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
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Date of reporting period: DECEMBER 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
DECEMBER 31, 2004
American Century Variable Portfolios II
Annual Report
[photo of market line chart]
[photo of starfish]
[photo of bridge]
VP Inflation Protection Fund
[american century investments logo and text logo]
Table of Contents
VP INFLATION PROTECTION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Portfolio at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . 4
Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .11
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .12
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .13
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .14
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Report of Independent Registered Public Accounting Firm . . . . . . . . . .20
OTHER INFORMATION
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .25
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .26
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 DECEMBER 31, 2004
--------------
AVERAGE ANNUAL
RETURNS
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SINCE INCEPTION
1 YEAR INCEPTION DATE
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CLASS II 5.81% 5.71%(1) 12/31/02
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CITIGROUP U.S.
INFLATION-LINKED
SECURITIES INDEX(2) 8.40% 8.33% --
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BLENDED INDEX(3) 5.78% 5.76% --
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Class I -- 7.37%(4) 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) See Additional Information page.
(4) 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.
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. As interest rates
rise, bond values will decline.
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.
(continued)
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2
VP Inflation Protection - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made December 31, 2002
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended December 31
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2003 2004
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Class II 5.61% 5.81%
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Citigroup U.S. Inflation-Linked Securities Index 8.26% 8.40%
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Blended index 5.75% 5.78%
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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. As interest rates
rise, bond values will decline.
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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3
VP Inflation Protection - Portfolio Commentary
PORTFOLIO MANAGER: JEREMY FLETCHER
RETURN SUMMARY & PERSPECTIVE
VP Inflation Protection returned 5.81%* in 2004, narrowly outperforming its
blended index, which returned 5.78%. (Please see pages 2 and 3.) Of course
unlike the blended index, fees reduce VP Inflation Protection's returns;
nevertheless, the portfolio approximately matched the index's performance.
Speaking of the blended index, it represents 55% Citigroup U.S. Inflation-Linked
Securities Index, 25% Citigroup Government-Sponsored 1- to 3-Year 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
boosted performance. That's because as an asset class, TIIS solidly outperformed
traditional government agency and mortgage-backed securities. We discuss the
fixed-income market's performance and the strategies that we employed for the
portfolio later on in this commentary.
ECONOMIC PERSPECTIVE
The U.S. economy lost momentum during 2004, growing at a 4.5% seasonally
adjusted annual pace (as measured by gross domestic product) during the year's
first quarter but slowing to 3.1% during the final three months.
Numerous factors provided a backdrop for that economic downshift, including
crude oil prices surging from approximately $32 a barrel to a record high of
approximately $55 a barrel by late October, on-and-off concerns regarding
terrorism and developments in Iraq, slowing U.S. manufacturing growth as the
year progressed, and U.S. political uncertainty preceding the presidential
election.
Inflation also picked up steam. Helped along by the biggest increase in energy
prices since 1990, consumer prices rose 3.3% in 2004, up from 1.9% in 2003.
BOND MARKET PERSPECTIVE
U.S. bonds posted positive returns even though the Federal Reserve lifted
short-term interest rates for the first time since May 2000. From late June
through the end of December, the Fed raised its benchmark interest rate five
times in increments of 25 basis points (0.25%) -- pushing up the fed funds rate
target to 2.25% -- in an effort to nudge interest rates back up to more moderate
levels.
Helped along by higher inflation, rising interest rates, and soaring prices for
commodities such as aluminum, gold, and oil, inflation-indexed securities
solidly outperformed most other types of bonds as investors increasingly looked
to help protect the future purchasing power of their portfolios.
PORTFOLIO AT A GLANCE
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AS OF AS OF
12/31/04 6/30/04
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30-Day SEC Yield
Class I 5.28% 4.07%
Class II 5.03% 3.79%
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Weighted Average
Maturity 7.7 years 7.5 years
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Average Duration
(Effective) 5.0 years 4.3 years
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*All fund returns referenced in this commentary
are for Class II shares. (continued)
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4
VP Inflation Protection - Portfolio Commentary
Putting that performance into perspective, the Citigroup U.S. Inflation-Linked
Securities Index returned 8.40% for the 12 months, heavily outpacing the 4.21%
return of the Citigroup 15-Year Mortgage Index, as well as the 1.30% return of
the Citigroup Government-Sponsored 1- to 3-Year Index.
PORTFOLIO POSITIONING & STRATEGIES
In trying to provide an investment best used as an inflation hedge and not as an
income-producing vehicle, we put the portfolio's substantial incoming cash to
work in a variety of fixed-income securities, including ones with
inflation-adjusted components.
Along those lines, we added various-maturity TIIS throughout the year. We
modified that strategy toward year-end, however, when we concentrated more on
buying TIIS with maturities around the 10-year range, specifically. The strategy
change reflected our belief that those securities will hold up better than
shorter-term equivalents in our current environment.
