UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-10155
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American Century Variable Portfolios II, Inc.
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(Exact name of registrant as specified in charter)
4500 Main Street, Kansas City, Missouri 64111
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(Address of principal executive offices) (Zip code)
David C. Tucker, Esq., 4500 Main Street, 9th Floor, Kansas City, Missouri 64111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 816-531-5575
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Date of fiscal year end: DECEMBER 31, 2003
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Date of reporting period: JUNE 30, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
JUNE 30, 2004
American Century Variable Portfolios II
Semiannual Report
[graphic of market line chart]
[graphic of starfish]
[graphic of bridge over creek]
VP Inflation Protection Fund
[american century logo and text logo]
Table of Contents
VP INFLATION PROTECTION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . 7
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . 9
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .10
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
OTHER INFORMATION
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .15
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .16
The opinions expressed in the Portfolio Commentary reflect those of the
portfolio management team as of the date of the report, and do not necessarily
represent the opinions of American Century or any other person in the American
Century organization. Any such opinions are subject to change at any time based
upon market or other conditions and American Century disclaims any
responsibility to update such opinions. These opinions may not be relied upon as
investment advice and, because investment decisions made by American Century
funds are based on numerous factors, may not be relied upon as an indication of
trading intent on behalf of any American Century fund. Security examples are
used for representational purposes only and are not intended as recommendations
to purchase or sell securities. Performance information for comparative indices
and securities is provided to American Century by third party vendors. To the
best of American Century's knowledge, such information is accurate at the time
of printing.
VP Inflation Protection - Performance
TOTAL RETURNS AS OF JUNE 30, 2004
----------------
AVERAGE ANNUAL
RETURNS
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SINCE INCEPTION
1 YEAR INCEPTION DATE
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CLASS II 1.51% 4.28%(1) 12/31/02
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CITIGROUP U.S. INFLATION-LINKED
SECURITIES INDEX(2) 3.91% 6.76% --
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BLENDED INDEX 2.69% 4.58% --
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Class I -- 2.18%(3) 5/7/04
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(1) The total return for Class II would have been lower if the distribution fee
had not been waived from December 31, 2002 to March 31, 2003.
(2) The Citigroup U.S. Inflation-Linked Securities Index is not subject to the
tax code diversification and other regulatory requirements limiting the
type and amount of securities that the fund may own.
(3) Returns for periods less than one year are not annualized.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to the insurance
contracts.
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made December 31, 2002
* From 12/31/02, Class II's inception date, through 6/30/03. Not annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
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2
VP Inflation Protection - Portfolio Commentary
BY JEREMY FLETCHER, PORTFOLIO MANAGER
PERFORMANCE SUMMARY
VP Inflation Protection returned 0.82%* for the first six months of 2004. By
comparison, the blended index returned 1.14%. (Please see the previous page for
details.) We feel it's worth remembering, however, that VP Inflation
Protection's returns are reduced by fees, while those of the blended index are
not.
Speaking of the blended index, it represents 55% Citigroup Inflation-Linked
Index, 25% Citigroup 1-3 Year Government Sponsored Index, and 20% Citigroup
15-Year Mortgage Index.
VP Inflation Protection held a conservative overweight in Treasury
inflation-indexed securities (TIIS) compared with the blended index, which
served the fund well during the first quarter of this year. However, that same
overweight dampened returns during the second quarter as bonds, and particularly
Treasurys, suffered one of their worst three-month performances in years.
ECONOMIC BACKDROP
Economic growth (as measured by seasonally adjusted real gross domestic product)
increased at a 4.5% annualized pace during the first quarter, up modestly from
the final quarter of 2003, when the economy expanded at a 4.2% rate. Meanwhile,
manufacturing activity remained solid, increasing for a 13th consecutive month
during June.
Other upbeat economic news included a surge in new jobs, which had previously
been a key missing ingredient to the current economic expansion. The March
employment report started that ball rolling by revealing that more new jobs were
added during that month than during any prior month since early 2000.
