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: JUNE 30, 2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy with toy plane]
JUNE 30, 2005
VP Inflation Protection Fund
[american century investments logo and text logo]
Table of Contents
VP INFLATION PROTECTION
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Asset Allocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Portfolio at a Glance. . . . . . . . . . . . . . . . . . . . . . . . . . . .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
OTHER INFORMATION
Approval of Management Agreement for VP Inflation Protection. . . . . . . . . 20
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 JUNE 30, 2005
--------------
AVERAGE ANNUAL
RETURNS
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SINCE INCEPTION
1 YEAR INCEPTION DATE
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CLASS II 6.86% 5.30%(1) 12/31/02
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CITIGROUP U.S. INFLATION-LINKED
SECURITIES INDEX(2) 9.30% 7.77% --
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BLENDED INDEX(3) 6.83% 5.48% --
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Class I 7.12% 8.19% 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.
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 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 June 30
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2003* 2004 2005
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Class II 4.89% 1.51% 6.86%
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Citigroup U.S. Inflation-Linked
Securities Index 6.15% 3.91% 9.30%
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Blended Index 4.16% 2.69% 6.83%
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*From 12/31/02, the fund'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. 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
PERFORMANCE SUMMARY
VP Inflation Protection returned 1.95%* for the six months ended June 30, 2005,
compared with the 2.14% return of its blended index. (Please see pages 2 and 3
for additional information.) Fund returns were reduced by operating expenses
while the blended index's were not. 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 maintained a conservative overweight in Treasury
Inflation Protected Securities (TIPS), and that worked out well because as an
asset class, TIPS performed better than traditional government agency and
mortgage-backed securities. Later on in this commentary, we discuss the
fixed-income market's performance and the strategies that we employed for the
portfolio.
ECONOMIC REVIEW
The U.S. economy grew at a moderate pace in the first half of 2005 -- the
annualized real rate of GDP growth was 3.8% in the first quarter and was
anticipated to be between 3% and 4% in the second. Growth slowed from 4.4% in
2004 as short-term U.S. interest rates and oil prices rose. The Federal Reserve
raised its overnight interest rate target four times in six months, from 2.25%
to 3.25%, the highest since September 2001. Meanwhile, crude oil jumped 30%,
from $43.45 to $56.50 a barrel, closing briefly above $60 in late June.
Despite soaring energy costs, "core" inflation (excluding food and energy
prices) was stable -- the year-to-date annualized gain for core CPI as of June
30, 2005, was 2.2%, the same as for all of 2004. As economic growth slowed and
inflation remained low, longer-term interest rates and bond yields fell. The
combination of rising short-term and falling long-term rates reduced the
difference between the two, resulting in a "flatter" Treasury yield curve, often
a harbinger of slower economic growth and tame inflation.
ASSET ALLOCATION
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% OF % OF
NET ASSETS NET ASSETS
AS OF 6/30/05 AS OF 12/31/04
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U.S. Treasury Securities 57.6% 59.2%
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U.S. Government
Agency Securities 14.8% 13.6%
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Corporate Bonds 9.1% 10.0%
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U.S. Government Agency Mortgage-Backed
Securities 7.1% 8.4%
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Collateralized
Mortgage Obligations 5.9% 3.6%
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Zero-Coupon U.S. Government
Agency Securities 3.3% --
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Asset-Backed Securities 2.9% 3.7%
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Commercial Paper 1.9% --
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Zero-Coupon U.S. Treasury
Securities & Equivalents 1.1% 3.8%
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Temporary
Cash Investments(1) (3.7)% (2.3)%
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(1) Includes temporary cash investments and other assets and liabilities
*All fund returns referenced in this commentary are for Class I shares.
Returns for periods less than one year are not annualized.
(continued)
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4
VP Inflation Protection - Portfolio Commentary
BOND MARKET REVIEW
As the Treasury yield curve flattened, falling bond yields produced bond price
gains. The Lehman Brothers U.S. Aggregate Index gained 2.51% and the 10-year
Treasury note returned 4.11% as its yield fell from 4.22% to 3.92%.
Longer-maturity/duration indices and bonds performed even better -- the 30-year
Treasury bond returned 11.67%. That helped make Treasurys (up 3.20%) the top
major sector of the Lehman Aggregate.
Putting that performance into the perspective of VP Inflation Protection's
blended index components, the Citigroup U.S. Inflation-Linked Securities Index
returned 2.74%, outpacing the 1.84% return of the Citigroup 15-Year Mortgage
Index, as well as the 1.08% return of the Citigroup Government-Sponsored 1- to
3-Year Index.
PORTFOLIO STRATEGY
VP Inflation Protection is best used as an inflation hedge and not as an
income-producing vehicle, and we put the portfolio's incoming cash to work with
that notion in mind.
That meant adding a variety of debt securities, including what we believed to be
attractively valued TIPS. We selected a fairly wide range of maturities with the
goal of enabling that slice of the portfolio to provide performance similar to
that of the broad market for such securities.
