Q&A - -------------------------------------------------------------------------------- (Continued) maturing securities to buy floaters, which have relatively short maturities. We were content to hold floaters even in a declining interest rate environment because their yields were virtually the same as those on one-year securities. HOW DID YOU MANAGE THE FUND'S CREDIT QUALITY? We continued to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities. First-tier obligations have generally received the highest credit rating from at least two nationally recognized statistical rating organizations. For example, the SP1 rating category (which includes SP1+) is Standard & Poor's highest rating for short-term municipal debt. The SP2 rated securities shown in the chart at left are considered first tier because they received top ratings from Fitch and Moody's, two other ratings services. Those SP2 securities are backed by Union Bank of California, whose majority owner is Bank of Tokyo Mitsubishi. We also believe Union Bank of California is worthy of a higher S&P rating because its operations are governed by U.S. banking regulations and are primarily limited to California. These securities offer an additional 40-50 basis points in yield over securities rated SP1+ at what we believe is minimal additional credit risk. WHAT IS YOUR OUTLOOK FOR INTEREST RATES? The outlook for rates is uncertain. On the one hand, it seems unlikely the United States can remain an oasis of prosperity amid the global economic slowdown. That would argue for further Fed interest rate cuts. On the other hand, despite global turmoil, the U.S. economy has so far continued to grow rapidly. And although inflation is dormant now, oil prices have rebounded and the unemployment rate remains very low. Those factors would seem to argue for higher interest rates. AND WHAT'S YOUR OUTLOOK FOR THE FUND? We may increase the fund's average maturity in April and May, when seasonal supply and demand factors typically affect the tax-exempt money market. That's when many shareholders withdraw money from tax-free and municipal money market funds to pay their income taxes. Those redemptions mean less demand for and greater supply of tax-free money market securities. The net effect is often a temporary increase in yields on one-year securities. Despite those seasonal factors, yields and returns on tax-free money market funds are likely to remain modest as long as inflation is nearly non-existent and interest rates are historically low. [left margin] "We continued to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 SP1+ 79% 73% SP1 11% 16% SP2 10% 11% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. "Yields and returns on tax-free money market funds are likely to remain modest as long as inflation is nearly non-existent and interest rates are historically low." 6 1-800-345-2021 Cal. Tax-Free Money Market--Sch. of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITES $ 2,912,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-17, VRDN, 2.79%, 3/3/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 11/18/98-- 12/31/98, Cost $2,912,000)(1) $ 2,912,000 2,500,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-10, VRDN, 2.79%, 3/3/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 8/19/98, Cost $2,500,000)(1) 2,500,000 6,500,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-25, VRDN, 3.10%, 6/2/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 12/2/98, Cost $6,500,000)(1) 6,500,000 2,325,000 Agoura Hills Multifamily Housing Rev., (Oakridge Apartments), VRDN, 2.55%, 3/3/99 (LOC: Commerzbank A.G.) 2,325,000 2,000,000 Association of Bay Area Governments Financing Auth. Rev. COP, (Bentley School), VRDN, 2.70%, 3/3/99 (LOC: Banque Nationale de Paris S.A.) 2,000,000 10,800,000 Avalon Community Improvement Agency Tax Allocation Rev., (Community Improvement Area), VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 10,800,000 10,300,000 Azusa Multifamily Housing Rev., (Pacific Glen Apartments), VRDN, 2.60%, 3/4/99 (FNMA Collateral Agreement) 10,300,000 5,000,000 Bassett Unified School District COP, (Capital Improvement), VRDN, 3.20%, 3/4/99 (LOC: Union Bank of California, N.A.) 5,000,000 6,400,000 California Economic Development Financing Auth. Rev., Series 1998 C, VRDN, 3.50%, 3/1/99 (LOC: Bank of America N.T. & S.A.) 6,400,000 4,400,000 California Educational Facilities Auth. Rev., (Mount St. Marys College), VRDN, 2.40%, 3/3/99 (LOC: Allied Irish Banks, PLC) 4,400,000 3,500,000 California Educational Facilities Auth. Rev., Series 1998 A, (University Judaism), VRDN, 2.70%, 3/4/99 (LOC: Allied Irish Banks, PLC) 3,500,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,700,000 California Health Facilities Auth. Rev., (Episcopal Home), VRDN, 2.70%, 3/1/99 (LOC: Union Bank of California, N.A.) $ 4,700,000 910,000 California Health Facilities Financing Auth. Rev., (Little Co. Mary Health Service), 3.50%, 10/1/99 (AMBAC) 911,550 490,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Pooled Project), VRDN, 2.10%, 3/3/99 (LOC: Rabobank Nederland) 490,000 3,500,000 California Health Facilities Financing Auth. Rev., Series 1995 C, (Catholic Healthcare West), VRDN, 2.60%, 3/3/99 (MBIA) (SBBPA: Rabobank Nederland) 3,500,000 2,500,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Catholic Healthcare West), 4.50%, 7/1/99 2,510,688 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 10,500,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), 3.65%, 5/15/99 (Guaranteed: Chevron Corp.) 10,500,000 1,000,000 California Pollution Control Financing Auth. Rev., (Chevron USA Inc.), 3.10%, 11/15/99 (Guaranteed: Chevron Corp.) 1,000,000 3,000,000 California Pollution Control Financing Auth. Rev., Series 1986 B, (Southern California Edison), VRDN, 3.55%, 3/1/99 (Guaranteed: Southern California Edison Company) 3,000,000 1,700,000 California Pollution Control Financing Auth. Rev., Series 1986 C, (Southern California Edison), VRDN, 3.55%, 3/1/99 (Guaranteed: Southern California Edison Company) 1,700,000 5,000,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, VRDN, 3.10%, 3/15/99 (LOC: National Westminster Bank PLC) 5,000,000 4,000,000 California Rev. Anticipation Notes, 4.00%, 6/30/99 4,010,873 See Notes to Financial Statements www.americancentury.com 7 Cal. Tax-Free Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $10,000,000 California School Cash Reserve Program Auth. Rev., Series 1998 A, 4.50%, 7/2/99 (GIC: Trinity Funding Corporation) $ 10,024,667 5,000,000 California Statewide Communities Apartment Development Auth. Rev., (Whispering Winds Apartments), VRDN, 2.70%, 3/3/99 (LOC: Continental Casualty Co.) 5,000,000 1,905,000 California Statewide Communities Development Auth. COP, 4.25%, 4/1/99 (MBIA) 1,905,621 22,000,000 California Statewide Community Development Auth. Rev., Floating Rate Trust Receipts, 2.95%, 3/3/99 (FSA) (SBBPA: Bank of New York) (Acquired 7/2/98--8/12/98, Cost $22,000,000)(1)(2) 22,000,000 7,700,000 California Statewide COP, (Covenant Retirement Community), VRDN, 2.75%, 3/4/99 (LOC: LaSalle National Bank) 7,700,000 2,500,000 Covina Redevelopment Agency Multifamily Housing Rev., (Shadowhills Apartments), VRDN, 2.60%, 3/4/99 (FNMA Collateral Agreement) 2,500,000 6,500,000 East Bay Municipal Utility District Commercial Paper, 3.00%, 3/9/99 (SBBPA: Westdeutsche Landesbank Girozentrale) 6,500,000 2,990,000 Fillmore Public Financing Auth. Tax Allocation, Series 1998 B, (Central City Redevelopment), VRDN, 2.45%, 3/4/99 (LOC: California State Teachers' Retirement System) 2,990,000 990,000 Fontana Special Tax, (Community Facilities District No. 2-A), 4.00%, 9/1/99 (MBIA) 991,941 2,000,000 Fremont COP, (Family Resource Center Financing), VRDN, 2.45%, 3/4/99 (LOC: KBC Bank N.V.) 2,000,000 1,000,000 Fremont Unified High School District Santa Clara County GO, Series 1998 A, 7.00%, 9/1/99 (FGIC) 1,019,661 2,000,000 Glendale Industrial Development Auth. Rev., (Reliance Development), VRDN, 2.95%, 3/15/99 (LOC: Lloyds Bank PLC) 2,000,000 1,215,000 Hanford COP, (Public IMPC Corp.), VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 1,215,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 6,155,000 Hanford Sewer Rev., Series 1996 A, VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) $ 6,155,000 3,500,000 Hemet Multifamily Housing Auth. Rev., (Sunwest Resort), VRDN, 2.60%, 3/4/99 (LOC: FHLB) 3,500,000 4,200,000 Hemet Multifamily Housing Auth. Rev., (West Acacia), VRDN, 2.55%, 3/4/99 (LOC: FHLB) 4,200,000 2,200,000 Irvine Improvement Bond Act 1915, (Assessment District No. 94-15), VRDN, 3.10%, 3/1/99 (LOC: Canadian Imperial Bank of Commerce) 2,200,000 4,200,000 Irvine Improvement Bond Act 1915, (Assessment District No. 97-17), VRDN, 3.10%, 3/1/99 (LOC: Bayerische Hypo-Und Vereinsbank A.G.) 4,200,000 1,000,000 Irvine Ranch Water District GO, Series 1988 A, (Improvement District No. 284), VRDN, 3.00%, 3/3/99 (LOC: Landesbank Hessen-Thuringen Girozentrale) 1,000,000 1,700,000 Irvine Ranch Water District Rev., (Consolidated Bonds), VRDN, 3.10%, 3/3/99 (LOC: Landesbank Hessen-Thuringen Girozentrale) 1,700,000 3,400,000 Irvine Ranch Water District Rev., Series 1993 A, VRDN, 3.00%, 3/3/99 (LOC: Bank of America N.T. & S.A.) 3,400,000 18,900,000 Kern County Superintendent of Schools COP, Series 1996 A, VRDN, 2.75%, 3/4/99 (LOC: Anchor National Life Insurance Company) 18,900,000 4,250,000 Lancaster Redevelopment Agency Rev., Series 1996 C, (20th Street Apartments), VRDN, 2.55%, 3/4/99 (LOC: FHLB) 4,250,000 2,100,000 Lemore COP, (Golf Course), VRDN, 3.30%, 3/4/99 (LOC: Union Bank of California, N.A.) 2,100,000 3,000,000 Loma Linda Water Rev., VRDN, 2.85%, 3/3/99 (LOC: Union Bank of California, N.A.) 3,000,000 4,680,000 Los Angeles Community Redevelopment Agency Rev., VRDN, 2.60%, 3/4/99 (LOC: Barclays Bank PLC) 4,680,000 2,000,000 Los Angeles Convention and Exhibition Center Auth. COP, Series 1989 A, 7.00%, 8/15/99, Prerefunded at 101.5% of Par(3) 2,066,036 See Notes to Financial Statements 8 1-800-345-2021 Cal. Tax-Free Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Los Angeles COP, (Municipal Improvement Corp., Project H), 3.00%, 11/1/99 (AMBAC) $ 1,000,000 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., (Proposition A-2nd Tier), 5.50%, 7/1/99 (MBIA) 1,008,291 9,600,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1993 A, (Proposition C, Second Series), VRDN, 2.60%, 3/4/99 (MBIA) (SBBPA: Credit Locale de France) 9,600,000 4,500,000 Los Angeles County Public Works Financing Auth. Lease Rev., Floating Rate Trust Receipts, Series 1998 A47, 3.35%, 3/1/99 (AMBAC) (Acquired 9/23/98--1/26/99, Cost $4,500,000)(1)(2) 4,500,000 23,100,000 Los Angeles Multifamily Housing Rev., Series 1985 K, VRDN, 2.40%, 3/2/99 (LOC: FHLB) 23,100,000 3,000,000 Metropolitan Water District Southern California Waterworks Rev., Series 1998 C, VRDN, 2.40%, 3/4/99 (LOC: Bank of America N.T. & S.A.) 3,000,000 1,835,000 Modesto Irrigation District COP, Series 1999 A, 4.25%, 7/1/99 (AMBAC) 1,842,599 2,000,000 Modesto Multifamily Housing Rev., Series 1996 A, (Shadowbrook), VRDN, 2.80%, 3/4/99 (LOC: Bank of America N.T. & S.A.) 2,000,000 2,025,000 Modesto Special Tax, (Community Facilities District No. 98-1, VRDN, 2.70%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 2,025,000 1,880,000 Moreno Valley COP, (City Hall Refinancing), VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 1,880,000 1,500,000 Oakland Economic Development Rev., Series 1997 A, (Allen Temple Family Life), VRDN, 2.60%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 1,500,000 14,000,000 Oceanside Multifamily Housing Rev., (Lakeridge Apartments), VRDN, 3.20%, 3/3/99 (LOC: Continental Casualty Co.) 14,000,000 8,380,000 Orange County Apartment Development Rev., Series 1992 B, (Aliso Creek), VRDN, 3.00%, 3/4/99 (LOC: WFC Holdings Corp.) 8,380,000 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000,000 Rancho Water District Financing Auth. Rev., Series 1998 A, VRDN, 2.60%, 3/3/99 (FGIC) (SBBPA: General Electric Capital Corp.) $ 5,000,000 9,445,000 Redlands COP, (Sewer Treatment Facilities), VRDN, 2.55%, 3/3/99 (FGIC) (SBBPA: General Electric Capital Corp.) 9,445,000 8,720,000 Redlands COP, (Water Treatment Facilities), VRDN, 2.55%, 3/3/99 (FGIC) (SBBPA: General Electric Capital Corp.) 8,720,000 2,500,000 Redwood City COP, (City Hall), VRDN, 2.70%, 3/4/99 (LOC: KBC Bank N.V.) 2,500,000 5,065,000 Rialto Public Financing Auth. Tax Allocation, Series 1998 A, (Agua Mansa & Industrial), VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 5,065,000 3,580,000 Riverside County Asset Leasing Corp. Leasehold Rev., Series 1989 A, (Riverside County Hospital), 7.40%, 6/1/99, Prerefunded at 102% of Par(3) 3,690,238 3,420,000 Riverside County Multifamily Housing Rev., (Ambergate Apartments), VRDN, 2.55%, 3/4/99 (LOC: Union Bank of California, N.A.) 3,420,000 4,500,000 Riverside County Teeter Notes Commercial Paper, 3.10%, 4/7/99 (LOC: Westdeutsche Landesbank Girozentrale) 4,500,000 1,715,000 Rohnert Park Multifamily Housing Rev., (Crossbrook Apartments), VRDN, 2.60%, 3/3/99 (FNMA Collateral Agreement) 1,715,000 5,920,000 Sacramento County Multifamily Housing Rev., (River Oaks), VRDN, 2.70%, 3/4/99 (LOC: Chase Manhattan Bank) 5,920,000 3,400,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 2.65%, 3/3/99 (LOC: California State Teachers' Retirement System) 3,400,000 2,000,000 San Bernardino County COP, (Medical Center Financing), VRDN, 2.50%, 3/3/99 (MBIA) (SBBPA: Landesbank Hessen-Thuringen Girozentrale) 2,000,000 22,875,000 San Bernardino County COP, VRDN, 2.75%, 3/4/99 (MBIA) (SBBPA: Merrill Lynch & Co., Inc.) (Acquired 6/28/95-- 2/4/98, Cost $22,875,000)(1) 22,875,000 See Notes to Financial Statements www.americancentury.com 9 Cal. Tax-Free Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 15,000,000 San Bernardino County Multifamily Housing Auth. Rev., 5.45%, 5/1/99 (Put Agreement: National Westminster Bank PLC) (Acquired 5/8/98, Cost $15,206,100)(1) $ 15,037,673 3,350,000 San Bernardino County Multifamily Housing Auth. Rev., Series 1992 A, (Arrowview Park Apartments), VRDN, 2.55%, 3/4/99 (LOC: FHLB) 3,350,000 1,800,000 San Bernardino County Multifamily Housing Auth. Rev., Series 1993 A, (Monterey Villas Apartments), VRDN, 2.55%, 3/4/99 (LOC: FHLB) 1,800,000 2,800,000 San Bernardino County Multifamily Housing Auth. Rev., Series 1997 A, (Mountain View), VRDN, 2.55%, 3/4/99 (LOC: FHLB) 2,800,000 4,200,000 San Diego Multifamily Housing Rev., Series 1993 A, (Coral Point Apartments), VRDN, 3.20%, 3/4/99 (LOC: Continental Casualty Co.) 4,200,000 5,000,000 San Francisco City and County Redevelopment Agency Multifamily Housing Rev., Series 1985 B, (Bayside Village), VRDN, 2.40%, 3/4/99 (LOC: Bank One Arizona, N.A.) 5,000,000 3,285,000 San Francisco City and County Redevelopment Financing Auth. Rev., (Yerba Buena Garden), VRDN, 2.55%, 3/3/99 (LOC: National Westminster Bank PLC) 3,285,000 1,000,000 San Francisco City and County Sewer Rev., 6.50%, 10/1/99, Prerefunded at 102% of Par(3) 1,039,843 2,400,000 San Francisco City and County Unified School District Tax & Rev. Anticipation Notes, 4.50%, 9/22/99 2,414,437 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,945,000 San Jose Financing Auth. Rev., Series 1998 B, (Hayes Mansion Improvement), VRDN, 2.55%, 3/3/99 (AMBAC) (SBBPA: Bank of Nova Scotia) $ 2,945,000 13,400,000 Santa Paula Public Financing Auth. Lease Rev., (Water System Acquisition), VRDN, 2.25%, 3/3/99 (LOC: California State Teachers' Retirement System) 13,400,000 2,575,000 Simi Valley Multifamily Housing Rev., Series 1993 A, VRDN, 2.60%, 3/4/99 (LOC: FHLMC) 2,575,000 5,000,000 South Coast Local Education Agencies Tax & Rev. Anticipation Notes, Series 1998 A, 4.50%, 6/30/99 (MBIA) 5,020,882 525,000 South San Francisco COP, (Quality Control Plant), VRDN, 2.55%, 3/4/99 (LOC: National Westminster Bank PLC) 525,000 1,500,000 Triunfo Sanitation District Rev., VRDN, 2.20%, 3/3/99 (LOC: Banque Nationale de Paris S.A.) 1,500,000 1,900,000 West Hollywood COP, VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 1,900,000 4,500,000 Westminster COP, Series 1998 A, (Civic Center), VRDN, 2.70%, 3/4/99 (AMBAC) (SBBPA: First Union National Bank) 4,500,000 1,900,000 Westminster Redevelopment Agency Tax Allocation Rev., (Commercial Redevelopment Project No. 1), VRDN, 2.70%, 3/4/99 (AMBAC) (SBBPA: Landesbank Hessen-Thuringen Girozentrale) 1,900,000 ------------ TOTAL INVESTMENT SECURITIES--100.0% $449,727,000 ============ See Notes to Financial Statements 10 1-800-345-2021 Cal. Tax-Free Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank FHLMC = Federal Home Loan Mortgage Corp. 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 February 28, 1999. (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 February 28, 1999, was $79,614,673, which represented 17.6% 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 February 28, 1999. (3) Escrowed to maturity in U.S. government securities or state and local government securities. - -------------------------------------------------------------------------------- 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 amortized cost of each investment See Notes to Financial Statements www.americancentury.com 11 California Municipal Money Market--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA MUNICIPAL CALIFORNIA TAX-EXEMPT MONEY MARKET FUNDS(2) MONEY MARKET AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 1.35% 1.19% -- 1 YEAR 2.95% 2.62% 5 OUT OF 55 ================================================================================= AVERAGE ANNUAL RETURNS ================================================================================= 3 YEARS 3.08% 2.82% 8 OUT OF 50 5 YEARS 3.08% 2.90% 7 OUT OF 43 LIFE OF FUND(3) 3.11% 2.88% 6 OUT OF 35
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. (3) The fund's inception date was 12/31/90. See pages 26-27 for more information about returns and Lipper fund rankings. PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 59 58 WEIGHTED AVERAGE MATURITY 15 DAYS 40 DAYS EXPENSE RATIO 0.50%* 0.50% * Annualized. YIELDS AS OF FEBRUARY 28, 1999 7-DAY CURRENT YIELD 2.41% 7-DAY EFFECTIVE YIELD 2.43% 7-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 3.69% 37.42% TAX BRACKET 3.85% 41.95% TAX BRACKET 4.15% 45.22% TAX BRACKET 4.40% Past performance does not guarantee future results. Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Yields will fluctuate, and although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. The 7-day yield more closely reflects earnings of the fund than the total return. 12 1-800-345-2021 California Municipal Money Market--Q&A - -------------------------------------------------------------------------------- An interview with Todd Pardula (pictured on page 5), a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA MUNICIPAL MONEY MARKET PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1999? The fund performed well, producing a better return than the average California tax-free money market fund, according to Lipper Inc. For the six months, the portfolio's total return was 1.35%, compared with the 1.19% average return of the 55 "California Tax-Exempt Money Market Funds" tracked by Lipper. California Municipal Money Market's longer-term returns are also quite strong, consistently placing in the top 20% of the Lipper group (see the Total Returns table on the previous page for additional fund performance comparisons.) WHAT LED CALIFORNIA MUNICIPAL MONEY MARKET TO SUCH SOLID PERFORMANCE? A major reason for the fund's strong relative performance was our lower-than-average management fee. Other things being equal, lower expenses mean higher yields and returns for our shareholders. In addition, California Municipal Money Market typically holds a greater percentage of securities subject to the federal alternative minimum tax (AMT) than the other funds in the Lipper group. AMT securities typically offer higher yields than non-AMT notes because of their potential tax liability. Another reason we outperformed the Lipper group was our ability to purchase the most attractively priced variable-rate notes, or "floaters." We work hard to develop excellent relationships with dealers that offer the best rates on floaters. At the end of February, floaters made up about 90% of the portfolio, so if we can buy floaters with 10 additional basis points of yield (a basis point equals 0.01%, so 10 basis points equals 0.10%), we can get an extra 9 basis points of performance for the fund. That's a significant edge when total returns are in the 2% range. YOUR RELATIVE PERFORMANCE WAS STRONG, BUT THE FUND'S TOTAL RETURN SEEMS LOW. WHY? The fund's total return is related to the general level of short-term interest rates. In the second half of 1998, the Federal Reserve (the Fed) lowered rates by 75 basis points (0.75%) because a series of global financial crises threatened U.S. economic growth. When interest rates are low, municipalities are inclined to lock in those rates by issuing more long-term bonds than short-term notes. The supply of short-term securities was also reduced by the excellent health of the California economy, which has diminished municipal borrowing needs. While these factors reduced supply, demand for short-term tax-free securities surged. The imbalance between supply and demand sent yields on tax-free money market funds in February to their lowest levels since 1994. [right margin] "The fund performed well, producing a better return than the average California tax-free money market fund, according to Lipper Inc." [pie charts - data below] PORTFOLIO COMPOSITION BY SECURITY TYPE AS OF FEBRUARY 28, 1999 Variable-Rate Notes 89% Put Bonds 11% AS OF AUGUST 31, 1998 Variable-Rate Notes 79% Put Bonds 15% Bonds less than 1 Year 3% Municipal Notes 3% Security types are defined on page 27. www.americancentury.com 13 California Municipal Money Market--Q&A - -------------------------------------------------------------------------------- (Continued) YOU REDUCED THE PORTFOLIO'S WEIGHTED AVERAGE MATURITY FROM 40 DAYS TO 15 DAYS. WHY? We allowed the average maturity to shorten because we didn't think yields on one-year municipal securities were attractive enough to justify adding more of them to the portfolio. Additionally, it was particularly hard to find attractive one-year AMT paper. As a result, we used any new money and cash from maturing securities to buy floaters subject to AMT. We were content to hold floaters even in a declining interest rate environment because their yields were virtually the same as those on one-year securities. HOW DID YOU MANAGE THE FUND'S CREDIT QUALITY? We continued to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities. First-tier obligations have generally received the highest credit rating from at least two nationally recognized statistical rating organizations. For example, the SP1 rating category (which includes SP1+) is Standard and Poor's highest rating for short-term municipal debt. The SP2 rated securities shown in the chart at left are considered first tier because they received top ratings from Fitch & Moody's, two other rating services. However, at the end of February, 14% of assets were in securities rated SP2 by Standard & Poor's. Those SP2 securities are primarily backed by Union Bank of California, whose majority owner is Bank of Tokyo Mitsubishi. We also believe Union Bank of California is worthy of a higher S&P rating because its operations are governed by U.S. banking regulations and are primarily limited to California. These securities offer an additional 40-50 basis points in yield over securities rated SP1+ at what we believe is minimal additional credit risk WHAT IS YOUR OUTLOOK FOR INTEREST RATES? The outlook for rates is uncertain. On the one hand, it seems unlikely the United States can remain an oasis of prosperity amid the global economic slowdown. That would argue for further Fed interest rate cuts. On the other hand, despite global turmoil, the U.S. economy has so far continued to grow rapidly. And although inflation is dormant now, oil prices have rebounded and the unemployment rate remains very low. Those factors would seem to suggest interest rates could go higher. AND WHAT'S YOUR OUTLOOK FOR THE FUND? We may increase the fund's average maturity in April and May, when seasonal supply and demand factors typically affect the tax-exempt money market. That's when many shareholders withdraw money from tax-free and municipal money market funds to pay their income taxes. Those redemptions mean less demand for and greater supply of tax-free money market securities. The net effect is often a temporary increase in yields on one-year securities. Despite those seasonal factors, yields and returns on tax-free money market funds are likely to remain modest as long as inflation is nearly non-existent and interest rates are historically low. [left margin] "We continued to be very conservative regarding credit decisions, keeping the fund fully invested in first-tier municipal money market securities." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 SP1+ 72% 71% SP1 14% 15% SP2 14% 14% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 26 for more information. "Yields and returns on tax-free money market funds are likely to remain modest as long as inflation is nearly non-existent and interest rates are historically low." 14 1-800-345-2021 Cal. Municipal Money Market--Sch. of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES $1,000,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-17, VRDN, 2.79%, 3/3/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 11/18/98, Cost $1,000,000)(1) $ 1,000,000 4,500,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-10, VRDN, 2.79%, 3/3/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 8/19/98--1/6/99, Cost $4,500,000)(1) 4,500,000 2,500,000 ABN Amro Munitops Certificates Trust Receipts, Series 1998-25, 3.10%, 6/2/99 (FGIC) (SBBPA: ABN Amro Bank N.V.) (Acquired 12/2/98, Cost $2,500,000)(1) 2,500,000 3,000,000 Alameda County Industrial Development Auth. Rev., (Bat Properties), VRDN, 2.60%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 3,000,000 1,800,000 Alameda County Industrial Development Auth. Rev., Series 1994 A, (Scientific Technology), VRDN, 2.75%, 3/3/99 (LOC: Banque Nationale de Paris S.A.) 1,800,000 700,000 Alameda County Industrial Development Auth. Rev., Series 1996 A, (Edward L. Shimmon Inc.), VRDN, 2.80%, 3/4/99 (LOC: Banque Nationale de Paris S.A.) 700,000 1,685,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Adeline Association), VRDN, 2.80%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 1,685,000 1,350,000 Alameda County Industrial Development Auth. Rev., Series 1997 A, (Plyproperties), VRDN, 2.80%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 1,350,000 2,200,000 Association of Bay Area Governments Multifamily Housing Rev., Series 1997 A, (Mountain View Apartments), VRDN, 2.95%, 3/4/99 (LOC: Comerica Bank, N.A.) 2,200,000 2,000,000 California Economic Development Financing Auth. Industrial Development Rev., (Provena Foods Inc.), VRDN, 2.75%, 3/3/99 (LOC: Comerica Bank-CA) 2,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $3,100,000 California Health Facilities Auth. Rev., (Episcopal Home), VRDN, 2.70%, 3/1/99 (LOC: Union Bank of California, N.A.) $ 3,100,000 6,100,000 California Housing Financing Agency Rev., Series 1996 A, Class A, VRDN, 2.77%, 3/4/99 (LOC: Caisse Des Depots et Consignations) (Acquired 2/4/98, Cost $6,100,000)(1) 6,100,000 900,000 California Housing Financing Agency Rev., Series 1998 E, 3.55%, 3/12/99 900,000 2,500,000 California Pollution Control Financing Auth. Rev., Series 1986 A, (Southern California Edison), VRDN, 3.55%, 3/1/99 (Guaranteed: Southern California Edison Company) 2,500,000 1,200,000 California Pollution Control Financing Auth. Rev., Series 1986 B, (Southern California Edison), VRDN, 3.55%, 3/1/99 (Guaranteed: Southern California Edison Company) 1,200,000 2,800,000 California Pollution Control Financing Auth. Rev., Series 1986 D, (Southern California Edison), VRDN, 3.55%, 3/1/99 (Guaranteed: Southern California Edison Company) 2,800,000 7,000,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1994 A, (Western Waste Industries), VRDN, 2.90%, 3/4/99 (LOC: Union Bank of California, N.A.) 7,000,000 2,300,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 C, 3.10%, 3/15/99 (LOC: National Westminster Bank PLC) 2,300,000 6,100,000 California State Economic Development Financing Auth. Industrial Development Rev., (Applied Aerospace), VRDN, 2.75%, 3/3/99 (LOC: American National Bank and Trust Company of Chicago) 6,100,000 1,200,000 California State Economic Development Financing Auth. Industrial Development Rev., (CALCO), VRDN, 3.05%, 3/3/99 (LOC: Wells Fargo Bank, N.A.) 1,200,000 See Notes to Financial Statements www.americancentury.com 15 Cal. Municipal Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $3,750,000 California State Economic Development Financing Auth. Industrial Development Rev., (Coast Grain Co.), VRDN, 2.70%, 3/4/99 (LOC: Bank of America N.T. & S.A.) $ 3,750,000 2,000,000 California State Economic Development Financing Auth. Industrial Development Rev., (River Ranch Fresh Foods), VRDN, 2.70%, 3/4/99 (LOC: NationsBank, N.A.) 2,000,000 2,400,000 California State Economic Development Financing Auth. Industrial Development Rev., (Scientific Specialties), VRDN, 2.75%, 3/3/99 (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, 3.30%, 3/3/99 (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%, 3/4/99 (LOC: Wells Fargo Bank, N.A.) 1,468,364 3,000,000 California State GO, Series 1997 BJ, 4.125%, 6/1/99 3,000,176 5,000,000 California State Veterans GO, VRDN, 2.77%, 3/4/99 (FSA) (SBBPA: Merrill Lynch & Co., Inc.) (Acquired 12/30/97, Cost $5,000,000)(1) 5,000,000 1,000,000 California Statewide Communities Development Auth. Industrial Rev., Series 1998 C, (Nichols Pistachio), VRDN, 2.70%, 3/4/99 (LOC: Bank of America N.T. & S.A.) 1,000,000 8,500,000 California Statewide Communities Development Auth. Lease Rev., Floating Rate Trust Receipts, 3.00%, 3/4/99 (LOC: Merrill Lynch & Co., Inc.) (Acquired 2/16/99, Cost $8,500,000)(1)(2) 8,500,000 5,900,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 A, (Plaza Club Apartments), VRDN, 3.00%, 3/3/99 (LOC: Comerica Bank, N.A.) 5,900,000 1,200,000 California Statewide Communities Development Auth. Multifamily Housing Rev., Series 1997 G, (Sunrise of Moraga), VRDN, 2.85%, 3/4/99 (LOC: Commerzbank A.G.) 1,200,000 $1,225,000 California Statewide Communities Development Auth. Rev., Series 1996 G, (Lansmont Property), VRDN, 2.70%, 3/3/99 (LOC: Wells Fargo Bank, N.A.) $ 1,225,000 1,600,000 California Statewide Communities Development Corp. Rev., (Tri H Foods), VRDN, 3.75%, 3/3/99 (LOC: Union Bank of California, N.A.) 1,600,000 5,560,000 California Statewide Communities Development Corp. Rev., Series 1998 B, (DIX Metals), VRDN, 2.70%, 3/3/99 (LOC: California State Teachers' Retirement System) 5,560,000 3,465,000 Contra Costa County COP, (Concord Healthcare Center), VRDN, 2.35%, 3/3/99 (LOC: NationsBank, N.A.) 3,465,000 1,600,000 Fowler