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)
CHARLES A. ETHERINGTON, 4500 MAIN STREET, 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: 12-31
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Date of reporting period: 12-31-2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
American Century Variable Portfolios II
Annual Report
December 31, 2006
[photo of winter scene]
VP Inflation Protection Fund
[american century investments logo and text logo]
[inside front cover blank]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Fixed-Income Total Returns . . . . . . . . . . . . . . . . . . . . 2
VP INFLATION PROTECTION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Portfolio at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .13
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .14
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .15
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .16
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Report of Independent Registered Public Accounting Firm . . . . . . . . . .23
OTHER INFORMATION
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .27
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .28
The opinions expressed in the Market Perspective and 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.
Market Perspective
[photo of chief investment officer]
BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME
MULTIPLE ECONOMIC INFLECTION POINTS IN 2006
The U.S. economy experienced inflection points in economic growth, inflation,
and short-term interest rates in 2006. Real annualized gross domestic product
(GDP) growth peaked at a 5.6% rate in the first quarter, courtesy of healthy
business growth, solid consumer spending, and a four-year low in the national
unemployment rate.
However, higher interest rates and a flare-up in energy prices took a toll as
the year progressed, triggering a significant housing-sector decline and tough
times in the auto industry, which weighed on overall manufacturing activity.
Real annualized GDP growth slid to the 2-3% range for the remainder of the year.
Inflation fears increased as oil prices peaked in July, but clear signs of a
cooling economy and easing energy prices in the latter part of the third quarter
reduced those worries.
With the economy slowing and long-term inflation pressures apparently easing,
the Federal Reserve (the Fed) halted its two-year rate-raising campaign in
August to assess the impact of its moves. The Fed continued to voice concerns
about near-term inflation pressures, refusing to completely close the door on
additional rate increases, but left its overnight rate target at a five-year
high of 5.25%.
SECOND-HALF TURNAROUND FOR BONDS
After suffering its worst first-half performance since 1999, the broad U.S. bond
market rallied in the second half of 2006 to finish with a seventh consecutive
year of positive performance. Forecasts for modest growth ahead, the Fed's
interest rate halt, and expectations for possible rate cuts in 2007 boosted
second-half bond returns. Treasury yields remained below the Fed's overnight
rate target, and short-term yields finished higher than long-term. Such
"inverted" Treasury yield levels have often preceded economic downturns.
Corporate high-yield bonds finished among the market's top performers in 2006 as
investors eagerly embraced greater credit risk in exchange for potentially
higher returns. Inflation-linked bonds finished toward the bottom of the
performance spectrum as Treasury securities lagged and inflation concerns eased,
snapping a five-year string of solid relative performance for the
inflation-linked sector.
U.S. FIXED-INCOME TOTAL RETURNS
For the 12 months ended December 31, 2006
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U.S. TREASURY SECURITIES
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3-Month Bill 4.86%
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2-Year Note 3.71%
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5-Year Note 2.51%
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10-Year Note 1.34%
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30-Year Bond -1.10%
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LEHMAN BROTHERS U.S. BOND MARKET INDICES
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Fixed-Rate Mortgage-Backed 5.22%
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Agency 4.39%
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Aggregate (multi-sector) 4.33%
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Corporate Investment-Grade 4.30%
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Treasury 3.08%
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Treasury Inflation Protected
Securities (TIPS) 0.41%
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2
VP Inflation Protection - Performance
TOTAL RETURNS AS OF DECEMBER 31, 2006
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AVERAGE ANNUAL
RETURNS
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SINCE INCEPTION
1 YEAR INCEPTION DATE
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CLASS II 1.59% 3.62%(1) 12/31/02
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BLENDED INDEX(2) 2.25% 4.06% --
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CITIGROUP U.S.
INFLATION-LINKED
SECURITIES INDEX(3) 0.40% 4.92% --
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Class I 1.90% 4.15% 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) See Additional Information pages.
(3) 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.
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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3
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 2005 2006
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Class II 5.61%* 5.81% 1.56% 1.59%
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Blended index 5.75% 5.78% 2.51% 2.25%
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Citigroup U.S. Inflation-Linked
Securities Index 8.26% 8.40% 2.86% 0.40%
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*Returns would have been lower, along with ending value, if distribution fees
had not been waived from December 31, 2002 to March 31, 2003.
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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4
VP Inflation Protection - Portfolio Commentary
PORTFOLIO MANAGERS: JEREMY FLETCHER, BOB GAHAGAN, HANDO AGUILAR, AND DAN
SHIFFMAN
PERFORMANCE SUMMARY
VP Inflation Protection (VPIP) returned 1.90%* in 2006, compared with the 0.40%
return of the Citigroup U.S. Inflation Linked-Securities Index (ILSI). The
blended index -- which is 55% Citigroup U.S. ILSI, 25% Citigroup
Government-Sponsored 1- to 3-Year Index, and 20% Citigroup 15-Year Mortgage
Index -- returned 2.25% over the same period. The portfolio's results reflect
operating expenses, while the returns of the indices do not.
A broad bond market rally in the second half of 2006 resulted in positive annual
returns after a challenging first half. VPIP's outperformance versus the
Citigroup U.S. ILSI resulted from its mortgage and government agency holdings
and its relative underweight in inflation-linked securities compared with that
index. But the underweight in inflation-linked securities versus the ILSI
equated to a modest overweight versus the blended index, which tempered relative
performance against that index.
TIPS UNDERPERFORMED, SO WE UNDERPERFORMED
We overweighted inflation-linked securities compared with the blended index for
most of 2006, while tactically increasing or decreasing this position throughout
the year. The overweight position reflected our belief that inflation-linked
securities values were attractive based on low breakeven rates (the yield gap
between traditional and inflation-linked securities) and within the context of
our expectations for economic growth, inflation, and interest rates.
