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: 12-31-2007
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
AMERICAN CENTURY VARIABLE PORTFOLIOS II
Annual Report December 31, 2007
[photo of winter]
VP Inflation Protection Fund
[american century investments logo and text logo (R)]
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 . . . . . . . . . . . . . . . . . . . . . 8
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. . . . . . . . . . . . . . . . . . . . . . . 20
Report of Independent Registered Public Accounting Firm . . . . . 22
OTHER INFORMATION
Proxy Voting Results. . . . . . . . . . . . . . . . . . . . . . . 23
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Share Class Information . . . . . . . . . . . . . . . . . . . . . 27
Additional Information. . . . . . . . . . . . . . . . . . . . . . 28
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . 29
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
SOLID 2007 TREASURY RETURNS AFTER STRONG SECOND HALF
After producing modest results during the first six months of the year, the U.S.
Treasury market rallied strongly in the second half of 2007. The "Summer of
Subprime" and its financial sector fallout caused concerns about future economic
growth and fueled a flight to quality that made 2007 the best year for
high-quality U.S. government bonds since 2002.
The bond rally began after the 10-year Treasury yield hit a five-year closing
high of 5.30% on June 12. Economic and market conditions at the time seemed to
preclude any Federal Reserve (Fed) interest rate cuts through year end.
Inflation seemed like a bigger threat to the Fed than recession, based on wage
pressures, factory capacity utilization rates, demand for commodities, excess
global liquidity, and a weakening dollar. But in July, credit concerns captured
the markets, demand for high-quality bonds increased, and the 10-year Treasury
yield began a five-month plunge as the economic outlook deteriorated, taking the
yield all the way down to 3.84% in late November.
Meanwhile, Fed interest rate policy changed dramatically in late summer, leading
to three interest rate target cuts in the final four months of the year. The
Fed's short-term interest rate benchmark fell from 5.25% in August to 4.25% in
December, with more cuts on the way.
TIPS WERE TOPS
Treasuries, including Treasury inflation-protected securities (TIPS), finished
2007 as the top major U.S. bond sector on a total return basis. As is typical
during Treasury market rallies, longer-duration/maturity securities (including
most TIPS) generally outperformed their shorter-duration/maturity counterparts.
TIPS outpaced the broader Treasury sector for the year, as inflation and
duration played a role in returns. Overall (headline) inflation, as measured by
the consumer price index (CPI), jumped to 4.1% in 2007 from 2.5% in 2006,
fueling demand for TIPS and triggering favorable inflation adjustments that
enhanced returns.
U.S. Fixed-Income Total Returns For the 12 months ended December 31, 2007
CITIGROUP BOND MARKET INDICES
Citigroup US Broad Investment-Grade Bond Index 7.22%
Citigroup US Inflation-Linked Securities Index 11.61%
TREASURY BELLWETHERS
3-Month Treasury Bill 5.11%
10-Year Treasury Note 9.72%
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2
PERFORMANCE
VP Inflation Protection
Total Returns as of December 31, 2007
Average Annual
Returns
Since Inception
1 year 5 years Inception Date
CLASS II 9.49% 4.77% 4.77% 12/31/02
CITIGROUP US INFLATION-LINKED
SECURITIES INDEX(1)(2) 11.61% 6.23% 6.23% --
BLENDED INDEX(3) 9.61% 5.14% 5.14% --
Class I 9.66% -- 5.63% 5/7/04
(1) The Citigroup US 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.
(2) In June of 2007, the fund's benchmark changed from the Blended index to the
Citigroup US Inflation-Linked Securities Index. The fund's investment advisor
believes this index better represents the fund's portfolio composition.
(3) See Index Definitions page.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488. As interest rates
rise, bond values will decline.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
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3
VP Inflation Protection
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
2003 2004 2005 2006 2007
Class II 5.61%* 5.81% 1.56% 1.59% 9.49%
Citigroup US Inflation-Linked Securities
Index 8.26% 8.40% 2.86% 0.40% 11.61%
Blended index 5.75% 5.78% 2.51% 2.25% 9.61%
*Returns would have been lower, along with ending value, if distribution fees
had not been waived from 12/31/02 to 3/31/03.