Industrial Development Auth. Rev., (Bee Sweet Citrus Inc.), VRDN, 2.85%, 3/4/99 (LOC: Bank of America N.T. & S.A.) 1,600,000 1,700,000 Irvine Ranch Water District GO, Series 1988 A, (Improvement District No. 284), VRDN, 3.00%, 3/3/99 (LOC: Landesbank Hessen-Thuringen Girozentrale) 1,700,000 2,500,000 Kern County Superintendent of Schools COP, Series 1996 A, VRDN, 2.75%, 3/4/99 (LOC: Anchor National Life Insurance Company) 2,500,000 3,000,000 La Verne Industrial Development Auth. Rev., Series 1998 A, VRDN, 2.65%, 3/4/99 (LOC: Fleet Bank, N.A.) (Acquired 12/21/98, Cost $3,000,000)(1) 3,000,000 2,200,000 Lassen Municipal Utility District Rev., Series 1996 A, VRDN, 3.00%, 3/4/99 (FSA) (SBBPA: Credit Local de France) 2,200,000 3,340,000 Los Angeles County Industrial Development Auth. Rev., (Caitac & Jae Co., Inc.), VRDN, 3.75%, 3/3/99 (LOC: Union Bank of California, N.A.) 3,340,000 1,450,000 Los Angeles Industrial Development Auth. Rev., (Firstclass Foods-Trojan), VRDN, 2.75%, 3/3/99 (LOC: California State Teachers' Retirement System) 1,450,000 2,065,000 Los Angeles Industrial Development Auth. Rev., (Kairak Inc.), VRDN, 3.25%, 3/3/99 (LOC: Bank of Hawaii) 2,065,000 See Notes to Financial Statements 16 1-800-345-2021 Cal. Municipal Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,260,000 Los Angeles Industrial Development Auth. Rev., (Keystone Engineering Company), VRDN, 3.25%, 3/3/99 (LOC: Bank of Hawaii) $ 1,260,000 3,500,000 Los Angeles Multifamily Housing Rev., Series 1997 D, (Mission Village Terrace), VRDN, 2.70%, 3/4/99 (LOC: FHLB) 3,500,000 3,600,000 Oxnard Industrial Development Auth. Rev., (Western Saw Manufacturers), VRDN, 2.75%, 3/3/99 (LOC: California State Teachers' Retirement System) 3,600,000 2,500,000 Oxnard Industrial Development Financing Auth. Rev., (Accurate Engineering), VRDN, 2.75%, 3/3/99 (LOC: California State Teachers' Retirement System) 2,500,000 2,400,000 Pinole Redevelopment Agency, Series 1998 A, (East Bluff Apartments), VRDN, 2.95%, 3/4/99 (LOC: Comerica Bank-CA) 2,400,000 2,565,000 Pleasant Hill Redevelopment Agency Multifamily Housing Rev., Series 1996 A, (Chateau III), VRDN, 2.85%, 3/4/99 (LOC: Commerzbank A.G.) 2,565,000 3,000,000 Rialto Public Financing Auth. Tax Allocation, Series 1998 A, (Agua Mansa & Industrial), VRDN, 3.00%, 3/4/99 (LOC: Union Bank of California, N.A.) 3,000,000 2,205,000 Riverside County Industrial Development Auth. Rev., (Merrick Engineering Inc.), VRDN, 3.05%, 3/3/99 (LOC: Wells Fargo Bank, N.A.) (Acquired 3/14/97, Cost $2,205,000)(1) 2,205,000 Principal Amount Value - -------------------------------------------------------------------------------- $9,500,000 Sacramento County Housing Auth. Rev., Issue 1992 A, (Shadowood Apartments), VRDN, 2.80%, 3/3/99 (LOC: General Electric Capital Corp.) $ 9,500,000 3,400,000 Sacramento County Multifamily Housing Rev., Series 1996 A, VRDN, 2.65%, 3/3/99 (LOC: California State Teachers' Retirement System) 3,400,000 2,500,000 Sacramento County Special Facilities Airport Rev., (Cessna Aircraft Co.), VRDN, 2.75%, 3/4/99 (LOC: Bank of America N.T. & S.A.) 2,500,000 1,600,000 San Bernardino County Industrial Development Auth. Rev., (Master Halco Inc.), VRDN, 2.30%, 3/2/99 (LOC: California State Teachers' Retirement System) 1,600,000 9,840,000 San Bernardino County Single Family Mortgage Rev., Series 1998 A, 4.00%, 5/1/99 (GIC: Transamerica Life Insurance and Annuity Company) 9,840,000 900,000 San Diego Industrial Development Rev., Series 1987 A, (Kaiser Aerospace and Electricity), VRDN, 2.75%, 3/4/99 (LOC: ABN Amro Bank N.V.) 900,000 2,800,000 San Francisco City & County Airport Rev., (Community International Airport, SGA 50), VRDN, 2.85%, 3/3/99 (MBIA) (SBBPA: Societe Generale) (Acquired 7/8/97, Cost $2,800,000)(1) 2,800,000 3,000,000 San Jose Multifamily Housing Rev., Series 1998 A, (Carlton Plaza), VRDN, 2.80%, 3/4/99 (LOC: Commerzbank A.G.) 3,000,000 -------------- TOTAL INVESTMENT SECURITIES--100.0% $175,468,540 ============== See Notes to Financial Statements www.americancentury.com 17 Cal. Municipal Money Market--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FHLB = Federal Home Loan Bank 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 February 28, 1999. (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 February 28, 1999, was $35,605,000, which represented 20.1% 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 February 28, 1999. - -------------------------------------------------------------------------------- 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 amortized cost of each investment See Notes to Financial Statements 18 1-800-345-2021 Statements of Assets and Liabilities - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET ASSETS Investment securities, at value (amortized cost and cost for federal income tax purposes) ......... $ 449,727,000 $ 175,468,540 Cash ....................................... 366,394 1,046,488 Interest receivable ........................ 2,888,382 603,504 ------------- ------------- 452,981,776 177,118,532 ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ...................... 566,225 -- Payable for capital shares redeemed ........ 120,137 8,238 Accrued management fees (Note 2) ........... 171,374 66,740 Payable for trustees' fees and expenses .... 1,046 407 Dividends payable .......................... 56,707 23,242 ------------- ------------- 915,489 98,627 ------------- ------------- Net Assets ................................. $ 452,066,287 $ 177,019,905 ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) .................... 452,066,287 177,056,747 ============= ============= Net Asset Value Per Share .................. $ 1.00 $ 1.00 ============= ============= NET ASSETS CONSIST OF: Capital paid in ............................ $ 452,066,287 $ 177,056,747 Undistributed net investment income ........ 299,123 122,436 Accumulated net realized loss on investment transactions ............... (299,123) (159,278) ------------- ------------- $ 452,066,287 $ 177,019,905 ============= ============= - -------------------------------------------------------------------------------- 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 down 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 breakdown 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 19 Statements of Operations - -------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET INVESTMENT INCOME Income: Interest ................................. $7,037,083 $2,797,839 ---------- ---------- Expenses (Note 2): Management fees .......................... 1,122,231 430,088 Trustees' fees and expenses .............. 7,605 3,554 ---------- ---------- 1,129,836 433,642 ---------- ---------- Net investment income .................... $5,907,247 $2,364,197 ========== ========== - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down 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 See Notes to Financial Statements 20 1-800-345-2021
Statements of Changes in Net Assets - -------------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) AND YEAR ENDED AUGUST 31, 1998 TAX-FREE MUNICIPAL MONEY MARKET MONEY MARKET Increase (Decrease) in Net Assets 1999 1998 1999 1998 OPERATIONS Net investment income ............. $ 5,907,247 $ 13,370,351 $ 2,364,197 $ 5,404,285 Net realized loss on investments .. -- (580) -- (669) ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ....... 5,907,247 13,369,771 2,364,197 5,403,616 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........ (5,907,244) (13,369,357) (2,364,200) (5,398,614) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......... 152,776,889 434,812,626 73,054,594 153,582,331 Proceeds from reinvestment of distributions ................ 5,611,276 12,745,632 2,231,655 5,174,073 Payments for shares redeemed ...... (162,315,441) (409,349,170) (70,857,963) (156,647,128) ------------- ------------- ------------- ------------- Net increase (decrease) in net assets from capital share transactions .............. (3,927,276) 38,209,088 4,428,286 2,109,276 ------------- ------------- ------------- ------------- Net increase (decrease) in net assets ................... (3,927,273) 38,209,502 4,428,283 2,114,278 NET ASSETS Beginning of period ............... 455,993,560 417,784,058 172,591,622 170,477,344 ------------- ------------- ------------- ------------- End of period ..................... $ 452,066,287 $ 455,993,560 $ 177,019,905 $ 172,591,622 ============= ============= ============= ============= Undistributed net investment income .......................... $ 299,123 $ 299,086 $ 122,436 $ 122,436 ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold .............................. 152,776,889 434,812,626 73,054,594 153,582,331 Issued in reinvestment of distributions ................ 5,611,276 12,745,632 2,231,655 5,174,073 Redeemed .......................... (162,315,441) (409,349,170) (70,857,963) (156,647,128) ------------- ------------- ------------- ------------- Net increase (decrease) ........... (3,927,276) 38,209,088 4,428,286 2,109,276 ============= ============= ============= =============
- -------------------------------------------------------------------------------- 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 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 21 Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. California Tax-Free Money Market Fund (Tax-Free Money Market) and California Municipal Money Market Fund (Municipal Money Market) (the funds) are two of the seven funds issued by the trust. Tax-Free Money Market is diversified and Municipal Money Market is non-diversified under the 1940 Act. The funds seek income that is exempt from federal and California income taxes. Tax-Free Money Market and Municipal Money Market seek to obtain as high a level of interest income as is consistent with prudent investment management and conservation of shareholders' capital. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these principles may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued at amortized cost, which approximates current market value. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS --Distributions from net investment income are declared and credited daily and distributed monthly. The funds do not expect to realize any long-term capital gains, and accordingly, do not expect to pay any capital gains distributions. At August 31, 1998, accumulated net realized capital loss carryovers for Tax-Free Money Market of approximately $289,123 (expiring in 1999 through 2006) and for Municipal Money Market of approximately $159,278 (expiring in 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 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. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's distributor. Certain officers of FDI are also officers of the trust. 22 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1570% to 0.2700% and the rates for the Complex Fee range from 0.2900% to 0.3100%. For the six months ended February 28, 1999, the effective annual management fee for both funds was 0.50%. 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. - -------------------------------------------------------------------------------- 3. SUBSEQUENT EVENTS The following name changes became effective March 1, 1999: ================================================================== NEW NAME FORMER NAME ================================================================== FUND: California Tax-Free American Century - Benham California Money Market Fund Tax-Free Money Market Fund FUND: California Municipal American Century - Benham California Money Market Fund Municipal Money Market Fund www.americancentury.com 23
Cal. Tax-Free Money Market--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ...... 0.01 0.03 0.03 0.03 0.03 0.02 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income . (0.01) (0.03) (0.03) (0.03) (0.03) (0.02) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== =========== Total Return(2) ............ 1.29% 3.12% 3.17% 3.12% 3.31% 2.09% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ........ 0.50%(3) 0.50% 0.49% 0.49% 0.52% 0.50% Ratio of Net Investment Income to Average Net Assets ........ 2.59%(3) 3.07% 3.10% 3.12% 3.28% 2.07% Net Assets, End of Period (in thousands) ............... $ 452,066 $ 455,994 $ 417,784 $ 425,846 $ 414,099 $ 371,074
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 * income 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
Cal. Municipal Money Market--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period .............$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ......... 0.01 0.03 0.03 0.03 0.03 0.02 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income .... (0.01) (0.03) (0.03) (0.03) (0.03) (0.02) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period ..$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 =========== =========== =========== =========== =========== =========== Total Return(2) ............... 1.35% 3.20% 3.15% 3.23% 3.35% 2.15% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ........... 0.50%(3) 0.50% 0.52% 0.53% 0.53% 0.51% Ratio of Net Investment Income to Average Net Assets ........... 2.71%(3) 3.16% 3.10% 3.20% 3.31% 2.13% Net Assets, End of Period (in thousands) ..................$ 177,020 $ 172,592 $ 170,477 $ 196,520 $ 191,722 $ 243,701
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 * income 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 25 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA TAX-FREE MONEY MARKET and CALIFORNIA MUNICIPAL MONEY MARKET seek to provide interest income exempt from both federal and California state income taxes while maintaining a stable share price. The funds invest in high-quality California municipal money market securities 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 funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the funds. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. The 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 Credit quality (the issuer's financial strength and the likelihood of timely payment of interest and principal) is a key factor in fixed-income investment analysis. Credit ratings issued by independent rating and research companies such as Standard & Poor's help quantify credit quality--the stronger the issuer, the higher the credit rating. 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. [left margin] 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 24-25. 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 Glossary - -------------------------------------------------------------------------------- (Continued) FUND CLASSIFICATIONS INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION--Offers taxable and tax-free money market funds for relative stability of principal and liquidity, allowing maximum portfolio diversification. * INCOME--Offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME--Offers funds that emphasize both growth and income, diversification, varying capitalization sizes, and different investment styles and strategies. * GROWTH--Offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. * CONSERVATIVE--these funds generally provide lower return potential with either low or minimal price fluctuation risk. * MODERATE-- these funds generally provide moderate return potential with moderate price fluctuation risk. * AGGRESSIVE-- these funds generally provide high return potential with corresponding high price fluctuation risk. 28 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Tax-Managed Value Strategic Allocation -- Income & Growth Moderate Value Strategic Allocation -- Equity Income Conservative =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL New Opportunities Global Gold Emerging Markets Giftrust(reg.tm) International Discovery Vista International Growth Heritage Global Growth Growth Ultra Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] [american century logo(reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9904 Funds Distributor, Inc. SH-BKT-15978 (c)1999 American Century Services Corporation [front cover] FEBRUARY 28, 1999 SEMIANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] AMERICAN CENTURY - --------------------------------- 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] AMERICAN CENTURY KEEPS WITH TRADITION - -------------------------------------------------------------------------------- FOLLOWING BENHAM'S FOOTSTEPS On March 1, we made it easier for you to do business with us. We simplified our organizational structure by eliminating the venerable Benham and Twentieth Century names, and putting all our funds under American Century. The name change will not affect your funds' investment management--the proven Benham investment philosophy, experienced portfolio management teams, and legacy of innovation and high-quality performance remain. CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment practices that have helped our fixed-income funds perform so well over the years. In 1998, two-thirds of American Century bond funds beat their peer group average, according to Lipper, Inc. CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will continue to offer a "pure play" on their sector of the market, as they did under Benham. CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that remains the same; we've retained our core team of experienced fixed-income portfolio managers. * Experience--The more than 35 fixed-income investment professionals at American Century have an average of nine years of investment management experience. * Bigger and better--Since American Century was formed, we've doubled the size of the original Benham management team in our Mountain View, California office. TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in fixed-income fund innovation. For example, we introduced a total of four new fixed-income funds in the last three years, including the first no-load inflation-adjusted bond fund. We continue to run our fixed-income operation from our offices in Mountain View, California, which is also home to our walk-in Investor Center. We look forward to continuing to meet your fixed-income investment needs in the Benham tradition. WHAT'S NEW . . . We now classify our funds in easy-to-remember categories based on objective and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME, GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE, MODERATE, and AGGRESSIVE. This new classification system makes it easier for investors to identify which funds are right for them. Turn to the inside back cover of this report to see a list of the funds classified by objective and risk. For definitions of the fund categories, see the Glossary. Past performance is no guarantee of future results. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) - -------------------------------------- CALIFORNIA INTERMEDIATE-TERM TAX-FREE (BCITX) - -------------------------------------- CALIFORNIA LONG-TERM TAX-FREE (BCLTX) - -------------------------------------- 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 six-month period ended February 28, 1999, the financial markets experienced a dramatic shift in expectations. Six months ago, the economic outlook appeared grim--financial problems in Asia, Russia, and Latin America led to expectations of an impending U.S. economic slowdown. That sent the domestic stock market reeling and pushed U.S. bond yields to record lows. But expectations began to change in the fourth quarter of 1998. The Federal Reserve cut interest rates three times in six weeks, bolstering confidence in the economy. That, in turn, brought greater stability to U.S. financial markets and eventually produced a stock market rebound. By early 1999, reports of the strongest quarterly economic surge in two years caught investors by surprise. Bond yields rose reflexively amid higher inflation expectations, but productivity gains and competitive pressures kept inflation at its lowest level in a dozen years. The resiliency of California's economy was especially surprising. With many Asian economies--including six of the state's ten biggest export markets--at a standstill, there were concerns that the economic stagnation would spread to California. However, the state's economy hardly missed a beat and is now as healthy as it has been in a decade. This economic environment has been positive for California municipal bonds. All seven of American Century's California municipal funds, ranging from money market funds to long-term and high-yield bond funds, produced above-average returns during the past six months, as well as over longer time periods (according to Lipper Inc.). We've been investing in the California municipal market for more than 15 years, and the consistent performance of our California funds reflects that experience. At American Century, we've recently made some changes that we hope will make it easier for you to identify and select the funds that best meet your investment needs. We reorganized our family of 71 funds based on investment goals and risk level (see the front and back inside covers of this report for more details). In addition, California municipal fund shareholders were the first to receive our new simplified prospectus. This document provides the fund information you need in clear and straightforward language, and it includes helpful tips and definitions of investment terms. We want your experience with American Century to be rewarding, and we appreciate your continued confidence in us. 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 CALIFORNIA LIMITED-TERM TAX-FREE Performance Information ................................................ 4 Management Q&A ......................................................... 5 Portfolio at a Glance .................................................. 5 Schedule of Investments ................................................ 8 CALIFORNIA INTERMEDIATE-TERM TAX-FREE Performance Information ................................................ 12 Management Q&A ......................................................... 13 Portfolio at a Glance .................................................. 13 Schedule of Investments ................................................ 16 CALIFORNIA LONG-TERM TAX-FREE Performance Information ................................................ 22 Management Q&A ......................................................... 23 Portfolio at a Glance .................................................. 23 Schedule of Investments ................................................ 26 FINANCIAL STATEMENTS Statements of Assets and Liabilities ......................................................... 30 Statements of Operations ............................................... 31 Statements of Changes in Net Assets ....................................................... 32 Notes to Financial Statements .......................................................... 33 Financial Highlights ................................................... 36 OTHER INFORMATION Background Information Investment Philosophy and Policies ..................................................... 39 Comparative Indices ................................................. 39 Lipper Rankings ..................................................... 39 Investment Team Leaders .......................................................... 39 Credit Rating Guidelines ....................................................... 39 Glossary ............................................................... 40 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * Municipal bonds posted modestly positive returns during the six months ended February 28, 1999. * Short- and intermediate-term municipal bonds produced modest price gains as their yields fell slightly. They outperformed long-term municipals, whose yields rose a little. * Bond yields fell and prices rose in the fourth quarter of 1998 as the Federal Reserve cut short-term interest rates three times, but yields rose in early 1999 as the U.S. economy surged. * Municipal bonds outperformed Treasury securities thanks to improving supply and demand conditions. However, municipal yields are still attractive relative to Treasury yields. CALIFORNIA LIMITED-TERM TAX-FREE * The fund outperformed the average California short-intermediate fund while offering a significantly higher yield. * A longer-than-average duration and the addition of several higher-yielding, out-of-favor bonds helped boost fund performance. * The credit quality of the portfolio improved as we reduced the fund's exposure to lower-rated bonds. * The healthy economic environment in California is favorable for the state's municipal bonds, so we expect to maintain our longer duration and current positioning. CALIFORNIA INTERMEDIATE-TERM TAX-FREE * The fund outperformed the average California intermediate fund while offering an attractive yield. * We lengthened the fund's duration by buying long-term Puerto Rico municipal bonds, which provide tax-exempt income in all states. * We added yield to the portfolio by taking advantage of differences among short-term municipal bonds. * The portfolio's credit quality remained high, reflecting our belief that higher-quality bonds will outperform lower-rated bonds going forward. * We're optimistic about the outlook for longer-term municipal bonds, so we plan to maintain the fund's longer duration in the coming months. CALIFORNIA LONG-TERM TAX-FREE * The fund outperformed the average California municipal debt fund while offering a higher yield. * Because of our expectations for lower interest rates, the portfolio had a longer-than-average duration and focused on discount bonds (bonds with lower-than-prevailing interest rates). * We invested mainly in high-quality bonds because we were getting very little extra yield for lower- quality bonds. * Market conditions remain favorable for municipal bonds, so we plan to maintain the fund's current positioning going forward. [left margin] CALIFORNIA LIMITED-TERM TAX-FREE (BCSTX) TOTAL RETURNS: AS OF 2/28/99 6 Months 2.27%* 1 Year 4.86% NET ASSETS: $151.0 million 30-DAY SEC YIELD: 3.03% INCEPTION DATE: 6/1/92 CALIFORNIA INTERMEDIATE-TERM TAX-FREE (BCITX) TOTAL RETURNS: AS OF 2/28/99 6 Months 2.51%* 1 Year 5.46% NET ASSETS: $490.1 million 30-DAY SEC YIELD: 3.46% INCEPTION DATE: 11/9/83 CALIFORNIA LONG-TERM TAX-FREE (BCLTX) TOTAL RETURNS: AS OF 2/28/99 6 Months 2.20%* 1 Year 6.17% NET ASSETS: $348.1 million 30-DAY SEC YIELD: 4.17% INCEPTION DATE: 11/9/83 * Not annualized. See Total Returns on pages 4, 12, and 22. Investment terms are defined in the Glossary on pages 40-41. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- /photo of Randall W. Merk/ Randall W. Merk, chief investment officer of fixed income MUNICIPAL BOND PERFORMANCE Amid several powerful shifts in market sentiment, municipal securities posted modestly positive returns during the six months ended February 28, 1999. Their performance was primarily dictated by changing interest rates. Rates fell in September and October but crept higher during much of the remainder of the period. Short- and intermediate-term municipal bonds outperformed long-term municipals during the period (see the accompanying table). Short- and intermediate-term yields fell slightly overall, producing modest price gains in these sectors of the market. In contrast, long-term municipal yields actually rose a little. STRONGER-THAN-EXPECTED ECONOMIC CONDITIONS Despite initial fears to the contrary, the U.S. economy continued to grow at a healthy pace during the past six months. At the start of the period, bond investors were optimistic because they felt that the Federal Reserve (the Fed) would need to lower interest rates to stimulate U.S. economic growth and combat a slowing global economy. Those expectations, and the three Fed interest rate cuts that followed, supported a bond market rally that lasted through mid-October. By November, however, the factors that had driven the bond rally began to unwind. The Fed's actions helped restore confidence in the U.S. stock market, and investors began to gravitate away from bonds. In early 1999, bond investors worried that the U.S. economy's impressive growth--which climbed to a 6% annual rate during the final three months of 1998--could ignite inflation and prompt the Fed to reverse course. MUNICIPALS GAIN GROUND In 1998, municipal bonds underperformed Treasury bonds, primarily because of supply and demand factors. In the municipal market, demand was sporadic, while supply increased as many issuers took advantage of the low interest rate environment. In contrast, Treasurys benefited from strong demand amid a global flight to safety, and supply shrank as the federal budget surplus reduced the government's borrowing needs. By October, municipal and Treasury yields were as tight as they had been in a decade (see the chart at right). In the first two months of this year, however, the tide turned in favor of municipal bonds, thanks to diminished supply and firmer demand. Meanwhile, flight-to-quality demand in the Treasury market began to dry up. As the chart illustrates, Treasury and municipal yields widened out quite a bit at the end of the period. Even after outperforming Treasurys in recent months, municipal bonds still offer attractive yields on a tax-equivalent basis. As of February 28, an investor in the highest federal tax bracket (39.6%) could earn a tax-adjusted yield of nearly 7% on a AAA-rated 10-year municipal bond, well above the 5.24% yield on a 10-year U.S. Treasury bond. [right margin] "EVEN AFTER OUTPERFORMING TREASURYS IN RECENT MONTHS, MUNICIPAL BONDS STILL OFFER ATTRACTIVE YIELDS ON A TAX-EQUIVALENT BASIS." MUNICIPAL BOND INDEX RETURNS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 LEHMAN THREE-YEAR MUNICIPAL INDEX 2.53% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 2.72% LEHMAN LONG-TERM MUNICIPAL INDEX 2.24% Source: Lipper Inc., Frank Russell Co. [line graph - data below] 10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS 10-Year 10-Year AAA Municipal Treasury 8/31/98 4.27% 4.96% 9/15/98 4.23% 4.84% 9/30/98 4.14% 4.37% 10/15/98 4.02% 4.32% 10/31/98 4.10% 4.54% 11/15/98 4.22% 4.80% 11/30/98 4.16% 4.71% 12/15/98 4.10% 4.62% 12/31/98 4.14% 4.63% 1/15/99 4.15% 4.68% 1/31/99 4.05% 4.63% 2/15/99 4.08% 5.05% 2/28/99 4.15% 5.24% Source: Bloomberg Financial Markets www.americancentury.com 3 California Limited-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA LIMITED- LEHMAN 3-YEAR CALIF. SHORT-INTERM. MUNICIPAL DEBT FUNDS(2) TERM TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 2.27% 2.53% 2.16% -- 1 YEAR 4.86% 5.24% 4.41% 5 OUT OF 13 ================================================================================================= AVERAGE ANNUAL RETURNS ================================================================================================= 3 YEARS 4.72% 5.08% 4.31% 4 OUT OF 10 5 YEARS 4.59% 5.12% 4.58% 4 OUT OF 6 LIFE OF FUND(3) 4.83% 5.36% 5.04%(4) 2 OUT OF 2(4)