Our strategy worked in July, August, and November, but generally detracted from
performance during the rest of the year. In 2006, Treasury Inflation-Protected
Securities (TIPS) underperformed traditional Treasurys for the first time since
2000, according to Lehman Brothers, and lagged most other bond sectors. That
underperformance occurred in spite of TIPS' best quarterly return since 2004 in
the third quarter. Unfortunately, the favorable third quarter was followed by an
ugly fourth, including a 2.33% decline for TIPS in December, their biggest
monthly drop since tumbling 4.85% in April 2004.
ASSET ALLOCATION
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% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
12/31/06 6/30/06
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U.S. Treasury Securities
& Equivalents 55.9% 57.2%
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U.S. Government Agency
Securities 13.0% 14.4%
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Corporate Bonds 10.3% 9.7%
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Collateralized Mortgage
Obligations 9.1% 7.9%
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U.S. Government Agency
Mortgage-Backed
Securities 5.6% 6.1%
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Zero-Coupon U.S.
Government Agency
Securities 3.6% 3.1%
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Zero-Coupon U.S. Treasury
Securities & Equivalents 2.2% 1.8%
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Asset-Backed Securities 1.0% 2.1%
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Cash and Equivalents(1) (0.7)% (2.3)%
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(1) Includes Commercial Paper and other assets and liabilities.
*All fund returns referenced in this commentary are for Class I shares.
(continued)
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5
VP Inflation Protection - Portfolio Commentary
OTHER INFLATION-LINKED OPPORTUNITIES
Hoping to boost long-term performance, we acquired government agency and
corporate inflation-linked securities at what we believed were attractive
prices. For example, we purchased an odd-lot position in Sallie Mae
inflation-linked securities that reset monthly off of the consumer price index
(CPI)--the same index that TIPS use. In addition, we added bonds issued by
Barclays Bank, John Hancock Life Insurance, Lehman Brothers, and Morgan Stanley
with similar monthly CPI resets. These securities primarily reflect rising
inflation through upwardly adjusted monthly interest payments; by comparison,
TIPS make semiannual principal adjustments before coupon payments are made.
STRATEGIES IN THE NON-INFLATION-LINKED SLICES
The Citigroup Government-Sponsored 1- to 3-Year Index returned 4.47% for the
year, outperforming Citigroup's inflation-linked index by more than 4.0%. Within
this slice of the portfolio we leveraged our extensive knowledge of the
zero-coupon bond market to add what we believed to be undervalued securities
with the potential to appreciate. More specifically, we purchased zeros issued
by the Agency for International Development, and Government Trust Certificates.
We also bought Federal Judiciary securities and short-term bonds issued by the
Financing Corporation.
Outperforming other blended index components, the Citigroup 15-Year Mortgage
Index returned 4.55% in 2006. We occasionally added traditional mortgage-backed
pass-throughs, such as those issued by Freddie Mac and Ginnie Mae, for this
slice of the portfolio. However, our main strategy involved "mortgage rolls."
That meant buying current-coupon, mortgage-backed securities for forward
settlement, then swapping them for new, similar ones before the securities'
settlement dates. This strategy helped us to "coupon up" and cushion the
portfolio when bond yields rose.
STARTING POINT FOR THE NEXT REPORT PERIOD
At year-end, we felt comfortable with our positioning compared with the blended
index. We trimmed the portfolio's TIPS exposure at year-end in anticipation of
increasing supply -- the Treasury Department planned to auction 10- and 20-year
inflation-linked bonds in January 2007. We also conservatively extended the
portfolio's sensitivity to interest rate changes (its duration) beyond that of
the blended index, anticipating a slowing economy and relatively favorable
conditions for bonds.
PORTFOLIO AT A GLANCE
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AS OF AS OF
12/31/06 6/30/06
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30-Day SEC Yield
Class I (1.47)% 9.52%*
Class II (1.72)% 9.26%*
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Weighted
Average Maturity 6.7 years 6.8 years
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Average
Duration (effective) 4.5 years 4.5 years
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*The above-average 30-day SEC yields as of June 30, 2006, primarily resulted
from an unusually elevated April inflation reading. The market conditions
fostering this occurrence may not be repeated or consistently achieved in the
future.
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6
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, 2006 to December 31, 2006.
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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7
Shareholder Fee Example (Unaudited)
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 7/1/06 - EXPENSE
7/1/06 12/31/06 12/31/06 RATIO*
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VP INFLATION PROTECTION SHAREHOLDER FEE EXAMPLE
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ACTUAL
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Class I $1,000 $1,025.40 $2.55 0.50%
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Class II $1,000 $1,023.50 $3.83 0.75%
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HYPOTHETICAL
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Class I $1,000 $1,022.68 $2.55 0.50%
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Class II $1,000 $1,021.42 $3.82 0.75%
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*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
184, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
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8
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2006
Principal Amount Value
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U.S. TREASURY SECURITIES
& EQUIVALENTS - 55.9%
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$ 1,500,000 AID (Egypt), 4.45%, 9/15/15 $ 1,452,041
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19,387,634 U.S. Treasury Inflation Indexed
Bonds, 2.375%, 1/15/25 19,308,124
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19,328,320 U.S. Treasury Inflation Indexed
Bonds, 2.00%, 1/15/26 18,183,736
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15,573,042 U.S. Treasury Inflation Indexed
Bonds, 3.625%, 4/15/28 18,807,499
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13,896,970 U.S. Treasury Inflation Indexed
Bonds, 3.875%, 4/15/29 17,504,762
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7,661,063 U.S. Treasury Inflation Indexed
Bonds, 3.375%, 4/15/32 9,256,724