The expanding market of inflation-indexed securities also yielded what we felt
were attractive opportunities outside of TIIS. For example, we added an
inflation-adjusted security issued by Toyota Motor Credit Corp. during the last
half of 2004. Our credit research team played an important role in helping us
find this security, which is indexed off of the consumer price index (just like
TIIS).
With regard to the portfolio's mortgage slice, we generally favored
current-coupon mortgage-backed securities for forward settlement. Then we
swapped for new, similar ones before the securities' settlement dates, a
technique known as "mortgage rolls."
OUR COMMITMENT
We remain committed to seeking long-term total return using a strategy that
seeks to protect against U.S. inflation by investing substantially all of the
portfolio's assets in investment-grade debt securities. To help protect against
inflation, under normal conditions, we expect to invest over 50% of the
portfolio in inflation-adjusted debt securities. In addition, we monitor VP
Inflation Protection's weighted average maturity and attempt to adjust it
appropriately.
ASSET ALLOCATION
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% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
12/31/04 6/30/04
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U.S. Treasury Securities
& Equivalents 54.6% 58.0%
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U.S. Government
Agency Securities 12.6% 16.9%
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Corporate Bonds 9.2% 8.0%
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U.S. Government Agency
Mortgage-Backed
Securities 7.7% 6.1%
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Zero-Coupon U.S.
Treasury Securities
& Equivalents 3.5% --
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Asset-Backed Securities 3.4% 2.4%
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Collateralized Mortgage
Obligations 3.3% 2.9%
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Commercial Paper -- 1.5%
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Temporary Cash
Investments 5.7% 4.2%
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5
Shareholder Fee Example (Unaudited)
Fund shareholders may incur two types of costs: (1) transaction costs, including
sales charges (loads) on purchase payments and redemption/exchange fees; and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in your fund and to compare these costs
with the ongoing cost of investing in other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
period and held for the entire period from July 1, 2004 to December 31, 2004.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond Fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
American Century may charge you a $12.50 semiannual account maintenance fee if
the value of those shares is less than $10,000. We will redeem shares
automatically in one of your accounts to pay the $12.50 fee. In determining your
total eligible investment amount, we will include your investments in all
PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered
under your Social Security number. PERSONAL ACCOUNTS include individual
accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell
Education Savings Accounts and IRAs (including traditional, Roth, Rollover,
SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you
have only business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee. We will not
charge the fee as long as you choose to manage your accounts exclusively online.
If you are subject to the Account Maintenance Fee, your account value could be
reduced by the fee amount.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(continued)
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6
Shareholder Fee Example (Unaudited)
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
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EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 7/1/04 - EXPENSE
7/1/04 12/31/04 12/31/04 RATIO*
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VP INFLATION PROTECTION SHAREHOLDER FEE EXAMPLE
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ACTUAL:
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Class I $1,000 $1,050.80 $2.53 0.49%
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Class II $1,000 $1,049.40 $3.81 0.74%
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HYPOTHETICAL:
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Class I $1,000 $1,022.67 $2.49 0.49%
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Class II $1,000 $1,021.42 $3.76 0.74%
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*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
184, the number of days in the most recent fiscal half-year, divided by 366, to
reflect the one-half year period.
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7
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2004
Principal Amount Value
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U.S. TREASURY SECURITIES - 59.2%
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$10,378,945 U.S. Treasury Inflation Indexed
Bonds, 2.375%, 1/15/25 $ 11,101,828
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8,260,630 U.S. Treasury Inflation Indexed
Bonds, 3.625%, 4/15/28 10,845,951
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7,837,020 U.S. Treasury Inflation Indexed
Bonds, 3.875%, 4/15/29 10,756,929
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2,150,620 U.S. Treasury Inflation Indexed
Bonds, 3.375%, 4/15/32 2,846,632
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1,204,700 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/07 1,276,277
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4,725,760 U.S. Treasury Inflation Indexed
Notes, 3.625%, 1/15/08 5,149,051
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6,982,980 U.S. Treasury Inflation Indexed
Notes, 3.875%, 1/15/09 7,828,849
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4,537,840 U.S. Treasury Inflation Indexed
Notes, 4.25%, 1/15/10 5,265,138
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4,030,040 U.S. Treasury Inflation Indexed
Notes, 0.875%, 4/15/10 3,992,101
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6,579,960 U.S. Treasury Inflation Indexed
Notes, 3.50%, 1/15/11 7,474,940
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2,687,300 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/12 3,059,744
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6,369,360 U.S. Treasury Inflation Indexed
Notes, 3.00%, 7/15/12 7,109,550
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12,470,640 U.S. Treasury Inflation Indexed
Notes, 1.875%, 7/15/13 12,832,102
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15,236,455 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/14(1) 15,774,500
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19,239,020 U.S. Treasury Inflation Indexed
Notes, 2.00%, 7/15/14(1) 19,855,283
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TOTAL U.S. TREASURY SECURITIES
(Cost $121,460,847) 125,168,875
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U.S. GOVERNMENT AGENCY
SECURITIES - 13.6%
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6,250,000 FAMCA, 2.50%, 2/15/07 6,153,313
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2,000,000 FFCB, 2.60%, 9/7/06 1,981,850
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4,000,000 FFCB, 4.60%, 1/23/07 4,106,444
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2,000,000 FFCB, 3.05%, 4/15/08 1,969,836
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5,000,000 FHLMC, 2.375%, 4/15/06 4,957,225
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2,000,000 FNMA, VRN, 3.68%, 1/18/05,
resets monthly off the
Consumer Price Index plus
1.14% with no caps 2,018,760
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7,228,200 TVA Inflation Indexed Notes,
3.375%, 1/15/07 7,638,328
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TOTAL U.S. GOVERNMENT
AGENCY SECURITIES
(Cost $26,819,431) 28,825,756
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Principal Amount Value
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CORPORATE BONDS - 10.0%
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AUTOMOBILES - 3.9%
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$ 8,062,000 Toyota Motor Credit Corp.