(1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. (3) The fund's inception date was 6/1/92. (4) Since 6/30/92, the date nearest the fund's inception for which data are available. See pages 39-40 for more information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER LIFE OF FUND Value on 2/28/99 Lehman 3-Year Municipal Index $14,163 California Limited-Term Tax-Free $13,747 California Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE VALUE VALUE 6/1/92 $10,000 $10,000 6/30/92 $10,074 $10,122 9/30/92 $10,277 $10,357 12/31/92 $10,413 $10,451 3/31/93 $10,616 $10,662 6/30/93 $10,754 $10,822 9/30/93 $10,913 $10,976 12/31/93 $11,029 $11,100 3/31/94 $10,880 $10,951 6/30/94 $10,941 $11,070 9/30/94 $11,036 $11,175 12/31/94 $10,961 $11,176 3/31/95 $11,289 $11,489 6/30/95 $11,517 $11,732 9/30/95 $11,682 $11,982 12/31/95 $11,872 $12,167 3/31/96 $11,902 $12,235 6/30/96 $11,993 $12,334 9/30/96 $12,161 $12,497 12/31/96 $12,339 $12,708 3/31/97 $12,383 $12,759 6/30/97 $12,626 $12,995 9/30/97 $12,842 $13,217 12/31/97 $12,997 $13,405 3/31/98 $13,127 $13,543 6/30/98 $13,247 $13,696 9/30/98 $13,573 $13,967 12/31/98 $13,636 $14,035 2/28/99 $13,747 $14,163 $10,000 investment made 6/1/92 The graph at left shows the growth of a $10,000 investment over the life of the fund, while the graph below shows the fund's year-by-year performance. The Lehman 3-Year Municipal Bond Index is provided for comparison in each graph. California Limited-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER LIFE OF FUND (PERIODS ENDED FEBRUARY 28) California Limited-Term Lehman 3-Year Tax-Free Municipal Index DATE RETURN RETURN 2/28/93* 6.73% 6.94% 2/28/94 2.93% 3.67% 2/28/95 2.00% 2.72% 2/29/96 6.82% 7.71% 2/28/97 3.90% 4.56% 2/28/98 5.40% 5.42% 2/28/99 4.86% 5.24% * From 6/1/92 (the fund's inception date) to 2/28/93. 4 1-800-345-2021 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- /photo of Joel Silva/ An interview with Joel Silva, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA LIMITED-TERM TAX-FREE PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1999? The fund continued to outperform its peers. For the six-month period, California Limited-Term Tax-Free returned 2.27%, compared with the 2.16% average return of the 13 "California Short-Intermediate Municipal Debt Funds" tracked by Lipper Inc. The fund's longer-term returns also consistently beat the average California short-intermediate municipal fund. (See the previous page for other fund performance comparisons.) WHAT WAS BEHIND THE FUND'S OUTPERFORMANCE? One reason is that we were better positioned to benefit from falling interest rates than our peers were. We extended California Limited-Term Tax-Free's duration from 3.0 years to 3.3 years during the six-month period. (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 short-term municipal bond yields fell, our longer duration helped the fund generate more gains on its bonds. Another important factor was our focus on adding yield, which resulted in a fund yield that was well above average. As of February 28, California Limited-Term Tax-Free's 30-day SEC yield was 3.03%, compared with the 2.77% yield of the average California short-intermediate municipal fund (according to Lipper). WHY IS YIELD IMPORTANT? For one thing, we try to provide shareholders with as much tax-free income as we can, within our investment constraints. But yield is also important because, in shorter-term funds like this, interest income makes up a significant portion of the total return. So, we're always looking to maximize our yield whenever possible. WHAT DID YOU DO TO BOOST THE FUND'S YIELD? We purchased some put bonds, which are longer-term municipal securities that can be "put back"--that is, sold at face value to a specific dealer at a prearranged date. These bonds gave us an extra 10-40 basis points (0.10% to 0.40%--a basis point equals 0.01%) in yield, even though they were high-quality bonds. The only drawback is that they are a little less liquid (harder to sell), but that's not really a problem for us because we have plenty of liquid bonds in the portfolio. We also took advantage of types of bonds that were out of favor with the retail sector of the market. WHO MAKES UP THE RETAIL SECTOR? It's basically individual investors, as opposed to mutual funds or other institutions. Individuals make up a big part of the municipal market, and they tend to invest in bonds with specific characteristics--shorter-term bonds [right margin] "YIELD IS IMPORTANT BECAUSE, IN SHORTER-TERM FUNDS LIKE THIS, INTEREST INCOME MAKES UP A SIGNIFICANT PORTION OF THE TOTAL RETURN." YIELDS AS OF FEBRUARY 28, 1999 30-DAY SEC YIELD 3.03% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 4.64% 37.42% TAX BRACKET 4.84% 41.95% TAX BRACKET 5.22% 45.22% TAX BRACKET 5.53% PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 90 86 WEIGHTED AVERAGE MATURITY 4.0 YRS 3.6 YRS AVERAGE DURATION 3.3 YRS 3.0 YRS EXPENSE RATIO 0.51%* 0.52% * Annualized. Investment terms are defined in the Glossary on page 40. www.americancentury.com 5 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) that are non-callable (meaning they can't be paid off early) and that they can buy at par (a price equal to the face value). Retail investors typically buy newly issued bonds, but new issuance in California has been very limited so far in 1999. Instead, individuals have been buying existing bonds, and that demand has brought down the yields of non-callable par bonds. As a result, we sold some of our par bonds at a profit and replaced them with bonds that individual investors were avoiding, like callable bonds and non-par bonds. And the best part about these trades is that we were able to pick up a little yield while improving the fund's overall credit quality. DOES THAT EXPLAIN WHY THE FUND OWNS MORE AAA-RATED BONDS THAN IT DID SIX MONTHS AGO (SEE THE TABLE AT LEFT)? That's part of it. Most of the bonds we bought for yield were rated AA or better. But we also made a conscious choice to trade up in credit quality. By November, credit spreads--the differences in yield between municipal bonds with different credit ratings--had narrowed considerably, largely because of increased credit upgrades and wider use of bond insurance. We felt that credit spreads had gotten about as narrow as they would get, so we reduced our exposure to lower-rated bonds. Right now, more than two-thirds of the portfolio is rated AA or AAA. If credit spreads widen back out to more normal levels, our higher-rated bonds would likely outperform lower-quality ones. HAVE YOU SEEN ANY EVIDENCE OF WIDENING CREDIT SPREADS? Yes. One prominent municipal bond insurer recently indicated that it will be more selective about the bonds it insures going forward. This is a change from the past couple of years, when it seemed like insurers were willing to insure almost any municipal bond. As a result, we could see more bonds coming to market with lower-quality ratings. And a greater supply of lower-rated bonds means wider credit spreads. But it's too early to tell whether this is an isolated case or the beginning of a trend among bond insurers. The California economy remains very healthy, and that's generally positive for credit quality. WHAT EFFECT DOES THE STRONG STATE ECONOMY HAVE ON CALIFORNIA MUNICIPAL BOND YIELDS? In general, a strong economy tends to bring municipal yields down. It's partly because of improving credit quality--increased economic growth leads to higher tax revenues, which strengthen the ability of municipalities to pay off their debt. Credit quality goes up, and yields come down correspondingly. In California, one side effect of the robust economy has been less new issuance of municipal bonds. Budget surpluses at most municipalities reduced their need to borrow, so they've issued less debt. As I mentioned before, the lack of new supply had a significant impact on the California municipal market during the past six months and helped bring short-term yields down. [left margin] "WE FELT THAT CREDIT SPREADS HAD GOTTEN ABOUT AS NARROW AS THEY WOULD GET, SO WE REDUCED OUR EXPOSURE TO LOWER-RATED BONDS. RIGHT NOW, MORE THAN TWO-THIRDS OF THE PORTFOLIO IS RATED AA OR AAA." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 AAA 53% 43% AA 15% 14% A 27% 36% BBB 5% 7% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 39 for more information. 6 1-800-345-2021 California Limited-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) DO YOU EXPECT LOWER MUNICIPAL YIELDS GOING FORWARD? We think California municipal yields are in a "trading range," meaning that we expect yields to fluctuate within a fairly narrow range for the foreseeable future. Right now, yields are near the top of the range, so we may see yields decline in the coming months. We also expect to see the economy slow down a bit in 1999. In the last couple of years, there's been a pattern in the U.S. economy--unsustainably strong growth in the fourth quarter, and then slower growth as the consumer takes a breather in the first part of the following year. We anticipate the same modest slowing pattern in the first half of this year, which would be favorable for bonds in general. It's worth noting that short-term municipal yields are still attractive compared with short-term Treasury yields, so municipal bonds could also get a boost from increased investor demand. WHAT ARE YOUR PLANS FOR CALIFORNIA LIMITED-TERM TAX-FREE OVER THE NEXT SIX MONTHS? For now, we'll maintain the fund's longer-than-average duration, which will enhance returns if short-term municipal yields fall. In addition, we intend to stick with higher-quality bonds until we see wider credit spreads. We're also positioning the fund to take advantage of a narrowing trend among short-term municipal yields. During the past six months, the difference between the yields of one- and five-year municipal bonds widened out from about 45 basis points to 75 basis points (0.45% to 0.75%). That's about as wide as we think that gap will get, so we're in the process of repositioning the portfolio to benefit if that gap shrinks. [right margin] "SHORT-TERM MUNICIPAL YIELDS ARE STILL ATTRACTIVE COMPARED WITH SHORT-TERM TREASURY YIELDS, SO MUNICIPAL BONDS COULD ALSO GET A BOOST FROM INCREASED INVESTOR DEMAND." TOP FIVE SECTORS (AS OF 2/28/99) % OF FUND INVESTMENTS COPS/LEASES 34% HOSPITAL REVENUE 13% GO 10% ELECTRIC REVENUE 9% SALES TAX REVENUE 7% TOP FIVE SECTORS (AS OF 8/31/98) % OF FUND INVESTMENTS COPS/LEASES 27% HOSPITAL REVENUE 12% ELECTRIC REVENUE 11% HOUSING REVENUE 9% GO 9% Security types are defined on pages 40-41. www.americancentury.com 7 Cal. Limited-Term Tax-Free--Sch. of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES--99.5% CALIFORNIA--98.1% $1,235,000 Association of Bay Area Governments Finance Auth. COP, (Episcopal Homes Foundation), 4.50%, 7/1/03 $ 1,264,060 2,450,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,536,485 1,245,000 Association of Bay Area Governments Finance Auth. COP, (Rhoda Haas Goldman Plaza), 5.00%, 5/15/07 (California Mortgage Insurance) 1,309,566 565,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.45%, 11/1/99 569,819 590,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 4.60%, 11/1/00 598,797 1,145,000 California Educational Facilities Auth. Rev., (Pepperdine University), 5.125%, 1/15/02 (AMBAC) 1,195,769 1,080,000 California Educational Facilities Auth. Rev., Series 1995 A, (Pooled College & University Project), 4.95%, 12/1/02 1,129,486 395,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.45%, 4/1/02 414,154 420,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.55%, 4/1/03 446,401 440,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.65%, 4/1/04 473,686 465,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College & University Projects), 5.75%, 4/1/05 506,655 1,140,000 California Educational Facilities Auth. Rev., Series 1995 A, (University Project), 4.55%, 12/1/99 1,153,418 1,710,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/01 1,807,282 Principal Amount Value - -------------------------------------------------------------------------------- $1,910,000 California Educational Facilities Auth. Rev., Series 1997 A, (University of Southern California), 5.60%, 10/1/03 $ 2,072,560 1,445,000 California Health Facilities Financing Auth. Rev., (Little Co. Mary Health Service), 4.25%, 10/1/03 (AMBAC) 1,476,125 1,000,000 California Health Facilities Financing Auth. Rev., (Sisters Providence), 5.25%, 10/1/01 1,044,700 1,180,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/02 (MBIA) 1,239,590 1,750,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.50%, 11/1/01(1) 1,848,595 1,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.00%, 8/1/04 (California Mortgage Insurance) 1,053,590 1,245,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Kaiser Permanente), 5.00%, 6/1/06 (FSA) 1,316,700 1,600,000 California Public Works Board Lease Rev., Series 1995 A, (Department of Justice Building), 5.50%, 5/1/00 1,644,576 3,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Community Colleges), 5.00%, 4/1/02 3,125,970 1,065,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 4.50%, 10/1/04 1,104,139 1,025,000 California Special Districts Association Finance Corp. COP, Series 1998 GG, (Special Districts Financing), 4.25%, 9/1/02 (FSA) 1,053,454 1,000,000 California State GO, 5.00%, 10/1/06 1,067,960 2,325,000 California State GO, 6.10%, 2/1/02 (AMBAC) 2,493,586 1,500,000 California State GO, 6.25%, 9/1/04 1,687,215 1,600,000 California State GO, 6.70%, 10/1/01 1,731,744 1,965,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.00%, 7/1/06 2,065,294 See Notes to Financial Statements 8 1-800-345-2021 Cal. Limited-Term Tax-Free--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 California Statewide Community Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/05 (AMBAC and California Mortgage Insurance) $ 1,062,300 4,825,000 Central Valley Financing Auth. Cogeneration Project Rev., (Carson Ice General), 4.50%, 7/1/01 (MBIA) 4,951,801 3,000,000 Central Valley Schools Financing Auth. Tax and Rev. Anticipation Notes, 3.50%, 1/27/00 3,015,630 3,175,000 City of Whittier Health Rev., (Presbyterian Intercommunity Hospital), 5.50%, 6/1/02 (MBIA) 3,363,532 1,100,000 Clovis Unified School District COP, (Stadium & Relocatables Financing), 4.375%, 7/1/04 1,128,424 1,270,000 Contra Costa County Public Lease Financing Rev., Series 1999 A, 4.00%, 6/1/03 (MBIA) 1,290,104 1,000,000 Encinitas Unified School District COP, 5.00%, 9/1/01 1,035,350 1,775,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/01 (AMBAC) 1,863,253 1,400,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.25%, 11/1/05 (AMBAC) 1,519,126 2,955,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.30%, 5/1/01 3,072,018 1,000,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 4.90%, 5/1/03 1,044,650 1,600,000 Los Angeles Building Auth. Lease Rev., Series 1995 A, 5.60%, 5/1/04 1,731,440 1,230,000 Los Angeles Community Redevelopment Agency Financing Auth. Rev., Series 1998 E, (Pooled Financing- Monterey), 4.50%, 9/1/02 (FSA) 1,268,487 2,100,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1997 I, (Central Business District), 5.00%, 11/15/01 2,165,499 1,800,000 Los Angeles Convention and Exhibition Center COP, 6.60%, 8/15/99 (AMBAC) 1,831,374 5,000,000 Los Angeles COP, (Equipment & Real Estate Acquisition Program AC), 4.25%, 10/1/01 5,097,150 Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Los Angeles COP, (Equipment & Real Estate Acquisition Program AC), 4.50%, 10/1/04 $ 1,033,180 2,500,000 Los Angeles COP, (Equipment and Real Property Acquisition Program AE), 4.00%, 12/1/03 (AMBAC) 2,529,650 1,750,000 Los Angeles County Capital Asset Leasing Corp. Rev., Series 1998 B, 4.00%, 12/1/00 1,762,023 1,265,000 Los Angeles County Capital Asset Leasing Corp. Rev., 5.625%, 12/1/03 (AMBAC) 1,368,376 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/02 (AMBAC) 1,076,210 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/05 (AMBAC) 1,117,450 2,645,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.50%, 7/1/02 (MBIA) 2,813,592 2,360,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1996 A, 6.00%, 9/1/04 (MBIA) 2,625,382 1,500,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 A, (Master Reference), 4.50%, 3/1/05 (FSA) 1,553,925 5,000,000 Los Angeles County Public Works Financing Auth. Rev., Series 1997 A, (Regional Park & Open Space District), 5.00%, 10/1/01 5,206,600 1,950,000 Los Angeles County Public Works Financing Auth. Rev., Series 1997 A, (Regional Park and Open Space District), 6.00%, 10/1/02 2,113,020 1,015,000 Los Angeles County Schools Regionalized Business Services COP, Series 1997 C, 4.35%, 10/1/04 (FSA) 1,041,075 3,000,000 Los Angeles GO, Series 1994 A, 5.40%, 9/1/03 (MBIA) 3,226,350 3,100,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/04 (FGIC) 3,291,425 1,000,000 Los Angeles Wastewater System Rev., 6.70%, 2/1/00 1,031,740 See Notes to Financial Statements www.americancentury.com 9 Cal. Limited-Term Tax-Free--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,250,000 Los Angeles Wastewater System Rev., Series 1990 A, 6.80%, 2/1/01 $ 1,311,250 1,000,000 Los Angeles Wastewater System Rev., Series 1996 A, 6.00%, 2/1/03 (FGIC) 1,087,780 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.375%, 7/1/02 1,083,100 2,000,000 Modesto, Stockton, Redding Public Power Agency San Juan Project Rev., Series 1997 G, 5.50%, 7/1/01 (MBIA) 2,098,740 4,000,000 Northern California Power Agency Public Power Rev., Series 1998 A, (Geothermal Project No. 3), 4.75%, 7/1/03 (AMBAC) 4,182,600 1,365,000 Ontario Redevelopment Financing Auth. Rev., (Center City Cimarron), 5.70%, 8/1/01 (MBIA) 1,440,061 1,500,000 Orange County Transportation Sales Tax Rev., 5.50%, 2/15/01 (AMBAC) 1,562,265 1,160,000 Oroville Hospital Rev., Series 1997 A, (Oroville Hospital), 4.75%, 12/1/04 (California Mortgage Insurance) 1,213,743 1,000,000 Riverside County Asset Leasing Corporation Leasehold Rev., Series 1993 A, (Riverside County Hospital), 5.90%, 6/1/02 1,066,960 1,185,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.30%, 6/1/02 (AMBAC) 1,251,490 2,000,000 Riverside Unified School District COP, (School Facility Boarding Refunding Program), 3.85%, 9/1/01 (FSA) (SBBPA: First Union National Bank) 2,016,560 1,000,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments), 4.80%, 9/1/02 (Guarantee: Connecticut General Life Insurance) 1,020,720 1,000,000 Sacramento Redevelopment Agency Tax Allocation, Series 1998 A, (Merged Downtown Redevelopment), 4.40%, 11/1/07 (FSA) 1,025,280 1,360,000 Sacramento Schools Insurance Auth. Rev., Series 1993 C, (Workers Compensation Program), 5.75%, 6/1/03(1) 1,422,886 Principal Amount Value - -------------------------------------------------------------------------------- $2,450,000 San Bernardino County COP, (Medical Center Financing), 5.25%, 8/1/05 (MBIA) $ 2,647,299 2,000,000 San Bernardino County COP, Series 1995 A, (Medical Center Financing), 5.20%, 8/1/04 (MBIA) 2,134,660 1,600,000 San Bernardino County Transportation Auth. Sales Tax Rev., Series 1993 A, 5.10%, 3/1/05 (MBIA) 1,695,328 2,000,000 San Diego Unified School District COP, Series 1997 A, (Capital), 5.00%, 7/1/00 2,048,740 1,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 4, 5.625%, 5/1/05 (MBIA) 1,087,160 2,930,000 San Francisco Port Commission Rev., 5.25%, 7/1/99 2,953,294 1,000,000 San Jacinto Unified School District COP, (School Facilities Bridge Funding), 3.875%, 10/1/02 (FSA) (SBBPA: First Union National Bank) 1,000,310 1,085,000 Santa Barbara County COP, 4.90%, 3/1/01 1,116,584 800,000 South San Francisco Capital Improvements Financing Auth. Rev., Series 1999 A, 4.10%, 9/1/05 (ACA) 797,736 1,000,000 Southern California Public Power Auth. Electric Rev., 6.75%, 7/1/99 1,012,970 1,000,000 Southern California Public Power Auth. Power Project Rev., Series 1997 A, (Palo Verde), 5.00%, 7/1/04 (FSA) 1,061,750 1,075,000 Stockton Health Facilities Auth. Rev., Series 1997 A, (Dameron Hopital Association), 4.80%, 12/1/02 1,099,875 1,040,000 Victor Valley Joint Union High School District GO, 5.60%, 9/1/04 (MBIA) 1,138,550 ------------- 148,239,203 ------------- PUERTO RICO--0.7% 1,000,000 Puerto Rico Commonwealth Highway and Transportation Auth. Rev., Series 1996 Y, 6.00%, 7/1/03 (MBIA) 1,093,830 ------------- VIRGIN ISLANDS--0.7% 1,000,000 Virgin Islands Water and Power Auth. Electric System Rev., 5.00%, 7/1/02 1,034,630 ------------- TOTAL MUNICIPAL SECURITIES 150,367,663 ------------- (Cost $147,046,249) See Notes to Financial Statements 10 1-800-345-2021 Cal. Limited-Term Tax-Free--Sch. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- SHORT-TERM MUNICIPAL SECURITIES--0.5% $ 800,000 California State Economic Development Financing Auth. Rev., Series 1998 C, VRDN, 3.50%, 3/1/99 (LOC: Bank of America N.T. & S.A.) $ 800,000 ------------- (Cost $800,000) TOTAL INVESTMENT SECURITIES--100.0% $151,167,663 ============= (Cost $147,846,249) NOTES TO SCHEDULE OF INVESTMENTS ACA = American Capital Access Financial Guaranty Corp. AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FGIC = Financial Guaranty Insurance Co. FSA = Financial Security Assurance Inc. GO = General Obligation LOC = Letter of Credit MBIA = MBIA Insurance Corp. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. (1) Escrowed to maturity in U.S. Government or state and local government securities. - -------------------------------------------------------------------------------- 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 11 California Int.-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA INT.-TERM LEHMAN 5-YEAR CALIF. INTERMEDIATE MUNICIPAL DEBT FUNDS(2) TAX-FREE GO INDEX AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 2.51% 2.72% 2.37% -- 1 YEAR 5.46% 5.72% 5.16% 15 OUT OF 29 ================================================================================================ AVERAGE ANNUAL RETURNS ================================================================================================ 3 YEARS 5.75% 5.66% 5.62% 9 OUT OF 21 5 YEARS 5.73% 5.74% 5.56% 6 OUT OF 15 10 YEARS 6.98% 7.04% 6.98% 1 OUT OF 1
The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 39-40 for more information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/99 Lehman 5-Year GO Index $19,739 California Intermediate-Term Tax-Free $19,643 California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE VALUE VALUE 2/28/89 $10,000 $10,000 2/28/90 $10,858 $10,921 2/28/91 $11,787 $11,898 2/29/92 $12,690 $12,961 2/28/93 $14,297 $14,405 2/28/94 $14,870 $14,932 2/28/95 $15,073 $15,226 2/29/96 $16,614 $16,735 2/28/97 $17,314 $17,532 2/28/98 $18,630 $18,671 2/28/99 $19,643 $19,739 $10,000 investment made 2/28/89 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman 5-Year General Obligation Index is provided for comparison in each graph. California Intermediate-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED FEBRUARY 28) California Intermediate-Term Lehman 5-Year Tax-Free GO Index DATE RETURN RETURN 2/28/90 8.58% 8.35% 2/28/91 8.56% 8.96% 2/29/92 7.66% 8.92% 2/28/93 12.66% 11.12% 2/28/94 4.01% 3.67% 2/28/95 1.36% 1.97% 2/29/96 10.23% 9.91% 2/28/97 4.21% 4.76% 2/28/98 7.60% 6.50% 2/28/99 5.46% 5.72% 12 1-800-345-2021 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- /photo of Colleen Denzler/ An interview with Colleen Denzler, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID CALIFORNIA INTERMEDIATE-TERM TAX-FREE PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1999? The fund continued to outperform its peers. For the six-month period, California Intermediate-Term Tax-Free returned 2.51%, compared with the 2.37% average return of the 29 "California Intermediate Municipal Debt Funds" tracked by Lipper Inc. The fund's longer-term returns also consistently beat the average California intermediate municipal fund. (See the previous page for other fund performance comparisons.) WHY DID THE FUND OUTPERFORM ITS PEER GROUP AVERAGE? We had a longer duration than many of our peers, which meant we were better positioned to benefit from falling interest rates. (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.) Municipal yields were fairly volatile over the past six months, so our longer duration helped when yields fell and hurt when they rose. Overall, though, intermediate-term municipal yields declined, so the fund generated more gains on its bonds. California Intermediate-Term Tax-Free's duration lengthened from 5.6 years to 6.0 years during the six-month period. We accomplished this by adding some bonds with maturities of 15-20 years to the portfolio, including several Puerto Rico bonds. DO PUERTO RICO BONDS HAVE TAX-EXEMPT STATUS IN CALIFORNIA? Yes. Municipal bonds issued by United States territories--including Puerto Rico, Guam, and the Virgin Islands--have the unique distinction of providing federal and state tax-free income for investors in all 50 states. That distinction makes them very desirable investments, especially for investors in high-tax states like California and New York. Heavy demand from around the country means that Puerto Rico municipal yields are typically 5-10 basis points (0.05% to 0.10%--a basis point equals 0.01%) lower than California municipal yields. WHY DID YOU BUY THESE PUERTO RICO BONDS? They just happened to fit our needs at the time. We were looking to extend the fund's duration by buying some bonds in the 15- to 20-year maturity range, but the limited supply available in California depressed yields and made those bonds very expensive. [right margin] "THE FUND'S LONGER-TERM RETURNS CONSISTENTLY BEAT THE AVERAGE CALIFORNIA INTERMEDIATE MUNICIPAL FUND." YIELDS AS OF FEBRUARY 28, 1999 30-DAY SEC YIELD 3.46% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 5.30% 37.42% TAX BRACKET 5.53% 41.95% TAX BRACKET 5.96% 45.22% TAX BRACKET 6.31% PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 145 151 WEIGHTED AVERAGE MATURITY 9.1 YRS 8.6 YRS AVERAGE DURATION 6.0 YRS 5.6 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on page 40. www.americancentury.com 13 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) Instead, we found what we were looking for in Puerto Rico. We were able to get insured, AAA-rated Puerto Rico bonds in the maturity range we wanted while picking up a few basis points in yield over comparable California securities. This was a key theme to the changes we made to the portfolio over the past six months--trying to add yield whenever possible while maintaining a longer-than-average duration. WHAT ELSE DID YOU DO TO BOOST CALIFORNIA INTERMEDIATE-TERM TAX-FREE'S YIELD? We were able to trade up in yield among the fund's short-term securities. We own a number of shorter-term bonds because they help balance out the duration of the longer-term bonds we added. During the past six months, short-term California municipal yields spread out quite a bit--you could pick up an extra 75-100 basis points in yield by moving from a one-year to a four-year security, compared with maybe 35 basis points six months ago. So we sold some securities maturing in less than a year and replaced them with three- and four-year bonds. This gave us a nice yield pick-up while having little effect on the fund's duration or overall positioning. We also got some extra yield by investing in premium callable bonds. WHAT ARE THOSE? Premium bonds trade at a price above face value, mainly because their interest coupons are higher than prevailing market rates. Callable bonds allow the municipality that issued them to pay back the principal early, kind of like a homeowner does when refinancing a mortgage. Typically, the issuer can only "refinance" the bonds on a specific call date. The municipality usually issues new bonds at a lower rate and uses the proceeds to pay off the older bonds. As you might expect, the higher interest rates of premium bonds means they are more likely to be called. HOW DID THESE SECURITIES PROVIDE EXTRA YIELD? Instead of buying ordinary 10-year municipal bonds, we bought longer-term premium callable bonds. Although these bonds had maturities of 15-20 years, they had call dates of around 10 years. Because of their high interest coupons, the premium callable bonds were priced in the marketplace as if they would be called in 10 years. As a result, we got the price volatility of a 10-year bond, but with the higher yield of a 15- to 20-year bond. The risk of this approach is that interest rates will rise to the point where these premium bonds begin to trade based on their maturity date rather than their call date. That would lead to greater price volatility at a time when bond prices are falling. However, yields would have had to rise substantially to affect the bonds we held. [left margin] "INSURED BONDS STILL MAKE UP TWO-THIRDS OF THE PORTFOLIO, AND MORE THAN 80% OF THE FUND'S BONDS ARE RATED AA OR AAA. THIS REFLECTS OUR BELIEF THAT CREDIT SPREADS--THE DIFFERENCES IN YIELD BETWEEN MUNICIPAL BONDS WITH DIFFERENT CREDIT RATINGS --ARE ABOUT AS NARROW AS THEY'RE GOING TO GET." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 AAA 65% 64% AA 17% 14% A 17% 21% BBB 1% 1% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 39 for more information. 