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11,469,420 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/07 11,453,294
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28,869,687 U.S. Treasury Inflation Indexed
Notes, 3.625%, 1/15/08(1) 29,186,589
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26,161,725 U.S. Treasury Inflation Indexed
Notes, 3.875%, 1/15/09 26,889,360
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6,528,381 U.S. Treasury Inflation Indexed
Notes, 4.25%, 1/15/10 6,873,164
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5,195,678 U.S. Treasury Inflation Indexed
Notes, 0.875%, 4/15/10 4,927,373
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6,032,416 U.S. Treasury Inflation Indexed
Notes, 3.50%, 1/15/11 6,281,730
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4,424,951 U.S. Treasury Inflation Indexed
Notes, 2.375%, 4/15/11 4,408,707
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7,789,067 U.S. Treasury Inflation Indexed
Notes, 3.375%, 1/15/12 8,134,403
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11,229,500 U.S. Treasury Inflation Indexed
Notes, 3.00%, 7/15/12 11,559,816
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14,346,126 U.S. Treasury Inflation Indexed
Notes, 1.875%, 7/15/13 13,864,197
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19,013,328 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/14 18,475,612
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17,459,582 U.S. Treasury Inflation Indexed
Notes, 2.00%, 7/15/14 16,951,491
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14,380,776 U.S. Treasury Inflation Indexed
Notes, 1.625%, 1/15/15 13,540,407
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15,259,041 U.S. Treasury Inflation Indexed
Notes, 1.875%, 7/15/15 14,627,820
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14,903,152 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/16 14,394,358
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5,798,724 U.S. Treasury Inflation Indexed
Notes, 2.50%, 7/15/16 5,844,482
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TOTAL U.S. TREASURY
SECURITIES & EQUIVALENTS
(Cost $297,114,190) 291,925,689
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U.S. GOVERNMENT AGENCY
SECURITIES - 13.0%
674,000 FAMCA, 4.25%, 7/29/08 665,644
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4,000,000 FAMCA, 3.375%, 2/15/09 3,870,316
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Principal Amount Value
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$ 3,750,000 FAMCA, 5.50%, 7/15/11
(Acquired 9/6/06,
Cost $3,804,075)(2) $ 3,822,641
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1,000,000 FAMCA, 5.40%, 10/14/11 1,015,352
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3,974,000 FAMCA, 6.71%, 7/28/14 4,408,187
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6,000,000 FFCB, 2.625%, 9/17/07 5,894,669
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1,500,000 FFCB, 2.65%, 4/2/08 1,455,405
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2,000,000 FFCB, 3.00%, 5/21/08 1,944,488
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2,000,000 FFCB, 3.375%, 7/15/08 1,950,744
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3,000,000 FHLB, 4.125%, 4/18/08 2,962,875
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2,000,000 FHLB, 2.625%, 7/15/08 1,929,728
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3,000,000 FHLB, 3.625%, 11/14/08 2,926,194
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2,500,000 FHLB, 4.375%, 9/17/10 2,457,068
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2,000,000 FHLB, 4.625%, 2/18/11 1,980,990
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2,000,000 FNMA, VRN, 3.20%, 1/17/07,
resets monthly off the
Consumer Price Index Year
over Year plus 1.14% with a
cap of 24.00%,
Final Maturity 2/17/09 1,952,200
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2,000,000 PEFCO, 7.17%, 5/15/07
(Acquired 3/29/05,
Cost $2,125,820)(2) 2,014,702
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3,000,000 PEFCO, 3.375%, 2/15/09 2,905,074
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1,500,000 PEFCO, 5.69%, 5/15/12 1,549,545
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2,200,000 PEFCO, 4.97%, 8/15/13 2,207,139
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4,000,000 PEFCO, 4.55%, 5/15/15 3,892,564
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15,936,122 TVA Inflation Indexed Notes,
3.375%, 1/15/07 15,949,508
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TOTAL U.S. GOVERNMENT
AGENCY SECURITIES
(Cost $68,299,769) 67,755,033
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CORPORATE BONDS - 10.3%
2,000,000 ABN AMRO Bank N.V., VRN,
4.06%, 1/29/07, resets monthly
off the Consumer Price Index
Year over Year plus 2.00% with
no caps, Final Maturity 9/27/08 1,992,500
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3,000,000 Barclays Bank plc, VRN, 2.71%,
1/12/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.40% with no caps,
Final Maturity 5/15/07 2,983,050
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2,000,000 Barclays Bank plc, VRN, 3.06%,
1/12/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.75% with no caps,
Final Maturity 3/17/08 1,977,860
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2,000,000 Barclays Bank plc, VRN, 5.65%,
1/26/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.83% with no caps,
Final Maturity 7/28/08 1,985,040
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See Notes to Financial Statements.
(continued)
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9
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2006
Principal Amount Value
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$ 529,000 HSBC Finance Corp., VRN, 2.39%,
1/10/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.08% with no caps,
Final Maturity 9/10/09 $ 500,127
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1,067,000 HSBC Finance Corp., VRN, 2.50%,
1/10/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.19% with no caps,
Final Maturity 2/10/09 1,033,646
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3,000,000 HSBC Finance Corp., VRN, 3.17%,
1/10/07, resets monthly off the
Consumer Price Index Year
over Year plus 1.11% with no caps,
Final Maturity 2/10/10 2,842,800
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40,000 John Hancock Life Insurance Co.,
VRN, 2.44%, 1/15/07, resets monthly
off the Consumer Price
Index Year over Year plus 1.13% with
no caps, Final Maturity 6/15/10 37,238
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115,000 John Hancock Life Insurance Co.,
VRN, 2.93%, 1/15/07, resets monthly
off the Consumer Price
Index Year over Year plus 1.62% with
no caps, Final Maturity 11/15/10 107,741
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2,114,000 Lehman Brothers Holdings Inc.,
VRN, 4.13%, 1/10/07, resets
monthly off the Consumer Price
Index Year over Year plus 2.07%
with no caps, Final Maturity 11/10/15 1,948,770
- --------------------------------------------------------------------------------
4,065,000 Lehman Brothers Holdings Inc.,