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
PORTFOLIO COMMENTARY
VP Inflation Protection
Lead Portfolio Managers: Brian Howell, Jim Platz, Seth Plunkett,
and Bob Gahagan
Macro Strategy Team Representatives: Brian Howell and Bob Gahagan
PERFORMANCE SUMMARY
VP Inflation Protection returned 9.66%* for the year ended December 31, 2007,
its best annual return since inception. The portfolio's new benchmark, the
Citigroup US Inflation-Linked Securities Index, returned 11.61%. The old
benchmark -- a blended index (composition shown on page 29) -- returned 9.61%.
We changed the benchmark in June 2007, believing the new benchmark more closely
fit the portfolio's investment objective.
The portfolio's absolute return reflected the strong performance of
inflation-indexed securities in a solid year for high-quality U.S. bonds (see
the Market Perspective on page 2). After Treasury inflation-protected securities
(TIPS) posted positive performance in a difficult environment for bonds in the
first half of the year, they flourished in the flight-to-quality environment of
the year's second half, benefiting from their high credit quality and relatively
long duration. In addition, with energy and commodity prices on the upswing,
inflation threats throughout the reporting period increased the attractiveness
of TIPS.
Relative to the new benchmark, our yield curve positioning and favorable foreign
currency trades helped performance, while non-Treasury holdings detracted. It's
also worth noting that the fund's returns are reduced by operating expenses,
while the indices' are not.
MANAGEMENT CHANGE
In September 2007, we announced changes in our liquid markets team, which is
responsible for security selection within the U.S. Treasury, agency, and
derivatives markets in which VP Inflation Protection invests. In the past, some
team members had primary responsibility for one or more of the group's
portfolios. Going forward, the entire team will be involved in collective
decision-making across all of these
Asset Allocation
% of % of
net assets net assets
as of as of
12/31/07 6/30/07
U.S. Treasury Securities & Equivalents 54.9% 55.4%
U.S. Government Agency Securities 15.8% 7.1%
Collateralized Mortgage Obligations 12.7% 17.5%
Corporate Bonds 10.1% 9.9%
Zero-Coupon U.S. Treasury Securities & Equivalents 1.8% 1.9%
U.S. Government Agency Mortgage-Backed Securities 1.7% 4.1%
Zero-Coupon U.S. Government Agency Securities 1.4% 1.8%
Sovereign Governments & Agencies 0.9% --
Asset-Backed Securities --(1) 0.3%
Cash and Equivalents(2) 0.7% 2.0%
(1) Category is less than 0.05% of total net assets.
(2) Includes Commercial Paper and other assets and liabilities.
*All fund returns referenced in this commentary are for Class I shares.
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5
VP Inflation Protection
portfolios. As part of these changes, portfolio manager Jeremy Fletcher left the
company in September. The portfolios he managed were team-managed prior to his
departure and should continue to benefit from the skills and experience of the
present team.
PORTFOLIO POSITIONING
As inflation risks increased during the year, we maximized the portfolio's
exposure to inflation-linked products, which contributed to performance.
However, we retained a slight overweight in non-Treasury inflation-linked
products compared with the new benchmark. That detracted from relative
performance as the Treasury sector outperformed.
In addition, we maintained a yield-curve-steepening bias, which contributed
positively to performance, as the slope of the nominal Treasury yield curve
turned positive and steepened during the year. The yield difference between two-
and 10-year Treasury notes started the year at -11 basis points, indicating an
inverted yield curve, and ended the period at +98 basis points, a more normal,
steeper curve.
OUTLOOK
We believe the prospect of deepening economic weakness and the resulting Federal
Reserve (Fed) rate cuts bode well for high-quality bonds in general in the near
term. This includes TIPS, which should also benefit from lingering concerns
regarding the near-term and future inflation outlook for the U.S. economy.