14 1-800-345-2021 California Intermediate-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) DID THE PORTFOLIO'S CREDIT QUALITY CHANGE AT ALL? No. Insured bonds still make up two-thirds of the portfolio, and more than 80% of the fund's bonds are rated AA or AAA. This reflects our belief that credit spreads--the differences in yield between municipal bonds with different credit ratings--are about as narrow as they're going to get. We expect to see credit spreads widen back out at some point going forward. If that happens, our higher-rated bonds will more than likely outperform lower-quality ones. But it may be a while before that happens. The California economy is in excellent shape, and that's usually good news for municipal credit quality. DOES THAT ALSO MEAN GOOD NEWS FOR THE CALIFORNIA MUNICIPAL BOND MARKET GOING FORWARD? The resiliency of the California economy is definitely positive for the state's municipal bonds. Six months ago, there were fears that the recession in many Asian economies would have a negative impact on California because the state does a lot of business with that region. But the Asian slowdown had virtually no effect on the California economy. Continued healthy economic growth leads to higher tax revenues, which strengthen the ability of municipalities to pay off their debt. Credit quality goes up, and so do bond prices as yields come down correspondingly. In addition to the favorable economic conditions, longer-term municipal bonds are still fairly attractive, especially relative to Treasury bonds. For much of 1998, municipal bond yields were very high compared with Treasury yields. In recent months, short- and intermediate-term municipal yields have fallen, but longer-term yields remained relatively high. We think this represents the best value in the municipal market right now, and that's one reason why we've added longer-term municipal bonds to California Intermediate-Term Tax-Free's portfolio over the past six months. DO YOU PLAN TO MAINTAIN THIS POSITION GOING FORWARD? For the time being. If longer-term municipal yields fall in the coming months, we may look to trim our duration back toward a neutral position. Other than that, though, we're pretty comfortable with our current position. We'll continue to look for opportunities to boost the level of tax-free income in the portfolio, and we also intend to stick with higher-quality bonds until we see wider credit spreads. [right margin] "LONGER-TERM MUNICIPAL BONDS ARE STILL FAIRLY ATTRACTIVE, ESPECIALLY RELATIVE TO TREASURY BONDS. WE THINK THIS REPRESENTS THE BEST VALUE IN THE MUNICIPAL MARKET RIGHT NOW." TOP FIVE SECTORS (AS OF 2/28/99) % OF FUND INVESTMENTS COPS/LEASES 26% GO 20% SALES TAX REVENUE 12% WATER AND SEWER REVENUE 11% ELECTRIC REVENUE 8% TOP FIVE SECTORS (AS OF 8/31/98) % OF FUND INVESTMENTS COPS/LEASES 27% SALES TAX REVENUE 13% GO 13% WATER AND SEWER REVENUE 11% PREREFUNDED/ETM 11% Security types are defined on pages 40-41. www.americancentury.com 15 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES--99.0% CALIFORNIA--90.0% $ 8,845,000 Alameda County COP, (Santa Rita Jail), 5.375%, 6/1/09 (MBIA) $ 9,607,616 2,450,000 Association of Bay Area Governments Financing Auth. COP, (Episcopal Homes Foundation), 4.80%, 7/1/06 2,536,485 4,060,000 Burbank Redevelopment Agency Tax Allocation, (West Olive), 6.50%, 12/1/01 (AMBAC) 4,398,563 1,335,000 California Community College Financing Auth. Lease Rev., Series 1999 A, 4.20%, 10/1/10 (MBIA) 1,316,030 1,210,000 California Community College Financing Auth. Lease Rev., Series 1999 A, 4.30%, 10/1/11 (MBIA) 1,190,652 1,175,000 California Educational Facility Auth. Rev., (Santa Clara University), 5.25%, 9/1/10 (MBIA) 1,249,131 2,145,000 California Educational Facility Auth. Rev., (University of San Diego), 6.75%, 10/1/00, Prerefunded at 102% of Par (MBIA)(1) 2,308,964 1,045,000 California Health Facilities Financing Auth. Rev., (Valley Presbyterian Hospital), 5.25%, 5/1/03 (MBIA) 1,108,609 1,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 6.70%, 10/1/99 1,532,865 1,745,000 California Health Facilities Financing Auth. Rev., Series 1993 A, (St. Francis Memorial Hospital), 5.625%, 11/1/02(1) 1,871,600 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) 1,729,244 3,145,000 California Health Facilities Financing Auth. Rev., Series 1995 A, (Insured Health Facility), 6.00%, 7/1/04 (AMBAC) 3,467,992 1,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.50%, 8/1/12 (California Mortgage Insurance) 1,059,950 Principal Amount Value - -------------------------------------------------------------------------------- $ 3,250,000 California Public Works Board Energy Efficiency Rev., Series 1991 A, (Pooled Project), 6.00%, 9/1/99 $ 3,301,480 1,320,000 California Public Works Board Energy Efficiency Rev., Series 1998 A, 5.00%, 10/1/11 (AMBAC) 1,388,508 2,000,000 California Public Works Board Lease Rev. COP, Series 1990 A, (University of California), 6.90%, 9/1/00(2) 1,901,280 4,520,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Archives Building Project), 6.20%, 12/1/05 (AMBAC) 5,148,370 1,000,000 California Public Works Board Lease Rev. COP, Series 1992 A, (Various University of California Projects), 5.90%, 12/1/03 (AMBAC) 1,097,450 3,700,000 California Public Works Board Lease Rev. COP, Series 1993 D, (California State Prisons), 5.25%, 6/1/08 3,917,190 3,000,000 California Public Works Board Lease Rev. COP, Series 1994 A, (Various University of California Projects), 6.15%, 11/1/04, Prerefunded at 102% of Par(1) 3,427,800 1,010,000 California Public Works Board Lease Rev. COP, Series 1997 A, (California Science Center), 4.60%, 10/1/05 1,052,238 1,000,000 California Public Works Board Lease Rev. COP, Series 1997 D, (Department of Corrections), 5.75%, 9/1/06 (MBIA) 1,115,690 1,470,000 California Public Works Board Lease Rev. COP, Series 1996 C, (Department of Corrections), 5.125%, 9/1/11 (MBIA) 1,555,157 4,795,000 California State Department Water Resource Rev., (Central Valley Project), Series 1992 J-2, (Water System), 5.80%, 12/1/04 5,317,032 7,000,000 California State GO, 4.50%, 12/1/21 (FGIC) 6,531,490 5,925,000 California State GO, 4.75%, 9/1/11 6,137,352 5,250,000 California State GO, 5.00%, 10/1/06 5,606,790 6,460,000 California State GO, 5.00%, 10/1/07 6,899,151 See Notes to Financial Statements 16 1-800-345-2021 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,700,000 California State GO, 5.00%, 10/1/11 $ 4,930,535 5,860,000 California State GO, 5.75%, 10/1/08 6,608,146 4,270,000 California State GO, 6.30%, 9/1/08 (MBIA) 4,998,377 2,500,000 California State GO, 6.50%, 10/1/05 2,883,425 10,000,000 California State GO, 6.50%, 3/1/02 (AMBAC) 10,855,500 1,855,000 California State GO, 7.00%, 11/1/06 (FGIC) 2,219,062 3,000,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 3,254,130 8,000,000 California Statewide Communities Development Auth. COP, (California Lutheran Homes), 5.375%, 11/15/06 8,682,400 2,500,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System Obligation Group), 5.25%, 7/1/11 2,629,750 2,385,000 California Statewide Communities Development Auth. COP, (St. Joseph Health System), 6.50%, 7/1/03(1) 2,664,450 2,545,000 Capistrano Unified Public Financing Auth. Special Tax Rev., Series 1996 A, (First Lien), 6.00%, 9/1/06 (AMBAC) 2,876,919 2,075,000 Chabot Las Positas Community College District COP, 5.50%, 12/1/10 (FSA) 2,310,990 1,065,000 Contra Costa County Water District Rev., Series 1990 A, 7.00%, 10/1/00, Prerefunded at 102% of Par(1) 1,148,432 7,935,000 Contra Costa Transportation Auth. Sales Tax Rev., Series 1993 A, 6.00%, 3/1/05 (FGIC) 8,858,872 1,220,000 Coronado Community Development Agency Tax Allocation, 6.00%, 9/1/08 (FSA) 1,374,306 2,570,000 East Bay Municipal Utility District Water System Rev., 6.00%, 6/1/05 2,803,330 3,590,000 East Bay Municipal Utility District Water System Rev., 4.50%, 6/1/12 3,594,488 3,000,000 Fremont Unified School District Alameda County GO, 5.25%, 9/1/16 (MBIA) 3,126,780 Principal Amount Value - -------------------------------------------------------------------------------- $ 4,230,000 Fresno Special Tax, (Community Facilities District No. 3), 4.75%, 9/1/05 (LOC: Rabobank International) $ 4,315,446 1,285,000 Garden Grove Agency Community Development Tax Allocation, (Garden Grove Community), 5.30%, 10/1/02 1,346,988 7,350,000 Imperial Irrigation District COP, (Electrical System), 6.50%, 11/1/07 (MBIA) 8,659,329 1,225,000 Imperial Irrigation District COP, (Electrical System), 5.20%, 11/1/09 (AMBAC) 1,331,134 2,715,000 Irvine Unified School District Special Tax, (Community Facilities District No. 86-1), 5.50%, 11/1/10 (AMBAC) 2,999,885 1,750,000 Loma Linda Hospital Rev., (University Medical Center), 6.95%, 12/1/05 (AMBAC) 1,836,118 2,300,000 Los Angeles Airport Rev., Series 1995 A, 6.00%, 5/15/05 (FGIC) 2,571,699 4,000,000 Los Angeles Capital Asset Lease Rev. COP, 5.875%, 12/1/05 (AMBAC) 4,454,120 1,155,000 Los Angeles Convention and Exhibition Center Auth. Lease Rev. COP, Series 1993 A, 6.00%, 8/15/10 (MBIA) 1,335,261 4,315,000 Los Angeles COP, (Equipment & Real Estate Acquisition Program), 4.60%, 10/1/05 4,480,178 2,625,000 Los Angeles County Metropolitan Transportation Auth. Rev., Series 1996 A, (Union Station), 5.10%, 7/1/10 (FSA) 2,779,403 1,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1995 A, (Proposition C), 5.90%, 7/1/06 (AMBAC) 1,124,670 6,175,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1997 A, (Proposition A), 5.25%, 7/1/12 (MBIA) 6,551,428 1,000,000 Los Angeles County Public Properties COP, 6.25%, 4/1/00 (BIGI) 1,034,620 3,500,000 Los Angeles County Public Works Financing Auth. Lease Rev., Series 1997 B, (Multiple Capital Facilities), 5.125%, 12/1/17 (AMBAC) 3,570,000 2,625,000 Los Angeles County Sanitation Districts Financing Auth. Rev., Series 1993 A, (Capital), 5.20%, 10/1/05 2,823,319 See Notes to Financial Statements www.americancentury.com 17 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,900,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.00%, 7/1/01 $ 3,063,531 4,665,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.20%, 7/1/03 5,101,504 2,000,000 Los Angeles County Transportation Commission COP, Series 1992 B, 6.25%, 7/1/04 2,193,780 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) 2,724,900 3,515,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.20%, 7/1/04 3,908,223 3,765,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1992 A, (Proposition C), 6.40%, 7/1/06 4,315,744 4,780,000 Los Angeles County Wastewater System Rev., Series 1992 B, 6.20%, 6/1/02, Prerefunded at 102% of Par (AMBAC)(1) 5,271,575 1,000,000 Los Angeles Department of Water and Power Waterworks Rev., 6.30%, 4/15/06 (FGIC) 1,085,540 8,490,000 Los Angeles Department of Water and Power Waterworks Rev., 5.00%, 10/15/14 (FGIC) 8,697,241 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/10 (FGIC) 1,151,810 2,900,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/11 (FGIC) 3,345,701 1,000,000 Los Angeles Unified School District GO, Series 1997 A, 6.00%, 7/1/15 (FGIC) 1,145,240 4,150,000 Los Gatos-Saratoga Joint Unified School District, Series 1998 A, 4.375%, 10/1/18 3,825,719 1,000,000 Metropolitan Water District of Southern California Waterworks Rev., 6.625%, 7/1/01, Prerefunded at 102% of Par(1) 1,094,290 5,000,000 Metropolitan Water District of Southern California Waterworks Rev., Series 1996 C, 5.00%, 7/1/10 5,288,600 1,100,000 Mojave Water Agency Improvement District GO, (Morongo Basin), 5.40%, 9/1/08 (FGIC) 1,206,007 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Morgan Hill Redevelopment Agency Tax Allocation, (Ojo De Agua Community Development), 5.50%, 3/1/99 $ 1,000,350 1,130,000 Ontario Redevelopment Financing Auth. Local Agency Rev., Series 1995 A, 5.80%, 9/2/06 (FSA) 1,234,389 3,000,000 Orange County Water District COP, Series 1997 A, 5.00%, 8/15/14 (MBIA) 3,072,450 1,330,000 Oxnard Harbor District Rev., 7.00%, 8/1/04 (FSA) 1,534,554 1,000,000 Ramona Municipal Water District COP, 6.90%, 10/1/01 (AMBAC) 1,073,540 1,060,000 Redding Joint Powers Financing Auth. Electric System Rev., Series 1996 A, 6.25%, 6/1/07 (MBIA) 1,222,721 1,010,000 Richmond Joint Powers Financing Auth. Rev. COP, Series 1995 A, 5.30%, 5/15/06 1,079,478 2,080,000 Riverside County Public Financing Auth. Special Tax Rev., Series 1995 A, 5.25%, 9/1/04 (MBIA) 2,241,075 1,225,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.60%, 6/1/05 (AMBAC) 1,347,169 2,900,000 Riverside County Transportation Commission Sales Tax Rev., Series 1993 A, 5.70%, 6/1/06 (AMBAC) 3,222,393 1,025,000 Rocklin Unified School District Community Facility Special Tax Rev., (No. 1), 5.20%, 9/1/09 (MBIA) 1,105,955 2,600,000 Sacramento County Multifamily Housing Rev., Issue 1985 B, (Parcwood Apartments), 4.80%, 9/1/02 (Guaranteed: Connecticut General Life Insurance) 2,653,872 1,000,000 Sacramento Municipal Utility District Electric Rev., Series 1992 A, 6.25%, 8/15/10 (MBIA) 1,178,560 5,710,000 Sacramento Municipal Utility District Electric Rev., Series 1992 C, 5.75%, 11/15/07 (MBIA) 6,220,931 3,500,000 Sacramento Municipal Utility District Electric Rev., Series 1994 H, 5.75%, 1/1/11 (MBIA) 3,831,520 4,230,000 Sacramento Municipal Utility District Electric Rev., Series 1997 L, 5.00%, 7/1/10 (AMBAC) 4,484,054 See Notes to Financial Statements 18 1-800-345-2021 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,205,000 Saddleback Valley Unified School District Public Financing Special Tax Rev., 6.00%, 9/1/11 (FSA) $ 1,395,944 5,000,000 San Bernardino County COP, Series 1995 A, (Medical Center), 5.75%, 8/1/07 (MBIA) 5,611,300 2,000,000 San Diego County COP, (Central Jail), 5.00%, 10/1/10 (AMBAC) 2,096,360 7,200,000 San Diego County Water Auth. Rev. COP, Series 1991 A, 6.125%, 5/1/03 7,734,456 2,000,000 San Diego County Water Auth. Rev. COP, Series 1998 A, 4.50%, 5/1/24 (FGIC) 1,856,200 3,505,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/04 (FGIC) 3,798,053 5,175,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1992 A, 5.50%, 4/1/05 (FGIC) 5,651,048 4,000,000 San Diego Regional Transportation Commission Sales Tax Rev., Series 1994 A, 6.00%, 4/1/04 (FGIC) 4,424,640 1,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 5.35%, 7/1/07 (FGIC) 1,074,880 2,200,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/17 (MBIA) 2,098,580 3,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/19 (MBIA) 2,823,270 7,000,000 San Francisco City and County GO, Series 1, 4.50%, 6/15/05 (FGIC) 7,273,980 1,605,000 San Francisco City and County Public Utilities Commission Water Rev., Series 1996 A, 5.00%, 11/1/11 1,683,372 3,405,000 San Francisco Port Commission Rev., 5.625%, 7/1/02 3,614,373 1,000,000 San Jacinto Unified School District COP, 3.875%, 10/1/02 (FSA) (SBBPA: First Union National Bank) 998,010 3,950,000 San Jose Financing Auth. Rev. COP, (Convention Center), 6.00%, 9/1/05 4,248,107 4,580,000 San Jose Financing Auth. Rev. COP, Series 1993 A, (Convention Center), 6.10%, 9/1/06 4,936,553 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) $ 4,158,108 1,620,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, 4.875%, 7/15/11 (FSA) 1,683,115 4,585,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.00%, 6/1/11 (MBIA) 4,867,895 1,750,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/15 (MBIA) 1,857,433 1,015,000 Santa Ana Police Administration COP, Series 1994 A, 5.50%, 7/1/07 (MBIA) 1,101,194 3,610,000 Santa Clara County Financing Auth. Lease Rev., Series 1994 A, (VMC Facility Replacement), 6.75%, 11/15/04, Prerefunded at 102% of Par (AMBAC)(1) 4,246,551 1,510,000 Santa Clara County Financing Auth. Lease Rev., Series 1997 A, 6.00%, 11/15/12 (AMBAC) 1,752,506 4,000,000 Santa Clara County Financing Auth. Lease Rev., Series 1998 A, (Multiple Facilities), 4.125%, 5/15/07 (AMBAC) 4,030,360 3,440,000 Santa Clara County Financing Auth. Lease Rev., Series 1998 A, (Multiple Facilities), 4.30%, 5/15/09 (AMBAC) 3,474,710 5,255,000 Santa Clara County Financing Auth. Lease Rev., Series 1998 A, (Multiple Facilities), 4.50%, 5/15/11 (AMBAC) 5,303,136 1,785,000 South Sutter Water District Hydroelectric Rev., 6.80%, 8/1/01 (FGIC) 1,849,563 3,090,000 Southern California Public Power Auth. Rev., (Transmission), 5.625%, 7/1/03 (MBIA) 3,338,930 2,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/00 2,090,760 3,000,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/01 3,183,270 4,065,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.20%, 7/1/02 (MBIA) 4,354,387 5,000,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.40%, 7/1/04 (MBIA) 5,379,800 See Notes to Financial Statements www.americancentury.com 19 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,500,000 Southern California Rapid Transit District COP, (Workers Compensation), 6.50%, 7/1/07 (MBIA) $ 1,616,595 2,000,000 Stanislaus County COP, 5.50%, 5/1/06 (MBIA) 2,191,400 1,150,000 Taft Public Financing Auth. Lease Rev. COP, Series 1997 A, (Community Correctional Facility), 5.50%, 1/1/06 1,235,261 1,510,000 Tulare County COP, 5.00%, 8/15/10 (MBIA) 1,597,172 1,950,000 University of California Rev., (University of California Medical Center), 5.60%, 7/1/09 (AMBAC) 2,128,191 2,510,000 Watsonville Hospital Insured Rev., Series 1996 A, (Watsonville Community Hospital), 5.45%, 7/1/03 (California Mortgage Insurance)(1) 2,688,411 3,980,000 Whittier Health Facility Rev., (Presbyterian Intercommunity), 6.00%, 6/1/06 (MBIA) 4,470,535 1,465,000 Woodland Wastewater System COP, 6.00%, 3/1/06 (AMBAC) 1,647,891 ------------- 436,296,885 ------------- PUERTO RICO--9.0% 14,150,000 Puerto Rico Commonwealth GO, 4.50%, 7/1/23 13,019,132 3,655,000 Puerto Rico Commonwealth GO, 6.00%, 7/1/16 (MBIA) 4,202,300 3,000,000 Puerto Rico Commonwealth Highway and Transportation Auth. Rev., Series 1993 X, 5.10%, 7/1/03 (MBIA) 3,176,370 3,500,000 Puerto Rico Commonwealth Infrastructure Financing Auth. Special Tax Rev., Series 1998 A, 5.50%, 7/1/08 (AMBAC) 3,884,265 Principal Amount Value - -------------------------------------------------------------------------------- $ 5,000,000 Puerto Rico Electric Power Auth. Rev., Series 1995 W, 6.00%, 7/1/03 (MBIA) $ 5,462,850 5,790,000 Puerto Rico Electric Power Auth. Rev., Series 1998 DD, 4.50%, 7/1/19 (FSA) 5,518,623 3,090,000 Puerto Rico Public Buildings Auth. Rev., Series 1995 A, 6.25%, 7/1/09 (AMBAC) 3,629,760 4,500,000 Puerto Rico Public Finance Corp., Series 1998 A, 5.375%, 6/1/11 (AMBAC) 4,927,770 ------------- 43,821,070 ------------- TOTAL MUNICIPAL SECURITIES 480,117,955 ------------- (Cost $458,492,713) SHORT--TERM MUNICIPAL SECURITIES--1.0% 1,600,000 California State Economic Development Financing Auth. Rev., Series 1998 C, VRDN, 3.50%, 3/1/99 (LOC: Bank of America N.T. & S.A.) 1,600,000 3,100,000 California Statewide Community Development Auth. Rev., Floating Rate Trust Receipts, 2.95%, 3/3/99 (FSA) (SBBPA: Bank of New York) (Acquired 2/16/99, Cost $3,100,000)(3)(4) 3,100,000 ------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES 4,700,000 ------------- (Cost $4,700,000) TOTAL INVESTMENT SECURITIES--100.0% $484,817,955 ============= (Cost $463,192,713) See Notes to Financial Statements 20 1-800-345-2021 Cal. Int.-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) 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. SBBPA = Standby Bond Purchase Agreement VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. (1) Escrowed to maturity in U.S. Government securities or state and local government securities. (2) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (3) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement, and unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The value of the security at February 28, 1999 was $3,100,000, which represented 0.6% of net assets. (4) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. - -------------------------------------------------------------------------------- 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 California Long-Term Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA LONG-TERM LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNICIPAL INDEX AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 2.20% 2.24% 2.09% -- 1 YEAR 6.17% 6.40% 5.43% 10 OUT OF 107 ========================================================================================== AVERAGE ANNUAL RETURNS ========================================================================================== 3 YEARS 6.93% 7.99% 6.49% 28 OUT OF 91 5 YEARS 6.58% 7.43% 6.04% 13 OUT OF 65 10 YEARS 8.04% 9.11% 7.58% 7 OUT OF 33
The fund's inception date was 11/9/83. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 39-40 for more information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/99 Lehman Long-Term Municipal Index $23,922 California Long-Term Tax-Free $21,621 California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE VALUE VALUE 2/28/89 $10,000 $10,000 2/28/90 $10,841 $11,108 2/28/91 $11,764 $12,141 2/29/92 $12,923 $13,521 2/28/93 $14,791 $15,730 2/28/94 $15,754 $16,716 2/28/95 $15,781 $16,876 2/29/96 $17,715 $18,996 2/28/97 $18,603 $20,170 2/28/98 $20,402 $22,483 2/28/99 $21,621 $23,922 $10,000 investment made 2/28/89 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each graph. California Long-Term Tax-Free's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED FEBRUARY 28) California Long-Term Lehman Long-Term Tax-Free Municipal Index DATE RETURN RETURN 2/28/90 8.41% 11.08% 2/28/91 8.51% 9.30% 2/29/92 9.86% 11.37% 2/28/93 14.45% 16.33% 2/28/94 6.51% 6.27% 2/28/95 0.17% 0.96% 2/29/96 12.26% 12.56% 2/28/97 5.01% 6.18% 2/28/98 9.67% 11.47% 2/28/99 6.17% 6.40% 22 1-800-345-2021 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- /photo of Dave MacEwen/ An interview with Dave MacEwen, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM DURING THE SIX MONTHS ENDED FEBRUARY 28, 1999? California Long-Term Tax-Free posted a total return of 2.20%, which was better than the 2.09% average total return of its peer group--108 "California Municipal Debt Funds" tracked by Lipper Inc. (See the previous page for other fund performance comparisons.) The fund also produced more tax-free income than its peers did. The fund's 30-day SEC yield as of February 28 was 4.17%, compared with the 3.75% yield of the average California municipal fund, according to Lipper. WHAT WAS YOUR INVESTMENT APPROACH DURING THE PERIOD? Given our view that interest rates would decline due to global economic weakness, we kept California Long-Term Tax-Free's duration a bit longer than the average duration of its benchmark (a group of funds with similar investment objectives). Duration measures how sensitive a fund's share price is to changes in interest rates. (The longer a fund's duration, the more the share price will rise or fall when rates change.) Having a slightly longer-than-average duration was a plus for the fund's performance during periods when interest rates declined--such as last autumn and in January--but detracted from performance when rates were on the upswing, like they were in February. Although we make small adjustments to duration based on our interest rate expectations, we generally keep the fund's duration within a year of the duration of California Long-Term Tax-Free's benchmark. Our expectations of lower interest rates also led us to emphasize discount bonds--bonds that trade below their face value. WHY DO FALLING INTEREST RATES FAVOR DISCOUNT BONDS? Discount bonds typically perform best when rates are falling because municipal bond issuers often "call" outstanding bonds. Calling essentially means that municipalities refinance their debt at lower rates, similar to what occurs when homeowners refinance home mortgages. Because the coupons--the interest rates issuers promise to pay --on discount bonds are below prevailing rates, there is less incentive for issuers to refinance them. As a result, the durations of discount bonds remain long, so they generate more price gains when rates fall. Conversely, rising interest rates tend to hurt discount bonds. Investors become less worried that bonds will be called and are less willing to pay more for the call protection that discount bonds provide. The focus on discount bonds served us well during periods when rates were falling but detracted from fund performance when rates rose. Because of unexpectedly strong economic growth, there was more of the latter than we expected. [right margin] "WE KEPT CALIFORNIA LONG-TERM TAX-FREE'S DURATION A BIT LONGER THAN THE AVERAGE DURATION OF ITS BENCHMARK." YIELDS AS OF FEBRUARY 28, 1999 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 2/28/99 8/31/98 NUMBER OF SECURITIES 84 83 WEIGHTED AVERAGE MATURITY 20.0 YRS 19.5 YRS AVERAGE DURATION 8.7 YRS 8.7 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on page 40. www.americancentury.com 23 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) THE DIFFERENCE IN YIELD--OR THE "SPREAD" --BETWEEN SECURITIES WITH HIGHER AND LOWER CREDIT QUALITY REMAINED HISTORICALLY NARROW DURING THE PAST SIX MONTHS. HOW DID THAT AFFECT YOUR INVESTMENT APPROACH? Narrow yield spreads between bonds with higher and lower credit quality justified our focus on relatively high-quality securities. By the end of the period, 60% of the fund's assets were invested in the highest-quality AAA bonds--many of them insured--with the remainder invested in bonds with ratings of BBB or higher. History tells us that under normal conditions, investors tend to be rewarded with anywhere from 30 to 80 basis points (0.30-0.80%--a basis point equals 0.01%) more yield for owning a BBB California municipal security instead of a AAA security. That extra yield is compensation for the added risk that the issuer will be unable to make timely interest and principal payments. Throughout much of the period, however, BBB securities offered only about 35 basis points more yield than AAA insured bonds. Even in the highest-quality tiers of the California municipal market, spreads were very tight. At one point, for example, the yield difference between an insured bond and an uninsured bond from the same issuer was just 1 basis point. The narrow spreads were a direct result of diminished supply of lower-rated bonds and strong demand for securities with higher yields. As municipal bond insurance became more prevalent, there were fewer lower-quality bonds available. Also curtailing supply were credit upgrades resulting from the strong fiscal and economic condition of many California issuers. In light of the state's ongoing economic strength, investors didn't demand much more yield from lower-quality bonds because they felt the additional risks of owning them were minimal. From a demand standpoint, investors increasingly sought lower-quality securities for additional yield in a falling rate environment. Reduced supply and firm demand caused lower-quality municipal bonds to outperform higher-quality securities throughout the period. In our minds, however, the small incremental yield lower-quality securities offered wasn't adequate to override their added credit risk. WHAT'S YOUR OUTLOOK FOR INTEREST RATES? In our view, interest rates could resume their decline this year, although we wouldn't be surprised to see them temporarily drift higher as investors digest news about strong growth and low unemployment. While the U.S. economy grew much faster than expected in the fourth quarter of last year and unemployment hit 29-year lows, inflation remained in check. Continued low inflation owed much to slowing economies in the rest of the world. Many Asian countries are struggling through recessions, with some teetering toward depression. Parts of Latin America have also come under pressure as they deal with high inflation, unstable currencies, and slowing economies. In addition, Europe shows signs of slowing down in reaction to problems encountered with the introduction of the continent's unified currency, the euro. [left margin] "NARROW YIELD SPREADS BETWEEN BONDS WITH HIGHER AND LOWER CREDIT QUALITY JUSTIFIED OUR FOCUS ON RELATIVELY HIGH-QUALITY SECURITIES. BY THE END OF THE PERIOD, 60% OF THE FUND'S ASSETS WERE INVESTED IN THE HIGHEST-QUALITY AAA BONDS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 AAA 60% 53% AA 9% 11% A 26% 30% BBB 5% 6% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 39 for more information. 24 1-800-345-2021 California Long-Term Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) With such anemic growth overseas, we're likely to see excess global capacity for all types of goods and services, and practically no pricing pressures as a result. Combine that with increasing productivity due to technological improvements, and it appears unlikely that inflation will be a problem any time soon. WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET? Continued low inflation and declining interest rates would certainly help boost the market. But supply and demand will also influence the performance of municipal bonds. Municipals underperformed Treasurys when interest rates declined last year, mainly because of the surge in demand for Treasurys from overseas investors, while municipals languished from too much supply. So far in 1999, however, we've already seen signs that the supply of California municipals is tapering off and demand has firmed, which we believe could set the stage for lower municipal yields. On the demand side, the relative cheapness of municipals compared with Treasurys may attract investors who want tax-free income. WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA LONG-TERM TAX-FREE? We will probably keep the portfolio's duration a bit long compared with the average California municipal fund as long as we believe that interest rates are poised to move lower. That should be positive for fund returns if municipal bond yields decline, as we expect they will. We'll also continue to focus on high-quality bonds. This reflects our belief that credit spreads are about as narrow as they're going to get. We expect to see credit spreads widen back out at some point going forward. If that happens, our higher-rated bonds will more than likely outperform lower-quality ones. In addition, we'll continue to emphasize call-protected securities--such as discount bonds and non-callable bonds --because we believe that unwanted calls continue to be an important concern. And, finally, we will continue to monitor the California municipal market to uncover securities that we believe offer good relative values and attractive yields. [right margin] "WE'VE ALREADY SEEN SIGNS THAT THE SUPPLY OF CALIFORNIA MUNICIPALS IS TAPERING OFF AND DEMAND HAS FIRMED, WHICH WE BELIEVE COULD SET THE STAGE FOR LOWER MUNICIPAL YIELDS." TOP FIVE SECTORS (AS OF 2/28/99) % OF FUND INVESTMENTS COPS/LEASES 21% TAX ALLOCATION REVENUE 14% GO 11% HIGHER EDUCATION 7% HOSPITAL REVENUE 7% TOP FIVE SECTORS (AS OF 8/31/98) % OF FUND INVESTMENTS COPS/LEASES 23% WATER AND SEWER REVENUE 12% TAX ALLOCATION REVENUE 12% ELECTRIC REVENUE 10% HOSPITAL REVENUE 8% Security types are defined on pages 40-41. www.americancentury.com 25 Cal. Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES--98.4% CALIFORNIA--95.8% $ 2,300,000 Alameda County COP, 6.80%, 6/15/17 (MBIA)(1) $ 917,447 2,700,000 Brea Public Financing Auth. Rev., (Project Area AB), 7.00%, 8/1/15 (MBIA) 2,955,582 1,220,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 1,343,952 5,000,000 California Educational Facilities Auth. Rev., (California Institute of Technology), 4.25%, 10/1/28 4,406,150 9,000,000 California Educational Facilities Auth. Rev., (California Institute of Technology), 4.50%, 10/1/27 8,286,750 1,500,000 California Educational Facilities Auth. Rev., Series 1997 B, (Pooled College and University Projects), 6.30%, 4/1/21 1,625,025 7,000,000 California Educational Facilities Auth. Rev., Series 1997 M, (Stanford University), 5.25%, 12/1/26 7,114,380 7,000,000 California Educational Facilities Auth. Rev., Series 1997 N, (Stanford University), 5.20%, 12/1/27 7,130,970 4,000,000 California Health Facilities Financing Auth. Rev., (Kaiser Permanente), 7.00%, 10/1/99, Prerefunded at 102% of Par(2) 4,176,360 3,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/09(1) 1,887,630 1,500,000 California Health Facilities Financing Auth. Rev., Series 1988 A, (H.M. Newhall Memorial Hospital), 8.00%, 10/1/18 (California Mortgage Insurance) 1,535,520 1,730,000 California Health Facilities Financing Auth. Rev., Series 1990 A, (Gould Medical), 7.30%, 4/1/20(2) 1,845,374 2,500,000 California Health Facilities Financing Auth. Rev., Series 1991 B, (Adventist Health), 6.75%, 3/1/14 (MBIA) 2,693,450 2,000,000 California Health Facilities Financing Auth. Rev., Series 1992 A, 6.75%, 3/1/20 (California Mortgage Insurance) 2,170,820 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,290,000 California Health Facilities Financing Auth. Rev., Series 1992 C, (AIDS Healthcare Foundation), 6.25%, 9/1/17 (California Mortgage Insurance) $ 1,369,632 5,165,000 California Health Facilities Financing Auth. Rev., Series 1993 C, (St. Francis Memorial Hospital), 5.875%, 11/1/23(2) 5,765,070 1,290,000 California Housing Finance Agency Rev., (Multi-Unit Rental Housing), 6.875%, 2/1/22 1,320,638 5,125,000 California Housing Finance Agency Rev., Series 1994 G, (Home Mortgage), 7.25%, 8/1/17 5,544,276 1,125,000 California Housing Finance Agency Rev., Series 1995 C, (Home Mortgage), 6.80%, 8/1/17 1,213,819 1,500,000 California Pollution Control Financing Auth. Rev., Series 1987 D, (Southern California Edison), 6.85%, 12/1/08 1,553,670 3,000,000 California Public Works Board Lease Rev., Series 1997 A, (California Science Center), 5.25%, 10/1/22 3,037,560 1,000,000 California State Franchise Tax Board COP, 6.90%, 10/1/99, Prerefunded at 102% of Par(2) 1,043,500 8,000,000 California State GO, 4.25%, 10/1/26 (MBIA) 7,112,240 4,655,000 California State GO, 4.50%, 12/1/24 (FGIC) 4,322,773 3,000,000 California State GO, 6.125%, 10/1/11 (AMBAC) 3,513,720 1,410,000 California State GO, Series 1984 B, (New Prison Construction), 10.00%, 8/1/03 1,768,887 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) 18,149,769 9,000,000 California Statewide Community Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 9,080,370 5,695,000 Capistrano School District Special Tax, (Refunding Issue 1988-1), 6.50%, 9/1/14 (FSA) 6,553,066 1,000,000 Coachella Valley Water District #71 COP, (Flood Control), 6.75%, 10/1/02, Prerefunded at 102% of Par(2) 1,126,380 See Notes to Financial Statements 26 1-800-345-2021 Cal. Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 1,320,000 Coalinga Public Financing Auth. Local Obligation Rev., Series 1998 A, 6.375%, 9/15/21 (AMBAC) $ 1,584,964 13,500,000 Compton Redevelopment Agency Tax Allocation, Series 1995 A, 6.50%, 8/1/13 (FSA) 15,493,680 2,580,000 Concord Joint Power Financing Auth. Lease Rev. COP, (Police Facilities), 5.25%, 8/1/13 2,737,122 3,605,000 Inglewood Redevelopment Agency Tax Allocation, Series 1998 A, (Merged Redevelopment), 5.25%, 5/1/23 (AMBAC) 3,758,825 1,815,000 Kern County High School District GO, 7.15%, 8/1/14 (MBIA)(2) 2,303,435 1,305,000 Los Altos Association of Bay Area Governments COP, 5.90%, 5/1/27 1,378,641 3,475,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 A, 6.45%, 7/1/17 (AMBAC) 3,707,860 2,000,000 Los Angeles County Metropolitan Transportation Auth. Sales Tax Rev., Series 1996 A, 6.00%, 7/1/23 (MBIA) 2,175,980 3,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1987 A, 7.40%, 7/1/15 3,103,920 4,050,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1989 A, (Capital Appreciation), 7.20%, 7/1/02 (MBIA)(1) 3,335,540 3,340,000 Los Angeles Department of Water and Power Waterworks Rev., 4.50%, 10/15/24 3,084,123 1,000,000 Los Angeles Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (MBIA) 1,082,460 2,410,000 Los Angeles Wastewater System Rev., Series 1991 C, 6.90%, 6/1/99, Prerefunded at 102% of Par(2) 2,483,409 3,050,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.10%, 6/1/99, Prerefunded at 102% of Par(2) 3,144,459 1,865,000 Mendocino Coast District Health Care Facility Rev., 5.875%, 2/1/20 (California Mortgage Insurance) 1,982,010 Principal Amount Value - -------------------------------------------------------------------------------- $ 8,000,000 Metropolitan Water District of Southern California Waterworks Rev., 5.75%, 8/10/18 $ 8,899,360 5,150,000 Mid-Peninsula Regional Open Space District GO, 7.00%, 9/1/14 5,930,946 5,830,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA) 7,098,491 3,000,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) 3,280,680 1,855,000 Pacifica Financing Auth. Sewer Rev., 6.20%, 8/1/26 1,913,284 2,950,000 Pasadena COP, (Old Pasadena Parking Facility), 6.25%, 1/1/18 3,405,156 5,000,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.25%, 8/1/26 5,467,850 4,475,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.20%, 8/1/19 4,881,733 2,700,000 Pittsburg Redevelopment Agency Tax Allocation, Series 1993 B, (Los Medanos Community Development), 5.80%, 8/1/34 (FSA) 2,980,017 2,100,000 Pomona Public Financing Auth. Rev., Series 1992 A, (Water Treatment), 6.10%, 7/1/17 (AMBAC) 2,282,175 5,680,000 Riverside County Asset Leasing Corporation Rev. COP, Series 1997 B, (Riverside County Hospital), 5.00%, 6/1/19 (MBIA) 5,604,797 8,705,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 9,111,524 1,000,000 Saddleback Valley Unified School District Public Financing Auth. Special Tax Rev., Series 1997 A, 6.00%, 9/1/16 (FSA) 1,144,270 2,000,000 San Diego County COP, (Downtown Courthouse), 4.50%, 5/1/23 (AMBAC) 1,859,140 3,400,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) 3,772,810 3,500,000 San Diego County Regional Transportation Sales Tax Rev., Series 1991 A, 6.93%, 4/1/04(1)(2) 2,883,160 See Notes to Financial Statements www.americancentury.com 27 Cal. Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $10,450,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) $ 9,684,642 1,000,000 San Francisco City and County Redevelopment Hotel Tax Rev., 6.75%, 7/1/04, Prerefunded at 102% of Par (FSA)(2) 1,167,110 3,000,000 San Jose Financing Auth. Rev. COP, Series 1993 C, (Convention Center), 6.375%, 9/1/13 3,185,550 7,575,000 San Jose Financing Auth. Rev. COP, Series 1993 D, (Central Service Yard), 5.25%, 10/15/23 7,665,446 9,525,000 San Jose Redevelopment Agency Tax Allocation, Series 1993 D, (Merged Area Redevelopment), 5.75%, 8/1/24 10,078,688 5,000,000 San Marino Unified School District GO, Series 1998 B, 5.00%, 6/1/23 5,038,250 3,475,000 San Mateo County Joint Powers Finance Auth. Lease Rev. COP, (Capital Projects Program), 6.50%, 7/1/16 (MBIA) 4,176,394 4,000,000 San Mateo County Joint Powers Finance Auth. Lease Rev. COP, (Capital Projects Program), 6.00%, 7/1/19 (MBIA) 4,581,960 3,500,000 Santa Ana Finance Auth. Lease Rev. COP, 6.25%, 7/1/15 (MBIA) 4,111,660 4,830,000 Santa Monica Community College District COP, Series 1997 A, 5.90%, 2/1/27 5,180,465 3,730,000 Southern California Public Power Auth. Rev., (Multipurpose), 6.75%, 7/1/13 (FSA) 4,589,652 1,425,000 Southern California Public Power Auth. Rev., (Transportation Auth.), 7.00%, 7/1/09 1,516,798 3,260,000 Southern California Public Power Auth. Rev., 6.00%, 7/1/18 3,325,362 7,315,000 Southern California Public Power Auth. Rev., 6.75%, 7/1/12 (FSA) 8,998,181 3,000,000 Southern California Public Power Auth. Rev., Series 1989 A, 7.15%, 7/1/04 (AMBAC)(1) 2,438,280 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,000,000 Southern Orange County Finance Auth. Special Tax Rev., Series 1994 A, 7.00%, 9/1/11 (MBIA) $ 2,508,400 800,000 Stockton Health Facilities Rev., Series 1997 A, (Dameron Hospital Association), 5.70%, 12/1/14 815,400 2,000,000 Taft Public Financing Auth. Lease Rev. COP, Series 1997 A, (Community Correctional Facility), 6.05%, 1/1/17 2,126,260 1,400,000 Torrance Redevelopment Agency Rev., Series 1998 A, (Downtown Redevelopment), 5.60%, 9/1/28 1,408,847 3,020,000 Watsonville Insured Hospital Rev., Series 1996 A, (Watsonville Community Hospital), 6.20%, 7/1/12 (California Mortgage Insurance) 3,501,176 ------------- 328,535,122 ------------- PUERTO RICO--2.6% 9,750,000 Puerto Rico Commonwealth GO, 4.50%, 7/1/23 8,970,780 ------------- TOTAL MUNICIPAL SECURITIES 337,505,902 ------------- (Cost $315,005,970) MUNICIPAL DERIVATIVES--1.2% 4,000,000 Northern California Transmission Rev., Inverse Floater, 6.78%, 4/29/24 (MBIA)(3) 4,250,000 ------------- (Cost $3,963,920) SHORT--TERM MUNICIPAL SECURITIES--0.4% 1,200,000 California State Economic Development Financing Auth. Rev., Series 1998 B, (California Independent System), VRDN, 3.00%, 3/1/99 (LOC: Bank of America N.T. & S.A.) 1,200,000 ------------- (Cost $1,200,000) TOTAL INVESTMENT SECURITIES--100.0% $342,955,902 ============= (Cost $320,169,890) See Notes to Financial Statements 28 1-800-345-2021 Cal. Long-Term Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) 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 February 28, 1999. (1) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Escrowed to maturity in U.S. Government securities or state and local government securities. (3) Inverse floaters have interest rates 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 www.americancentury.com 29
Statements of Assets and Liabilities - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE ASSETS Investment securities, at value (identified cost of $147,846,249, $463,192,713 and $320,169,890, respectively) (Note 3) .................$ 151,167,663 $ 484,817,955 $ 342,955,902 Cash ..................................... 178,935 1,925,660 905,300 Investment in affiliated money market fund (Note 2) ................... 7,751 10,117 7,247 Receivable for investments sold .......... -- -- 2,392,375 Interest receivable ...................... 2,041,623 7,350,653 4,213,937 ------------- ------------- ------------- 153,395,972 494,104,385 350,474,761 ------------- ------------- ------------- LIABILITIES Disbursements in excess of demand deposit cash ................. 4,691 174,193 193,606 Payable for investments purchased ........ 2,090,411 3,101,135 1,357,077 Payable for capital shares redeemed ...... 192,870 349,354 577,788 Accrued management fees (Note 2) ......... 58,938 189,546 134,787 Dividends payable ........................ 45,802 152,556 115,757 Payable for trustees' fees and expenses .. 351 1,129 803 ------------- ------------- ------------- 2,393,063 3,967,913 2,379,818 ------------- ------------- ------------- Net Assets ...............................$ 151,002,909 $ 490,136,472 $ 348,094,943 ============= ============= ============= CAPITAL SHARES Outstanding (unlimited number of shares authorized) .................. 14,417,441 43,428,999 30,011,032 ============= ============= ============= Net Asset Value Per Share ................$ 10.47 $ 11.29 $ 11.60 ============= ============= ============= NET ASSETS CONSIST OF: Capital paid in ..........................$ 148,083,551 $ 467,628,350 $ 324,712,514 Accumulated undistributed net realized gain (loss) on investments .... (402,056) 882,880 596,417 Net unrealized appreciation on investments (Note 3) ................ 3,321,414 21,625,242 22,786,012 ------------- ------------- ------------- $ 151,002,909 $ 490,136,472 $ 348,094,943 ============= ============= =============
- -------------------------------------------------------------------------------- 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 shares outstanding gives you the price of an individual share, or the net asset value per share. NET ASSETS are also broken down by capital (money invested by 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 breakdown 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 30 1-800-345-2021
Statements of Operations - -------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) LIMITED-TERM INTERMEDIATE- LONG-TERM TAX-FREE TERM TAX-FREE TAX-FREE INVESTMENT INCOME Income: Interest ............................ $ 3,186,794 $ 11,605,811 $ 8,998,028 ------------ ------------ ------------ Expenses (Note 2): Management fees ..................... 376,544 1,195,017 849,802 Trustees' fees and expenses ......... 3,301 8,276 6,170 ------------ ------------ ------------ 379,845 1,203,293 855,972 ------------ ------------ ------------ Net investment income ............... 2,806,949 10,402,518 8,142,056 ------------ ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3) Net realized gain on investments .... 178,503 3,132,169 1,681,833 Change in net unrealized appreciation on investments ....... 483,135 (2,058,696) (2,512,870) ------------ ------------ ------------ Net realized and unrealized gain (loss) on investments ........ 661,638 1,073,473 (831,037) ------------ ------------ ------------ Net Increase in Net Assets Resulting from Operations ......... $ 3,468,587 $ 11,475,991 $ 7,311,019 ============ ============ ============
- -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down 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 31
Statements of Changes in Net Assets - -------------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) AND YEAR ENDED AUGUST 31, 1998 LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX-FREE Increase in Net Assets 1999 1998 1999 1998 1999 1998 OPERATIONS Net investment income ........$ 2,806,949 $ 5,160,591 $ 10,402,518 $ 20,402,484 $ 8,142,056 $ 15,874,999 Net realized gain on investments ............. 178,503 253,098 3,132,169 3,919,772 1,681,833 2,963,978 Change in net unrealized appreciation on investments ................ 483,135 1,302,650 (2,058,696) 5,632,637 (2,512,870) 8,929,558 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations .. 3,468,587 6,716,339 11,475,991 29,954,893 7,311,019 27,768,535 ------------- ------------- ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ... (2,806,949) (5,160,591) (10,410,538) (20,402,484) (8,151,089) (15,874,999) From net realized gains on investment transactions .... -- -- (4,848,583) (5,651,243) (2,740,719) (5,354,293) ------------- ------------- ------------- ------------- ------------- ------------- Decrease in net assets from distributions ......... (2,806,949) (5,160,591) (15,259,121) (26,053,727) (10,891,808) (21,229,292) ------------- ------------- ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold .... 43,745,487 43,612,098 85,940,777 155,826,396 72,766,847 98,878,179 Proceeds from reinvestment of distributions ........... 1,818,189 3,439,775 11,516,286 19,653,179 7,590,445 14,613,846 Payments for shares redeemed ................... (25,358,992) (45,102,215) (64,141,300) (154,216,741) (53,875,216) (99,508,180) ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets from capital share transactions ............... 20,204,684 1,949,658 33,315,763 21,262,834 26,482,076 13,983,845 ------------- ------------- ------------- ------------- ------------- ------------- Net increase in net assets ... 20,866,322 3,505,406 29,532,633 25,164,000 22,901,287 20,523,088 NET ASSETS Beginning of period .......... 130,136,587 126,631,181 460,603,839 435,439,839 325,193,656 304,670,568 ------------- ------------- ------------- ------------- ------------- ------------- End of period ................$ 151,002,909 $ 130,136,587 $ 490,136,472 $ 460,603,839 $ 348,094,943 $ 325,193,656 ============= ============= ============= ============= ============= ============= Undistributed net investment income .......... -- -- -- $ 8,020 -- $ 9,033 ============= ============= ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ......................... 4,183,233 4,214,707 7,542,848 13,806,443 6,217,969 8,544,372 Issued in reinvestment of distributions ........... 173,605 332,197 1,012,547 1,741,245 648,056 1,262,693 Redeemed ..................... (2,420,920) (4,357,987) (5,632,838) (13,662,495) (4,597,761) (8,606,849) ------------- ------------- ------------- ------------- ------------- ------------- Net increase ................. 1,935,918 188,917 2,922,557 1,885,193 2,268,264 1,200,216 ============= ============= ============= ============= ============= =============
- -------------------------------------------------------------------------------- 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 32 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. California Limited-Term Tax-Free Fund (Limited-Term), California Intermediate-Term Tax-Free Fund (Intermediate-Term), and California Long-Term Tax-Free Fund (Long-Term) (the funds) are three of the seven funds issued by the trust. Each fund is diversified under the 1940 Act. The funds seek to obtain as high a level of interest income exempt from federal and California income taxes as is consistent with prudent investment management and conservation of shareholders' capital. The funds invest primarily in municipal obligations with maturities based on each fund's investment objective. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these principles may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS --Distributions from net investment income for the funds are declared daily and distributed monthly. Distributions from net realized gains for the funds are declared and paid annually. 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 February 28, 1999. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's distributor. Certain officers of FDI are also officers of the trust. www.americancentury.com 33 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1625% to 0.2800% and the rates for the Complex Fee range from 0.2900% to 0.3100%. For the six months ended February 28, 1999, the effective annual management fee was 0.51% for Limited-Term, Intermediate-Term, and Long-Term. 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 February 28, 1999, Limited-Term, Intermediate-Term, and Long-Term had invested $7,751, $10,117, and $7,247, respectively, in shares of California Tax-Free Money Market Fund, which is also managed by ACIM. 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 California Tax-Free Money Market. - -------------------------------------------------------------------------------- 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 .. $53,825,479 $145,027,842 $128,883,986 PROCEEDS FROM SALES Municipal Obligations .. $35,096,054 $123,570,116 $103,126,976 On February 28, 1999, the composition of unrealized appreciation and depreciation of investment securities based on the aggregate cost of investments for federal income tax purposes was as follows: LIMITED-TERM INTERMEDIATE-TERM LONG-TERM TAX-FREE TAX-FREE TAX FREE Appreciation ........... $3,326,093 $22,143,865 $23,239,160 Depreciation ........... (4,679) (518,623) (453,148) -------------- -------------- -------------- Net .................... $3,321,414 $21,625,242 $22,786,012 ============== ============== ============== The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. 34 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 4. BANK LOANS Effective December 18, 1998, the funds, along with other funds managed by ACIM, entered into an unsecured $570,000,000 bank line of credit agreement with Chase Manhattan Bank. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.40%. The funds may borrow money for temporary or emergency purposes to fund shareholder redemptions. The funds did not borrow from the line during the period December 18, 1998 through February 28, 1999. - -------------------------------------------------------------------------------- 5. SUBSEQUENT EVENTS The following name changes became effective March 1, 1999: ===================================================================== NEW NAME FORMER NAME ===================================================================== FUND: California Limited-Term American Century - Benham Tax-Free Fund California Limited-Term Tax-Free Fund FUND: California American Century - Benham Intermediate-Term California Intermediate-Term Tax-Free Fund Tax-Free Fund FUND: California Long-Term American Century - Benham Tax-Free Fund California Long-Term Tax-Free Fund www.americancentury.com 35 Cal. Limited-Term Tax-Free--Financial Highlights
- -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period .................$ 10.43 $ 10.30 $ 10.19 $ 10.23 $ 10.12 $ 10.34 ----------- ----------- ----------- ----------- ----------- ----------- Income From Investment Operations Net Investment Income ............. 0.20 0.42 0.43 0.43 0.41 0.38 Net Realized and Unrealized Gain (Loss) on Investment Transactions . 0.04 0.13 0.11 (0.04) 0.11 (0.18) ----------- ----------- ----------- ----------- ----------- ----------- Total From Investment Operations .. 0.24 0.55 0.54 0.39 0.52 0.20 ----------- ----------- ----------- ----------- ----------- ----------- Distributions From Net Investment Income ........ (0.20) (0.42) (0.43) (0.43) (0.41) (0.38) In Excess of Net Realized Gains ... -- -- -- -- -- (0.04) ----------- ----------- ----------- ----------- ----------- ----------- Total Distributions ............... (0.20) (0.42) (0.43) (0.43) (0.41) (0.42) ----------- ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Period ......$ 10.47 $ 10.43 $ 10.30 $ 10.19 $ 10.23 $ 10.12 =========== =========== =========== =========== =========== =========== Total Return(2) ................... 2.27% 5.40% 5.42% 3.87% 5.33% 1.90% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............... 0.51%(3) 0.52% 0.49% 0.49% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets ............... 3.76%(3) 4.02% 4.20% 4.20% 4.10% 3.68% Portfolio Turnover Rate ............. 24% 44% 47% 44% 50% 66% Net Assets, End of Period (in thousands) ......................$ 151,003 $ 130,137 $ 126,631 $ 103,707 $ 104,723 $ 120,627
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 36 1-800-345-2021
Cal. Int.-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period .................... $11.37 $11.27 $11.05 $11.06 $10.86 $11.36 ---------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................ 0.25 0.52 0.54 0.54 0.54 0.54 Net Realized and Unrealized Gain (Loss) on Investment Transactions .... 0.03 0.25 0.25 (0.01) 0.20 (0.41) ---------- --------- --------- --------- --------- --------- Total From Investment Operations ..... 0.28 0.77 0.79 0.53 0.74 0.13 ---------- --------- --------- --------- --------- --------- Distributions From Net Investment Income ........... (0.25) (0.52) (0.54) (0.54) (0.54) (0.54) From Net Realized Gains on Investment Transactions .............. (0.11) (0.15) (0.03) -- -- (0.08) In Excess of Net Realized Gains ...... -- -- -- -- -- (0.01) ---------- --------- --------- --------- --------- --------- Total Distributions .................. (0.36) (0.67) (0.57) (0.54) (0.54) (0.63) ---------- --------- --------- --------- --------- --------- Net Asset Value, End of Period ......... $11.29 $11.37 $11.27 $11.05 $11.06 $10.86 ========== ========= ========= ========= ========= ========= Total Return(2) ...................... 2.51% 7.00% 7.39% 4.79% 7.09% 1.11% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .................. 0.51%(3) 0.51% 0.48% 0.48% 0.48% 0.48% Ratio of Net Investment Income to Average Net Assets .................. 4.40%(3) 4.60% 4.81% 4.87% 5.02% 4.82% Portfolio Turnover Rate ................ 26% 28% 42% 36% 25% 44% Net Assets, End of Period (in thousands) .................. $490,136 $460,604 $435,440 $430,950 $417,550 $448,293
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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
Cal. Long-Term Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period ..................... $11.72 $11.48 $11.06 $10.94 $10.88 $12.02 ---------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income ................. 0.28 0.59 0.61 0.61 0.62 0.63 Net Realized and Unrealized Gain (Loss) on Investment Transactions ..... (0.02) 0.44 0.44 0.12 0.12 (0.71) ---------- --------- --------- --------- --------- --------- Total From Investment Operations ...... 0.26 1.03 1.05 0.73 0.74 (0.08) ---------- --------- --------- --------- --------- --------- Distributions From Net Investment Income ............ (0.28) (0.59) (0.61) (0.61) (0.62) (0.63) From Net Realized Gains on Investment Transactions ............... (0.10) (0.20) (0.02) -- (0.06) (0.43) ---------- --------- --------- --------- --------- --------- Total Distributions ................... (0.38) (0.79) (0.63) (0.61) (0.68) (1.06) ---------- --------- --------- --------- --------- --------- Net Asset Value, End of Period .......... $11.60 $11.72 $11.48 $11.06 $10.94 $10.88 ========== ========= ========= ========= ========= ========= Total Return(2) ....................... 2.20% 9.25% 9.70% 6.77% 7.21% (0.78)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ................... 0.51%(3) 0.51% 0.48% 0.48% 0.49% 0.48% Ratio of Net Investment Income to Average Net Assets ................... 4.84%(3) 5.07% 5.40% 5.48% 5.84% 5.51% Portfolio Turnover Rate ................. 31% 36% 50% 42% 60% 62% Net Assets, End of Period (in thousands) .......................... $348,095 $325,194 $304,671 $288,022 $276,085 $277,477
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA LIMITED-TERM TAX-FREE seeks to provide interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of five years or less. CALIFORNIA INTERMEDIATE-TERM TAX-FREE seeks to provide interest income exempt from both federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of 5-10 years. CALIFORNIA LONG-TERM TAX-FREE seeks to provide interest income exempt from federal and California state income taxes. The fund invests primarily in California municipal securities and maintains a weighted average maturity of 10 years or more. COMPARATIVE INDICES The following indices are used in the report to serve as fund performance comparisons. They are not investment products available for purchase. The LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of more than 4,000 municipal bonds with maturities of 2-4 years. The average credit rating of the securities in the index is AA1/AA2. The index's average maturity is 3 years The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of more than 5,000 municipal bonds with maturities of 4-6 years. The average credit rating of the securities in the index is AA1/AA2. The index's average maturity is approximately 5 years. THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The index's average maturity is approximately 27 years. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. CALIFORNIA SHORT-INTERMEDIATE MUNICIPAL DEBT FUNDS (Limited-Term Tax-Free) - --funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California with dollar-weighted average maturities of 1-5 years. CALIFORNIA INTERMEDIATE MUNICIPAL DEBT FUNDS (Intermediate-Term Tax-Free) - --funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California with dollar-weighted average maturities of 5-10 years. CALIFORNIA MUNICIPAL DEBT FUNDS (Long-Term Tax-Free)--funds that invest at least 65% of assets in municipal debt issues that are exempt from taxation in California. [right margin] 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. THEY ARE BASED ON AN ISSUER'S FINANCIAL STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER. SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE" SECURITIES, MEANING THEY ARE RELATIVELY SAFE FROM DEFAULT. HERE ARE THE MOST COMMON CREDIT RATINGS AND THEIR DEFINITIONS: * AAA--EXTREMELY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * AA--VERY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * A--STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * BBB--GOOD ABILITY TO MEET FINANCIAL OBLIGATIONS. IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY. www.americancentury.com 39 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. INVESTMENT TERMS * BASIS POINT--one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * YIELD CURVE--a graphic representation of the relationship between maturity and yield for fixed-income securities. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES--the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION--a time-weighted average of the interest and principal payments of the securities in a portfolio. As the duration of a portfolio increases, so does the impact of a change in interest rates on the value of the portfolio. * EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * COPS (CERTIFICATES OF PARTICIPATION)/ LEASES--securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO (GENERAL OBLIGATION) BONDS--securities backed by the taxing power of the issuer. * LAND-SECURED BONDS--securities such as Mello-Roos bonds and 1915 Act bonds that are issued to finance real estate development projects. 40 1-800-345-2021 Glossary - -------------------------------------------------------------------------------- (Continued) * 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). FUND CLASSIFICATIONS INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION--Offers taxable and tax-free money market funds for relative stability of principal and liquidity, allowing maximum portfolio diversification. * INCOME--Offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME--Offers funds that emphasize both growth and income, diversification, varying capitalization sizes, and different investment styles and strategies. * GROWTH--Offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. * CONSERVATIVE--these funds generally provide lower return potential with either low or minimal price fluctuation risk. * MODERATE-- these funds generally provide moderate return potential with moderate price fluctuation risk. * AGGRESSIVE-- these funds generally provide high return potential with corresponding high price fluctuation risk. www.americancentury.com 41 Notes - -------------------------------------------------------------------------------- 42 1-800-345-2021 Notes - -------------------------------------------------------------------------------- www.americancentury.com 43 Notes - -------------------------------------------------------------------------------- 44 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Tax-Managed Value Strategic Allocation -- Income & Growth Moderate Value Strategic Allocation -- Equity Income Conservative =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL New Opportunities Global Gold Emerging Markets Giftrust(reg.tm) International Discovery Vista International Growth Heritage Global Growth Growth Ultra Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] [american century logo(reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9904 Funds Distributor, Inc. SH-BKT-15980 (c)1999 American Century Services Corporation [front cover] FEBRUARY 28, 1999 SEMIANNUAL REPORT - ----------------- AMERICAN CENTURY [graphic of stairs] AMERICAN CENTURY - --------------------------------- CALIFORNIA HIGH-YIELD MUNICIPAL CALIFORNIA INSURED TAX-FREE [american century logo(reg.sm)] American Century [inside front cover] AMERICAN CENTURY KEEPS WITH TRADITION - -------------------------------------------------------------------------------- FOLLOWING BENHAM'S FOOTSTEPS On March 1, we made it easier for you to do business with us. We simplified our organizational structure by eliminating the venerable Benham and Twentieth Century names, and putting all our funds under American Century. The name change will not affect your funds' investment management--the proven Benham investment philosophy, experienced portfolio management teams, and legacy of innovation and high-quality performance remain. CONSISTENT, SOLID PERFORMANCE--We'll continue to adhere to the investment practices that have helped our fixed-income funds perform so well over the years. In 1998, two-thirds of American Century bond funds beat their peer group average, according to Lipper, Inc. CONSISTENT INVESTMENT PHILOSOPHY--American Century fixed-income funds will continue to offer a "pure play" on their sector of the market, as they did under Benham. CONTINUITY OF THE MANAGEMENT TEAM--The investment process is not all that remains the same; we've retained our core team of experienced fixed-income portfolio managers. * Experience--The more than 35 fixed-income investment professionals at American Century have an average of nine years of investment management experience. * Bigger and better--Since American Century was formed, we've doubled the size of the original Benham management team in our Mountain View, California office. TRADITION OF INNOVATION--Like Benham before it, American Century is a leader in fixed-income fund innovation. For example, we introduced a total of four new fixed-income funds in the last three years, including the first no-load inflation-adjusted bond fund. We continue to run our fixed-income operation from our offices in Mountain View, California, which is also home to our walk-in Investor Center. We look forward to continuing to meet your fixed-income investment needs in the Benham tradition. WHAT'S NEW . . . We now classify our funds in easy-to-remember categories based on objective and risk. The four objective categories are: CAPITAL PRESERVATION, INCOME, GROWTH AND INCOME, and GROWTH. The three risk categories are: CONSERVATIVE, MODERATE, and AGGRESSIVE. This new classification system makes it easier for investors to identify which funds are right for them. Turn to the inside back cover of this report to see a list of the funds classified by objective and risk. For definitions of the fund categories, see the Glossary. Past performance is no guarantee of future results. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) - -------------------------------------- CALIFORNIA INSURED TAX-FREE (BCINX) - -------------------------------------- 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 six-month period ended February 28, 1999, the financial markets experienced a dramatic shift in expectations. Six months ago, the economic outlook appeared grim--financial problems in Asia, Russia, and Latin America led to expectations of an impending U.S. economic slowdown. That sent the domestic stock market reeling and pushed U.S. bond yields to record lows. But expectations began to change in the fourth quarter of 1998. The Federal Reserve cut interest rates three times in six weeks, bolstering confidence in the economy. That, in turn, brought greater stability to U.S. financial markets and eventually produced a stock market rebound. By early 1999, reports of the strongest quarterly economic surge in two years caught investors by surprise. Bond yields rose reflexively amid higher inflation expectations, but productivity gains and competitive pressures kept inflation at its lowest level in a dozen years. The resiliency of California's economy was especially surprising. With many Asian economies--including six of the state's ten biggest export markets--at a standstill, there were concerns that the economic stagnation would spread to California. However, the state's economy hardly missed a beat and is now as healthy as it has been in a decade. This economic environment has been positive for California municipal bonds. All seven of American Century's California municipal funds, ranging from money market portfolios to long-term and high-yield bond funds, produced above-average returns during the past six months, as well as over longer time periods (according to Lipper Inc.). We've been investing in the California municipal market for more than 15 years, and the consistent performance of our California funds reflects that experience. At American Century, we've recently made some changes in the way we classify our funds that we hope will make it easier for you to identify and select the funds that best meet your investment needs. We reorganized our family of 71 funds based on investment goals and risk level (see the front and back inside covers of this report for more details). In addition, California municipal fund shareholders were the first to receive our new simplified prospectus. This document provides the fund information you need in clear and straightforward language, and it includes helpful tips and definitions of investment terms. We want your experience with American Century to be rewarding, and we appreciate your continued confidence in us. 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 CALIFORNIA HIGH-YIELD MUNICIPAL Performance Information ................................................. 4 Management Q&A .......................................................... 5 Portfolio Composition by Credit Rating ..................................................... 6 Top Five Sectors ........................................................ 7 Schedule of Investments ................................................. 8 CALIFORNIA INSURED TAX-FREE Performance Information ................................................. 14 Management Q&A .......................................................... 15 Top Five Sectors ........................................................ 16 Portfolio Composition by Credit Rating ..................................................... 17 Schedule of Investments ................................................. 18 FINANCIAL STATEMENTS Statements of Assets and Liabilities .......................................................... 21 Statements of Operations ................................................ 22 Statements of Changes in Net Assets ........................................................ 23 Notes to Financial Statements ........................................................... 24 Financial Highlights .................................................... 26 OTHER INFORMATION Background Information Investment Philosophy and Policies ...................................................... 28 Comparative Indices .................................................. 28 Lipper Rankings ...................................................... 28 Investment Team Leaders ........................................................... 28 Credit Rating Guidelines ........................................................ 28 Glossary ................................................................ 29 www.americancentury.com 1 Report Highlights - -------------------------------------------------------------------------------- MARKET PERSPECTIVE * Municipal bonds posted modestly positive returns during the six months ended February 28, 1999. * Short- and intermediate-term municipal bonds produced modest price gains as their yields fell slightly. They outperformed long-term municipals, whose yields rose a little. * Bond yields fell and prices rose early in the period as the Federal Reserve cut short-term interest rates three times, but yields rose in early 1999 as the U.S. economy surged. * Municipal bonds outperformed Treasury securities in terms of total return, thanks to improving supply and demand conditions. However, municipal yields are still attractive relative to Treasury yields. CALIFORNIA HIGH-YIELD MUNICIPAL * The fund outperformed the average California municipal debt fund while offering a significantly higher yield. * The "neutral" duration of the portfolio during a volatile environment for bonds helped California High-Yield Municipal outperform other funds. * Fund performance was also bolstered by the portfolio's 45% position in unrated bonds, which performed well as credit spreads tightened. * California High-Yield Municipal continued to adhere to its long-standing investment practices, which emphasize a value approach and individual security selection instead of targeting sectors. * It appears as though the California economy will remain robust, which should help California municipal securities. Rapid growth in the high-tech, biotech, and entertainment sectors has offset weakened overseas demand for California goods. CALIFORNIA INSURED TAX-FREE * The fund outperformed the average California insured municipal debt fund while offering a higher yield. * Because of our expectations for lower interest rates, the portfolio had a longer-than-average duration and focused on discount bonds (bonds with lower-than-prevailing interest rates) * The longer duration allowed California Insured Tax-Free to cap-ture additional price gains when interest rates fell. The discount bonds gave the portfolio some protection from refinancing by municipal bond issuers. * Looking ahead, market conditions appear to be favorable for municipal bonds, so we plan to maintain the fund's current positioning. [left margin] CALIFORNIA HIGH-YIELD MUNICIPAL (BCHYX) TOTAL RETURNS: AS OF 2/28/99 6 Months 2.40%* 1 Year 6.59% NET ASSETS: $342.4 million 30-DAY SEC YIELD: 4.58% INCEPTION DATE: 12/30/86 CALIFORNIA INSURED TAX-FREE (BCINX) TOTAL RETURNS: AS OF 2/28/99 6 Months 2.23%* 1 Year 6.06% NET ASSETS: $228.6 million 30-DAY SEC YIELD: 3.97% INCEPTION DATE: 12/30/86 * Not annualized. See Total Returns on pages 4 and 14. Investment terms are defined in the Glossary on page 29. 2 1-800-345-2021 Market Perspective from Randall W. Merk - -------------------------------------------------------------------------------- /photo of Randall W. Merk/ Randall W. Merk, chief investment officer of fixed income MUNICIPAL BOND PERFORMANCE Amid several powerful shifts in market sentiment, municipal securities posted modestly positive returns during the six months ended February 28, 1999. Their performance was primarily dictated by changes in interest rates. Rates fell in September and October but crept higher during much of the remainder of the period. Short- and intermediate-term municipal bonds outperformed long-term municipals during the period (see the accompanying table). Short- and intermediate-term yields fell slightly overall, producing modest price gains in these sectors of the market. In contrast, long-term municipal yields actually rose a little. STRONGER-THAN-EXPECTED ECONOMIC CONDITIONS Despite initial fears to the contrary, the U.S. economy continued to grow at a healthy pace during the past six months. At the start of the period, bond investors were optimistic because they felt that the Federal Reserve (the Fed) would need to lower interest rates to stimulate U.S. economic growth and combat a slowing global economy. Those expectations, and the three Fed interest rate cuts that followed, supported a bond market rally that lasted through mid-October. By November, however, the factors that had driven the bond rally began to unwind. The Fed's actions helped restore confidence in the U.S. stock market, and investors began to shy away from bonds. In early 1999, bond investors worried that the U.S. economy's impressive growth--which climbed to a 6% annual rate during the final three months of 1998--could ignite inflation and prompt the Fed to reverse course. MUNICIPALS GAIN GROUND In 1998, municipal bonds underperformed Treasury bonds, primarily because of supply and demand factors. In the municipal market, demand was sporadic, while supply increased as many issuers took advantage of the low interest rate environment. In contrast, Treasurys benefited from strong demand amid a global flight to safety, and supply shrank as the federal budget surplus reduced the government's borrowing needs. By October, municipal and Treasury yields were as tight as they had been in a decade (see the chart at right). In the first two months of this year, however, the tide turned in favor of municipal bonds, thanks to diminished supply and firmer demand. Meanwhile, flight-to-quality demand in the Treasury market began to dry up. As the chart illustrates, Treasury and municipal yields widened out quite a bit at the end of the period. Even after outperforming Treasurys in recent months, municipal bonds still offer attractive yields on a tax-equivalent basis. As of February 28, an investor in the highest federal tax bracket (39.6%) could earn a tax-adjusted yield of nearly 7% on a 10-year AAA rated municipal bond, well above the 5.24% yield on a 10-year U.S. Treasury bond. [right margin] "EVEN AFTER OUTPERFORMING TREASURYS IN RECENT MONTHS, MUNICIPAL BONDS STILL OFFER ATTRACTIVE YIELDS ON A TAX-EQUIVALENT BASIS." MUNICIPAL BOND INDEX RETURNS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 LEHMAN THREE-YEAR MUNICIPAL INDEX 2.53% LEHMAN FIVE-YEAR GENERAL OBLIGATION INDEX 2.72% LEHMAN LONG-TERM MUNICIPAL INDEX 2.24% Source: Lipper Inc., Frank Russell Co. [line graph - data below] 10-YEAR TREASURY YIELDS VS. 10-YEAR AAA MUNICIPAL YIELDS 10-Year 10-Year AAA Municipal Treasury 8/31/98 4.27% 4.96% 9/15/98 4.23% 4.84% 9/30/98 4.14% 4.37% 10/15/98 4.02% 4.32% 10/31/98 4.10% 4.54% 11/15/98 4.22% 4.80% 11/30/98 4.16% 4.71% 12/15/98 4.10% 4.62% 12/31/98 4.14% 4.63% 1/15/99 4.15% 4.68% 1/31/99 4.05% 4.63% 2/15/99 4.08% 5.05% 2/28/99 4.15% 5.24% Source: Bloomberg Financial Markets www.americancentury.com 3
California High-Yield Municipal--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA LEHMAN LONG-TERM CALIFORNIA MUNICIPAL DEBT FUNDS(2) HIGH-YIELD MUNICIPAL MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 2.40% 2.24% 2.09% -- 1 YEAR 6.59% 6.40% 5.43% 3 OUT OF 107 =========================================================================================== AVERAGE ANNUAL RETURNS =========================================================================================== 3 YEARS 7.97% 7.99% 6.49% 3 OUT OF 91 5 YEARS 7.22% 7.43% 6.04% 4 OUT OF 65 10 YEARS 8.18% 9.11% 7.58% 4 OUT OF 33
The fund's inception date was 12/30/86. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 28-29 for more information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/99 Lehman Long-Term Municipal Bond Index $23,922 California High-Yield Municipal $21,953 California Lehman Long-Term High-Yield Municipal Municipal Bond Index DATE VALUE VALUE 2/28/89 $10,000 $10,000 2/28/90 $10,877 $11,108 2/28/91 $11,608 $12,141 2/29/92 $12,711 $13,521 2/28/93 $14,333 $15,730 2/28/94 $15,485 $16,716 2/28/95 $15,531 $16,876 2/29/96 $17,397 $18,996 2/28/97 $18,609 $20,170 2/28/98 $20,586 $22,483 2/28/99 $21,953 $23,922 $10,000 investment made 2/28/89 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each graph. California High-Yield Municipal's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED FEBRUARY 28) California Lehman Long-Term High-Yield Municipal Municipal Bond Index DATE RETURN RETURN 2/28/90 8.77% 11.08% 2/28/91 6.72% 9.30% 2/29/92 9.50% 11.37% 2/28/93 12.76% 16.33% 2/28/94 8.04% 6.27% 2/28/95 0.30% 0.96% 2/29/96 12.01% 12.56% 2/28/97 6.97% 6.18% 2/28/98 10.62% 11.47% 2/28/99 6.59% 6.40% 4 1-800-345-2021 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- /photo of Steven Permut/ 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 SIX-MONTH PERIOD ENDED FEBRUARY 28, 1999? California High-Yield Municipal continued to perform well versus other funds. It returned 2.40%, compared with the 2.09% average total return of the 108 "California Municipal Debt Funds" tracked by Lipper Inc. The portfolio's longer-term returns also consistently beat the average California municipal fund. (See the previous page for additional performance comparisons.) In addition, California High-Yield Municipal performed well in terms of yield. The portfolio's 30-day SEC yield* as of February 28 was 4.58%, compared with the 3.75% yield of the average California municipal fund, according to Lipper. WHAT INVESTMENT STRATEGIES HELPED CALIFORNIA HIGH-YIELD MUNICIPAL? There were several factors behind the portfolio's relatively strong performance. First, we kept its duration--which measures its sensitivity to changes in interest rates--"neutral," or in line with the average duration of a peer group of similar funds. The longer a fund's duration, the more the share price will rise or fall when interest rates change. The shorter a fund's duration, the less its share price will fluctuate in response to changing rates. Throughout the period, expectations about U.S. economic growth and the potential for more inflation and higher interest rates changed rapidly. That uncertainty translated into bond market volatility and caused funds with durations that were too short or too long to suffer compared with those that remained "duration neutral." WHAT WERE OTHER KEY FACTORS BEHIND THE FUND'S PERFORMANCE? About 45% of California High-Yield Municipal's portfolio consisted of unrated bonds. These bonds were helped by the ongoing tightening of credit spreads, which refers to a narrowing of the gap between the yields of bonds of varying credit quality. The lower a bond's credit quality (based on the ability of its issuer to make timely interest and principal payments), the more yield it generally carries as compensation for that risk. During the past six months, however, the incremental yield that lower-quality (including unrated) bonds offered diminished for a variety of reasons. First, issuers increasingly sought municipal bond insurance and the AAA rating it carries, so there were fewer unrated bonds that came to market. Second, unrated bonds were in strong demand by individual investors who desired high yields in a declining * 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. [right margin] "CALIFORNIA HIGH-YIELD MUNICIPAL CONTINUED TO PERFORM WELL VERSUS OTHER FUNDS." YIELDS AS OF FEBRUARY 28, 1999 30-DAY SEC YIELD 4.58% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 7.01% 37.42% TAX BRACKET 7.32% 41.95% TAX BRACKET 7.89% 45.22% TAX BRACKET 8.36% PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 166 146 WEIGHTED AVERAGE MATURITY 20.0 YRS 20.8 YRS AVERAGE DURATION 7.5 YRS 7.9 YRS EXPENSE RATIO 0.54%* 0.54% * Annualized. Investment terms are defined in the Glossary on page 29. www.americancentury.com 5 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) interest rate environment. Finally, the continued strength of California's economy led to fewer credit concerns and more credit upgrades. HOW DID THAT ENVIRONMENT AFFECT CALIFORNIA HIGH-YIELD MUNICIPAL'S UNRATED BONDS? At the beginning of the period, the spread between unrated bonds and the highest-rated AAA bonds was about 75 basis points (0.75%--a basis point equals 0.01%). By the end of February, that spread had narrowed to about 65 basis points. As yields converged, unrated securities generally outperformed higher-rated bonds in terms of total return. THE FUND ALSO BENEFITED FROM SOME BONDS THAT WERE PREREFUNDED. WHAT IS PREREFUNDING AND HOW DID IT HELP THE PORTFOLIO? Through a somewhat complicated process, a municipal bond issuer that wants to reduce the cost of its debt refinances older--usually high-yielding--bonds. A prerefunded bond isn't retired when it's refinanced. Instead, it's backed by U.S. Treasury securities and assumes a higher credit rating and a shorter call date. (The call date is the first opportunity the issuer has to refinance the old bond.) A shorter-maturity, higher-rated bond tends to have a lower yield than a longer-maturity, lower-rated security. When several of our holdings went from being long-maturity, unrated bonds to shorter-maturity, AAA bonds, their yields fell substantially and their prices--which move in the opposite direction of yields--surged as much as 10-20%. HEALTHCARE BONDS WERE ONE AREA OF THE CALIFORNIA MUNICIPAL MARKET THAT STRUGGLED DURING THE PAST SIX MONTHS. WHAT WAS BEHIND THEIR PROBLEMS AND HOW DID IT AFFECT THE FUND? When a large hospital system in Pennsylvania filed for bankruptcy in 1998, it cast a pall on the entire healthcare sector. Fortunately, the fund had a light weighting relative to its peers in healthcare bonds, and their underperformance had only a very slight effect on the fund's return. By the end of the period, we selectively added some healthcare bonds--such as those issued by hospitals, long-term care facilities, and nursing homes--at what we felt were attractive prices. This is a good time to remind investors that our sector weightings are a byproduct of our individual bond selection; we don't focus on underweighting and overweighting sectors. At the core of our security selection process is an experienced research team that attempts to stay ahead of the market by identifying under- or fairly-valued securities that have the potential to appreciate as a result of improving credit quality. At the same time, we try to avoid securities that we view as expensive given their prospects, as well as bonds that appear poised to suffer from future credit quality deterioration. [left margin] "ABOUT 45% OF CALIFORNIA HIGH-YIELD MUNICIPAL'S PORTFOLIO CONSISTED OF UNRATED BONDS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 AAA 28% 26% AA 2% 9% A 13% 12% BBB 12% 13% UNRATED 45% 40% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 28 for more information. "UNRATED BONDS WERE IN STRONG DEMAND BY INDIVIDUAL INVESTORS WHO DESIRED HIGH YIELDS IN A DECLINING INTEREST RATE ENVIRONMENT." 6 1-800-345-2021 California High-Yield Municipal--Q&A - -------------------------------------------------------------------------------- (Continued) WHAT'S YOUR OUTLOOK FOR THE CALIFORNIA HIGH-YIELD BOND MARKET? Let's start with interest rates, which likely will be the prime determinant of municipal bond performance. Amid contradictory signs about U.S. economic growth, inflationary pressures, and Federal Reserve policy, we think that interest rates will stay in a "trading range." At the end of February, interest rates appeared to be on the high side of that trading range, which suggests they could fall. From a credit quality standpoint, we think the California economy will remain robust, despite declining exports to recession-afflicted Asia. Weakened overseas demand for California goods has been offset by rapid growth in the high-tech, biotech, and entertainment sectors. We think those growth sectors will continue to post good results in 1999. As a result, our outlook calls for continued tight credit spreads and relatively good high-yield municipal bond performance. GIVEN THAT OUTLOOK, WHAT WILL YOUR STRATEGY BE? We'll likely keep California High-Yield Municipal's duration neutral until we see more definitive signs about which way rates are headed. Even then, we'll only make slight adjustments to duration. We'll also continue to do what has led to the fund's strong performance over the past 10 years--use thorough bond-by-bond analysis to help identify opportunities and avoid problem areas. [right margin] "OUR SECTOR WEIGHTINGS ARE A BYPRODUCT OF OUR INDIVIDUAL BOND SELECTION; WE DON'T FOCUS ON UNDERWEIGHTING AND OVERWEIGHTING SECTORS." TOP FIVE SECTORS (AS OF 2/28/99) % OF FUND INVESTMENTS LAND BASED 27% COPS/LEASES 15% TAX ALLOCATION REVENUE 11% TRANSPORTATION REVENUE 7% PREREFUNDED 7% TOP FIVE SECTORS (AS OF 8/31/98) % OF FUND INVESTMENTS LAND BASED 27% TRANSPORTATION REVENUE 16% HOSPITAL REVENUE 13% TAX AND REVENUE ANTICIPATION NOTES 9% GENERAL OBLIGATION 8% Security types are defined on pages 29-30. www.americancentury.com 7 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES--96.6% $2,845,000 Alameda Corridor Transportation Auth. Rev., Series 1999 A, 5.25%, 10/1/21 (MBIA) $ 2,912,082 2,000,000 Alameda Public Financing Auth. Local Agency Rev., Series 1996 A, (Community Facility District No. 1), 7.00%, 8/1/19 2,205,400 1,000,000 American Canyon Joint Powers Financing Auth. Lease Rev., (Civic-Recreation Facilities), 6.40%, 6/1/22 1,053,180 4,000,000 Anaheim Public Financing Auth. Lease Rev., Series 1997 C, (Public Improvements), 5.90%, 9/1/18 (FSA)(1) 1,487,200 1,000,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Episcopal Homes Foundation), 5.125%, 7/1/18 984,260 3,000,000 Association of Bay Area Governments Finance Auth. Rev. COP, (Rhoda Haas Goldman Plaza), 5.125%, 5/15/23 (California Mortgage Insurance) 2,966,940 700,000 Bishop, Escalon & Lemoore Cities COP, Series 1991 A, 7.70%, 5/1/11 738,339 1,000,000 Blythe Financing Auth. Water Rev., 5.75%, 4/1/28 1,027,530 1,800,000 Blythe Redevelopment No. 1 Tax Allocation, 5.80%, 5/1/28 1,858,464 4,000,000 Bonita Canyon Public Facilities Financing Auth. Special Tax, (Community Facilities District No. 98-1), 5.375%, 9/1/28 3,894,360 3,000,000 Brawley COP, (Water System Improvement), 6.40%, 12/1/06, Prerefunded at 102% of Par(2)(3) 3,514,860 1,250,000 Brea Community Facilities District Special Tax, (Olinda Heights No. 1997-1), 5.80%, 9/1/28 1,256,863 2,000,000 Brea Olinda Unified School District Community Facilities Special Tax, (No. 95-1), 5.75%, 9/1/28 2,020,280 2,500,000 Brentwood Infrastructure Refinancing Auth. Rev., Series 1998-1, 5.875%, 9/2/28 2,513,975 1,540,000 Brisbane COP, (Capital Improvement Refinancing), 6.00%, 4/1/18 1,613,751 1,000,000 Cabrillo Unified School District GO, Series 1996 A, 5.95%, 8/1/17 (AMBAC)(1) 399,200 Principal Amount Value - -------------------------------------------------------------------------------- $1,850,000 California Community College Financing Auth. Lease Rev., Series 1998 A, 4.625%, 9/1/23 (MBIA) $ 1,751,340 500,000 California Educational Facilities Auth. Rev., (California Lutheran University), 7.375%, 12/1/16 532,295 2,000,000 California Educational Facilities Auth. Rev., (Los Angeles College Chiropractic), 5.60%, 11/1/17 2,072,240 1,000,000 California Educational Facilities Auth. Rev., (Mills College), 6.875%, 9/1/02, Prerefunded at 102% of Par(3) 1,128,200 1,000,000 California Educational Facilities Auth. Rev., (University of San Diego), 4.98%, 10/1/15 (AMBAC)(1) 445,240 1,000,000 California Educational Facilities Auth. Rev., Series 1993 B, (Pooled College and University Financing), 6.125%, 6/1/09 1,068,190 2,000,000 California Educational Facilities Auth. Rev., Series 1997 N, (Stanford University), 5.20%, 12/1/27 2,037,420 2,500,000 California Educational Facilities Auth. Rev., Series 1998 A, (Pooled College and University Projects), 5.625%, 7/1/23 2,565,200 4,000,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Kaiser Permanente), 7.15%, 10/1/12 (AMBAC)(1) 2,111,320 1,000,000 California Health Facilities Financing Auth. Rev., Series 1998 A, (Casa De Las Campanas), 5.25%, 8/1/20 (California Mortgage Insurance) 1,006,990 445,000 California Housing Finance Agency Home Mortgage Rev., Series 1989 B, 8.00%, 8/1/29 458,083 300,000 California Housing Finance Agency Home Mortgage Rev., Series 1990 C, 7.60%, 8/1/30 313,074 1,955,000 California Housing Finance Agency Home Mortgage Rev., Series 1997 B, 6.10%, 2/1/28 (MBIA) 2,082,231 1,500,000 California Housing Finance Agency Home Mortgage Rev., Series 1997 E, 6.10%, 8/1/29 (AMBAC) 1,601,340 3,500,000 California Housing Finance Agency Multi-Unit Mortgage Rev., Series 1992 C, 6.875%, 8/1/24 3,723,510 See Notes to Financial Statements 8 1-800-345-2021 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $3,455,000 California Housing Finance Agency Multifamily Mortgage Rev., Series 1997 A, 5.95%, 8/1/28 (MBIA) $ 3,634,695 2,500,000 California Housing Finance Agency Single Family Mortgage Rev., Series 1997 A-1, 5.95%, 8/1/16 2,657,850 2,960,000 California Housing Finance Agency Single Family Mortgage Rev., Series 1997 C-2, 5.65%, 2/1/25 3,066,086 400,000 California Public Capital Improvements Financing Auth. Rev., Series 1988 A, (Pooled Project), 8.50%, 3/1/18 407,472 7,000,000 California Public Works Board Lease Rev., Series 1998 A, (California Community Colleges), 5.25%, 12/1/14 7,356,720 3,000,000 California Public Works Board Lease Rev., Series 1998 A, (California Community Colleges), 5.25%, 12/1/15 3,135,150 3,665,000 California State GO, 6.75%, 9/1/09(1) 2,327,605 1,555,000 California State and Local Government Financing Auth. Rev., (Marin Valley Mobile Country-B), 7.50%, 10/1/24 (Acquired 3/13/97, Cost $1,555,000)(4) 1,658,501 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) 2,122,780 7,000,000 California Statewide Communities Development Auth. Lease Rev., Series 1997 A, (United Airlines), 5.70%, 10/1/33 7,195,790 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) 1,024,920 3,520,000 Central Valley Schools Financing Auth. Tax and Rev. Anticipation Notes, 3.50%, 1/27/00 3,538,339 190,000 Clayton Improvement Bond Act 1915 Special Assessment, (Oakhurst Assessment District), 8.00%, 9/2/14 197,902 55,000 Clayton Improvement Bond Act 1915 Special Assessment, Series 1988 A, (Oakhurst Assessment District), 8.40%, 9/2/10 57,497 Principal Amount Value - -------------------------------------------------------------------------------- $2,785,000 Coachella Redevelopment Agency Tax Allocation, (Project Area No. 3), 5.875%, 12/1/28 $ 2,755,730 4,500,000 Colton Public Financing Auth. Rev., (Electric System), 7.50%, 10/1/03, Prerefunded at 101% of Par(3) 5,259,825 1,320,000 Compton Sewer Rev., 5.375%, 9/1/23 1,309,334 750,000 Contra Costa County Public Financing Auth. Tax Allocation Rev., Series 1992 A, 7.10%, 8/1/22 818,303 1,000,000 Contra Costa County Public Financing Lease Rev., Series 1999 A, 5.25%, 6/1/14 (MBIA)(5) 1,056,800 1,250,000 Contra Costa County Public Financing Lease Rev., Series 1999 A, 5.25%, 6/1/15 (MBIA)(5) 1,314,700 675,000 Corcoran COP, 8.75%, 6/1/16 (Acquired 4/28/92, Cost $675,000)(4) 744,471 1,750,000 Corona Community Facilities District Special Tax, (Eagle Glen), 5.875%, 9/1/23 1,745,468 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(3) 1,164,840 1,500,000 Del Mar Race Track Auth. Rev., 6.20%, 8/15/11 1,625,400 275,000 Fairfield Housing Auth. Rev., (Creekside Estates), 5.50%, 9/1/12 273,961 300,000 Fairfield Housing Auth. Rev., (Creekside Estates), 5.55%, 9/1/13 298,815 340,000 Fairfield Housing Auth. Rev., (Creekside Estates), 5.55%, 9/1/14 338,599 1,215,000 Fairfield Housing Auth. Rev., (Creekside Estates), 5.625%, 9/1/23 1,208,585 3,400,000 Fairfield Redevelopment Agency Tax Allocation, 5.00%, 8/1/04 3,383,136 3,000,000 Folsom Public Financing Auth. Rev., Series1997 A, 6.875%, 9/2/19 3,105,390 2,000,000 Folsom Special Tax, (Community Facilities District No. 11), 5.65%, 9/1/18 1,961,780 1,750,000 Folsom Special Tax, (Community Facilities District No. 11), 5.75%, 9/1/23 1,712,865 See Notes to Financial Statements www.americancentury.com 9 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,500,000 Folsom Special Tax, (Community Facility District No. 7), 7.25%, 9/1/21 $ 1,626,600 2,500,000 Fontana Redevelopment Agency Tax Allocation, Series 1994 B, (Jurupa Hills), 7.70%, 1/1/19 2,778,100 1,040,000 Foothill-De Anza Community College District COP, (Campus Center), 7.35%, 3/1/07 1,145,581 2,500,000 Foster City Redevelopment Agency Tax Allocation, (Metro Center), 6.75%, 9/1/20 2,765,850 3,065,000 Fremont Public Financing Auth. Rev., Series 1998 A, 5.50%, 9/2/11 3,069,076 1,185,000 Gateway Improvement Auth. Rev., Series 1995 A, (Marin City Community Facility), 7.75%, 9/1/05, Prerefunded at 102% of Par(3) 1,462,468 1,250,000 High Desert Memorial Health Care District Rev., 5.50%, 10/1/15 1,219,000 2,000,000 Industry Urban Redevelopment Agency Tax Allocation, (Project 3), 6.90%, 11/1/16 2,181,780 985,000 Irvine Improvement Bond 1915 Special Assessment, Series 1992 A, (District No. 89-9), 7.40%, 9/2/17 1,010,344 1,000,000 La Mesa Improvement Bond Act 1915 Special Assessment, (Limited Obligation, District No. 98-1), 5.75%, 9/2/23 1,007,530 2,000,000 La Mirada Redevelopment Agency Special Tax Rev., (Community Facilities District No. 89-1), 5.70%, 10/1/20 2,020,000 3,250,000 Lake Elsinore School Financing Auth. Rev., (Horsethief Canyon), 5.625%, 9/1/16 3,239,210 1,000,000 Lake Elsinore School Financing Auth. Rev., 6.125%, 9/1/19 1,061,400 1,000,000 Lake Elsinore Unified School District Community Facilities Special Tax, (No. 88-1), 8.25%, 9/1/01, Prerefunded at 102% of Par(3) 1,135,380 2,195,000 Las Virgenes Unified School District GO, Series 1998 A, 5.19%, 11/1/20 (MBIA)(1) 726,589 3,440,000 Long Beach Harbor Rev., 5.375%, 5/15/20 (MBIA) 3,508,387 