Inflation Indexed Bonds,
1.22%, 10/1/09 $ 8,118,192
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CAPITAL MARKETS - 1.4%
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3,000,000 Merrill Lynch & Co., Inc., VRN,
3.70%, 1/3/05, resets monthly
off the Consumer Price Index
plus 1.16% with no caps 2,983,920
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CONSUMER FINANCE - 4.7%
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10,000,000 SLM Corp. Inflation Indexed
Bonds, 1.32%, 7/25/05(2) 9,947,700
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TOTAL CORPORATE BONDS
(Cost $23,068,892) 21,049,812
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U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(3) - 8.4%
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2,000,000 FHLMC, 5.00%, settlement
date 1/19/05(4) 2,030,624
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2,000,000 FHLMC, 5.50%, settlement
date 1/19/05(4) 2,065,624
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612,236 FHLMC, 5.50%, 12/1/33 622,532
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3,000,000 FNMA, 5.00%, settlement
date 1/19/05(4) 3,047,814
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3,000,000 FNMA, 5.50%, settlement
date 1/19/05(4) 3,100,314
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262,982 GNMA, 6.00%, 6/20/17 273,510
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270,846 GNMA, 6.00%, 7/20/17 281,689
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1,162,766 GNMA, 6.00%, 5/15/24 1,212,863
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4,907,487 GNMA, 5.50%, 9/20/34 5,010,127
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TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $17,634,529) 17,645,097
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ZERO-COUPON U.S. TREASURY
SECURITIES & EQUIVALENTS(5) - 3.8%
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1,000,000 AID Israel Government Bond,
2.64%, 2/15/07 934,029
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308,000 AID Israel Government Bond,
2.64%, 3/15/07 286,790
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800,000 FICO STRIPS - COUPON,
4.39%, 6/6/09 676,310
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2,000,000 FICO STRIPS - COUPON,
3.52%, 6/6/10 1,614,171
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1,763,000 FICO STRIPS - COUPON,
4.83%, 3/26/12 1,287,716
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900,000 Government Trust Certificates,
2.87%, 5/15/08 792,872
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See Notes to Financial Statements. (continued)
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8
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2004
Principal Amount Value
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$ 1,000,000 Government Trust Certificates,
3.06%, 11/15/08 $ 860,616
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1,940,000 TVA STRIPS - COUPON,
4.20%, 10/15/09 1,602,789
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TOTAL ZERO-COUPON U.S. TREASURY
SECURITIES AND EQUIVALENTS
(Cost $8,096,895) 8,055,293
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ASSET-BACKED SECURITIES(3) - 3.7%
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371,598 Ameriquest Mortgage
Securities Inc., Series 2003-5,
Class A3 SEQ, 3.03%, 7/25/33 371,191
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427,819 Atlantic City Electric Transition
Funding LLC, Series 2003-1,
Class A1 SEQ, 2.89%, 7/20/11 421,156
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2,000,000 CNH Equipment Trust,
Series 2004 A, Class A3A,
VRN, 2.47%, 1/15/05, resets
monthly off the 1-month
LIBOR plus 0.07% and no caps 2,001,606
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2,000,000 First Franklin Mortgage Loan
Asset Backed Certificates,
Series 2004 FF11, Class 2A1,
VRN, 2.56%, 1/25/05, resets
monthly off the 1-month LIBOR
plus 0.15% with no caps 2,000,000
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1,898,468 Residential Asset Mortgage
Products Inc,, Series 2004
RS10, Class AII1, VRN, 2.59%,
1/25/05, resets monthly off
the 1-month LIBOR plus
0.17% with a cap of 14% 1,899,850
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714,299 SLM Student Loan Trust,
Series 2004-8, Class A1,
VRN, 2.09%, 1/25/05, resets
quarterly off the 3-month
LIBOR minus 0.01% with
no caps 714,773
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500,000 WFS Financial Owner Trust,
Series 2002-3, Class A4 SEQ,
3.50%, 2/20/10 502,095
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TOTAL ASSET-BACKED SECURITIES
(Cost $7,917,124) 7,910,671
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Principal Amount Value
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS(3) - 3.6%
- --------------------------------------------------------------------------------
$ 815,431 Citigroup Commercial Mortgage
Trust, Series 2004 FL1,
Class A1, VRN, 2.53%,
1/15/05, resets monthly off
the 1-month LIBOR plus
0.13% with no caps $ 816,970
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1,731,549 GNMA, Series 2003-112,
Class MN, 4.00%, 5/16/25 1,736,605
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1,000,000 LB-UBS Commercial Mortgage
Trust, Series 2003 C5,
Class A2 SEQ,
3.48%, 7/15/27 984,863
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2,000,000 Washington Mutual,
Series 2004 AR4, Class A6,