As the economy weakens, there is a growing risk that the Fed will favor
anti-recessionary insurance over inflation vigilance, thereby igniting
inflationary expectations. In addition, the U.S. economy continues to face
inflationary pressures from the weakening U.S. dollar and soaring energy and
commodity prices. Typically, corporations have absorbed the higher costs
associated with these trends, but, if these factors persist, companies
eventually will have to raise prices. These inflation factors, if sustained,
should prove rewarding for inflation-protected securities.
Portfolio at a Glance
As of As of
12/31/07 6/30/07
30-Day SEC Yield
Class I 3.91% 7.93%*
Class II 3.66% 7.67%*
Weighted Average Maturity 9.5 years 9.3 years
Average Duration (effective) 6.4 years 6.4 years
*The above-average 30-day SEC yields as of June 30, 2007, 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, 2007 to December 31, 2007.
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.
Beginning Ending Expenses Paid
Account Value Account Value During Period* Annualized
7/1/07 12/31/07 7/1/07 - 12/31/07 Expense Ratio*
ACTUAL
Class I $1,000 $1,083.30 $2.63 0.50%
Class II $1,000 $1,082.00 $3.94 0.75%
HYPOTHETICAL
Class I $1,000 $1,022.68 $2.55 0.50%
Class II $1,000 $1,021.42 $3.82 0.75%
*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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7
SCHEDULE OF INVESTMENTS
VP Inflation Protection
DECEMBER 31, 2007
Principal Amount Value
U.S. Treasury Securities & Equivalents -- 54.9%
$1,500,000 AID (Egypt), 4.45%, 9/15/15 $1,494,594
36,797,552 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/15/25(1) 38,643,207
41,262,704 U.S. Treasury Inflation Indexed Bonds, 2.00%,
1/15/26(1) 41,108,009
21,134,196 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/15/27(1) 22,356,027
21,959,070 U.S. Treasury Inflation Indexed Bonds, 3.625%,
4/15/28(1) 27,826,270
14,379,781 U.S. Treasury Inflation Indexed Bonds, 3.875%,
4/15/29 19,030,748
18,520,410 U.S. Treasury Inflation Indexed Bonds, 3.375%,
4/15/32(1) 23,726,386
807,151 U.S. Treasury Inflation Indexed Notes, 4.25%,
1/15/10 861,507
3,721,984 U.S. Treasury Inflation Indexed Notes, 0.875%,
4/15/10 3,710,647
240,078 U.S. Treasury Inflation Indexed Notes, 3.50%,
1/15/11 258,272
3,420,853 U.S. Treasury Inflation Indexed Notes, 2.375%,
4/15/11 3,566,776
5,706,510 U.S. Treasury Inflation Indexed Notes, 3.375%,
1/15/12 6,226,784
2,522,447 U.S. Treasury Inflation Indexed Notes, 2.00%,
4/15/12 2,615,068
1,161,970 U.S. Treasury Inflation Indexed Notes, 3.00%,
7/15/12 1,258,832
4,550,080 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/13 4,690,141
7,914,830 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/15/14 8,177,634
15,627,876 U.S. Treasury Inflation Indexed Notes, 2.00%,
7/15/14 16,151,660
19,913,348 U.S. Treasury Inflation Indexed Notes, 1.625%,
1/15/15(1) 19,998,916
16,863,213 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/15 17,193,901
16,236,664 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/15/16 16,667,958
16,552,160 U.S. Treasury Inflation Indexed Notes, 2.50%,
7/15/16 17,656,504
20,098,206 U.S. Treasury Inflation Indexed Notes, 2.375%,
1/15/17(1) 21,214,601
16,960,105 U.S. Treasury Inflation Indexed Notes, 2.625%,