With the help of our credit research team, we also monitored the growing supply
of inflation-indexed bonds in search of attractive opportunities outside of
TIPS. Along those lines, we added some corporate inflation-indexed securities
that reset monthly off of the CPI.
With regard to the portfolio's mortgage slice, we generally favored a technique
known as "mortgage rolls." In other words, we bought current-coupon
mortgage-backed securities for forward settlement. Then we swapped for new,
similar ones before the securities' settlement dates.
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 will monitor VP
Inflation Protection's weighted average maturity and attempt to adjust it
appropriately.
PORTFOLIO AT A GLANCE
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AS OF AS OF
6/30/05 12/31/04
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30-Day SEC Yield
Class I 6.85% 5.28%
Class II 6.60% 5.03%
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Weighted Average
Maturity 7.7 years 7.7 years
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Average Duration
(effective) 5.1 years 5.0 years
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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 January 1, 2005 to June 30, 2005.
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.
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.
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.
(continued)
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6
Shareholder Fee Example (Unaudited)
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/05 - EXPENSE
1/1/05 6/30/05 6/30/05 RATIO*
VP INFLATION PROTECTION SHAREHOLDER FEE EXAMPLE
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ACTUAL
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Class I $1,000 $1,019.50 $2.50 0.50%
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Class II $1,000 $1,018.20 $3.75 0.75%
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HYPOTHETICAL
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Class I $1,000 $1,022.32 $2.51 0.50%
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Class II $1,000 $1,021.08 $3.76 0.75%
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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
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
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7
VP Inflation Protection - Schedule of Investments
JUNE 30, 2005 (UNAUDITED)
Principal Amount Value
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U.S. TREASURY SECURITIES - 57.6%
$16,772,438 U.S. Treasury Inflation Indexed
Bonds, 2.375%, 1/15/25 $ 18,365,165
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14,735,525 U.S. Treasury Inflation Indexed
Bonds, 3.625%, 4/15/28 19,803,750
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7,988,490 U.S. Treasury Inflation Indexed
Bonds, 3.875%, 4/15/29 11,230,075
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6,028,495 U.S. Treasury Inflation Indexed
Bonds, 3.375%, 4/15/32 8,202,762
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2,455,980 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/07 2,534,746
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9,634,240 U.S. Treasury Inflation Indexed
Notes, 3.625%, 1/15/08 10,197,621
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8,897,400 U.S. Treasury Inflation Indexed
Notes, 3.875%, 1/15/09 9,683,921
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8,672,925 U.S. Treasury Inflation Indexed
Notes, 4.25%, 1/15/10 9,762,470
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14,377,720 U.S. Treasury Inflation Indexed
Notes, 0.875%, 4/15/10 14,027,277
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8,942,800 U.S. Treasury Inflation Indexed
Notes, 3.50%, 1/15/11 9,914,283
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8,217,750 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/12 9,179,169
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10,820,700 U.S. Treasury Inflation Indexed
Notes, 3.00%, 7/15/12 11,888,400
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15,359,850 U.S. Treasury Inflation Indexed
Notes, 1.875%, 7/15/13 15,692,852
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14,741,160 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/14 15,188,584
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14,450,100 U.S. Treasury Inflation Indexed
Notes, 2.00%, 7/15/14 14,894,339
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22,925,475 U.S. Treasury Inflation Indexed
Notes, 1.625%, 1/15/15(1) 22,849,363
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TOTAL U.S. TREASURY SECURITIES
(Cost $198,947,261) 203,414,777
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U.S. GOVERNMENT AGENCY
SECURITIES - 14.8%
6,250,000 FAMCA, 2.50%, 2/15/07 6,122,937
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4,000,000 FAMCA, 3.375%, 2/15/09 3,928,224
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2,000,000 FFCB, 2.60%, 9/7/06 1,973,108
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4,000,000 FFCB, 4.60%, 1/23/07 4,048,032
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2,000,000 FFCB, 3.80%, 9/7/07 1,998,568
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2,000,000 FFCB, 2.625%, 9/17/07 1,951,230
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2,000,000 FFCB, 3.05%, 4/15/08 1,957,350
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4,000,000 FHLB, 3.625%, 1/15/08 3,980,596
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3,000,000 FHLB, 4.125%, 4/18/08 3,021,759
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3,000,000 FHLB, 3.625%, 11/14/08 2,974,779
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2,000,000 FNMA, VRN, 4.29%, 7/18/05,
resets monthly off the Consumer
Price Index plus 1.14% with