3.81%, 6/25/34 1,969,928
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2,000,000 Washington Mutual,
Series 2004 AR9, Class A6,
4.28%, 8/25/34 1,997,356
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TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $7,509,663) 7,505,722
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TEMPORARY CASH INVESTMENTS - 6.2%
- --------------------------------------------------------------------------------
3,100,000 FHLB Discount Notes, 1.25%,
1/3/05(6) 3,099,412
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10,000,000 FHLB Discount Notes, 2.22%,
1/25/05(6) 9,986,770
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TOTAL TEMPORARY CASH INVESTMENTS
(Cost $13,084,985) 13,086,182
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TOTAL INVESTMENT SECURITIES - 108.5%
(Cost $225,592,366) 229,247,408
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OTHER ASSETS AND
LIABILITIES - (8.5)% (18,043,154)
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TOTAL NET ASSETS - 100.0% $ 211,204,254
================================================================================
See Notes to Financial Statements. (continued)
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9
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2004
NOTES TO SCHEDULE OF INVESTMENTS
AID = Agency for International Development
Equivalent = Security whose principal payments are secured by U.S. Treasurys.
FAMCA = Federal Agricultural Mortgage Corporation
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FICO = Financing Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
LB-UBS = Lehman Brothers Inc. -- UBS AG
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
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 December 31, 2004.
(1) Security, or a portion thereof, has been segregated for a when-issued
security and/or forward commitment.
(2) When-issued security.
(3) Final maturity indicated, unless otherwise noted.
(4) Forward Commitment.
(5) The rate indicated is the yield to maturity at purchase. Zero-coupon
securities are issued at a substantial discount from their value at
maturity.
(6) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
10
Statement of Assets and Liabilities
DECEMBER 31, 2004
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $225,592,366) $229,247,408
- ----------------------------------------------------------------
Cash 664,690
- ----------------------------------------------------------------
Interest receivable 1,680,053
- --------------------------------------------------------------------------------
231,592,151
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 20,265,937
- ----------------------------------------------------------------
Accrued management fees 82,712
- ----------------------------------------------------------------
Distribution fees payable 39,248
- --------------------------------------------------------------------------------
20,387,897
- --------------------------------------------------------------------------------
NET ASSETS $211,204,254
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $207,523,098
- ----------------------------------------------------------------
Undistributed net realized gain on investment transactions 26,114
- ----------------------------------------------------------------
Net unrealized appreciation on investments 3,655,042
- --------------------------------------------------------------------------------
$211,204,254
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $11,318,987
- ----------------------------------------------------------------
Shares outstanding 1,072,927
- ----------------------------------------------------------------
Net asset value per share $10.55
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $199,885,267
- ----------------------------------------------------------------
Shares outstanding 18,947,128
- ----------------------------------------------------------------
Net asset value per share $10.55
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
11
Statement of Operations
YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------
INCOME:
- ----------------------------------------------------------------
Interest $4,345,976
- --------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------
Management fees 519,735
- ----------------------------------------------------------------
Distribution fees -- Class II 253,518
- ----------------------------------------------------------------
Other expenses 98
- --------------------------------------------------------------------------------
773,351
- --------------------------------------------------------------------------------
Amount reimbursed (725)
- --------------------------------------------------------------------------------
772,626
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,573,350
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
- --------------------------------------------------------------------------------
Net realized gain on investment transactions 78,893
- ----------------------------------------------------------------
Change in net unrealized appreciation on investments 3,206,348
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN 3,285,241
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,858,591
================================================================================
See Notes to Financial Statements.