VRN, 3.52%, 1/23/07, resets
monthly off the Consumer Price
Index Year over Year plus 1.46%
with no caps, Final Maturity 3/23/12 3,714,597
- --------------------------------------------------------------------------------
4,500,000 Merrill Lynch & Co., Inc., VRN,
3.22%, 1/2/07, resets monthly off
the Consumer Price Index Year
over Year plus 1.16% with
no caps, Final Maturity 3/2/09 4,294,665
- --------------------------------------------------------------------------------
4,311,000 Merrill Lynch & Co., Inc., VRN,
2.86%, 1/12/07, resets monthly
off the Consumer Price Index
Year over Year plus 0.80% with
no caps, Final Maturity 3/12/07 4,296,299
- --------------------------------------------------------------------------------
4,359,000 Morgan Stanley, VRN, 4.16%,
1/2/07, resets monthly off the
Consumer Price Index Year
over Year plus 2.10% with no caps,
Final Maturity 12/1/17 3,919,264
- --------------------------------------------------------------------------------
2,000,000 Principal Life Income Funding
Trusts, VRN, 3.11%, 1/1/07,
resets monthly off the Consumer
Price Index Year over Year plus
1.05% with no caps, Final Maturity 4/1/08 1,956,860
- --------------------------------------------------------------------------------
303,000 Prudential Financial, Inc., VRN,
4.06%, 1/2/07, resets monthly off
the Consumer Price Index Year
over Year plus 2.00% with no caps,
Final Maturity 11/2/20 266,410
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 10,572,300 SLM Corporation, 1.32%,
1/25/10 $ 10,059,121
- --------------------------------------------------------------------------------
490,000 SLM Corporation, VRN, 4.21%,
1/2/07, resets monthly off the
Consumer Price Index Year
over Year plus 2.15% with no caps,
Final Maturity 2/1/14 462,991
- --------------------------------------------------------------------------------
1,500,000 SLM Corporation, VRN, 3.51%,
1/15/07, resets monthly off the
Consumer Price Index Year
over Year plus 2.20% with no caps,
Final Maturity 6/15/09 1,466,655
- --------------------------------------------------------------------------------
8,528,240 Toyota Motor Credit Corp. Inflation
Indexed Bonds, 1.22%, 10/1/09 8,218,324
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $56,273,686) 54,063,958
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS(3) - 9.1%
2,110,619 Banc of America Large Loan,
Series 2005 MIB1, Class A1, VRN,
5.50%, 1/15/07, resets monthly off
the 1-month LIBOR plus 0.15% with no caps,
Final Maturity 3/15/22 (Acquired 11/18/05,
Cost $2,110,619)(2) 2,112,099
- --------------------------------------------------------------------------------
2,850,000 Bear Stearns Commercial
Mortgage Securities, Series 2003 T12,
Class A2 SEQ, 3.88%, 8/1/39 2,769,180
- --------------------------------------------------------------------------------
1,400,822 Commercial Mortgage
Pass-Through Certificates, Series 2005
FL11, Class A1, VRN, 5.50%, 1/16/07, resets
monthly off the 1-month LIBOR plus 0.15%
with no caps, Final Maturity 11/15/17
(Acquired 11/18/05,
Cost $1,400,822)(2) 1,402,162
- --------------------------------------------------------------------------------
1,939,487 FHLMC, Series 2508,
Class UL SEQ, 5.00%,
12/15/16 1,923,640
- --------------------------------------------------------------------------------
3,000,000 FNMA, Series 2003-92,
Class PD, 4.50%, 3/25/17 2,914,416
- --------------------------------------------------------------------------------
2,845,350 GNMA, Series 2003-105,
Class A SEQ, 4.50%, 11/16/27 2,807,433
- --------------------------------------------------------------------------------
782,215 GNMA, Series 2003-112,
Class MN, 4.00%, 5/16/25 773,444
- --------------------------------------------------------------------------------
2,000,000 GNMA, Series 2005-24,
Class UB SEQ, 5.00%, 1/20/31 1,962,802
- --------------------------------------------------------------------------------
6,000,000 Greenwich Capital Commercial
Funding Corp., Series 2005 GG3,
Class A2 SEQ, 4.31%, 8/10/42 5,844,791
- --------------------------------------------------------------------------------
2,000,000 LB-UBS Commercial Mortgage
Trust, Series 2003 C3, Class A3
SEQ, 3.85%, 5/11/27 1,893,824
- --------------------------------------------------------------------------------
1,000,000 LB-UBS Commercial Mortgage
Trust, Series 2003 C5, Class A2
SEQ, 3.48%, 7/15/27 973,332
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
10
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,000,000 LB-UBS Commercial Mortgage
Trust, Series 2004 C4, Class A2,
VRN, 4.57%, 1/11/07, Final
Maturity 6/15/29 $ 4,928,045
- --------------------------------------------------------------------------------
4,750,000 LB-UBS Commercial Mortgage
Trust, Series 2005 C2, Class A2
SEQ, 4.82%, 4/15/30 4,692,112
- --------------------------------------------------------------------------------
2,000,000 LB-UBS Commercial Mortgage
Trust, Series 2005 C3, Class A3
SEQ, 4.65%, 7/30/30 1,952,694
- --------------------------------------------------------------------------------
2,000,000 Merrill Lynch Mortgage Trust,
Series 2006 C1, Class A2, VRN,
5.62%, 1/1/07, Final Maturity
5/12/39 2,034,036
- --------------------------------------------------------------------------------
5,000,000 Morgan Stanley Capital I, Series
2004 HQ3, Class A2 SEQ, 4.05%,
1/13/41 4,856,315
- --------------------------------------------------------------------------------
2,055,000 Washington Mutual, Inc.,
Series 2004 AR4, Class A6,
3.81%, 6/25/34 1,985,301
- --------------------------------------------------------------------------------
855,000 Washington Mutual, Inc.,
Series 2004 AR7, Class A6,
3.94%, 7/25/34 830,969
- --------------------------------------------------------------------------------
1,000,000 Washington Mutual, Inc.,
Series 2005 AR4, Class A3,
4.59%, 4/25/35 980,942
- --------------------------------------------------------------------------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $47,860,450) 47,637,537
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(3) - 5.6%
813,828 FHLMC, 4.50%, 5/1/19 785,480
- --------------------------------------------------------------------------------
4,619,003 FHLMC, 5.00%, 4/1/21 4,539,704
- --------------------------------------------------------------------------------
6,000,000 FHLMC, 5.50%, 11/1/21 5,997,252
- --------------------------------------------------------------------------------
436,628 FHLMC, 5.50%, 12/1/33 432,588
- --------------------------------------------------------------------------------
11,734,283 FNMA, 6.00%, settlement
date 1/11/07(4) 11,814,957
- --------------------------------------------------------------------------------
1,226,291 FNMA, 5.00%, 9/1/20 1,205,954
- --------------------------------------------------------------------------------
141,825 GNMA, 6.00%, 6/20/17 143,086
- --------------------------------------------------------------------------------
143,452 GNMA, 6.00%, 7/20/17 144,727
- --------------------------------------------------------------------------------
880,464 GNMA, 6.00%, 5/15/24 894,263
- --------------------------------------------------------------------------------