no caps, Final Maturity 2/17/09 1,985,400
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Principal Amount Value
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$ 2,000,000 PEFCO, 7.17%, 5/15/07
(Acquired 3/29/05,
Cost $2,125,820)(2) $ 2,119,744
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2,000,000 PEFCO, 3.375%, 2/15/09 1,967,746
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4,000,000 PEFCO, 4.55%, 5/15/15 4,086,852
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9,823,920 TVA Inflation Indexed
Notes, 3.375%, 1/15/07 10,123,550
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TOTAL U.S. GOVERNMENT
AGENCY SECURITIES
(Cost $52,379,861) 52,239,875
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CORPORATE BONDS - 9.1%
479,000 HSBC Finance Corp., 4.59%,
7/11/05, resets monthly off
the Consumer Price Index Year
over Year plus 1.08% with no
caps, Final Maturity 9/10/09 461,090
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3,000,000 HSBC Finance Corp., VRN, 4.62%,
7/11/05, resets monthly off the
Consumer Price Index Year
over Year plus 1.11% with no caps,
Final Maturity 2/10/10 2,903,970
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4,000,000 Lehman Brothers Holdings Inc.,
VRN, 4.61%, 7/25/05, resets
monthly off the Consumer Price
Index Year over Year plus 1.46%
with no caps, Final Maturity
3/23/12 3,919,040
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3,000,000 Merrill Lynch & Co., Inc., VRN,
4.31%, 7/1/05, resets monthly
off the Consumer Price Index
plus 1.16% with no caps,
Final Maturity 3/2/09 2,956,410
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2,000,000 Merrill Lynch & Co., Inc., VRN,
3.95%, 7/12/05, resets monthly
off the Consumer Price Index
Year over Year with no caps,
Final Maturity 3/12/07 1,993,600
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2,000,000 Principal Life Income Funding
Trusts, 4.56%, 7/1/05, resets
monthly off the Consumer
Price Index Year over Year
plus 1.05% with no caps,
Final Maturity 6/15/17 1,973,760
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10,000,000 SLM Corporation, 1.32%, 1/25/10 9,803,074
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8,217,840 Toyota Motor Credit Corp.
Inflation Indexed Bonds,
1.22%, 10/1/09 8,108,378
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TOTAL CORPORATE BONDS
(Cost $32,841,303) 32,119,322
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U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(3) - 7.1%
3,000,000 FHLMC, 5.00%, settlement
date 7/19/05(4) 3,033,750
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6,000,000 FHLMC, 5.50%, settlement
date 7/19/05(4) 6,157,501
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1,003,270 FHLMC, 4.50%, 5/1/19 999,675
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See Notes to Financial Statements.
(continued)
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8
VP Inflation Protection - Schedule of Investments
JUNE 30, 2005 (UNAUDITED)
Principal Amount Value
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$ 569,991 FHLMC, 5.50%, 12/1/33 $ 578,463
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4,000,000 FNMA, 5.00%, settlement
date 7/19/05(4) 4,045,000
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4,000,000 FNMA, 5.50%, settlement
date 7/19/05(4) 4,106,248
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254,782 GNMA, 6.00%, 6/20/17 262,949
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263,507 GNMA, 6.00%, 7/20/17 271,953
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991,800 GNMA, 6.00%, 5/15/24 1,026,472
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4,493,105 GNMA, 5.50%, 9/20/34 4,583,120
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TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $25,037,051) 25,065,131
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COLLATERALIZED MORTGAGE
OBLIGATIONS(3) - 5.9%
1,000,000 Bear Stearns Adjustable Rate
Mortgage Trust, Series 2005-4,
Class 2A2, 4.57%, 8/25/35 999,000
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435,924 Citigroup Commercial Mortgage
Trust, Series 2004 FL1, Class A1,
VRN, 3.35%, 7/15/15,
resets monthly off the 1-month LIBOR
plus 0.13% with no caps,
Final Maturity 7/15/08 436,480
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1,533,317 GNMA, Series 2003-112,
Class MN, 4.00%, 5/16/25 1,530,467
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2,000,000 GNMA, Series 2005-24,
Class UB SEQ, 5.00%, 1/20/31 2,014,960
- --------------------------------------------------------------------------------
2,000,000 Greenwich Capital Commercial
Funding Corp., Series 2005 GG3,
Class A2, 4.31%, 7/1/05,
Final Maturity 8/10/42 2,000,654
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1,000,000 LB-UBS Commercial Mortgage
Trust, Series 2003 C5, Class
A2 SEQ, 3.48%, 7/15/27 983,788
- --------------------------------------------------------------------------------
2,000,000 LB-UBS Commercial Mortgage
Trust, Series 2005 C2, Class A2
SEQ, 4.82%, 4/15/30 2,045,664
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2,000,000 LB-UBS Commercial Mortgage
Trust, Series 2005 C3, Class A3,
4.65%, 7/30/30 2,023,750
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3,000,000 Morgan Stanley Capital I,
Series 2004 HQ3, Class A2
SEQ, 4.05%, 1/13/41 2,972,295
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1,999,256 Wachovia Bank Commercial
Mortgage Trust, Series 2005
WL5A, Class A1, VRN, 3.32%,
7/15/05, resets monthly off the
1-month LIBOR plus 0.10%
with no caps, Final Maturity 1/15/18
(Acquired 3/24/05, Cost
$1,999,256)(2) 1,999,803
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2,000,000 Washington Mutual, Series
2004 AR4, Class A6,
3.81%, 6/25/34 1,969,206