- ------
12
Statement of Changes in Net Assets
YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS 2004 2003
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income $ 3,573,350 $ 246,728
- -------------------------------------------------
Net realized gain (loss) 78,893 (8,731)
- -------------------------------------------------
Change in net unrealized appreciation 3,206,348 448,631
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 6,858,591 686,628
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- -------------------------------------------------
Class I (127,644) --
- -------------------------------------------------
Class II (3,445,706) (246,728)
- -------------------------------------------------
From net realized gains:
- -------------------------------------------------
Class I -- --
- -------------------------------------------------
Class II (36,984) (7,064)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (3,610,334) (253,792)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase in net assets
from capital share transactions 174,127,093 30,396,005
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS 177,375,350 30,828,841
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 33,828,904 3,000,063
- --------------------------------------------------------------------------------
End of period $211,204,254 $33,828,904
================================================================================
See Notes to Financial Statements.
- ------
13
Notes to Financial Statements
DECEMBER 31, 2004
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. Discount notes are valued through a commercial pricing
service or at amortized cost, which approximates fair value. If the fund
determines that the market price of a portfolio security is not readily
available, or that the valuation methods mentioned above do not reflect the
security's fair value, such security is valued at its fair value as determined
by, or in accordance with procedures adopted by, the Board of Directors or its
designee if such fair value determination would materially impact a fund's net
asset value. Circumstances that may cause the fund to fair value a security
include: 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; or trading in a security has been halted during
the trading day.
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 American Century Investment Management, Inc. (ACIM) 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. In these
transactions, the securities' prices and yields are fixed on the date of the
commitment. In a when-issued transaction, the payment and delivery are scheduled
for a future date and during this period, securities are subject to market
fluctuations. In a forward commitment transaction, the fund may sell a security
and at the same time make a commitment to purchase the same security at a future
date at a specified price. Conversely, the fund may purchase a security and at
the same time make a commitment to sell the same security at a future date at a
specified price. These types of transactions are executed simultaneously in what
are known as "roll" transactions. The fund will segregate cash, cash equivalents
or other appropriate liquid securities on its records in amounts sufficient to
meet the purchase price. The funds account for "roll" transactions as purchases
and sales; as such these transactions may increase portfolio turnover.
(continued)
- ------
14
Notes to Financial Statements
DECEMBER 31, 2004
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income are declared
daily and 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.
The fund has elected to treat $16,020 of net capital losses incurred in the
two-month period ended December 31, 2004, as having been incurred in the
following fiscal year for federal income tax purposes.
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 (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, 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 and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears. The fee consists of (1) an Investment
Category Fee based on the daily net assets of the funds and certain other
accounts managed by the investment manager that are in the same broad investment
category as the fund and (2) a Complex Fee based on the assets of all the funds
in the American Century family of funds. The rates for the Investment Category
Fee range from 0.1625% to 0.2800%. The rates for the Complex Fee range from
0.2500% to 0.3100%. The effective annual management fee for the year ended
December 31, 2004 was 0.49% 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 and
accrued daily based on the Class II daily net assets, and paid monthly in
arrears. 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. During the year ended
December 31, 2004, distribution fees of $725 were reimbursed for Class II. The
reimbursement had no impact on the annualized ratios of operating expenses and
net investment income to average net assets. Fees incurred under the plan during
the year ended December 31, 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 custodian of
the fund and a wholly owned subsidiary of J.P. Morgan Chase & Co. (JPM). JPM is
an equity investor in ACC.
(continued)
- ------
15
Notes to Financial Statements
DECEMBER 31, 2004
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for the
year ended December 31, 2004, totaled $270,508,707, of which $264,593,201
represented U.S. Treasury and Agency obligations. Sales of investment
securities, excluding short-term investments, for the year ended December 31,
2004, totaled $104,811,572, of which $103,209,977 represented U.S. Treasury and
Agency obligations.
As of December 31, 2004, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $225,690,520
================================================================================
Gross tax appreciation of investments $3,916,758
- ----------------------------------------------------------------
Gross tax depreciation of investments (359,870)
- --------------------------------------------------------------------------------
Net tax appreciation of investments $3,556,888
================================================================================
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
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,137,145 $11,807,637
- -------------------------------------------------
Issued in reinvestment of distributions 12,280 127,644
- -------------------------------------------------
Redeemed (76,498) (796,098)
- --------------------------------------------------------------------------------
Net increase 1,072,927 $11,139,183
================================================================================
CLASS II
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 17,152,086 $178,539,344
- -------------------------------------------------
Issued in reinvestment of distributions 336,147 3,482,690
- -------------------------------------------------
Redeemed (1,822,771) (19,034,124)
- --------------------------------------------------------------------------------
Net increase 15,665,462 $162,987,910
================================================================================
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
================================================================================
(continued)
- ------
16
Notes to Financial Statements
DECEMBER 31, 2004
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM, has a $575,000,000
unsecured bank line of credit agreement with JPMCB, which was renewed from
$650,000,000 effective December 15, 2004. 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 year ended December 31, 2004.