1,000,000 Long Beach Industrial Development Rev., Series 1998 A, (CSU Foundation), 5.25%, 2/1/13 1,014,920 Principal Amount Value - -------------------------------------------------------------------------------- $3,590,000 Long Beach Water Rev., Series 1997 A, 5.00%, 5/1/24 (MBIA) $ 3,571,906 2,000,000 Los Angeles Community Facilities District Special Tax, (Cascades Business Park), 6.40%, 9/1/22 2,092,020 80,000 Los Angeles County Single Family Mortgage Rev., (GNMA Mortgage, Issue B), 9.00%, 12/1/20 (GNMA) 83,730 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., Series 1991 B, 6.50%, 7/1/13 1,081,280 5,000,000 Los Angeles Harbor Department Rev., Series 1996 B, 5.375%, 11/1/19 (MBIA) 5,113,250 15,000 Los Angeles Home Mortgage Rev., 9.00%, 6/15/18 15,184 2,150,000 Los Angeles State Building Auth. Lease Rev. COP, Series 1993 A, 5.625%, 5/1/11 2,392,929 3,000,000 Los Angeles Unified School District COP, Series 1996 A, 5.50%, 10/1/16 (FSA) 3,163,380 2,000,000 Metropolitan Water District Southern California Waterworks Rev., Series 1998 A, 4.75%, 7/1/22 1,930,100 4,145,000 Milpitas Improvement Bond Act 1915 Special Assessment, (Local Improvement District 18), 5.65%, 9/2/14 4,244,066 3,000,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1996 A, (Local Improvement District 18), 6.75%, 9/2/16 3,242,880 2,020,000 Milpitas Improvement Bond Act 1915 Special Assessment, Series 1998 A, (Local Improvement District 18), 5.85%, 9/2/18 2,065,854 1,500,000 Modesto Irrigation District Financing Auth. Rev., Series 1998 D, (Domestic Water), 4.75%, 9/1/22 (AMBAC) 1,447,470 2,000,000 Monterey Park Public Financing Auth. Tax Allocation Rev., (Merged Redevelopment), 5.30%, 3/1/28 1,939,500 2,000,000 Novato Community Facility District No. 1 Special Tax, (Vintage Oaks), 7.20%, 8/1/15 2,196,640 5,000,000 Oceanside Mobile Home Park Financing Auth. Rev., (Laguna Vista Mobile Estates), 5.80%, 3/1/28 5,068,600 See Notes to Financial Statements 10 1-800-345-2021 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,000,000 Orange County Community Facilities District Special Tax, Series 1993 A, (No. 87-5E), 7.30%, 8/15/18 $ 1,079,520 1,000,000 Pioneer Union Elementary School District GO, 7.50%, 8/1/14 1,060,050 1,645,000 Pittsburg Infrastructure Financing Auth. Rev. Improvement Special Assessment, Series 1998 A, 5.55%, 9/2/16 1,669,609 3,500,000 Pittsburg Redevelopment Agency Tax Allocation, (Los Medanos Community Development), 6.25%, 8/1/26(2) 3,827,495 5,000,000 Pomona Improvement Bond Act 1915, (Rio Rancho Assessment District), 7.50%, 9/2/21 5,458,450 475,000 Pomona Public Financing Auth. Rev., Series 1994 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/04, Prerefunded at 102% of Par(3) 525,260 1,025,000 Pomona Public Financing Auth. Rev., Series 1994 L, (Southwest Pomona Redevelopment), 5.70%, 2/1/13 1,089,872 1,305,000 Poway Community Facilities District Special Tax, (No. 88-1, Parkway Business Center), 6.75%, 8/15/15 1,424,525 2,250,000 Rancho Mirage Joint Powers Financing Auth. COP, (Eisenhower Memorial Hospital), 7.00%, 3/1/02, Prerefunded at 102% of Par(3) 2,513,790 1,815,000 Redondo Beach Public Financing Auth. Rev., (South Bay Center Redevelopment), 7.125%, 7/1/26 2,017,227 1,000,000 Richmond Joint Powers Financing Auth. Rev. COP, Series 1995 A, 5.25%, 5/15/13 1,037,280 3,165,000 Richmond Redevelopment Agency Tax Allocation, Series 1998 A, (Harbour Redevelopment), 4.75%, 7/1/23 (MBIA) 3,051,946 500,000 Roseville Community Facilities District No. 2 Special Tax, 8.25%, 9/1/00, Prerefunded at 102% of Par(3) 546,465 5,200,000 Roseville Special Tax, (Roseville Community Facilities District 1), 5.75%, 9/1/23 5,156,060 2,200,000 Sacramento County Improvement Bond Act 1915 Special Assessment, (Sunrise/Cordova Reassessment), 5.30%, 9/2/09 2,256,518 635,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.60%, 9/1/07 668,661 Principal Amount Value - -------------------------------------------------------------------------------- $ 645,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 9/1/08 $ 685,016 2,250,000 Sacramento County Special Tax, (Community Facilities District No. 1), 5.70%, 12/1/20 2,271,218 1,500,000 Sacramento County Special Tax, (Community Facilities District No. 1), 6.30%, 9/1/21 1,577,340 3,970,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 4,155,399 1,400,000 Salinas COP, Series 1997 A, (Capital Improvement), 5.70%, 10/1/28 1,465,114 750,000 Salinas Improvement Bond Act 1915 Special Assessment, (District No. 90-1, Series C-185), 5.45%, 9/2/13 761,663 1,000,000 Salinas Improvement Bond Act 1915 Special Assessment, (District No. 90-1, Series C-185), 5.50%, 9/2/14 1,010,930 1,915,000 Salinas Improvement Bond Act 1915 Special Assessment, (Harden Ranch Assessment District 94-1), 6.875%, 9/2/11 2,040,681 1,000,000 San Diego Community Facilities District No. 1 Special Tax, Series 1995 B, 7.10%, 9/1/05, Prerefunded at 102% of Par(3) 1,197,480 3,990,000 San Diego County Improvement Bond Act 1915 GO, 6.25%, 9/2/12 4,127,296 4,000,000 San Francisco Bay Area Rapid Transit District Sales Tax Rev., 4.75%, 7/1/23 (AMBAC) 3,862,560 1,615,000 San Francisco Building Auth. Lease Rev., Series 1996 A, (San Francisco Civic Center Complex), 5.25%, 12/1/16 (AMBAC) 1,679,309 1,500,000 San Francisco City and County Airport Commission International Airport Rev., 5.90%, 5/1/26 1,596,345 3,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/18 (MBIA) 2,839,170 1,970,000 San Francisco City and County Airport Commission International Airport Rev., Issue 21, 4.50%, 5/1/23 (MBIA) 1,833,873 1,250,000 San Francisco City and County Redevelopment Agency Lease Rev., (George R. Moscone), 7.05%, 7/1/13(1) 620,213 See Notes to Financial Statements www.americancentury.com 11 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $7,810,000 San Francisco Community College District COP, Series 1998 A, 5.95%, 7/1/18 $ 7,811,640 1,780,000 San Jose Finance Auth. Rev. COP, Series 1993 C, (Convention Center), 6.30%, 9/1/09 1,927,064 1,000,000 San Marcos Public Facilities Auth. Rev., 5.80%, 9/1/27 1,002,070 5,000,000 San Marcos Public Facilities Auth. Rev., Series 1993 A, (Civic Center), 6.20%, 8/1/22 5,160,550 2,365,000 San Marcos Redevelopment Agency Tax Allocation, Series 1998 A, (Affordable Housing), 5.65%, 10/1/28 2,441,981 3,250,000 San Marcos Unified School District Special Tax, (Community Facilities District No. 5), 5.60%, 9/1/29(5) 3,242,883 1,540,000 San Mateo County Joint Powers Auth. Lease Rev., Series 1997 A, 5.00%, 7/15/22 (FSA) 1,532,562 5,000,000 Santa Ana COP, (City Hall Expansion), 4.70%, 1/1/28 (FSA) 4,760,900 1,000,000 Santa Clara Improvement Bond Act 1915 Special Assessment, (Convention Center), 5.10%, 9/2/09 1,010,460 1,000,000 Santa Clara Improvement Bond Act 1915 Special Assessment, (Convention Center), 5.15%, 9/2/10 1,010,910 1,300,000 Santa Rosa Improvement Bond Act 1915 Special Assessment, Series 1999 A, (Fountaingrove Parkway), 5.70%, 9/2/19 1,297,647 1,500,000 Santa Rosa Improvement Bond Act 1915, Series 1998 A, (Skyhawk Assessment District), 5.75%, 9/2/20 1,519,455 1,615,000 South San Francisco Redevelopment Agency Tax Allocation, 7.60%, 9/1/02, Prerefunded at 102% of Par(3) 1,856,378 455,000 Southern California Housing Finance Auth. Single Family Mortgage Rev., Series 1991 A, (GNMA & FNMA Mortgage-Backed Securities), 7.35%, 9/1/24 (GNMA/FNMA Collateral) 477,745 500,000 Southern California Public Power Auth. Rev., (Pooled Project), 6.75%, 7/1/10 (FSA) 610,310 2,400,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/14 (MBIA)(1) 1,149,432 Principal Amount Value - -------------------------------------------------------------------------------- $1,250,000 Southern California Public Power Auth. Rev., (Transmission), 6.35%, 7/1/15 (MBIA)(1) $ 563,375 2,000,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 5.80%, 9/1/14 2,049,180 1,100,000 Stockton Community Facilities District Special Tax Rev., Series 1998 A, (Mello Roos-Weston Ranch), 6.00%, 9/1/24 1,130,877 2,000,000 Stockton East Water District COP, Series 1997 A, 4.75%, 4/1/22 (AMBAC) 1,927,880 1,770,000 Tehama Community COP, (Social Services Building), 7.00%, 10/1/05, Prerefunded at 102% of Par(3) 2,117,823 1,655,000 Torrance Hospital Rev., (Little County of Mary Hospital), 6.875%, 7/1/15, Prerefunded at 102% of Par(3) 1,859,078 1,180,000 Torrance Redevelopment Agency Tax Allocation, Series 1998 B, 5.625%, 9/1/28 1,185,652 2,255,000 Tracy Operating Partnership Joint Powers Auth. Rev., (Jr. Lien Assessment District 87-3), 6.375%, 9/2/11 2,312,863 1,565,000 Twentynine Palms Water District COP, 7.10%, 8/1/22 1,697,133 2,000,000 Union City Special Tax, (Community Facilities District No. 1997-1), 5.80%, 9/1/28 2,039,700 2,250,000 Vacaville Improvement Bond Act 1915 Special Assessment, (Northeast Sector Assessment District A), 7.00%, 9/2/22 2,370,465 3,850,000 Vacaville Special Tax, Series 1998 C, (Community Facilities District No. 2), 5.60%, 9/1/15 3,942,208 5,000,000 Vallejo Hiddenbrooke Improvement District No. 1 Rev., 6.50%, 9/1/31 5,020,850 1,645,000 Vallejo Multifamily Housing Rev., Series 1998 B, (Solano Affordable Housing), 8.25%, 4/1/39 (Acquired 10/21/98, Cost $1,645,000)(4) 1,596,292 2,000,000 West Contra Costa Unified School District COP, 7.125%, 1/1/24 2,250,420 2,000,000 West Sacramento Redevelopment Agency Tax Allocation, 4.75%, 9/1/27 (MBIA) 1,922,980 See Notes to Financial Statements 12 1-800-345-2021 Cal. High-Yield Municipal--Sched. of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $1,520,000 Windsor Redevelopment Agency Tax Allocation, 6.875%, 9/1/15 $ 1,682,503 ------------- TOTAL MUNICIPAL SECURITIES 330,011,271 ------------- (Cost $316,705,622) SHORT-TERM MUNICIPAL SECURITIES--3.4% 1,000,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.10%, 3/1/99 1,000,000 2,000,000 California Pollution Control Financing Auth. Solid Waste Disposal Rev., Series 1996 A, (Shell Martinez Refining), VRDN, 3.00%, 3/1/99 2,000,000 Principal Amount Value - -------------------------------------------------------------------------------- $1,300,000 California State Economic Development Financing Auth. Rev., Series 1998 C, VRDN, 3.50%, 3/1/99 1,300,000 5,900,000 California Statewide Community Development Auth. Rev., Floating Rate Trust Receipts, 2.95%, 3/3/99 (Acquired 2/16/99-2/26/99, Cost $5,900,000)(4)(6) 5,900,000 1,300,000 Irvine Ranch Water District Rev., Series 1993 A, VRDN, 3.00%, 3/1/99 1,300,000 ------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES 11,500,000 ------------- (Cost $11,500,000) TOTAL INVESTMENT SECURITIES--100.0% $341,511,271 ============= (Cost $328,205,622) NOTES TO SCHEDULE OF INVESTMENTS AMBAC = AMBAC Assurance Corporation COP = Certificates of Participation FNMA = Federal National Mortgage Association FSA = Financial Security Assurance Inc. GNMA = Government National Mortgage Association GO = General Obligation MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. (1) Security is a zero-coupon municipal bond. The yield to maturity at purchase is indicated. Zero-coupon securities are purchased at a substantial discount from their value at maturity. (2) Security, or a portion thereof, has been segregated at the custodian bank for a when-issued security. (3) Escrowed to maturity in U.S. Government securities or state and local government securities. (4) Security was purchased under Rule 144A of the Securities Act of 1933 or is a private placement, and unless registered under the Act or exempted from registration, may only be sold to qualified institutional investors. The aggregate value of restricted securities at February 28, 1999, was $9,899,264 which represented 2.9% of net assets. (5) When-issued security. (6) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. - -------------------------------------------------------------------------------- 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 13
California Insured Tax-Free--Performance - -------------------------------------------------------------------------------- TOTAL RETURNS AS OF FEBRUARY 28, 1999 CALIFORNIA INSURED LEHMAN LONG-TERM CALIF. INSURED MUNICIPAL DEBT FUNDS(2) TAX-FREE MUNI BOND INDEX AVERAGE RETURN FUND'S RANKING 6 MONTHS(1) 2.23% 2.24% 2.19% -- 1 YEAR 6.06% 6.40% 5.33% 3 OUT OF 26 ============================================================================================= AVERAGE ANNUAL RETURNS ============================================================================================= 3 YEARS 6.59% 7.99% 6.21% 4 OUT OF 25 5 YEARS 6.50% 7.43% 5.93% 3 OUT OF 17 10 YEARS 7.98% 9.11% 7.93% 3 OUT OF 7
The fund's inception date was 12/30/86. (1) Returns for periods less than one year are not annualized. (2) According to Lipper Inc., an independent mutual fund ranking service. See pages 28-29 for more information about returns, the comparative index, and Lipper fund rankings. [mountain graph - data below] GROWTH OF $10,000 OVER 10 YEARS Value on 2/28/99 Lehman Long-Term Municipal Bond Index $23,922 California Insured Tax-Free $21,557 California Lehman Long-Term Insured Tax-Free Municipal Bond Index DATE VALUE VALUE 2/28/89 $10,000 $10,000 2/28/90 $10,873 $11,108 2/28/91 $11,787 $12,141 2/29/92 $12,897 $13,521 2/28/93 $14,983 $15,730 2/28/94 $15,726 $16,716 2/28/95 $15,890 $16,876 2/29/96 $17,728 $18,996 2/28/97 $18,576 $20,170 2/28/98 $20,318 $22,483 2/28/99 $21,557 $23,922 $10,000 investment made 2/28/89 The graph at left shows the growth of a $10,000 investment in the fund over 10 years, while the graph below shows the fund's year-by-year performance. The Lehman Long-Term Municipal Bond Index is provided for comparison in each graph. California Tax-Free Insured's total returns include operating expenses (such as transaction costs and management fees) that reduce returns, while the total returns of the index do not. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and redemption value may be more or less than original cost. [bar graph - data below] ONE-YEAR RETURNS OVER 10 YEARS (PERIODS ENDED FEBRUARY 28) California Lehman Long-Term Insured Tax-Free Municipal Bond Index DATE RETURN RETURN 2/28/90 8.73% 11.08% 2/28/91 8.41% 9.30% 2/29/92 9.41% 11.37% 2/28/93 16.18% 16.33% 2/28/94 4.96% 6.27% 2/28/95 1.04% 0.96% 2/29/96 11.57% 12.56% 2/28/97 4.78% 6.18% 2/28/98 9.38% 11.47% 2/28/99 6.06% 6.40% 14 1-800-345-2021 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- /photo of Dave MacEwen/ An interview with Dave MacEwen, a portfolio manager on the California Tax-Free and Municipal funds investment team. HOW DID THE FUND PERFORM DURING THE SIX-MONTH PERIOD ENDED FEBRUARY 28, 1999? California Insured Tax-Free posted a 2.23% total return, which was better than the 2.19% average total return of its peer group--26 "California Insured Municipal Debt Funds" tracked by Lipper Inc. (See the previous page for other fund comparisons.) California Insured Tax-Free also produced more current income than its peers. The fund's 30-day SEC yield as of February 28 was 3.97%, compared with the 3.41% yield of the average California insured municipal fund, according to Lipper. WHAT STRATEGIES DETERMINED THE FUND'S PERFORMANCE? One of the main contributors to California Insured Tax-Free's performance was its longer-than-average duration. Duration measures how sensitive a fund's share price is to changes in interest rates. (The longer a fund's duration, the more the share price will rise or fall as interest rates change.) We maintained a slightly long duration because we believed interest rates would move lower as a slowing global economy suppressed inflationary pressures. The fund's longer-than-average duration served us well when interest rates declined--last autumn and again in January--but detracted from performance when rates rose like they did in February. It's important to note, however, that we make only small adjustments to duration based on our interest rates expectations. We typically keep duration within a year of that of California Insured Tax-Free's benchmark (a group of funds with similar investment objectives). WHY DID YOU CHOOSE TO MAKE CALIFORNIA TAX-FREE'S DURATION SLIGHTLY LONGER THAN ITS BENCHMARK'S? We believed the relationship between municipal and Treasury bond yields indicated that municipal yields were relatively high. As a result, we felt that municipal yields would likely decline. Historically speaking, municipal bond yields average about 83% of Treasury yields. Six months ago, some municipal bonds actually yielded more than Treasury bonds with comparable maturities. The relatively high yields of municipal bonds were a function of too much supply and too little demand. On the supply side, a near-record amount of new municipals was issued in 1998. On the demand side, municipals didn't enjoy the same strong demand from foreign investors--who can't benefit from municipals' tax-exempt status--that drove Treasury prices higher and their yields lower. By the end of the period, municipal yields had fallen back to about 90% of Treasury yields, but that still represented good value from a historical standpoint. [right margin] "ONE OF THE MAIN CONTRIBUTORS TO CALIFORNIA INSURED TAX-FREE'S PERFORMANCE WAS ITS LONGER-THAN-AVERAGE DURATION." YIELDS AS OF FEBRUARY 28, 1999 30-DAY SEC YIELD 3.97% 30-DAY TAX-EQUIVALENT YIELDS 34.70% TAX BRACKET 6.08% 37.42% TAX BRACKET 6.34% 41.95% TAX BRACKET 6.84% 45.22% TAX BRACKET 7.25% PORTFOLIO AT A GLANCE 2/28/99 8/31/98 NUMBER OF SECURITIES 76 71 WEIGHTED AVERAGE MATURITY 18.0 YRS 17.9 YRS AVERAGE DURATION 8.6 YRS 8.5 YRS EXPENSE RATIO 0.51%* 0.51% * Annualized. Investment terms are defined in the Glossary on page 29. www.americancentury.com 15 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WHAT OTHER MANAGEMENT TECHNIQUES DID YOU FOCUS ON DURING THE PERIOD? We continued to emphasize call protection by buying discount bonds. Discount bonds offer a degree of call protection because they are less likely to be called away by municipal bond issuers who want to refinance at lower rates--the municipal equivalent of a homeowner refinancing a mortgage. That's due to the fact that they carry coupons--the interest rate the issuer agrees to pay bondholders--that are lower than prevailing interest rates. While calls can be beneficial for bond issuers, they can spell trouble for bondholders who effectively have the duration of their municipal portfolio shortened. Our position in discount bonds aided the fund's performance when rates fell, but detracted from it when rates were moving higher. WHAT'S YOUR OUTLOOK FOR INTEREST RATES? In our view, interest rates could resume their decline this year, although we wouldn't be surprised to see them temporarily drift higher as investors digest news about strong growth and low unemployment. While the U.S. economy grew much faster than expected in the fourth quarter of last year and unemployment hit 29-year lows, inflation remained in check. Continued low inflation owed much to slowing economies in the rest of the world. Many Asian countries are struggling through recessions, with some teetering toward depression. Latin America also faces ongoing challenges as it struggles with inflation, slowing growth, and currency problems. Europe shows signs of slowing down in reaction to problems encountered with the introduction of the continent's unified currency, the euro. With such anemic economic growth overseas, we believe we're likely to see excess global capacity for all types of goods and services, and as a result, practically no pricing pressures. Combine that with increasing productivity due to technological improvements, and it appears unlikely that inflation will be a problem any time soon. WHAT DOES THAT OUTLOOK MEAN FOR THE MUNICIPAL MARKET? Continued low inflation and declining interest rates would certainly help boost the market. But supply and demand will also determine the performance of municipal bonds. Municipals underperformed Treasurys when interest rates declined last year in large part because of the surge in demand for Treasurys from overseas investors and increased municipal supply. So far in 1999, however, we've already seen signs that the supply of California municipals is tapering off and demand has firmed, which we believe could set the stage for lower municipal yields. On the demand side, the relative cheapness of municipals compared with Treasurys may attract investors who want tax- free income. [left margin] "WE CONTINUED TO EMPHASIZE CALL PROTECTION BY BUYING DISCOUNT BONDS." TOP FIVE SECTORS (AS OF 2/28/99) % OF FUND INVESTMENTS COPS/LEASES 24% ELECTRIC REVENUE 14% WATER AND SEWER REVENUE 12% TAX ALLOCATION REVENUE 9% GENERAL OBLIGATION 7% TOP FIVE SECTORS (AS OF 8/31/98) % OF FUND INVESTMENTS COPS/LEASES 24% ELECTRIC REVENUE 16% WATER AND SEWER REVENUE 14% TAX ALLOCATION REVENUE 11% HOSPITAL REVENUE 7% Security types are defined on pages 29-30. 16 1-800-345-2021 California Insured Tax-Free--Q&A - -------------------------------------------------------------------------------- (Continued) WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR CALIFORNIA INSURED TAX-FREE? We will likely keep the portfolio's duration a bit longer than the average California insured municipal fund. That should be a positive for returns if municipal bond yields decline, as we expect. In addition, we'll still emphasize call-protected securities, such as discount bonds. Other than that, we will continue to monitor the California municipal market to uncover securities that we believe offer good relative values and attractive yields. [right margin] "WE'VE ALREADY SEEN SIGNS THAT THE SUPPLY OF CALIFORNIA MUNICIPALS IS TAPERING OFF AND DEMAND HAS FIRMED, WHICH WE BELIEVE COULD SET THE STAGE FOR LOWER MUNICIPAL YIELDS." PORTFOLIO COMPOSITION BY CREDIT RATING % OF FUND INVESTMENTS AS OF AS OF 2/28/99 8/31/98 AAA 100% 100% Ratings provided by Standard & Poor's. See Credit Rating Guidelines on page 28 for more information. www.americancentury.com 17 Cal. Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- MUNICIPAL SECURITIES--95.2% $ 1,000,000 Banning COP, (Wastewater System Refunding & Improvement), 8.00%, 1/1/19 (AMBAC) $ 1,322,100 900,000 Brea Redevelopment Agency Tax Allocation, (Project AB), 6.125%, 8/1/13 (MBIA) 991,440 5,565,000 California Educational Facilities Auth. Rev., (California Institute of Technology), 4.25%, 10/1/28 4,904,042 2,450,000 California Educational Facilities Auth. Rev., Series 1997 M, (Stanford University), 5.25%, 12/1/26 2,490,033 2,500,000 California Health Facilities Financing Auth. Rev., Series 1989 A, (Sutter Hospital), 6.70%, 3/1/99 (AMBAC)(1) 2,526,325 1,250,000 California Health Facilities Financing Auth. Rev., Series 1991 A, (Adventist Health), 7.00%, 3/1/13 (MBIA) 1,351,925 1,505,000 California Public Capital Improvements Financing Auth. Rev., (Pooled Project 1988 B), 8.10%, 3/1/18 (BIGI) 1,533,700 2,000,000 California State GO, 4.50%, 12/1/24 (FGIC) 1,857,260 3,500,000 California State GO, 4.25%, 10/1/26 (MBIA) 3,111,605 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) 4,069,800 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) 6,368,340 4,135,000 California State Universities and Colleges Rev., 5.75%, 11/1/15 (FGIC) 4,485,276 3,925,000 California Statewide Communities Development Auth. Rev. COP, (Gemological Institute), 6.75%, 5/1/10 (Connie Lee) 4,745,914 7,000,000 California Statewide Community Development Auth. Rev., Series 1998 A, (Sherman Oaks), 5.00%, 8/1/22 (AMBAC, California Mortgage Insurance) 7,062,510 1,520,000 Castaic Lake Water Agency COP, Series 1994 A, (Water System Improvement), 7.00%, 8/1/12 (MBIA) 1,893,722 Principal Amount Value - -------------------------------------------------------------------------------- $ 1,000,000 Contra Costa County COP, 7.80%, 6/1/99, Prerefunded at 102% of Par (BIGI)(1) $ 1,032,860 1,200,000 Contra Costa Water District Rev., Series 1992 E, 6.25%, 10/1/12 (AMBAC) 1,421,904 1,000,000 East Valley Water District COP, (Treatment Plant), 6.60%, 12/1/14 (AMBAC) 1,110,330 2,000,000 Escondido Joint Powers Financing Auth. Rev. COP, 6.125%, 9/1/11 (AMBAC) 2,159,420 2,620,000 Escondido Unified School District COP, 4.75%, 7/1/19 (MBIA) 2,570,587 1,695,000 Escondido Unified School District COP, 4.75%, 7/1/23 (MBIA) 1,647,710 2,000,000 Fontana Unified School District GO, Series 1997 D, 5.85%, 5/1/22 (FGIC)(2) 2,095,120 3,100,000 Foothill-De Anza Community College District COP, 6.25%, 9/1/13 (Connie Lee) 3,435,234 1,725,000 Fresno Sewer Rev., Series 1993 A-1, 6.25%, 9/1/14 (AMBAC) 2,035,000 1,240,000 Fresno Sewer Rev., Series 1993 A-1, 4.75%, 9/1/21 (AMBAC) 1,215,126 5,000,000 Glendale Hospital Rev., Series 1991 A, (Adventist Hospital), 6.75%, 3/1/13 (MBIA) 5,378,600 4,830,000 Glendale Unified School District COP, Series 1994 A, 6.50%, 3/1/12 (AMBAC) 5,446,936 1,340,000 Kern High School District GO, Series 1993 C, 6.25%, 8/1/13 (MBIA) 1,582,955 3,630,000 Kern High School District GO, Series 1993 D, 7.00%, 8/1/17 (MBIA) 4,191,198 2,000,000 La Quinta Financing Auth. Lease Rev. COP, (La Quinta City Hall), 5.55%, 10/1/18 (MBIA) 2,179,700 790,000 Lake Elsinore Public Financing Auth. Tax Allocation, Series 1992 C, (Redevelopment), 6.625%, 2/1/17 (FGIC) 828,031 1,500,000 Lakewood Redevelopment Agency Tax Allocation, Series 1992 A, (Project No. 1), 6.50%, 9/1/17 (FSA) 1,654,395 640,000 Los Angeles Community Redevelopment Agency Housing Rev., Series 1994 C, 7.00%, 1/1/14 (AMBAC) 698,138 3,500,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/14 (FSA)(3) 3,947,650 See Notes to Financial Statements 18 1-800-345-2021 Cal. Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 4,000,000 Los Angeles Community Redevelopment Agency Tax Allocation, Series 1993 H, (Bunker Hill), 6.50%, 12/1/15 (FSA) $ 4,500,440 1,000,000 Los Angeles County Transportation Commission Sales Tax Rev., 6.50%, 7/1/13 (AMBAC) 1,082,460 2,000,000 Los Angeles Unified School District GO, Series 1997 A, 5.00%, 7/1/21 (FGIC) 1,990,540 1,100,000 Los Angeles Wastewater System Rev., Series 1991 C, 7.00%, 6/1/99, Prerefunded at 102% of Par (AMBAC)(1) 1,133,979 1,915,000 Midpeninsula Regional Open Space District Financing Auth. Rev., 5.90%, 9/1/14 (AMBAC) 2,099,223 5,000,000 Modesto, Stockton, Redding Public Power Agency Rev., Series 1989 D, (San Juan), 6.75%, 7/1/20 (MBIA) 6,087,900 1,200,000 National City Joint Powers Auth. Lease Rev. COP, (Police Facilities), 6.75%, 10/1/01, Prerefunded at 102% of Par (AMBAC)(1) 1,326,936 2,810,000 Oakland Redevelopment Agency Tax Allocation, (Central District Redevelopment Tax), 5.50%, 2/1/14 (AMBAC) 3,072,904 2,700,000 Orange County Financing Auth. Tax Allocation, Series 1992 A, 6.25%, 9/1/14 (MBIA) 2,918,160 1,950,000 Ramona Municipal Water District COP, 7.20%, 10/1/10 (AMBAC) 2,101,281 1,100,000 Redlands Unified School District COP, 6.00%, 9/1/12 (FSA) 1,160,632 17,500,000 Sacramento Municipal Utility District Electric Rev., Series 1997 K, 5.25%, 7/1/24 (AMBAC) 18,317,250 2,210,000 Sacramento Redevelopment Agency Tax Allocation, Series 1990 A, 6.50%, 11/1/00, Prerefunded at 102% of Par (MBIA)(1) 2,376,170 295,000 Sacramento Redevelopment Agency Tax Allocation, Series 1990 A, 6.50%, 11/1/13, Prerefunded at 102% of Par (MBIA)(1) 314,715 3,000,000 Saddleback Community College District COP, 7.00%, 8/1/19 (BIGI) 3,107,010 1,345,000 San Diego Community College District Lease Rev. COP, 6.125%, 12/1/06, Prerefunded at 102% of Par (MBIA)(1) 1,569,077 Principal Amount Value - -------------------------------------------------------------------------------- $ 7,000,000 San Diego County COP, 5.625%, 9/1/12 (AMBAC) $ 7,767,550 6,035,000 San Diego County Water Auth. Water Rev. COP, Series 1998 A, 4.50%, 5/1/24 (FGIC) 5,601,084 3,250,000 San Francisco Bay Area Rapid Transportation District Sales Tax Rev., 6.75%, 7/1/00, Prerefunded at 102% of Par (AMBAC)(1) 3,470,448 3,500,000 San Francisco City and County Airport Commission International Airport Rev., Issue 20, 4.50%, 5/1/26 (MBIA) 3,243,660 6,000,000 San Francisco City and County Airport Commission International Airport Rev., Issue 21, 4.50%, 5/1/23 (MBIA) 5,585,400 8,330,000 San Francisco City and County Airport Commission International Airport Rev., Issue 2, 6.75%, 5/1/20 (MBIA) 9,335,848 1,670,000 San Francisco City and County Airport Commission International Airport Rev., Issue 2, 6.75%, 5/1/03, Prerefunded at 102% of Par (MBIA)(1) 1,906,405 3,500,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 5.00%, 7/1/21 (MBIA) 3,549,385 3,535,000 San Mateo County Joint Powers Auth. Lease Rev., (Capital Projects Program), 6.50%, 7/1/15 (MBIA) 4,252,782 1,000,000 San Mateo County Transportation District Sales Tax Rev., Series 1993 A, 5.25%, 6/1/18 (MBIA) 1,051,560 1,000,000 San Ysidro School District GO, 6.125%, 8/1/21 (AMBAC) 1,136,140 3,500,000 Santa Ana Financing Auth. Rev., Series 1999 B, (South Harbor Boulevard), 5.125%, 9/1/19 (MBIA)(4) 3,467,450 2,000,000 Santa Clara Electric Rev., Series 1998 A, 5.00%, 7/1/27 (AMBAC) 1,989,360 2,000,000 Santa Margarita-Dana Point Auth. Rev., Series 1994 B, (Improvement Districts 3, 3A, 4, 4A), 7.25%, 8/1/14 (MBIA) 2,573,680 1,265,000 Sierra Valley Hospital District GO, 5.50%, 8/1/23 (MBIA) 1,331,349 2,500,000 South Coast Air Quality Management District Building GO, (Installment Sale Headquarters), 6.00%, 8/1/11 (AMBAC) 2,894,075 See Notes to Financial Statements www.americancentury.com 19 Cal. Insured Tax-Free--Schedule of Investments - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) Principal Amount Value - -------------------------------------------------------------------------------- $ 2,500,000 Ukiah Electric Rev., 6.25%, 6/1/18 (MBIA) $ 2,939,925 1,445,000 Walnut Valley Unified School District GO, Series 1992 B, 6.00%, 8/1/10 (AMBAC) 1,678,440 2,080,000 Watsonville Wastewater Rev., 5.00%, 5/15/16 (MBIA) 2,100,509 4,525,000 Woodland COP, (Wastewater System Reference), 5.75%, 3/1/12 (AMBAC) 5,079,901 ------------- TOTAL MUNICIPAL SECURITIES 217,458,514 ------------- (Cost $203,044,118) MUNICIPAL DERIVATIVES(5)--2.8% 2,000,000 East Bay Municipal Utility District Wastewater Treatment System Rev., Yield Curve Notes, Inverse Floater, 6.82%, 6/1/13 (AMBAC) 2,195,000 1,000,000 San Diego County Water Auth. Rev. COP, (Reg Rites), Yield Curve Notes, Inverse Floater, 7.25%, 5/1/09 (FGIC) 1,236,250 Principal Amount Value - -------------------------------------------------------------------------------- $ 2,750,000 Southern California Public Power Auth. Rev., Yield Curve Notes, Inverse Floater, 6.62%, 7/1/17 (FGIC) $ 3,080,000 ------------- TOTAL MUNICIPAL DERIVATIVES 6,511,250 ------------- (Cost $5,838,430) SHORT-TERM MUNICIPAL SECURITIES--2.0% 2,000,000 California Health Facilities Financing Auth. Rev., Series 1996 B, VRDN, 3.10%, 3/1/99 2,000,000 1,500,000 California State Economic Development Financing Auth. Rev., Series 1998 C, VRDN, 3.50%, 3/1/99 1,500,000 1,000,000 California Statewide Community Development Auth. Rev., Floating Rate Trust Receipts, 2.95%, 3/3/99 (Acquired 2/26/99, Cost $1,000,000)(6)(7) 1,000,000 ------------- TOTAL SHORT-TERM MUNICIPAL SECURITIES 4,500,000 ------------- (Cost $4,500,000) TOTAL INVESTMENT SECURITIES--100.0% $228,469,764 ============= (Cost $213,382,548) 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 MBIA = MBIA Insurance Corp. VRDN = Variable Rate Demand Note. Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. (1) Escrowed to maturity in U.S. Government securities or state and local government securities. (2) 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. (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. (6) 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 February 28, 1999, was $1,000,000, which represented 0.4% of net assets. (7) Interest reset date is indicated and used in calculating the weighted average portfolio maturity. Rate shown is effective February 28, 1999. - -------------------------------------------------------------------------------- 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 20 1-800-345-2021 Statements of Assets and Liabilities - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) HIGH-YIELD INSURED MUNICIPAL TAX-FREE ASSETS Investment securities, at value (identified cost of $328,205,622 and $213,382,548 respectively) (Note 3) .......... $341,511,271 $228,469,764 Investment in affiliated money market fund (Note 2) ......................... 8,639 8,759 Cash ........................................... 1,075,515 471,398 Interest receivable ............................ 6,125,299 3,393,379 ------------ ------------ 348,720,724 232,343,300 ------------ ------------ LIABILITIES Payable for investments purchased .............. 5,618,681 3,349,395 Payable for capital shares redeemed ............ 494,460 236,222 Accrued management fees (Note 2) ............... 138,599 88,504 Dividends payable .............................. 94,942 62,429 Payable for trustees' fees and expenses ................................. 779 527 ------------ ------------ 6,347,461 3,737,077 ------------ ------------ Net Assets ..................................... $342,373,263 $228,606,223 ============ ============ CAPITAL SHARES Outstanding (unlimited number of shares authorized) ........................ 34,893,379 21,714,314 ============ ============ Net Asset Value Per Share ...................... $ 9.81 $ 10.53 ============ ============ NET ASSETS CONSIST OF: Capital paid in ................................ $329,066,752 $213,200,784 Accumulated undistributed net realized gain on investment transactions ................................. 862 318,223 Net unrealized appreciation on investments (Note 3) ...................... 13,305,649 15,087,216 ------------ ------------ $342,373,263 $228,606,223 ============ ============ - -------------------------------------------------------------------------------- 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 shares outstanding gives you the price of an individual share, or the net asset value per share. NET ASSETS are also broken down by capital (money invested by 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 breakdown 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 21 Statements of Operations - -------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) HIGH-YIELD INSURED MUNICIPAL TAX-FREE INVESTMENT INCOME Income: Interest ................................... $ 8,763,384 $ 5,748,750 ----------- ----------- Expenses (Note 2): Management fees ............................ 841,595 554,669 Trustees' fees and expenses ................ 5,900 4,369 ----------- ----------- 847,495 559,038 ----------- ----------- Net investment income ...................... 7,915,889 5,189,712 ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3) Net realized gain on investments ........... 1,447,884 806,053 Change in net unrealized appreciation on investments .............. (1,890,452) (1,268,735) ----------- ----------- Net realized and unrealized loss on investments ...................... (442,568) (462,682) ----------- ----------- Net Increase in Net Assets Resulting from Operations ................ $ 7,473,321 $ 4,727,030 =========== =========== - -------------------------------------------------------------------------------- UNDERSTANDING THE STATEMENTS OF OPERATIONS--This statement breaks down 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 22 1-800-345-2021