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Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,000,000 Washington Mutual, Series
2004 AR9, Class A6, 4.28%,
8/25/34 $ 1,992,724
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TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $20,877,722) 20,968,791
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ZERO-COUPON U.S. GOVERNMENT
AGENCY SECURITIES(5) - 3.3%
25,000 FICO STRIPS - COUPON, 4.23%,
11/30/07 22,795
- --------------------------------------------------------------------------------
1,763,000 FICO STRIPS - COUPON, 4.83%,
3/26/12 1,336,975
- --------------------------------------------------------------------------------
125,000 FICO STRIPS - COUPON, 4.40%,
11/30/08 109,450
- --------------------------------------------------------------------------------
1,700,000 FICO STRIPS - COUPON, 3.875%,
3/7/09 1,472,899
- --------------------------------------------------------------------------------
800,000 FICO STRIPS - COUPON, 4.39%,
6/6/09 686,382
- --------------------------------------------------------------------------------
3,285,000 FICO STRIPS - COUPON, 4.01%,
11/11/09 2,771,452
- --------------------------------------------------------------------------------
2,000,000 FICO STRIPS - COUPON, 3.52%,
6/6/10 1,653,190
- --------------------------------------------------------------------------------
485,000 FICO STRIPS - COUPON, 4.58%,
11/30/10 393,618
- --------------------------------------------------------------------------------
900,000 Government Trust Certificates,
2.87%, 5/15/08 806,176
- --------------------------------------------------------------------------------
1,000,000 Government Trust Certificates,
3.06%, 11/15/08 877,656
- --------------------------------------------------------------------------------
1,940,000 TVA STRIPS - COUPON, 4.20%,
10/15/09 1,633,360
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. GOVERNMENT AGENCY SECURITIES
(Cost $11,740,258) 11,763,953
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES(3) - 2.9%
382,426 Atlantic City Electric
Transition Funding LLC,
Series 2003-1, Class
A1 SEQ, 2.89%, 7/20/11 373,465
- --------------------------------------------------------------------------------
2,000,000 CNH Equipment Trust, Series
2004 A, Class A3A, VRN, 3.29%,
7/15/05, resets monthly off
the 1-month LIBOR plus 0.07% and
no caps, Final Maturity 10/15/18 2,002,246
- --------------------------------------------------------------------------------
1,162,184 First Franklin Mortgage Loan
Asset Backed Certificates, Series
2004 FF11, Class 2A1, VRN,
3.46%, 7/25/05, resets monthly off the
1-month LIBOR plus 0.15% with
no caps, Final Maturity 1/25/35 1,162,836
- --------------------------------------------------------------------------------
1,388,729 Residential Asset Mortgage
Products Inc., Series 2004 RS10,
Class AII1, VRN, 3.48%, 7/25/05,
resets monthly off the 1-month
LIBOR plus 0.17% with a cap of
14.00%, Final Maturity 5/25/27 1,389,905
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
9
VP Inflation Protection - Schedule of Investments
JUNE 30, 2005 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 32,959 SLM Student Loan Trust, Series
2004-8, Class A1, VRN, 3.15%,
7/25/05, resets quarterly off
the 3-month LIBOR minus
0.01% with no caps, Final
Maturity 4/27/09 $ 32,981
- --------------------------------------------------------------------------------
3,913,213 Structured Asset Securities Corp.,
VRN, Series 2005 WF2, Class A1,
3.39%, 7/25/05, resets
monthly off the 1-month
LIBOR plus 0.08% with no caps,
Final Maturity 5/25/35 3,912,320
- --------------------------------------------------------------------------------
1,376,411 WFS Financial Owner Trust,
Series 2002-3, Class A4 SEQ,
3.50%, 2/20/10 1,373,540
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $10,257,070) 10,247,293
- --------------------------------------------------------------------------------
ZERO-COUPON U.S. TREASURY
SECURITIES & EQUIVALENTS(5) - 1.1%
1,000,000 AID (Israel), 2.64%,
2/15/07 941,061
- --------------------------------------------------------------------------------
308,000 AID (Israel), 2.64%,
3/15/07 288,928
- --------------------------------------------------------------------------------
493,000 Federal Judiciary, 3.37%,
2/15/07 463,795
- --------------------------------------------------------------------------------
12,000 Federal Judiciary, 4.60%,
8/15/12 8,994
- --------------------------------------------------------------------------------
61,000 Federal Judiciary, 4.70%,
8/15/13 43,522
- --------------------------------------------------------------------------------
353,000 REFCORP STRIPS - COUPON,
3.61%, 10/15/08 312,923
- --------------------------------------------------------------------------------
2,000,000 REFCORP STRIPS - COUPON,
3.68%, 1/15/09 1,755,866
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. TREASURY SECURITIES AND EQUIVALENTS
(Cost $3,841,927) 3,815,089
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 1.9%
6,740,000 SBC Communications Inc.,
3.36%, 7/1/05 (Acquired 6/30/05,
Cost $6,739,371)(2)(6)
(Cost $6,740,000) 6,740,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 103.7%
(Cost $362,662,453) 366,374,231
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - (3.7)% (13,068,889)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS - 100.0% $353,305,342
================================================================================
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
PEFCO = Private Export Funding Corporation
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
SLMA = Student Loan Marketing Association
STRIPS = Separate Trading of Registered Interest and Principal of Securities
TVA = Tennessee Valley Authority
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective June 30, 2005.