6. SUBSEQUENT EVENT
Effective January 1, 2005, American Century Services Corporation's name will
change to American Century Services, LLC.
- ------
17
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(2) 0.24
- --------------------------------------------------------------------
Net Realized and Unrealized Gain 0.48
- --------------------------------------------------------------------------------
Total From Investment Operations 0.72
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------
From Net Investment Income (0.24)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.55
================================================================================
TOTAL RETURN(3) 7.37%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 0.49%(4)
- --------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 3.52%(4)
- --------------------------------------------------------------------
Portfolio Turnover Rate 108%(5)
- --------------------------------------------------------------------
Net Assets, End of Period (in thousands) $11,319
- --------------------------------------------------------------------------------
(1) May 7, 2004 (commencement of sale) through December 31, 2004.
(2) Computed using average shares outstanding throughout the period.
(3) 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.
(4) Annualized.
(5) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2004.
See Notes to Financial Statements.
- ------
18
VP Inflation Protection - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2004 2003 2002(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.31 $10.00 $10.00
- --------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------
Net Investment Income(2) 0.35 0.24 --(3)
- --------------------------------------
Net Realized and Unrealized Gain 0.25 0.31 --(3)
- --------------------------------------------------------------------------------
Total From Investment Operations 0.60 0.55 --(3)
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------
From Net Investment Income (0.35) (0.24) --(3)
- --------------------------------------
From Net Realized Gains (0.01) --(3) --
- --------------------------------------------------------------------------------
Total Distributions (0.36) (0.24) --(3)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.55 $10.31 $10.00
================================================================================
TOTAL RETURN(4) 5.81% 5.61% 0.00%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.74% 0.74%(5) 0.50%(5)(6)
- --------------------------------------
Ratio of Net Investment Income
to Average Net Assets 3.40% 2.00%(5) 0.25%(5)(6)
- --------------------------------------
Portfolio Turnover Rate 108% 198% 0%
- --------------------------------------
Net Assets, End of Period
(in thousands) $199,885 $33,829 $3,000
- --------------------------------------------------------------------------------
(1) For the one day ended December 31, 2002 (inception).
(2) Computed using average shares outstanding throughout the period.
(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.
- ------
19
Report of Independent Registered Public Accounting Firm
To the Directors of the American Century Variable Portfolios II, Inc.
and the Shareholders of the VP Inflation Protection Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the VP Inflation Protection Fund
(the sole fund comprising the American Century Variable Portfolios II, Inc.,
hereafter referred to as the "Fund") at December 31, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the periods presented, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2004 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 15, 2005
- ------
20
Management
The individuals listed below serve as directors or officers of the fund. Each
director serves until his or her successor is duly elected and qualified or
until he or she retires. Effective March 2004, mandatory retirement age for
independent directors is 73. However, the mandatory retirement age may be
extended for a period not to exceed two years with the approval of the remaining
independent directors. The independent directors have extended the mandatory
retirement age of Mr. Eisenstat to 75. Mr. Scott may serve until age 77 based on
an extension granted under retirement guidelines in effect prior to March 2004.
Those listed as interested directors are "interested" primarily by virtue of
their engagement as officers of American Century Companies, Inc. (ACC) or its
wholly-owned subsidiaries, including the fund's investment advisor, American
Century Investment Management, Inc. (ACIM); the fund's principal underwriter,
American Century Investment Services, Inc. (ACIS); and the fund's transfer
agent, American Century Services Corporation (ACSC).
The other directors (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly-owned subsidiaries, including
ACIM, ACIS, and ACSC. The directors serve in this capacity for eight registered
investment companies in the American Century family of funds.
All persons named as officers of the fund also serve in similar capacities for
the other 13 investment companies advised by ACIM, unless otherwise noted. Only
officers with policy-making functions are listed. No officer is compensated for
his or her service as an officer of the fund. The listed officers are interested
persons of the fund and are appointed or re-appointed on an annual basis.
INDEPENDENT DIRECTORS
- --------------------------------------------------------------------------------
ALBERT EISENSTAT, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1930
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 8
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Private Investor
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Independent Director, Sungard Data Systems
(1991 to present); Independent Director, Business Objects S/A (1994 to present);
Independent Director, Commercial Metals (1983 to 2001)
- --------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Advisory Board Member
LENGTH OF TIME SERVED (YEARS): less than 1 year
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis
Management Company, LLC (April 2004 to present); Partner and Founder, Bay
Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware &
Freidenrich (1968 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
(continued)
- ------
21
Management
INDEPENDENT DIRECTORS (CONTINUED)
- --------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Lead Director
LENGTH OF TIME SERVED (YEARS): 8
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, Stanford Law School (1979 to present); Mark and Eva Stern
Professor of Law and Business, Columbia University School of Law (1992 to
present); Counsel, Marron, Reid & Sheehy (a San Francisco law firm, 1984 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 2
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to
present); President and Managing Director, Laurel Management Company, L.L.C.