But inflation also picked up steam, with consumer prices (as measured at a
seasonally adjusted annual rate by the consumer price index for all urban
consumers) excluding food and energy components rising 2.6% for the six months,
up from only 1.1% for all of 2003.
With that backdrop in mind, the Federal Reserve raised short-term interest rates
by 25 basis points (0.25%) to 1.25% in late June. That move marked the first
rate increase since May 2000 and officially shut the door on what had been the
lowest short-term rates in decades.
MARKET BACKDROP
As expectations regarding inflation and interest rates changed, so too did the
fate of the taxable bond market. After dropping by approximately 40 basis points
during the first quarter, the yield on the Treasury's bellwether 10-year bond
spent the next three months rising by approximately 75 basis points. Inflation
remained a concern, the U.S. economy began adding jobs at a
PORTFOLIO AT A GLANCE
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AS OF AS OF
6/30/04 12/31/03
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30-Day SEC Yield,
Class II 3.79% 0.32%
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Weighted Average
Maturity 7.5 years 8.2 years
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Average Duration
(Effective) 4.3 years 3.7 years
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*All fund returns referenced in this commentary
are for Class II shares. (continued)
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3
VP Inflation Protection - Portfolio Commentary
meaningful pace, and higher short-term interest rates went from a possibility to
a reality.
Those developments weighed heavily on U.S. Treasurys, overshadowing the positive
early on impact of what had been stepped-up overseas buying, combined with
concerns over terrorism and the still-uncertain times in the Middle East. TIIS
generally held up better than traditional Treasurys thanks in part to the
market's growing concern about the impact of record-low interest rates on future
inflation.
Government agency bonds fared better than their traditional Treasury
counterparts, while mortgage-backed securities (MBS) outperformed them both. In
fact, MBS finished as one of the top performers among U.S. fixed-income types
for the six months as refinancings slowed markedly from record levels.
PORTFOLIO STRATEGIES
VP Inflation Protection is best used as an inflation hedge, not as an income
producer. In trying to provide such an investment, we put incoming cash to work
in a variety of instruments, including TIIS. We chose a fairly wide range of
maturities with the goal of enabling that slice of the portfolio to provide
performance similar to that of the broader TIIS market.
For the portfolio's government agency slice, we picked up some securities that
we felt looked attractively priced. Along those lines, we added Federal Farm
Credit bonds as well as some Financing Corporation zero-coupon bonds. In
addition, we bought some bonds issued by the Federal National Mortgage
Association.
Lastly, we continued to generally look for current-coupon MBS for forward
settlement for the portfolio's mortgage exposure. Then we employed a technique
known as "mortgage rolls," which is where a mortgage pass-through is bought and
then swapped for a new, similar one before its settlement date.
ASSET ALLOCATION
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AS OF AS OF
6/30/04 12/31/03
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U.S. Treasury Securities
& Equivalents 58.0% 56.6%
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U.S. Government
Agency Securities 16.9% 18.0%
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Corporate Bonds 8.0% --
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U.S. Government Agency
Mortgage-Backed
Securities 6.1% 9.7%
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Collateralized Mortgage
Obligations 2.9% --
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Asset-Backed Securities 2.4% 5.3%
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Commercial Paper 1.5% 4.0%
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Temporary Cash
Investments 4.2% 6.4%
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4
VP Inflation Protection - Schedule of Investments
JUNE 30, 2004 (UNAUDITED)
Principal Amount Value
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U.S. TREASURY SECURITIES
& EQUIVALENTS -- 58.0%
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$1,812,000 AID Israel Government Bond,
2.64%, 5/15/08(1) $ 1,565,999
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1,693,000 REFCORP STRIPS - COUPON,
2.49%, 10/15/06(1) 1,582,440
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5,811,200 U.S. Treasury Inflation Indexed
Bonds, 3.625%, 4/15/28 7,091,484
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5,431,530 U.S. Treasury Inflation Indexed
Bonds, 3.875%, 4/15/29 6,927,748
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5,236,065 U.S. Treasury Inflation Indexed
Notes, 3.625%, 1/15/08 5,723,883
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4,584,880 U.S. Treasury Inflation Indexed
Notes, 3.875%, 1/15/09 5,112,861
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4,469,200 U.S. Treasury Inflation Indexed