(1) Security, or a portion thereof, has been segregated for forward
commitments.
(2) 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, 2005, was
$10,859,547, which represented 3.1% of net assets.
(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
JUNE 30, 2005 (UNAUDITED)
ASSETS
Investment securities, at value (cost of $362,662,453) $366,374,231
- -----------------------------------------------------------
Cash 1,668,621
- -----------------------------------------------------------
Interest receivable 2,810,231
- --------------------------------------------------------------------------------
370,853,083
- --------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased 17,345,625
- -----------------------------------------------------------
Accrued management fees 136,328
- -----------------------------------------------------------
Distribution fees payable 65,788
- --------------------------------------------------------------------------------
17,547,741
- --------------------------------------------------------------------------------
NET ASSETS $353,305,342
================================================================================
NET ASSETS CONSIST OF:
- -----------------------------------------------------------
Capital (par value and paid-in surplus) $349,771,190
- -----------------------------------------------------------
Accumulated net realized loss on investment transactions (177,626)
- -----------------------------------------------------------
Net unrealized appreciation on investments 3,711,778
- --------------------------------------------------------------------------------
$353,305,342
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $21,135,320
- -----------------------------------------------------------
Shares outstanding 2,006,610
- -----------------------------------------------------------
Net asset value per share $10.53
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $332,170,022
- -----------------------------------------------------------
Shares outstanding 31,536,494
- -----------------------------------------------------------
Net asset value per share $10.53
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
11
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
INVESTMENT INCOME
INCOME:
- --------------------------------------------------------------------
Interest $6,892,326
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------
Management fees 667,211
- --------------------------------------------------------------------
Distribution fees - Class II 321,879
- --------------------------------------------------------------------
Directors' fees and expenses 12,878
- --------------------------------------------------------------------
Other expenses 330
- --------------------------------------------------------------------------------
1,002,298
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,890,028
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS
- --------------------------------------------------------------------
Net realized loss on investment transactions (59,259)
- --------------------------------------------------------------------
Change in net unrealized appreciation on investments 56,736
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS (2,523)
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,887,505
================================================================================
- ------
12
See Notes to Financial Statements.
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS 2005 2004
OPERATIONS
Net investment income $ 5,890,028 $ 3,573,350
- --------------------------------------
Net realized gain (loss) (59,259) 78,893
- --------------------------------------
Change in net
unrealized appreciation 56,736 3,206,348
- --------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 5,887,505 6,858,591
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
- --------------------------------------
Class I (366,471) (127,644)
- --------------------------------------
Class II (5,523,557) (3,445,706)
- --------------------------------------
From net realized gains:
- --------------------------------------
Class I (8,214) --
- --------------------------------------
Class II (136,267) (36,984)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (6,034,509) (3,610,334)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net increase in net assets
from capital share transactions 142,248,092 174,127,093
- --------------------------------------------------------------------------------
Net increase in net assets 142,101,088 177,375,350
Net Assets
Beginning of period 211,204,254 33,828,904
- --------------------------------------------------------------------------------
End of period $353,305,342 $211,204,254
================================================================================
See Notes to Financial Statements.
- ------
13
Notes to Financial Statements
JUNE 30, 2005 (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.
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.
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.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) 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 or American Century Global
Investment Management, Inc. (ACGIM), 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.
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.
(continued)
- ------
14
Notes to Financial Statements
JUNE 30, 2005 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
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 advisor 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 fund for the six
months ended June 30, 2005 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. Fees incurred under the
plan during the six months ended June 30, 2005, 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
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC (formerly 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
JUNE 30, 2005 (UNAUDITED)
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the six months
ended June 30, 2005, were as follows:
- --------------------------------------------------------------------------------
NON-U.S.