(1996 to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Princeton University Investment
Company (1997 to present); Director, Stanford Management Company (2001 to
present); Director, UCSF Foundation (2000 to present); Director, San Francisco
Day School (1999 to present)
- --------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 23
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Oak Hill Platinum
Partners, and a Partner, Oak Hill Capital Management (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1981
to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Dimensional Fund Advisors
(investment advisor, 1982 to present); Director, Chicago Mercantile Exchange
(2000 to present)
- --------------------------------------------------------------------------------
KENNETH E. SCOTT, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1928
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 32
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Ralph M. Parsons Professor of Law
and Business, Stanford Law School (1972 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
JOHN B. SHOVEN, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 1
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford
University (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Cadence Design Systems (1992 to
present); Director, Watson Wyatt Worldwide (2002 to present); Director,
Palmsource Inc. (2002 to present)
- --------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Director
LENGTH OF TIME SERVED (YEARS): 19
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
Windy Hill Productions, LP (educational software, 1994 to 1998)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Quintus Corporation (automation
solutions, 1995 to present)
- --------------------------------------------------------------------------------
(continued)
- ------
22
Management
INTERESTED DIRECTOR
- --------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Director, Chairman of the Board
LENGTH OF TIME SERVED (YEARS): 6
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC and
other ACC subsidiaries (September 2000 to present); President, ACC (June 1997 to
present); President, ACIM (September 2002 to present); President, ACIS (July
2003 to present); Chief Operating Officer, ACC (June 1996 to September 2000);
Also serves as: Executive Vice President, ACSC and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 33
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
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OFFICERS
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WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: President
LENGTH OF TIME SERVED (YEARS): 3
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: See entry under "Interested
Director."
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ROBERT T. JACKSON, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Executive Vice President
LENGTH OF TIME SERVED (YEARS): 3
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Administrative Officer, ACC
(August 1997 to present); Chief Financial Officer, ACC (May 1995 to October
2002); Chairman, American Century Ventures, Inc. (April 2004 to present);
President, ACSC (January 1999 to present); Executive Vice President, ACC (May
1995 to present); Also serves as: Executive Vice President and Chief Financial
Officer, ACIM, ACIS and other ACC subsidiaries; and Treasurer, ACIM
- --------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Senior Vice President, Treasurer and Chief
Accounting Officer
LENGTH OF TIME SERVED (YEARS): 3
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President (April 1998
to present) and Assistant Treasurer, ACIM, ACIS and ACSC (September 1985 to
present)
- --------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel
LENGTH OF TIME SERVED (YEARS): 5
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President and General
Counsel, ACIM, ACIS, ACSC, and other ACC subsidiaries (June 1998 to present);
Vice President and General Counsel, ACC (June 1998 to present)
- --------------------------------------------------------------------------------
DAVID H. REINMILLER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Vice President and Chief Compliance Officer
LENGTH OF TIME SERVED (YEARS): 3 and less than 1 year
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACSC and
ACIM (March 2001 to present); Vice President, ACSC (March 2000 to present); Vice
President, ACIM (March 2002 to present); Vice President, ACIS (March 2003 to
present); Assistant General Counsel, ACSC (December 1996 to January 2001);
Associate General Counsel, ACSC (July 2001 to present)
- --------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Controller
LENGTH OF TIME SERVED (YEARS): 7
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACSC (February 2000
to present); Controller-Fund Accounting, ACSC (June 1997 to present)
- --------------------------------------------------------------------------------
(continued)
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23
Management
OFFICERS (CONTINUED)
- --------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUND: Controller(1)
LENGTH OF TIME SERVED (YEARS): 7
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACSC (February 2000
to present); Controller-Fund Accounting, ACSC (June 1997 to present)
- --------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
LENGTH OF TIME SERVED (YEARS): 6
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, Corporate Tax, ACSC
(April 1998 to present); Vice President, ACIM, ACIS and other ACC subsidiaries
(April 1999 to present); President, American Century Employee Benefit Services,
Inc. (January 2000 to December 2000); Director, American Century Employee
Benefit Services, Inc. (February 2000 to December 2003); Treasurer, American
Century Employee Benefit Services, Inc. (December 2000 to December 2003);
Treasurer, American Century Ventures, Inc. (December 1999 to April 2001)
- --------------------------------------------------------------------------------
(1) Ms. Wade serves in a similar capacity for seven other investment companies
advised by ACIM.
The SAI has additional information about the fund's directors and is available
without charge upon request by calling 1-800-378-9878.
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24
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 Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
25
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 U.S. 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).
The CITIGROUP GOVERNMENT-SPONSORED 1- TO 3-YEAR INDEX includes bonds with
remaining maturities of one to three years that are issued by U.S. or
supranational agencies. Supranational agencies are supported by the capital of
more than one sovereign state, such as the World Bank.