Notes, 4.25%, 1/15/10 5,116,537
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4,320,240 U.S. Treasury Inflation Indexed
Notes, 3.50%, 1/15/11 4,798,171
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5,227,450 U.S. Treasury Inflation Indexed
Notes, 3.00%, 7/15/12 5,653,001
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7,164,500 U.S. Treasury Inflation Indexed
Notes, 1.875%, 7/15/13(2) 7,079,708
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6,104,100 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/14 6,069,771
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TOTAL U.S. TREASURY SECURITIES
(Cost $56,790,921) 56,721,603
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U.S. GOVERNMENT AGENCY
SECURITIES -- 16.9%
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4,000,000 FFCB, 4.60%, 1/23/07 4,127,980
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2,000,000 FFCB, 3.05%, 4/15/08 1,947,052
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200,000 FICO STRIPS - COUPON,
1.35%, 11/11/04(1) 198,751
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800,000 FICO STRIPS - COUPON,
4.39%, 6/6/09(1) 650,678
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2,000,000 FICO STRIPS - COUPON,
3.52%, 6/6/10(1) 1,535,568
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2,000,000 FNMA, VRN, 2.88%, 7/19/04,
resets monthly off the
Consumer Price Index
plus 1.14% with no caps 1,989,340
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900,000 Government Trust Certificates,
2.87%, 5/15/08(1) 770,282
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1,000,000 Government Trust Certificates,
3.06%, 11/15/08(1) 833,825
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4,152,680 TVA Inflation Indexed Notes,
3.375%, 1/15/07 4,419,406
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TOTAL U.S. GOVERNMENT
AGENCY SECURITIES
(Cost $16,615,728) 16,472,882
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Principal Amount Value
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CORPORATE BONDS -- 8.0%
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CAPITAL MARKETS -- 3.0%
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$3,000,000 Merrill Lynch & Co., Inc., VRN,
2.85%, 7/1/04, resets monthly
off the Consumer Price Index
plus 1.16% with no caps $ 2,960,760
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CONSUMER FINANCE -- 5.0%
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2,000,000 SLM Corp., VRN, 2.89%,
7/1/04, resets monthly off
the Consumer Price Index
plus 1.20% with no caps 1,971,320
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3,000,000 SLM Corp., VRN, 3.86%,
7/1/04, resets monthly off
the Consumer Price Index
plus 2.12% with no caps 2,930,250
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4,901,570
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TOTAL CORPORATE BONDS
(Cost $8,070,218) 7,862,330
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U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(3) -- 6.1%
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1,000,000 FHLMC, 5.00%, settlement
date 7/20/04(4) 1,000,625
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1,000,000 FHLMC, 5.50%, settlement
date 7/20/04(4) 1,021,875
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640,248 FHLMC, 5.50%, 12/1/33 639,417
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2,000,000 FNMA, 5.50%, settlement
date 7/20/04(4) 2,045,624
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1,251,257 GNMA, 6.00%, 5/15/24 1,290,481
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TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $5,954,526) 5,998,022
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COLLATERALIZED MORTGAGE
OBLIGATIONS(3) -- 2.9%
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1,887,884 GNMA, Series 2003-112,
Class MN, 4.00%, 5/16/25 1,902,838
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1,000,000 LB-UBS Commercial Mortgage
Trust, Series 2003 C5, Class A2
SEQ, 3.48%, 7/15/27 970,236
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TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $2,906,779) 2,873,074
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See Notes to Financial Statements. (continued)
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5
VP Inflation Protection -
Schedule of Investments
JUNE 30, 2004 (UNAUDITED)
Principal Amount Value
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ASSET-BACKED SECURITIES(3) -- 2.4%
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$ 500,000 Ameriquest Mortgage
Securities Inc., Series 2003-5,
Class A3 SEQ, 3.03%, 7/25/33 $ 499,923
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500,000 Atlantic City Electric Transition
Funding LLC, Series 2003-1,
Class A1 SEQ, 2.89%, 7/20/11 493,481
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841,327 Public Service New Hampshire
Funding LLC, Series 2001-1,
Class A2 SEQ, 5.73%, 11/1/10 882,158
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500,000 WFS Financial Owner Trust,
Series 2002-3, Class A4 SEQ,
3.50%, 2/20/10 503,838
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TOTAL ASSET-BACKED SECURITIES
(Cost $2,411,611) 2,379,400
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COMMERCIAL PAPER -- 1.5%