U.S. TREASURY TREASURY
AND AGENCY AND AGENCY
OBLIGATIONS OBLIGATIONS
- --------------------------------------------------------------------------------
Purchases $212,909,165 $8,956,166
- --------------------------------------------------------------------------------
Proceeds from sales $98,051,168 $540,579
- --------------------------------------------------------------------------------
As of June 30, 2005, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $362,794,839
================================================================================
Gross tax appreciation of investments $5,134,774
- -----------------------------------------------------------
Gross tax depreciation of investments (1,555,382)
- --------------------------------------------------------------------------------
Net tax appreciation of investments $3,579,392
================================================================================
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
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 964,025 $10,141,726
- --------------------------------------------
Issued in reinvestment of distributions 35,424 374,685
- --------------------------------------------
Redeemed (65,766) (692,660)
- --------------------------------------------------------------------------------
Net increase 933,683 $9,823,751
================================================================================
PERIOD ENDED DECEMBER 31, 2004(1)
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
================================================================================
(1) May 7, 2004 (commencement of sale) through December 31, 2004.
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2005 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 12,995,621 $136,671,544
- -------------------------------------------
Issued in reinvestment of distributions 534,974 5,659,824
- -------------------------------------------
Redeemed (941,229) (9,907,027)
- --------------------------------------------------------------------------------
Net increase 12,589,366 $132,424,341
================================================================================
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
================================================================================
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$575,000,000 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, 2005.
- ------
17
VP Inflation Protection - Financial Highlights
For a Share Outstanding Throughout the Periods Indicated
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
2005(1) 2004(2)
PER-SHARE DATA
Net Asset Value, Beginning of Period $10.55 $10.07
- --------------------------------------------------------------------------------
Income From Investment Operations
- -------------------------------------------------
Net Investment Income 0.22 0.24
- -------------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.01) 0.48
- --------------------------------------------------------------------------------
Total From Investment Operations 0.21 0.72
- --------------------------------------------------------------------------------
Distributions
- -------------------------------------------------
From Net Investment Income (0.22) (0.24)
- -------------------------------------------------
From Net Realized Gains (0.01) --
- --------------------------------------------------------------------------------
Total Distributions (0.23) (0.24)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.53 $10.55
================================================================================
TOTAL RETURN(3) 1.95% 7.37%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets 0.50%(4) 0.49%(4)
- -------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 4.56%(4) 3.52%(4)
- -------------------------------------------------
Portfolio Turnover Rate 38% 108%(5)
- -------------------------------------------------
Net Assets, End of Period (in thousands) $21,135 $11,319
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2005 (unaudited).
(2) May 7, 2004 (commencement of sale) through December 31, 2004.
(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
- -------------------------------------------------------------------------------------------
2005(1) 2004 2003 2002(2)
PER-SHARE DATA
Net Asset Value,
Beginning of Period $10.55 $10.31 $10.00 $10.00
- -------------------------------------------------------------------------------------------
Income From Investment Operations
- -------------------------------------
Net Investment Income 0.20 0.35 0.24 --(3)
- -------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.01) 0.25 0.31 --(3)
- -------------------------------------------------------------------------------------------
Total From Investment Operations 0.19 0.60 0.55 --(3)
- -------------------------------------------------------------------------------------------
Distributions
- -------------------------------------
From Net Investment Income (0.20) (0.35) (0.24) --(3)
- -------------------------------------
From Net Realized Gains (0.01) (0.01) -- (3) --
- -------------------------------------------------------------------------------------------
Total Distributions (0.21) (0.36) (0.24) --(3)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.53 $10.55 $10.31 $10.00
===========================================================================================
TOTAL RETURN(4) 1.82% 5.81% 5.61% 0.00%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets 0.75%(5) 0.74% 0.74%(6) 0.50%(5)(6)
- -------------------------------------
Ratio of Net Investment
Income to Average Net Assets 4.31%(5) 3.40% 2.00%(6) 0.25%(5)(6)
- -------------------------------------
Portfolio Turnover Rate 38% 108% 198% 0%
- -------------------------------------
Net Assets, End of Period
(in thousands) $332,170 $199,885 $33,829 $3,000
- -------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2005 (unaudited).
(2) For the 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) Annualized.
(6) 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.
See Notes to Financial Statements.
- ------
19
Approval of Management Agreement for VP Inflation Protection
Under Section 15(c) of the Investment Company Act, contracts for investment
advisory services are required to be reviewed, evaluated and approved by a
majority of a fund's independent directors or trustees (the "Directors") each
year. At American Century, this process - referred to as the "15(c) Process" -
involves at least two board meetings spanning a 30 to 60 day period each year,
as well as meetings of the Corporate Governance Committee (comprised solely of
independent directors), which coordinates the board's 15(c) Process. In addition
to this annual review, the board and its committees oversee and evaluate at
quarterly meetings the nature and quality of significant services performed by
the advisor on behalf of the funds. At these meetings the board reviews fund
performance, provision of shareholder services, audit and compliance
information, and a variety of other reports from the advisor concerning fund
operations. The board, or committees of the board, also holds special meetings,
as needed.