Statements of Changes in Net Assets - -------------------------------------------------------------------------------- SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED) AND YEAR ENDED AUGUST 31, 1998 HIGH-YIELD MUNICIPAL INSURED TAX-FREE Increase in Net Assets 1999 1998 1999 1998 OPERATIONS Net investment income ............... $ 7,915,889 $ 12,677,129 $ 5,189,712 $ 9,928,056 Net realized gain on investments .... 1,447,884 2,562,512 806,053 1,583,804 Change in net unrealized appreciation on investments ....... (1,890,452) 6,311,903 (1,268,735) 5,870,522 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ......... 7,473,321 21,551,544 4,727,030 17,382,382 ------------- ------------- ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income .......... (7,934,700) (12,677,129) (5,189,712) (9,928,056) From net realized gains on investment transactions ........... (3,429,593) (2,545,652) (1,169,516) (2,921,262) ------------- ------------- ------------- ------------- Decrease in net assets from distributions ................ (11,364,293) (15,222,781) (6,359,228) (12,849,318) ------------- ------------- ------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ........... 92,105,967 181,804,274 42,920,146 82,053,478 Proceeds from reinvestment of distributions .................. 8,089,596 11,152,218 4,499,696 8,954,545 Payments for shares redeemed ........ (57,772,868) (88,275,006) (32,690,638) (69,176,578) ------------- ------------- ------------- ------------- Net increase in net assets from capital share transactions ........ 42,422,695 104,681,486 14,729,204 21,831,445 ------------- ------------- ------------- ------------- Net increase in net assets .......... 38,531,723 111,010,249 13,097,006 26,364,509 NET ASSETS Beginning of period ................. 303,841,540 192,831,291 215,509,217 189,144,708 ------------- ------------- ------------- ------------- End of period ....................... $ 342,373,263 $ 303,841,540 $ 228,606,223 $ 215,509,217 ============= ============= ============= ============= Undistributed net investment income ............................ -- $ 18,811 -- -- ============= ============= ============= ============= TRANSACTIONS IN SHARES OF THE FUNDS Sold ................................ 9,305,384 18,553,052 4,045,979 7,856,824 Issued in reinvestment of distributions .................. 818,052 1,137,993 424,129 855,798 Redeemed ............................ (5,824,261) (9,015,907) (3,081,616) (6,627,802) ------------- ------------- ------------- ------------- Net increase ........................ 4,299,175 10,675,138 1,388,492 2,084,820 ============= ============= ============= =============
- -------------------------------------------------------------------------------- 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 23 Notes to Financial Statements - -------------------------------------------------------------------------------- FEBRUARY 28, 1999 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the trust) is registered under the Investment Company Act of 1940 as an open-end management investment company. California High-Yield Municipal Fund (High-Yield) and California Insured Tax-Free Fund (Insured) (the funds) are two of the seven funds issued by the trust. The funds are diversified under the 1940 Act. The funds seek income that is exempt from federal and California income taxes. High-Yield seeks to provide as high a level of current income as is consistent with its investment policies, which permit investment in lower-rated and unrated municipal securities. Insured seeks to provide as high a level of current income as is consistent with safety of principal through investment in insured California municipal securities. The funds concentrate their investments in a single state and therefore may have more exposure to credit risk related to the state of California than a fund with a broader geographical diversification. The following significant accounting policies are in accordance with generally accepted accounting principles; these principles may require the use of estimates by fund management. SECURITY VALUATIONS -- Portfolio securities are valued through a commercial pricing service or at the mean of the most recent bid and asked prices. When valuations are not readily available, securities are valued at fair value as determined in accordance with procedures adopted by the Board of Trustees. SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade date. Net realized gains and losses are determined on the identified cost basis, which is also used for federal income tax purposes. INVESTMENT INCOME -- Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. INCOME TAX STATUS -- It is the funds' policy to distribute all net investment income and net realized gains to shareholders and to otherwise qualify as a regulated investment company under the provisions of the Internal Revenue Code. Accordingly, no provision has been made for federal or state income taxes. DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income for the funds are declared daily and distributed monthly. Distributions from net realized gains for the funds are declared and paid annually. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. These differences reflect the differing character of certain income items and net capital gains and losses for financial statement and tax purposes and may result in reclassification among certain capital accounts. FUTURES CONTRACTS -- The funds may buy and sell interest rate futures contracts relating to debt securities. Futures transactions may be used to maintain cash reserves while remaining fully invested, to facilitate trading, to reduce transaction costs, or to pursue higher investment returns when a futures contract is priced more attractively than its underlying security or index. One of the risks of entering into futures contracts may include the possibility that the changes in value of the contract may not correlate with the changes in value of the underlying securities. Upon entering into a futures contract, the funds are required to deposit either cash or securities in an amount equal to a certain percentage of the contract value (initial margin). Subsequent payments (variation margin) are made or received daily, in cash, by the funds. The variation margin is equal to the daily change in the contract value and is recorded as an unrealized gain or loss. The funds recognize a realized gain or loss when the contract is closed or expired. Net realized and unrealized gains or losses occurring during the holding period of futures contracts are a component of realized gain (loss) on investments and unrealized appreciation (depreciation) on investments, respectively. There were no open futures contracts at February 28, 1999. ADDITIONAL INFORMATION -- Funds Distributor, Inc. (FDI) is the trust's distributor. Certain officers of FDI are also officers of the trust. 24 1-800-345-2021 Notes to Financial Statements - -------------------------------------------------------------------------------- (Continued) FEBRUARY 28, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 2. TRANSACTIONS WITH RELATED PARTIES The trust has entered into a Management Agreement with American Century Investment Management, Inc. (ACIM) that provides each fund with investment advisory and management services in exchange for a single, unified management fee. Expenses excluded from this agreement are brokerage, taxes, portfolio insurance, interest, fees and expenses of the Trustees who are not considered "interested persons" as defined in the Investment Company Act of 1940 (including counsel fees) and extraordinary expenses. The fee is calculated daily and paid monthly. It consists of an Investment Category Fee based on the average net assets of the funds in a specific fund's investment category and a Complex Fee based on the average net assets of all the funds managed by ACIM. The rates for the Investment Category Fee range from 0.1925% to 0.3100% and 0.1625% to 0.2800%, for High-Yield and Insured, respectively. The rates for the Complex Fee range from 0.2900% to 0.3100%. For the six months ended February 28, 1999, the effective annual management fee was 0.54% and 0.51% for High-Yield and Insured, respectively. Certain officers and trustees of the trust are also officers and/or directors, and, as a group, controlling stockholders of American Century Companies, Inc., the parent of the trust's investment manager, ACIM, and the trust's transfer agent, American Century Services Corporation. As of February 28, 1999, High-Yield had invested $8,639 in shares of California Municipal Money Market Fund (Municipal Money Market) and Insured had invested $8,759 in shares of 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 $108,218,495 and $52,001,474, respectively. Sales of investment securities, excluding short-term investments, for High-Yield and Insured totaled $74,816,599 and $37,689,016, respectively. As of February 28, 1999, accumulated net unrealized appreciation for High-Yield and Insured was $13,305,649 and $15,087,216 respectively, which consisted of unrealized appreciation of $13,893,210 and $15,549,990, respectively, and unrealized depreciation of $587,561 and $462,774 respectively. The aggregate cost of investments for federal income tax purposes was the same as the cost for financial reporting purposes. - -------------------------------------------------------------------------------- 4. BANK LOANS Effective December 18, 1998, the funds, along with certain other funds managed by ACIM, entered into an unsecured $570,000,000 bank line of credit agreement with Chase Manhattan Bank. Borrowings under the agreement bear interest at the Federal Funds rate plus 0.40%. The funds may borrow money for temporary or emergency purposes to fund shareholder redemptions. The funds did not borrow from the line during the period December 18, 1998 through February 28, 1999. - -------------------------------------------------------------------------------- 5. SUBSEQUENT EVENTS The following name changes became effective March 1, 1999: ================================================================== NEW NAME FORMER NAME ================================================================== FUND: California High-Yield American Century - Benham California Municipal Fund High-Yield Municipal Fund FUND: California Insured American Century - Benham California Tax-Free Fund Insured Tax-Free Fund www.americancentury.com 25
Cal. High-Yield Municipal--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period ............... $9.93 $9.68 $9.27 $9.11 $9.06 $9.66 --------- -------- -------- -------- -------- -------- Income From Investment Operations Net Investment Income ........... 0.25 0.51 0.55 0.56 0.56 0.56 Net Realized and Unrealized Gain (Loss) on Investment Transactions .................... (0.01) 0.37 0.41 0.16 0.05 (0.48) --------- -------- -------- -------- -------- -------- Total From Investment Operations ...................... 0.24 0.88 0.96 0.72 0.61 0.08 --------- -------- -------- -------- -------- -------- Distributions From Net Investment Income ...... (0.25) (0.51) (0.55) (0.56) (0.56) (0.56) From Net Realized Gains ......... (0.11) (0.12) -- -- -- (0.12) --------- -------- -------- -------- -------- -------- Total Distributions ............. (0.36) (0.63) (0.55) (0.56) (0.56) (0.68) --------- -------- -------- -------- -------- -------- Net Asset Value, End of Period ..................... $9.81 $9.93 $9.68 $9.27 $9.11 $9.06 ========= ======== ======== ======== ======== ======== Total Return(2) ................. 2.40% 9.35% 10.61% 8.02% 7.09% 0.87% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets .............0.54%(3) 0.54% 0.50% 0.51% 0.51% 0.51% Ratio of Net Investment Income to Average Net Assets .............5.03%(3) 5.23% 5.77% 5.99% 6.30% 6.02% Portfolio Turnover Rate ........... 24% 36% 46% 36% 40% 43% Net Assets, End of Period (in thousands) ....................$342,373 $303,842 $192,831 $144,675 $116,166 $116,000
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 26 1-800-345-2021
Cal. Insured Tax-Free--Financial Highlights - -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED) 1999(1) 1998 1997 1996 1995 1994 PER-SHARE DATA Net Asset Value, Beginning of Period .............. $10.60 $10.37 $10.00 $9.89 $9.67 $10.64 ---------- --------- --------- --------- --------- --------- Income From Investment Operations Net Investment Income .......... 0.25 0.51 0.53 0.53 0.53 0.53 Net Realized and Unrealized Gain (Loss) on Investment Transactions ................... (0.01) 0.39 0.37 0.11 0.22 (0.69) ---------- --------- --------- --------- --------- --------- Total From Investment Operations ..................... 0.24 0.90 0.90 0.64 0.75 (0.16) ---------- --------- --------- --------- --------- --------- Distributions From Net Investment Income ..... (0.25) (0.51) (0.53) (0.53) (0.53) (0.53) From Net Realized Gains ........ (0.06) (0.16) -- -- -- (0.21) In Excess of Net Realized Gains ................. -- -- -- -- -- (0.07) ---------- --------- --------- --------- --------- --------- Total Distributions ............ (0.31) (0.67) (0.53) (0.53) (0.53) (0.81) ---------- --------- --------- --------- --------- --------- Net Asset Value, End of Period .................... $10.53 $10.60 $10.37 $10.00 $9.89 $9.67 ========== ========= ========= ========= ========= ========= Total Return(2) ................ 2.23% 8.96% 9.25% 6.60% 8.09% (1.68)% RATIOS/SUPPLEMENTAL DATA Ratio of Operating Expenses to Average Net Assets ............ 0.51%(3) 0.51% 0.48% 0.49% 0.50% 0.49% Ratio of Net Investment Income to Average Net Assets ............ 4.72%(3) 4.91% 5.23% 5.30% 5.54% 5.20% Portfolio Turnover Rate .......... 17% 31% 46% 43% 40% 47% Net Assets, End of Period (in thousands) ................... $228,606 $215,509 $189,145 $191,811 $178,913 $189,439
(1) Six months ended February 28, 1999 (unaudited). (2) Total return assumes reinvestment of dividends and capital gains distributions, if any. Total returns for periods less than one year are not annualized. (3) Annualized. - -------------------------------------------------------------------------------- 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 27 Background Information - -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY AND POLICIES American Century offers 38 fixed-income funds, ranging from money market portfolios to long-term bond funds and including both taxable and tax-exempt funds. Each is managed to provide a "pure play" on a specific sector of the fixed-income market. To ensure adherence to this principle, the basic structure of each portfolio is tied to a specific market index. Fund managers attempt to add value by making modest portfolio adjustments based on their analysis of prevailing market conditions. Investment decisions are made by management teams, which meet regularly to discuss market analysis and investment strategies. In addition to these principles, each fund has its own investment policies: CALIFORNIA HIGH-YIELD MUNICIPAL seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in California municipal securities. The fund typically invests a portion of its assets in lower-quality and unrated securities, which are subject to increased credit risk, default risk and liquidity risk. The fund is managed to maintain an average maturity of 10 years or more. CALIFORNIA INSURED TAX-FREE seeks to provide a high level of interest income exempt from both federal and California state income taxes by investing in insured California municipal securities. The fund is managed to maintain an average maturity of 10 years or more. Fund shares are not insured. COMPARATIVE INDICES The following index is used in the report for fund performance comparisons. It is not an investment product available for purchase. THE LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of more than 2,800 municipal bonds with maturities greater than 22 years. The average credit rating of the securities in the index is AA2/AA3. The average maturity of the index is approximately 27 years. LIPPER RANKINGS LIPPER INC. is an independent mutual fund ranking service that groups funds according to their investment objectives. Rankings are based on average annual returns for each fund in a given category for the periods indicated. Rankings are not included for periods less than one year. The Lipper categories for the California High-Yield Municipal and Insured Tax-Free funds are: CALIFORNIA MUNICIPAL DEBT FUNDS (High-Yield Municipal)--funds that invest at least 65% of assets in securities that are exempt from taxation in California. CALIFORNIA INSURED MUNICIPAL DEBT FUNDS (Insured Tax-Free)--funds that invest at least 65% of assets in securities that are exempt from taxation in California and insured as to timely payment of interest and repayment of principal. [left margin] INVESTMENT TEAM LEADERS PORTFOLIO MANAGERS DAVE MACEWEN STEVEN PERMUT CREDIT RESEARCH MANAGER STEVEN PERMUT CREDIT RATING GUIDELINES CREDIT RATINGS ARE ISSUED BY INDEPENDENT RESEARCH COMPANIES SUCH AS STANDARD & POOR'S AND MOODY'S. THEY ARE BASED ON AN ISSUER'S FINANCIAL STRENGTH AND ABILITY TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER. SECURITIES RATED AAA, AA, A, OR BBB ARE CONSIDERED "INVESTMENT-GRADE" SECURITIES, MEANING THEY ARE RELATIVELY SAFE FROM DEFAULT. CALIFORNIA HIGH-YIELD INSURED MAY INVEST UP TO 50% OF ITS PORTFOLIO IN SECURITIES THAT ARE BELOW INVESTMENT GRADE OR NOT RATED. HERE ARE THE MOST COMMON CREDIT RATINGS AND THEIR DEFINITIONS: * AAA--EXTREMELY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * AA--VERY STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * A--STRONG ABILITY TO MEET FINANCIAL OBLIGATIONS. * BBB--GOOD ABILITY TO MEET FINANCIAL OBLIGATIONS. * BB--LESS VULNERABLE TO DEFAULT THAN OTHER LOWER-QUALITY ISSUES BUT DO NOT QUITE MEET INVESTMENT-GRADE STANDARDS. IT'S IMPORTANT TO NOTE THAT CREDIT RATINGS ARE SUBJECTIVE, REFLECTING THE OPINIONS OF THE RATING AGENCIES; THEY ARE NOT ABSOLUTE STANDARDS OF QUALITY. 28 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 26-27. YIELDS * 30-DAY SEC YIELD represents net investment income earned by the fund over a 30-day period, expressed as an annual percentage rate based on the fund's share price at the end of the 30-day period. The SEC yield should be regarded as an estimate of the fund's rate of investment income, and it may not equal the fund's actual income distribution rate, the income paid to a shareholder's account, or the income reported in the fund's financial statements. * 30-DAY TAX-EQUIVALENT YIELDS show the taxable yields that investors in a combined California and federal income tax bracket would have to earn before taxes to equal the fund's tax-free 30-day SEC yield. INVESTMENT TERMS * BASIS POINT--a basis point equals one one-hundredth of a percentage point (or 0.01%). Therefore, 100 basis points equal one percentage point (or 1%). * COUPON--the stated interest rate of a security. * YIELD CURVE--a graphic representation of the relationship between maturity and yield for fixed-income securities. Yield curve graphs plot lengthening maturities along the horizontal axis and rising yields along the vertical axis. STATISTICAL TERMINOLOGY * NUMBER OF SECURITIES--the number of different securities held by a fund on a given date. * WEIGHTED AVERAGE MATURITY (WAM)--a measure of the sensitivity of a fixed-income portfolio to interest rate changes. WAM indicates the average time until the securities in the portfolio mature, weighted by dollar amount. * AVERAGE DURATION-- another measure of the sensitivity of a fixed-income portfolio to interest rate changes. Duration is a time-weighted average of the interest and principal payments of the securities in a portfolio. * EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage of average net assets. Shareholders pay an annual fee to the investment manager for investment advisory and management services. The expenses and fees are deducted from fund income, not from each shareholder account. (See Note 2 in the Notes to Financial Statements.) TYPES OF MUNICIPAL SECURITIES * COPS (CERTIFICATES OF PARTICIPATION)/ LEASES--securities issued to finance public property improvements (such as city halls and police stations) and equipment purchases. Certificates of participation represent long-term debt obligations, but leases have a higher risk profile because they require annual appropriation. * GO (GENERAL OBLIGATION) BONDS--securities backed by the taxing power of the issuer. www.americancentury.com 29 Glossary - -------------------------------------------------------------------------------- (Continued) * 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). FUND CLASSIFICATIONS INVESTMENT OBJECTIVE The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. * CAPITAL PRESERVATION--Offers taxable and tax-free money market funds for relative stability of principal and liquidity, allowing maximum portfolio diversification. * INCOME--Offers funds that can provide current income and competitive yields, as well as a strong and stable foundation and generally lower volatility levels than stock funds. * GROWTH & INCOME--Offers funds that emphasize both growth and income, diversification, varying capitalization sizes, and different investment styles and strategies. * GROWTH--Offers funds with a focus on capital appreciation and long-term growth, generally providing high return potential with corresponding high price fluctuation risk. RISK The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that the fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. * CONSERVATIVE--these funds generally provide lower return potential with either low or minimal price fluctuation risk. * MODERATE-- these funds generally provide moderate return potential with moderate price fluctuation risk. * AGGRESSIVE-- these funds generally provide high return potential with corresponding high price fluctuation risk. 30 1-800-345-2021 Notes - -------------------------------------------------------------------------------- www.americancentury.com 31 Notes - -------------------------------------------------------------------------------- 32 1-800-345-2021 [inside back cover] =============================================================================== INVESTMENT OBJECTIVE - CAPITAL PRESERVATION =============================================================================== RISK LEVEL - CONSERVATIVE TAXABLE MONEY MARKETS TAX-FREE MONEY MARKETS Premium Capital Reserve FL Municipal Money Market Prime Money Market CA Municipal Money Market Premium Government Reserve CA Tax-Free Money Market Government Agency Tax-Free Money Market Money Market Capital Preservation =============================================================================== INVESTMENT OBJECTIVE - INCOME =============================================================================== RISK LEVEL - AGGRESSIVE TAXABLE BONDS TAX-FREE BONDS Target 2025* CA High-Yield Municipal Target 2020* High-Yield Municipal Target 2015* Target 2010* High-Yield International Bond RISK LEVEL - MODERATE TAXABLE BONDS TAX-FREE BONDS Long-Term Treasury CA Long-Term Tax-Free Target 2005* Long-Term Tax-Free Bond CA Insured Tax-Free Premium Bond RISK LEVEL - CONSERVATIVE TAXABLE BONDS TAX-FREE BONDS Intermediate-Term Bond CA Intermediate-Term Tax-Free Intermediate-Term Treasury AZ Intermediate-Term Municipal GNMA FL Intermediate-Term Municipal Inflation-Adjusted Treasury Intermediate-Term Tax-Free Limited-Term Bond CA Limited-Term Tax-Free Target 2000* Limited-Term Tax-Free Short-Term Government Short-Term Treasury =============================================================================== INVESTMENT OBJECTIVE - GROWTH AND INCOME =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY Small Cap Quantitative Small Cap Value RISK LEVEL - MODERATE ASSET ALLOCATION/BALANCED DOMESTIC EQUITY SPECIALTY Strategic Allocation -- Equity Growth Utilities Aggressive Equity Index Real Estate Balanced Tax-Managed Value Strategic Allocation -- Income & Growth Moderate Value Strategic Allocation -- Equity Income Conservative =============================================================================== INVESTMENT OBJECTIVE - GROWTH =============================================================================== RISK LEVEL - AGGRESSIVE DOMESTIC EQUITY SPECIALTY INTERNATIONAL New Opportunities Global Gold Emerging Markets Giftrust(reg.tm) International Discovery Vista International Growth Heritage Global Growth Growth Ultra Select RISK LEVEL - MODERATE SPECIALTY Global Natural Resources The investment objective may be based on the fund's objective as stated in its prospectus or fund profile, or the fund's categorization by independent rating organizations based on its management style. The classification of funds by risk category is based on quantitative historical measures as well as qualitative prospective measures. It is not intended to be a precise indicator of future risk or return levels. The degree of risk within each category can vary significantly, and some fund returns have historically been higher than more aggressive funds or lower than more conservative funds. Please be aware that a fund's category may change over time. Therefore, it is important that you read a fund's prospectus or fund profile carefully before investing to ensure its objectives, policies and risk potential are consistent with your needs. For a definition of fund categories, see the Glossary. * While listed within the Income investment objective, the Target funds do not pay current dividend income. Income dividends are distributed once a year in December. The Target funds are listed in all three risk categories due to the dramatic price volatility investors may experience during certain market conditions. If held to their target dates, however, they can offer a conservative, dependable way to invest for a specific time horizon. Please call for a prospectus or profile on any American Century fund. These documents contain important information including charges and expenses, and you should read them carefully before you invest or send money. [back cover] [american century logo(reg.sm)] American Century P.O. BOX 419200 KANSAS CITY, MISSOURI 64141-6200 WWW.AMERICANCENTURY.COM INVESTOR RELATIONS 1-800-345-2021 OR 816-531-5575 AUTOMATED INFORMATION LINE 1-800-345-8765 FAX: 816-340-7962 TELECOMMUNICATIONS DEVICE FOR THE DEAF 1-800-634-4113 OR 816-444-3485 BUSINESS, NOT-FOR-PROFIT, EMPLOYER-SPONSORED RETIREMENT PLANS 1-800-345-3533 AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS INVESTMENT MANAGER AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. KANSAS CITY, MISSOURI THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. American Century Investments BULK RATE P.O. Box 419200 U.S. POSTAGE PAID Kansas City, MO 64141-6200 AMERICAN CENTURY www.americancentury.com COMPANIES 9904 Funds Distributor, Inc. SH-BKT-15979 (c)1999 American Century Services Corporation -----END PRIVACY-ENHANCED MESSAGE-----