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1,500,000 Falcon Asset Securitization Corp.,
1.20%, 7/15/04 (Acquired
6/14/04, Cost $1,498,500)(5)
(Cost $1,499,300) 1,499,175
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TEMPORARY CASH INVESTMENTS -- 4.2%
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4,100,000 FHLB Discount Notes,
1.25%, 7/1/04(1)
(Cost $4,100,000) 4,100,000
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TOTAL INVESTMENT SECURITIES -- 100.0%
(Cost $98,349,083) $97,906,486
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NOTES TO SCHEDULE OF INVESTMENTS
FFCB = Federal Farm Credit Bank
FHLMC = Federal Home Loan Mortgage Corporation
FHLB = Federal Home Loan Bank
FICO = Financing Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LB = Lehman Brothers
REFCORP = Resolution Funding Corporation
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
SEQ = Sequential Payer
SLM = Sallie Mae
STRIPS = Separate Trading of Registered Interest and Principal of Securities
TVA = Tennessee Valley Authority
VRN = Variable Rate Note. Interest reset date is indicated, unless otherwise
noted. Rate shown is effective June 30, 2004.
(1) The rate indicated is the yield to maturity at purchase.
(2) Security, or a portion thereof, has been segregated for a forward
commitment.
(3) Final maturity indicated, unless otherwise noted.
(4) Forward commitment.
(5) Security was purchased under Rule 144A of the Securities Act of 1933
or is a private placement and, unless registered under the Act or exempted
from registration, may only be sold to qualified institutional investors.
The aggregate value of restricted securities at June 30, 2004, was
$1,499,175, which represented 1.6% of net assets.
See Notes to Financial Statements.
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6
Statement of Assets and Liabilities
JUNE 30, 2004 (UNAUDITED)
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ASSETS
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Investment securities, at value (cost of $98,349,083) $97,906,486
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Cash 313,443
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Interest receivable 828,069
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99,047,998
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LIABILITIES
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Payable for investments purchased 4,027,701
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Accrued management fees 35,258
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Distribution fees payable 17,338
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4,080,297
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NET ASSETS $94,967,701
================================================================================
NET ASSETS CONSIST OF:
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Capital paid in $95,476,521
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Accumulated net realized loss on investment transactions (66,223)
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Net unrealized depreciation on investments (442,597)
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$94,967,701
================================================================================
CLASS I
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Net assets $1,870,814
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Shares outstanding 183,043
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Net asset value per share $10.22
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CLASS II
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Net assets $93,096,887
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Shares outstanding 9,108,718
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Net asset value per share $10.22
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See Notes to Financial Statements.
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7
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
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INVESTMENT INCOME
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INCOME:
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Interest $1,285,420
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EXPENSES:
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Management fees 146,008
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Distribution fees -- Class II 72,622
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Other expense 55
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218,685
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NET INVESTMENT INCOME 1,066,735
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REALIZED AND UNREALIZED LOSS
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Net realized loss on investment transactions (13,443)
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Change in net unrealized depreciation on investments (891,291)
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NET REALIZED AND UNREALIZED LOSS (904,734)
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 162,001
================================================================================
See Notes to Financial Statements.