ANNUAL CONTRACT REVIEW PROCESS
As part of the annual 15(c) Process undertaken during this half-year period, the
Directors requested and received extensive data and information compiled by the
advisor and certain independent providers of evaluative data (the "15(c)
Providers") concerning the VP Inflation Protection (the "fund") and the services
provided to the fund under the management agreement. The information included:
* the nature, extent and quality of investment management, shareholder
services and other services provided to the fund under the management
agreement;
* reports on the advisor's activities relating to the wide range of
programs and services the advisor provides to the fund and its shareholders
on a routine and non-routine basis;
* data comparing the cost of owning the fund to the cost of owning a
similar fund;
* data comparing the fund's performance to appropriate benchmarks
and/or a peer group of other mutual funds with similar investment
objectives and strategies;
* financial data showing the profitability of the fund to the advisor
and the overall profitability of the advisor; and
* data comparing services provided and charges to clients of the
advisor other than the fund.
In addition, the board also reviewed information provided by an independent
consultant retained by the board in connection with the 15(c) Process.
In keeping with its practice, the fund's board held two regularly scheduled
meetings and one special meeting to review and discuss the information provided
by the advisor and to complete its negotiations with the advisor regarding the
renewal of the management agreement, including the setting of the applicable
advisory fee. In addition, the independent directors and the Corporate
Governance Committee met
(continued)
- ------
20
Approval of Management Agreement for VP Inflation Protection
to review and discuss the information provided and evaluate the advisor's
performance as manager of the fund. Working through the Corporate Governance
Committee, the board also retained a consultant to assist it in its evaluation
of the profitability of the fund and the advisor, and in formulating the board's
fee proposals. The board also had the benefit of the advice of its independent
counsel throughout the period.
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, the
15(c) Providers, the board's consultant and its independent counsel, and
evaluated such information for each fund for which the board has responsibility.
The Directors did not identify any single factor as being all-important or
controlling, and each Director may have attributed different levels of
importance to different factors. In deciding to renew the agreement under the
terms ultimately determined by the board to be appropriate, the Directors'
decision was based on the following factors.
NATURE, EXTENT AND QUALITY OF SERVICES - GENERALLY. Under the management
agreement, the advisor is responsible for providing or arranging for all
services necessary for the operation of the fund. The board noted that under the
management agreement, the advisor provides or arranges at its own expense a wide
variety of services including:
* fund construction and design
* portfolio security selection
* initial capitalization/funding
* securities trading
* custody of fund assets
* daily valuation of the fund's portfolio
* shareholder servicing and transfer agency, including shareholder
confirmations, recordkeeping and communications
* legal services
* regulatory and portfolio compliance
* financial reporting
* marketing and distribution
The Directors noted that many of these services have expanded over time both in
terms of quantity and complexity in response to shareholder demands, competition
in the industry and the changing regulatory environment. In performing their
evaluation, the Directors considered information received in connection with the
annual review, as well as information provided on an ongoing basis at their
regularly scheduled board and committee meetings.
INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services
provided is quite complex and allows fund shareholders access to professional
money management, instant diversification of their investments within an asset
class, the opportunity to easily diversify among asset classes, and liquidity.
In evaluating investment performance, the board expects the advisor to manage
the fund in accordance with its investment objectives and approved
(continued)
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21
Approval of Management Agreement for VP Inflation Protection
strategies. In providing these services, the advisor utilizes teams of
investment professionals (portfolio managers, analysts, research assistants, and
securities traders) who require extensive information technology, research,
training, compliance and other systems to conduct their business. At each
quarterly meeting the board and the Portfolio Committee review investment
performance information for the fund, together with comparative information for
appropriate benchmarks and peer groups of funds managed similarly to the fund.
Further, the Portfolio Committee reports its assessment to the board. If
performance concerns are identified, the Directors discuss with the advisor and
its portfolio managers the reasons for such results (e.g., market conditions,
security selection) and any efforts being undertaken to improve performance. The
fund's performance for both one and three year periods was above the median for
its peer group.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the fund with a
comprehensive package of transfer agency, shareholder, and other services. The
Quality of Service Committee reviews reports and evaluations of such services at
its regular quarterly meetings, including the annual meeting concerning contract
review, and reports to the board. The Quality of Service Committee reviews
interim reports between regularly scheduled meetings. These reports include, but
are not limited to, information regarding the operational efficiency and
accuracy of the shareholder and transfer agency services provided, staffing
levels, shareholder satisfaction (as measured by external as well as internal
sources), technology support, new products and services offered to fund
shareholders, securities trading activities, portfolio valuation services,
auditing services, and legal and operational compliance activities. Certain
aspects of shareholder and transfer agency service level efficiency and the
quality of securities trading activities are measured by independent third party
providers and are presented in comparison to other fund groups not managed by
the advisor.
COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor
provides detailed information concerning its cost of providing various services
to the fund, its profitability in managing the fund, its overall profitability,
and its financial condition. The Directors have reviewed with the advisor the
methodology used to prepare this financial information. This financial
information regarding the advisor is considered in order to evaluate the
advisor's financial condition, its ability to continue to provide services under
the management agreement, and the reasonableness of the current management fee.
The board has retained a consultant to assist it in this review.
ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment
to providing quality services to shareholders and to conducting its business
ethically. They noted that the advisor's practices generally meet or exceed
industry best practices and that
(continued)
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Approval of Management Agreement for VP Inflation Protection
the advisor was not implicated in the industry scandals of 2003 and 2004.
ECONOMIES OF SCALE. The Directors review reports provided by the advisor on
economies of scale for the complex as a whole and the year-over-year changes in
revenue, costs, and profitability. The Directors concluded that economies of
scale are difficult to measure with precision, particularly on a fund-by-fund
basis. This analysis is also complicated by the additional services and content
provided by the advisor and its reinvestment in its ability to provide and
expand those services. Accordingly, the Directors also seek to evaluate
economies of scale by reviewing other information, such as year-over-year
profitability of the advisor generally, the profitability of its management of
the fund specifically, the expenses incurred by the advisor in providing various
functions to the fund, and the fee breakpoints of competitive funds not managed
by the advisor. The Directors believe the advisor is appropriately sharing
economies of scale through a competitive fee structure, through breakpoints that
reduce fees as the fund complex and the fund increases in size and through
reinvestment in its business to provide shareholders additional content and
services. In particular, separate breakpoint schedules based on the size of the
entire fund complex and on the size of the fund reflect the complexity of
assessing economies of scale.
COMPARISON TO OTHER FUNDS' FEES. The fund pays the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the fund, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the fund's
independent directors (including their independent legal counsel). Under the
unified fee structure, the advisor is responsible for providing all investment
advisory, custody, audit, administrative, compliance, recordkeeping, marketing
and shareholder services, or arranging and supervising third parties to provide
such services. By contrast, most other funds are charged a variety of fees,
including an investment advisory fee, a transfer agency fee, an administrative
fee, distribution charges and other expenses. Other than their investment
advisory fees and Rule 12b-1 distribution fees, all other components of the
total fees charged by these other funds may be increased without shareholder
approval. The board believes the unified fee structure is a benefit to fund
shareholders because it clearly discloses to shareholders the cost of owning
fund shares, and, since the unified fee cannot be increased without a vote of
fund shareholders, it shifts to the advisor the increased costs of operating the
fund and the risk of administrative inefficiencies. Part of the Directors'
analysis of fee levels involves comparing the fund's unified fee to the total
expense ratio of other funds in the fund's peer group. The unified fee charged
to shareholders of the fund was in the lowest quartile of the total expense
ratios of its peer group.
(continued)
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23
Approval of Management Agreement for VP Inflation Protection
COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The
Directors also requested and received information from the advisor concerning
the nature of the services, fees, and profitability of its advisory services to
advisory clients other than the fund. They observed that these varying types of
client accounts require different services and involve different regulatory and
entrepreneurial risks than the management of the fund. The Directors analyzed
this information and concluded that the fees charged and services provided to
the advisor's other clients did not suggest that the fund's fees were
unreasonable by comparison.
COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information
from the advisor concerning collateral benefits it receives as a result of its
relationship with the fund. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use the fund or shareholder
information to generate profits in other lines of business, and therefore does
not derive any significant collateral benefits from them. The Directors noted
that the advisor receives proprietary research from broker dealers that execute
fund portfolio transactions and concluded that this research is likely to
benefit fund shareholders. The Directors also determined that the advisor is
able to provide investment management services to clients other than the fund,
at least in part, due to its existing infrastructure built to serve the fund
complex. The Directors concluded, however, that the assets of those other
clients are not significant and that, in any event, the addition of such other
assets to the assets of the funds that use substantially the same investment
management team and strategy to determine whether breakpoints have been achieved
captures for the shareholders a portion of any benefit that exists.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the independent directors concluded that the
investment management agreement between the funds and the advisor is fair and
reasonable in light of the services provided and should be renewed.
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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) 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 advisor, 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 advisor 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
advisor 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, INC.
INVESTMENT ADVISOR:
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
0508
SH-SAN-44741 (c)2005 American Century Proprietary Holdings, Inc. All rights
reserved.
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. 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
formal procedures by which shareholders may recommend nominees to the
registrant's board. However, all such recommendations directed to the following
address will be forwarded to the Corporate Governance Committee of the board for
consideration: The Corporate Secretary, American Century Funds, P. O. Box
410141, Kansas City, Missouri 64141.
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) 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 12, 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: August 12, 2005
By: /s/ Maryanne L. Roepke
-------------------------------------------
Name: Maryanne L. Roepke
Title: Sr. Vice President, Treasurer, and
Chief Accounting Officer
(principal financial officer)
Date: August 12, 2005