3,382,927 GNMA, 5.50%, 9/20/34 3,361,365
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $29,404,780) 29,319,376
- --------------------------------------------------------------------------------
ZERO-COUPON U.S. GOVERNMENT
AGENCY SECURITIES(5) - 3.6%
25,000 FICO STRIPS - COUPON,
4.23%, 11/30/07 23,841
- --------------------------------------------------------------------------------
125,000 FICO STRIPS - COUPON,
4.40%, 11/30/08 113,535
- --------------------------------------------------------------------------------
1,700,000 FICO STRIPS - COUPON,
3.875%, 3/7/09 1,524,863
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 800,000 FICO STRIPS - COUPON,
4.39%, 6/6/09 $ 708,752
- --------------------------------------------------------------------------------
3,285,000 FICO STRIPS - COUPON,
4.01%, 11/11/09 2,852,799
- --------------------------------------------------------------------------------
3,000,000 FICO STRIPS - COUPON,
3.82%, 6/6/10 2,534,973
- --------------------------------------------------------------------------------
2,000,000 FICO STRIPS - COUPON,
4.31%, 9/26/10 1,666,666
- --------------------------------------------------------------------------------
485,000 FICO STRIPS - COUPON,
4.58%, 11/30/10 400,751
- --------------------------------------------------------------------------------
3,038,000 FICO STRIPS - COUPON,
5.10%, 4/6/11 2,478,479
- --------------------------------------------------------------------------------
1,763,000 FICO STRIPS - COUPON,
4.83%, 3/26/12 1,369,426
- --------------------------------------------------------------------------------
2,000,000 FICO STRIPS - COUPON,
4.39%, 10/6/12 1,508,568
- --------------------------------------------------------------------------------
2,000,000 Government Trust
Certificates, 5.10%, 11/15/07 1,912,614
- --------------------------------------------------------------------------------
900,000 Government Trust
Certificates, 2.87%, 5/15/08 839,866
- --------------------------------------------------------------------------------
1,000,000 Government Trust
Certificates, 3.06%, 11/15/08 911,207
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. GOVERNMENT AGENCY SECURITIES
(Cost $19,209,798) 18,846,340
- --------------------------------------------------------------------------------
ZERO-COUPON U.S. TREASURY
SECURITIES AND EQUIVALENTS(5) - 2.2%
1,000,000 AID (Israel), 2.64%, 2/15/07 993,817
- --------------------------------------------------------------------------------
308,000 AID (Israel), 2.64%, 3/15/07 304,780
- --------------------------------------------------------------------------------
493,000 Federal Judiciary,
3.37%, 2/15/07 489,940
- --------------------------------------------------------------------------------
45,000 Federal Judiciary,
5.34%, 2/15/08 42,518
- --------------------------------------------------------------------------------
242,000 Federal Judiciary,
4.41%, 8/15/11 194,093
- --------------------------------------------------------------------------------
12,000 Federal Judiciary,
4.60%, 8/15/12 9,171
- --------------------------------------------------------------------------------
4,351,000 Federal Judiciary,
4.85%, 8/15/13 3,165,826
- --------------------------------------------------------------------------------
72,000 Federal Judiciary,
5.45%, 2/15/23 31,223
- --------------------------------------------------------------------------------
353,000 REFCORP STRIPS -
COUPON, 3.61%, 10/15/08 324,075
- --------------------------------------------------------------------------------
2,000,000 REFCORP STRIPS -
COUPON, 3.68%, 1/15/09 1,815,630
- --------------------------------------------------------------------------------
2,000,000 REFCORP STRIPS -
COUPON, 4.83%, 4/15/09 1,794,770
- --------------------------------------------------------------------------------
2,000,000 REFCORP STRIPS -
COUPON, 4.51%, 1/15/14 1,435,482
- --------------------------------------------------------------------------------
232,000 REFCORP STRIPS -
COUPON, 4.84%, 4/15/16 148,113
- --------------------------------------------------------------------------------
142,000 REFCORP STRIPS -
COUPON, 4.87%, 7/15/17 84,705
- --------------------------------------------------------------------------------
442,000 REFCORP STRIPS -
COUPON, 4.91%, 1/15/18 256,157
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
11
VP Inflation Protection - Schedule of Investments
DECEMBER 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 475,000 REFCORP STRIPS -
COUPON, 4.94%, 4/15/19 $ 256,836
- --------------------------------------------------------------------------------
TOTAL ZERO-COUPON U.S. TREASURY
SECURITIES AND EQUIVALENTS
(Cost $11,438,208) 11,347,136
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES(3) - 1.0%
- --------------------------------------------------------------------------------
249,715 Atlantic City Electric Transition
Funding LLC, Series 2003-1,
Class A1 SEQ, 2.89%, 7/20/11 242,697
- --------------------------------------------------------------------------------
799,025 CNH Equipment Trust,
Series 2004 A, Class A3A,
VRN, 5.42%, 1/16/07, resets
monthly off the 1-month LIBOR
plus 0.07% with no caps,
Final Maturity 10/15/08 799,679
- --------------------------------------------------------------------------------
1,065,973 Countrywide Asset-Backed
Certificates, Series 2006-6,
Class 2A1, VRN, 5.42%, 1/25/07,
resets monthly off the 1-month
LIBOR plus 0.07% with no caps,
Final Maturity 9/25/36 1,066,709
- --------------------------------------------------------------------------------
1,123,539 Credit-Based Asset Servicing and
Securitization, Series 2006 CB3,
Class AV1, VRN, 5.41%, 1/25/07,
resets monthly off the 1-month
LIBOR plus 0.06% with no caps,
Final Maturity 3/25/36 1,124,318
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,928,702 IndyMac Residential Asset Backed
Trust, Series 2006 B, Class 2A1,
VRN, 5.41%, 1/25/07, resets monthly off
the 1-month LIBOR plus 0.06% with no caps,
Final Maturity 6/25/36 $ 1,930,267
- --------------------------------------------------------------------------------
3,645 Structured Asset Securities
Corp., Series 2005 WF2, Class A1,
VRN, 5.43%, 1/25/07, resets monthly off
the 1-month LIBOR plus 0.08% with no
caps, Final Maturity 5/25/35 3,647
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $5,170,607) 5,167,317
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 0.8%
- --------------------------------------------------------------------------------
4,400,000 Paradigm Funding LLC, 5.32%,
1/2/07 (Acquired 12/29/06,
Cost $4,397,399)(2)(6)
(Cost $4,399,350) 4,400,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 101.5%
(Cost $539,170,838) 530,462,386
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - (1.5)% (7,673,909)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS - 100.0% $522,788,477
================================================================================
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
LB-UBS = Lehman Brothers Inc. - UBS AG
LIBOR = London Interbank Offered Rate
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
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 December 31, 2006.