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8
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2003
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INCREASE IN NET ASSETS 2004 2003
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OPERATIONS
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Net investment income $ 1,066,735 $ 246,728
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Net realized loss (13,443) (8,731)
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Change in net unrealized depreciation (891,291) 448,631
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Net increase in net assets
resulting from operations 162,001 686,628
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DISTRIBUTIONS TO SHAREHOLDERS
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From net investment income:
- ---------------------------------------------------
Class I (4,984) --
- ---------------------------------------------------
Class II (1,061,751) (246,728)
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From net realized gains:
- ---------------------------------------------------
Class II (36,985) (7,064)
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Decrease in net assets from distributions (1,103,720) (253,792)
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CAPITAL SHARE TRANSACTIONS
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Net increase in net assets
from capital share transactions 62,080,516 30,396,005
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NET INCREASE IN NET ASSETS 61,138,797 30,828,841
NET ASSETS
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Beginning of period 33,828,904 3,000,063
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End of period $94,967,701 $33,828,904
================================================================================
See Notes to Financial Statements.
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9
Notes to Financial Statements
JUNE 30, 2004 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios II, Inc. (the corporation)
is registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Inflation Protection Fund (the fund)
is the sole fund in a series issued by the corporation. The fund is diversified
under the 1940 Act. The fund pursues long-term total return using a strategy
that seeks to protect against U.S. inflation. The following is a summary of the
fund's significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I and Class II. The
share classes differ principally in their respective shareholder servicing and
distribution expenses and arrangements. All shares of the fund represent an
equal pro rata interest in the assets of the class to which such shares belong,
and have identical voting, dividend, liquidation and other rights and the same
terms and conditions, except for class specific expenses and exclusive rights to
vote on matters affecting only individual classes. Income, non-class specific
expenses, and realized and unrealized capital gains and losses of the fund are
allocated to each class of shares based on their relative net assets. Sale of
Class I shares commenced on May 7, 2004.
SECURITY VALUATIONS -- Securities are valued through a commercial pricing
service or at the mean of the most recent bid and asked prices. Debt securities
maturing within 60 days may be valued at cost, plus or minus any amortized
discount or premium. If the investment manager, American Century Investment
Management, Inc. (ACIM), determines that the current market price of a security
owned by a non-money market fund is not readily available, the investment
manager may determine its fair value in accordance with procedures adopted by
the Board of Directors if such fair value determination would materially impact
a fund's net asset value. Valuations may not be readily available if, for
example: an event occurred after the close of the exchange on which a portfolio
security principally trades (but before the close of the New York Stock
Exchange) that was likely to have changed the value of the security; a security
has been declared in default; trading in a security has been halted during the
trading day; or the demand for the security (as reflected by its trading volume)
is insufficient for quoted prices to be reliable.
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 paydown gain (loss) and accretion of discounts and amortization of
premiums.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that the fund's investment manager has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each repurchase
agreement is recorded at cost. The fund requires that the collateral,
represented by securities, received in a repurchase transaction be transferred
to the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. ACIM
monitors, on a daily basis, the securities transferred to ensure the value,
including accrued interest, of the securities under each repurchase agreement is
equal to or greater than amounts owed to the fund under each repurchase
agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM, may transfer uninvested cash
balances into a joint trading account. These balances are invested in one or
more repurchase agreements that are collateralized by U.S. Treasury or Agency
obligations.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The fund may engage in securities
transactions on a when-issued or forward commitment basis. Under these
arrangements, the securities' prices and yields are fixed on the date of the
commitment, but payment and delivery are scheduled for a future date. During
this period, securities are subject to market fluctuations. The fund will
segregate cash, cash equivalents or other appropriate liquid securities on its
records in amounts sufficient to meet the purchase price.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
(continued)
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10
Notes to Financial Statements
JUNE 30, 2004 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income are paid monthly.
Distributions from net realized gains, if any, are generally declared and paid
annually.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net realized gains and losses for financial
statement and tax purposes, and may result in reclassification among certain
capital accounts on the financial statements.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee per class. The
Agreement provides that all expenses of the fund, except brokerage commissions,
taxes, portfolio insurance, interest, fees and expenses of those directors who
are not considered "interested persons" as defined in the 1940 Act (including
counsel fees) and extraordinary expenses, will be paid by ACIM. The fee is
computed daily and paid monthly in arrears. 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%. The rates for the Complex Fee range from 0.2900% to 0.3100%.