The CITIGROUP 15-YEAR MORTGAGE INDEX measures the performance of the 15-year
maturity sector of the mortgage component of the USBIG (U.S. Broad
Investment-Grade) Index, comprising 15-year Government National Mortgage
Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae),
and Federal Home Loan Mortgage Corporation (Freddie Mac) pass-throughs and
Fannie Mae and Freddie Mac balloon mortgages.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment 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. Information regarding how the investment
manager voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
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26
Notes
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27
Notes
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28
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 Investments logo, American Century
and American Century Investments are service marks
of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
(c)2005 American Century Proprietary Holdings, Inc. All rights reserved.
0502
SH-ANN-41913
ITEM 2. CODE OF ETHICS.
a. The registrant has adopted a Code of Ethics for Senior Financial
Officers that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer, and persons
performing similar functions.
b. No response required.
c. None.
d. None.
e. Not applicable.
f. The registrant's Code of Ethics for Senior Financial Officers was
filed as Exhibit 10(a) to American Century Mutual Fund, Inc.'s Annual
Certified Shareholder Report on Form N-CSR, File No. 811-0816, on
December 23, 2003, and is incorporated herein by reference.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The registrant's board has determined that the registrant has at least
one audit committee financial expert serving on its audit committee.
(a)(2) Albert Eisenstat is the registrant's designated audit committee
financial expert. He is "independent" as defined in Item 3 of Form
N-CSR.
(a)(3) Not applicable.
(b) No response required.
(c) No response required.
(d) No response required.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees.
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the audit of the
registrant's annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were as follows:
FY 2003: $11,174
FY 2004: $15,904
(b) Audit-Related Fees.
The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are reasonably
related to the performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were as follows:
For services rendered to the registrant:
FY 2003: $0
FY 2004: $0
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit services
with the registrant's investment adviser and its affiliates):
FY 2003: $0
FY 2004: $0
(c) Tax Fees.
The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning were as follows:
For services rendered to the registrant:
FY 2003: $7,200
FY 2004: $2,781
These services included review of federal and state income tax forms
and federal excise tax forms.
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit services
with the registrant's investment adviser and its affiliates):
FY 2003: $0
FY 2004: $0
(d) All Other Fees.
The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than the
services reported in paragraphs (a) through (c) of this Item were as follows:
For services rendered to the registrant:
FY 2003: $0
FY 2004: $0
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit services
with the registrant's investment adviser and its affiliates):
FY 2003: $0
FY 2004: $0
(e)(1) In accordance with paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation
S-X, before the accountant is engaged by the registrant to render
audit or non-audit services, the engagement is approved by the
registrant's audit committee. Pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X, the registrant's audit committee also
pre-approves its accountant's engagements for non-audit services with
the registrant's investment adviser, its parent company, and any
entity controlled by, or under common control with the investment
adviser that provides ongoing services to the registrant, if the
engagement relates directly to the operations and financial reporting
of the registrant.
(e)(2) All services described in each of paragraphs (b) through (d) of this
Item were pre-approved before the engagement by the registrant's audit
committee pursuant to paragraph (c)(7)(i)(A) of Rule 2-01 of
Regulation S-X. Consequently, none of such services were required to
be approved by the audit committee pursuant to paragraph (c)(7)(i)(C).
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the adviser that provides ongoing
services to the registrant for each of the last two fiscal years of
the registrant were as follows:
FY 2003: $92,650
FY 2004: $157,781
(h) The registrant's investment adviser and accountant have notified the
registrant's audit committee of all non-audit services that were
rendered by the registrant's accountant to the registrant's investment
adviser, its parent company, and any entity controlled by, or under
common control with the investment adviser that provides services to
the registrant, which services were not required to be pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. The
notification provided to the registrant's audit committee included
sufficient details regarding such services to allow the registrant's
audit committee to consider the continuing independence of its
principal accountant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The schedule of investments is included as part of the report to stockholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As of the end of the reporting period, the registrant did not have in place
procedures by which shareholders may recommend nominees to the registrant's
board.
ITEM 11. 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 second
fiscal quarter of the period covered by this report that have
materially affected, or are reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Registrant's Code of Ethics for Senior Financial Officers, which is
the subject of the disclosure required by Item 2 of Form N-CSR, was
filed as Exhibit 10(a) to American Century Mutual Fund, Inc.'s
Certified Shareholder Report on Form N-CSR, File No. 811-3706, on
December 23, 2003.
(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: February 18, 2005
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: February 18, 2005
By: /s/ Maryanne L. Roepke
-------------------------------------------------------
Name: Maryanne L. Roepke
Title: Sr. Vice President, Treasurer, and
Chief Accounting Officer
(principal financial officer)
Date: February 18, 2005