(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 December 31, 2006 was
$13,751,604, which represented 2.6% of total net assets.
(3) Final maturity indicated, unless otherwise noted.
(4) Forward commitment.
(5) The rate indicated is the yield to maturity at purchase. These 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.
- ------
12
Statement of Assets and Liabilities
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $539,170,838) $530,462,386
- -----------------------------------------------------------
Cash 67,150
- -----------------------------------------------------------
Interest receivable 4,640,386
- --------------------------------------------------------------------------------
535,169,922
- --------------------------------------------------------------------------------
LIABILITIES
- -----------------------------------------------------------
Payable for investments purchased 12,060,954
- -----------------------------------------------------------
Accrued management fees 216,837
- -----------------------------------------------------------
Distribution fees payable 103,654
- --------------------------------------------------------------------------------
12,381,445
- --------------------------------------------------------------------------------
NET ASSETS $522,788,477
================================================================================
NET ASSETS CONSIST OF:
- -----------------------------------------------------------
Capital (par value and paid-in surplus) $536,403,958
- -----------------------------------------------------------
Accumulated net realized loss on investment transactions (4,907,029)
- -----------------------------------------------------------
Net unrealized depreciation on investments (8,708,452)
- --------------------------------------------------------------------------------
$522,788,477
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $39,096,108
- -----------------------------------------------------------
Shares outstanding 3,875,793
- -----------------------------------------------------------
Net asset value per share $10.09
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $483,692,369
- -----------------------------------------------------------
Shares outstanding 47,970,181
- -----------------------------------------------------------
Net asset value per share $10.08
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
13
Statement of Operations
YEAR ENDED DECEMBER 31, 2006
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- -----------------------------------------------------------
Interest $19,481,923
- --------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------
Management fees 2,446,390
- -----------------------------------------------------------
Distribution fees -- Class II 1,174,237
- -----------------------------------------------------------
Directors' fees and expenses 57,189
- -----------------------------------------------------------
Other expenses 857
- --------------------------------------------------------------------------------
3,678,673
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 15,803,250
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions (3,685,042)
- -----------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments (3,464,415)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (7,149,457)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 8,653,793
================================================================================
See Notes to Financial Statements.
- ------
14
Statement of Changes in Net Assets
YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 15,803,250 $ 15,535,687
- -----------------------------------------------
Net realized gain (loss) (3,685,042) (1,088,953)
- -----------------------------------------------
Change in net unrealized
appreciation (depreciation) (3,464,415) (8,899,079)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 8,653,793 5,547,655
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- -----------------------------------------------
Class I (1,216,198) (1,003,143)
- -----------------------------------------------
Class II (15,885,793) (14,532,544)
- -----------------------------------------------
From net realized gains:
- -----------------------------------------------
Class I -- (8,214)
- -----------------------------------------------
Class II -- (136,267)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (17,101,991) (15,680,168)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets from
capital share transactions 83,772,753 246,392,181
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 75,324,555 236,259,668
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 447,463,922 211,204,254
- --------------------------------------------------------------------------------
End of period $522,788,477 $447,463,922
================================================================================
See Notes to Financial Statements.
- ------
15
Notes to Financial Statements
DECEMBER 31, 2006
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 one fund in a series issued by the corporation. The fund is diversified under
the 1940 Act. The fund's investment objective is to pursue long-term total
return using a strategy that seeks to protect against U.S. inflation. The fund
pursues its investment objective by investing substantially all of its assets in
investment-grade debt securities that are designed to protect the future
purchasing power of the money invested in them. 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 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.
SECURITY VALUATIONS -- Debt securities maturing in greater than 60 days are
valued at current market value as provided by a commercial pricing service or at
the mean of the most recent bid and asked prices. Debt securities maturing
within 60 days may be valued at cost, plus or minus any amortized discount or
premium. If an event occurs after the value of a security was established but
before the net asset value per share was determined that was likely to
materially change the net asset value, that security would be valued at fair
value as determined in accordance with procedures adopted by the Board of
Directors. 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. Certain other circumstances may cause the fund
to fair value a security such as: a security has been declared in default;
trading in a security has been halted during the trading day; or there is a
foreign market holiday and no trading will commence.
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. Inflation adjustments related to inflation-linked debt securities are
reflected as interest income.
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 fund accounts for "roll" transactions as purchases
and sales; as such these transactions may increase portfolio turnover.