The effective annual management fee for the six months ended June 30, 2004 was
0.50% for Class I and Class II.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed daily and
paid monthly in arrears based on the Class II average daily closing net assets
during the previous month. The distribution fee provides compensation for
expenses incurred in connection with distributing shares of Class II including,
but not limited to, payments to brokers, dealers, and financial institutions
that have entered into sales agreements with respect to shares of the fund. Fees
incurred under the plan during the six months ended June 30, 2004, are detailed
in the Statement of Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
manager, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services Corporation. The fund has a bank line
of credit agreement with JPMorgan Chase Bank (JPMCB). JPMCB is a wholly owned
subsidiary of J.P. Morgan Chase & Co.
(continued)
- ------
11
Notes to Financial Statements
JUNE 30, 2004 (UNAUDITED)
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for the
six months ended June 30, 2004, totaled $83,207,142, of which $81,238,162
represented U.S. Treasury and Agency obligations. Sales of investment
securities, excluding short-term investments, for the six months ended June 30,
2004, totaled $33,935,392, of which $33,419,450 represented U.S. Treasury and
Agency obligations.
As of June 30, 2004, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $98,400,860
================================================================================
Gross tax appreciation of investments $ 261,192
- ----------------------------------------------------------
Gross tax depreciation of investments (755,566)
- --------------------------------------------------------------------------------
Net tax depreciation of investments $(494,374)
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
PERIOD ENDED JUNE 30, 2004(1)
SHARES AUTHORIZED 25,000,000
================================================================================
Sold 184,899 $1,883,369
- -------------------------------------------------
Issued in reinvestment of distributions 486 4,984
- -------------------------------------------------
Redeemed (2,342) (23,785)
- --------------------------------------------------------------------------------
Net Increase 183,043 $1,864,568
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2004
SHARES AUTHORIZED 25,000,000
================================================================================
Sold 6,604,491 $68,306,234
- -------------------------------------------------
Issued in reinvestment of distributions 106,518 1,098,736
- -------------------------------------------------
Redeemed (883,957) (9,189,022)
- --------------------------------------------------------------------------------
Net Increase 5,827,052 $60,215,948
================================================================================
YEAR ENDED DECEMBER 31, 2003
SHARES AUTHORIZED 25,000,000
================================================================================
Sold 4,796,831 $ 49,000,125
- -------------------------------------------------
Issued in reinvestment of distributions 27,649 253,792
- -------------------------------------------------
Redeemed (1,842,814) (18,857,912)
- --------------------------------------------------------------------------------
Net Increase 2,981,666 $ 30,396,005
================================================================================
(1) May 7, 2004 (commencement of sale) through June 30, 2004.
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM, has a $650,000,000
unsecured bank line of credit agreement with JPMCB. The fund may borrow money
for temporary or emergency purposes to fund shareholder redemptions. Borrowings
under the agreement bear interest at the Federal Funds rate plus 0.50%. The fund
did not borrow from the line during the six months ended June 30, 2004.
- ------
12
VP Inflation Protection - Financial Highlights
For a Share Outstanding Throughout the Period Indicated
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
2004(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.07
- --------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------------------------------------
Net Investment Income 0.07
- --------------------------------------------------------------------
Net Realized and Unrealized Gain 0.15
- --------------------------------------------------------------------------------
Total From Investment Operations 0.22
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------
From Net Investment Income (0.07)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.22
================================================================================
TOTAL RETURN(2) 2.18%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.50%(3)
- --------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.19%(3)
- --------------------------------------------------------------------
Portfolio Turnover Rate 65%(4)
- --------------------------------------------------------------------
Net Assets, End of Period (in thousands) $1,871
- --------------------------------------------------------------------------------
(1) May 7, 2004 (commencement of sale) through June 30, 2004 (unaudited).
(2) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(3) Annualized.
(4) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the six months ended June 30, 2004.
See Notes to Financial Statements.