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),
(continued)
- ------
16
Notes to Financial Statements
DECEMBER 31, 2006
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The book-basis 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.
As of December 31, 2006, the fund has accumulated net realized capital loss
carryovers for federal income tax purposes of $4,120,184, which may be used to
offset future taxable gains. Capital loss carryovers of $721,603 and $3,398,581
expire in 2013 and 2014, respectively.
The fund has elected to treat $131,153 of net capital losses incurred in the
two-month period ended December 31, 2006, 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 each class of the
fund for the year ended December 31, 2006 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 year ended December 31, 2006, 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,
(continued)
- ------
17
Notes to Financial Statements
DECEMBER 31, 2006
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
ACIM, the distributor of the corporation, ACIS, and the corporation's transfer
agent, American Century Services, LLC.
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 JPMorgan Chase
& Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the year ended
December 31, 2006, were as follows:
- --------------------------------------------------------------------------------
U.S. TREASURY NON-U.S. TREASURY
AND AGENCY AND AGENCY
OBLIGATIONS OBLIGATIONS
- --------------------------------------------------------------------------------
Purchases $469,170,957 $9,197,938
- --------------------------------------------------------------------------------
Proceeds from sales $424,375,727 $3,925,958
- --------------------------------------------------------------------------------
As of December 31, 2006, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $539,826,532
================================================================================
Gross tax appreciation of investments $ 110,629
- ----------------------------------------------------------------
Gross tax depreciation of investments (9,474,775)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $(9,364,146)
================================================================================
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.
(continued)
- ------
18
Notes to Financial Statements
DECEMBER 31, 2006
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2006
SHARES AUTHORIZED 250,000,000
================================================================================
Sold 1,264,516 $12,833,670
- ----------------------------------------------------
Issued in reinvestment of distributions 120,190 1,216,198
- ----------------------------------------------------
Redeemed (338,808) (3,426,598)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,045,898 $10,623,270
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,925,153 $20,070,921
- ----------------------------------------------------
Issued in reinvestment of distributions 97,442 1,011,357
- ----------------------------------------------------
Redeemed (265,627) (2,751,334)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,756,968 $18,330,944
================================================================================
CLASS II
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2006
SHARES AUTHORIZED 250,000,000
================================================================================
Sold 13,857,984 $140,732,274
- ----------------------------------------------------
Issued in reinvestment of distributions 1,571,323 15,885,793
- ----------------------------------------------------
Redeemed (8,234,158) (83,468,584)
- --------------------------------------------------------------------------------
Net increase (decrease) 7,195,149 $73,149,483
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 23,907,694 $249,635,578
- ----------------------------------------------------
Issued in reinvestment of distributions 1,412,486 14,668,811
- ----------------------------------------------------
Redeemed (3,492,276) (36,243,152)
- --------------------------------------------------------------------------------
Net increase (decrease) 21,827,904 $228,061,237
================================================================================
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 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 0.40%. The fund did not borrow from the line during the year ended
December 31, 2006.
(continued)
- ------
19
Notes to Financial Statements
DECEMBER 31, 2006
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 establishes a minimum
threshold for financial statement recognition of the benefit of positions taken
in filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. FIN 48 is
effective for fiscal years beginning after December 15, 2006, and is to be
applied to all open tax years as of the date of effectiveness. The FASB issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
(FAS 157), in September 2006, which is effective for fiscal years beginning
after November 15, 2007. FAS 157 defines fair value, establishes a framework for
measuring fair value and expands the required financial statement disclosures
about fair value measurements. Management is currently evaluating the impact of
adopting FIN 48 and FAS 157.
- ------
20
VP Inflation Protection - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
2006 2005 2004(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.26 $10.55 $10.07
- --------------------------------------------------------------------------------
Income From Investment Operations
- -------------------------------------
Net Investment Income 0.34(2) 0.47 0.24
- -------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.15) (0.28) 0.48
- --------------------------------------------------------------------------------
Total From Investment Operations 0.19 0.19 0.72
- --------------------------------------------------------------------------------
Distributions
- -------------------------------------
From Net Investment Income (0.36) (0.47) (0.24)
- -------------------------------------
From Net Realized Gains -- (0.01) --
- --------------------------------------------------------------------------------
Total Distributions (0.36) (0.48) (0.24)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.09 $10.26 $10.55
================================================================================
TOTAL RETURN(3) 1.90% 1.81% 7.37%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.50% 0.50% 0.49%(4)
- -------------------------------------
Ratio of Net Investment
Income to Average Net Assets 3.37% 4.85% 3.52%(4)
- -------------------------------------
Portfolio Turnover Rate 96% 82% 108%(5)
- -------------------------------------
Net Assets, End of
Period (in thousands) $39,096 $29,040 $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.
- ------
21
VP Inflation Protection - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.26 $10.55 $10.31 $10.00 $10.00
- --------------------------------------------------------------------------------
Income From
Investment Operations
- ------------------------
Net Investment Income 0.32(2) 0.45 0.35 0.24 --(3)
- ------------------------
Net Realized and
Unrealized Gain (Loss) (0.16) (0.28) 0.25 0.31 --(3)
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.16 0.17 0.60 0.55 --(3)
- --------------------------------------------------------------------------------
Distributions
- ------------------------
From Net
Investment Income (0.34) (0.45) (0.35) (0.24) --(3)
- ------------------------
From Net
Realized Gains -- (0.01) (0.01) --(3) --
- --------------------------------------------------------------------------------
Total Distributions (0.34) (0.46) (0.36) (0.24) --(3)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.08 $10.26 $10.55 $10.31 $10.00
================================================================================
TOTAL RETURN(4) 1.59% 1.56% 5.81% 5.61% 0.00%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to
Average Net Assets 0.75% 0.75% 0.74% 0.74%(5) 0.50%(5)(6)
- ------------------------
Ratio of Net Investment
Income to
Average Net Assets 3.12% 4.60% 3.40% 2.00%(5) 0.25%(5)(6)
- ------------------------
Portfolio Turnover Rate 96% 82% 108% 198% 0%
- ------------------------
Net Assets, End of
Period (in thousands) $483,692 $418,424 $199,885 $33,829 $3,000
- --------------------------------------------------------------------------------
(1) For the one day ended December 31, 2002 (fund 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 its 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 annualized ratios of 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.