- ------
13
VP Inflation Protection - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2004(1) 2003 2002(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.31 $10.00 $10.00
- --------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------
Net Investment Income 0.17 0.24 --(3)
- --------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.08) 0.31 --(3)
- --------------------------------------------------------------------------------
Total From Investment Operations 0.09 0.55 --(3)
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------
From Net Investment Income (0.17) (0.24) --(3)
- --------------------------------------
From Net Realized Gains (0.01) --(3) --
- --------------------------------------------------------------------------------
Total Distributions (0.18) (0.24) --(3)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.22 $10.31 $10.00
================================================================================
TOTAL RETURN(4) 0.82% 5.61% 0.00%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets(5) 0.75%(6) 0.74% 0.50%(6)
- --------------------------------------
Ratio of Net Investment Income
to Average Net Assets(5) 3.65%(6) 2.00% 0.25%(6)
- --------------------------------------
Portfolio Turnover Rate 65% 198% 0%
- --------------------------------------
Net Assets, End of Period
(in thousands) $93,097 $33,829 $3,000
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2004 (unaudited).
(2) One day ended December 31, 2002 (inception).
(3) Per-share amount was less than $0.005.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) ACIM waived the distribution fee from December 31, 2002 through March 31,
2003. In absence of the waiver, the annualized ratios of operating expenses
to average net assets and net investment income to average net assets would
have been 0.75% and 1.99% for the year ended December 31, 2003 and 0.75%
and 0.00% for the period ended December 31, 2002, respectively.
(6) Annualized.
See Notes to Financial Statements.
- ------
14
Share Class Information
Two classes of shares are authorized for sale by the fund: Class I and Class II.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of the Class I shares.
All classes of shares represent a pro rata interest in the portfolio and
generally have the same rights and preferences. Because all shares of the
portfolio are sold through insurance company separate accounts, additional fees
may apply.
- ------
15
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The BLENDED INDEX is considered the benchmark for VP Inflation Protection. It
consists of a mix of three Citigroup (formerly Salomon Smith Barney) indices in
the following proportions: 55% Citigroup Inflation-Linked Securities Index, 25%
Citigroup Government Sponsored 1- to 3 -Year Index, and 20% Citigroup 15-Year
Mortgage Index.
The CITIGROUP U.S. INFLATION-LINKED SECURITIES INDEX (ILSI)(reg.sm) measures
the return of bonds with fixed-rate coupon payments that adjust for inflation
as measured by the Consumer Price Index (CPI).
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's manager, is responsible
for exercising the voting rights associated with the securities purchased and/or
held by the fund. A description of the policies and procedures the manager uses
in fulfilling this responsibility is available without charge, upon request, by
calling 1-800-378-9878. It is also available on American Century's Web site at
americancentury.com and on the Securities and Exchange Commission's Web site at
sec.gov.
- ------
16
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS II, INC.
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.
The American Century logo, American Century and
American Century Investments are service marks
of American Century Services Corporation.
0408 American Century Investment Services, Inc.
SH-SAN-38972 (c)2004 American Century Services Corporation
ITEM 2. CODE OF ETHICS.
Not applicable for semiannual report filings.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semiannual report filings.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semiannual report filings.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED].
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant does not currently have in place procedures by which shareholders
may recommend nominees to the registrant's board.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) are effective based on their evaluation of these controls and
procedures as of a date within 90 days of the filing date of this report.
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Investment Company Act of
1940) that occurred during the registrant's last fiscal half-year that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 11. EXHIBITS.
(a)(1) Not applicable for semiannual report filings.
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment
Company Act of 1940, are filed and attached hereto as Exhibit
99.302CERT.
(a)(3) Not applicable.
(b) A certification by the registrant's chief executive officer and chief
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, is furnished and attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: American Century Variable Portfolios II, Inc.
By: /s/ William M. Lyons
-----------------------------------------------
Name: William M. Lyons
Title: President
Date: August 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ William M. Lyons
-----------------------------------------------
Name: William M. Lyons
Title: President
(principal executive officer)
Date: August 13, 2004
By: /s/ Maryanne L. Roepke
-----------------------------------------------
Name: Maryanne L. Roepke
Title: Sr. Vice President, Treasurer, and
Chief Accounting Officer
(principal financial officer)
Date: August 13, 2004