- ------
22
Report of Independent Registered Public Accounting Firm
To the Directors of the American Century Variable Portfolios II, Inc.
and 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, 2006, 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
financial 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 audit. We conducted our audit
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 audit, which included confirmation
of securities at December 31, 2006 by correspondence with the custodian and
brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 12, 2007
- ------
23
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. 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, direct or indirect, 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,
LLC (ACS).
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, direct or indirect,
subsidiaries, including ACIM, ACIS, and ACS. 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 14 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of 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
- --------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 2005
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: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Director, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, Stanford Law School (1979 to present); Marc and Eva Stern
Professor of Law and Business, Columbia University School of Law (1992 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
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
FIRST YEAR OF SERVICE: 2001
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, LLC (1996
to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
(continued)
- ------
24
Management
INDEPENDENT DIRECTORS (CONTINUED)
- --------------------------------------------------------------------------------
PETER F. PERVERE, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUND: Advisory Board Member
FIRST YEAR OF SERVICE: 2006
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, formerly Vice President
and Chief Financial Officer, Commerce One, Inc. (software and services provider
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Intraware, Inc.
- --------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 1980
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: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Dimensional Fund Advisors
(investment advisor, 1982 to present); Director, Chicago Mercantile Exchange
(2000 to present)
- --------------------------------------------------------------------------------
JOHN B. SHOVEN, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUND: Director
FIRST YEAR OF SERVICE: 2002
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford
University (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
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
FIRST YEAR OF SERVICE: 1984
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
Windy Hill Productions, LP (educational software)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Quintus Corporation (automation
solutions, 1995 to present)
- --------------------------------------------------------------------------------
INTERESTED DIRECTOR
- --------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Director, President
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chairman, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; Chief Executive
Officer, ACIM, ACGIM, ACIS and other ACC subsidiaries (October 2000 to October
2006); President, ACIM, ACGIM and other ACC subsidiaries (September 2002 to
September 2006); Executive Vice President, ACS (January 2005 to September 2006);
Director, ACC, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 43
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- --------------------------------------------------------------------------------
(continued)
- ------
25
Management
OFFICERS
- --------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Chief Administrative Officer, ACC (February 2006 to
present). Also serves as: President and Chief Executive Officer, ACS; Chief
Financial Officer and Chief Accounting Officer, ACIM, ACGIM, ACS, ACIS and other
ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November
2005)
- --------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Chief Compliance Officer and Senior Vice President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM,
ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995
to August 2006); Treasurer and Chief Financial Officer, various American Century
funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS
- --------------------------------------------------------------------------------
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
FIRST YEAR OF SERVICE: 1998
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial
Officer
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller, various American Century funds (1997 to September 2006
- --------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUND: Controller
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present)
- --------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President, ACC (August
2006 to present); Vice President, ACC and certain ACC subsidiaries (October 2001
to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006).
Also serves as: Senior Vice President, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
The SAI has additional information about the fund's directors and is available
without charge, upon request, by calling 1-800-378-9878.
- ------
26
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.
- ------
27
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)(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.
The LEHMAN BROTHERS U.S. AGENCY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of U.S.
government agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. CORPORATE INDEX is composed of those securities
included in the Lehman Brothers U.S. Aggregate Index that are U.S.
dollar-denominated, investment-grade, fixed-rate, taxable securities sold by
industrial, utility and financial issuers.
The LEHMAN BROTHERS U.S. FIXED-RATE MORTGAGE-BACKED SECURITIES (MBS) INDEX is
the MBS Fixed-Rate component of the Lehman Brothers U.S. Aggregate Index. It
covers the mortgage-backed pass-through securities of the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA),
and the Federal Home Loan Mortgage Corporation (FHLMC).
The LEHMAN BROTHERS U.S. TIPS (TREASURY INFLATION PROTECTED SECURITIES) INDEX
measures the performance of coupon-bearing fixed-income securities that adjust
for inflation, as measured by the Consumer Price Index for All Urban Consumers.
(continued)
- ------
28
Additional Information
The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of the
U.S. Treasury with a remaining maturity of one year or more.
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 website at americancentury.com and on the Securities and Exchange
Commission's website 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 website 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 website at ipro.americancentury.com (for Investment Professionals) and, upon
request, by calling 1-800-378-9878.
- ------
29
Notes
- ------
30
Notes
- ------
31
Notes
- ------
32
[inside back cover blank]
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 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
(c)2007 American Century Proprietary Holdings, Inc. All rights reserved.
0702
SH-ANN-52866
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 12 (a)(1) to American Century Asset Allocation Portfolios, Inc.'s
Annual Certified Shareholder Report on Form N-CSR, File No. 811-21591, on
September 29, 2005, 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) Jeanne D. Wohlers and Ronald J. Gilson are the registrant's designated
audit committee financial experts. They are "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 2005: $18,110
FY 2006: $18,845
(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 2005: $0
FY 2006: $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 2005: $0
FY 2006: $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 2005: $3,003
FY 2006: $3,003
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 2005: $0
FY 2006: $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 2005: $0
FY 2006: $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 2005: $0
FY 2006: $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 2005: $103,003
FY 2006: $256,583
(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.
During the reporting period, there were no material changes to the 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 12(a)(1) to American Century Asset Allocation Portfolios,
Inc.'s Certified Shareholder Report on Form N-CSR, File No. 811-21591,
on September 29, 2005.
(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.
/s/ William M. Lyons
By: ----------------------------------------
Name: William M. Lyons
Title: President
Date: February 16, 2007
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.
/s/ William M. Lyons
By: ----------------------------------------
Name: William M. Lyons
Title: President
(principal executive officer)
Date: February 16, 2007
/s/ Robert J. Leach
By: ----------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: February 16, 2007