7/15/17 18,304,990
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TOTAL U.S. TREASURY SECURITIES & EQUIVALENTS
(Cost $314,575,373) 332,739,432
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Principal Amount Value
U.S. Government Agency Securities -- 15.8%
$4,000,000 FAMCA, 4.875%, 1/14/11 (Acquired 8/30/07, Cost
$4,018,400)(2) $4,135,806
3,750,000 FAMCA, 5.50%, 7/15/11 (Acquired 9/6/06, Cost
$3,804,075)(2) 3,974,696
1,000,000 FAMCA, 5.40%, 10/14/11 1,054,300
3,974,000 FAMCA, 6.71%, 7/28/14 4,563,074
5,000,000 FFCB, 4.50%, 10/17/12 5,122,980
2,000,000 FFCB, 4.875%, 12/16/15 2,072,648
5,000,000 FFCB, 4.875%, 1/17/17 5,138,700
4,000,000 FHLB, 4.875%, 11/18/11 4,154,256
5,000,000 FHLB, 5.00%, 3/9/12 5,218,945
15,000,000 FHLB, 5.50%, 8/13/14 16,189,980
4,000,000 FHLB, 4.75%, 12/16/16 4,091,212
1,030,000 FHLB, 4.875%, 5/17/17 1,061,500
5,000,000 FHLMC, 5.50%, 8/20/12 5,335,270
3,000,000 FNMA, 4.875%, 5/18/12 3,120,138
2,655,000 FNMA, 4.75%, 11/19/12 2,750,551
2,000,000 FNMA, 5.375%, 6/12/17 2,128,498
10,070,000 FNMA, VRN, 3.90%, 1/17/08, resets monthly off the
Consumer Price Index Year over Year plus 1.14%
with a cap of 24.00%, Final Maturity 2/17/09 10,012,299
5,000,000 PEFCO, 6.67%, 9/15/09 5,256,910
1,500,000 PEFCO, 5.69%, 5/15/12 1,606,788
2,845,000 PEFCO, 4.97%, 8/15/13 2,986,957
4,000,000 PEFCO, 4.55%, 5/15/15 4,093,004
1,750,000 TVA Inflation Indexed Notes, 4.875%, 12/15/16 1,799,282
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TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $92,752,874) 95,867,794
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Collateralized Mortgage Obligations(3) -- 12.7%
4,958,813 Banc of America Alternative Loan Trust, Series
2007-2, Class 2A4, 5.75%, 6/25/37 4,871,478
6,200,000 Banc of America Commercial Mortgage Inc., Series
2007-4, Class A3 SEQ, 5.81%, 8/10/14 6,354,089
873,016 Banc of America Large Loan, Series 2005 MIB1, Class
A1, VRN, 5.18%, 1/15/08, resets monthly off the 1-month LIBOR
plus 0.15% with no caps, Final Maturity 3/15/22 (Acquired
11/18/05, Cost
$873,016)(2) 856,161
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8
VP Inflation Protection
Principal Amount Value
$2,616,062 Bear Stearns Commercial Mortgage Securities Trust,
Series 2003 T12, Class A2 SEQ, 3.88%, 8/1/39 $2,595,497
108,620 Commercial Mortgage Pass-Through Certificates, Series 2005 FL11,
Class A1, VRN, 5.18%, 1/15/08, resets monthly off the 1-month
LIBOR plus 0.15% with no caps, Final Maturity 11/15/17 (Acquired
11/18/05, Cost $108,620)(2) 108,093
7,000,000 Credit Suisse Mortgage Capital Certificates, Series
2007 TF2A, Class A1, VRN, 5.21%, 1/15/08, resets monthly off the
1-month LIBOR plus 0.18% with no
caps, Final Maturity 4/15/22 6,748,923
1,479,255 FHLMC, Series 2508, Class UL SEQ, 5.00%, 12/15/16 1,486,475
3,000,000 FNMA, Series 2003-92, Class PD, 4.50%, 3/25/17 2,983,458
4,215,000 GMAC Commercial Mortgage Securities, Inc., Series
2005 C1, Class A2 SEQ, 4.47%, 5/10/43 4,173,297
1,108,147 GNMA, Series 2003-46, Class PA, 5.00%, 5/20/29 1,110,802
299,207 GNMA, Series 2003-112, Class MN, 4.00%, 5/16/25 298,168
2,000,000 GNMA, Series 2005-24, Class UB SEQ, 5.00%, 1/20/31 1,992,720
6,000,000 Greenwich Capital Commercial Funding Corp., Series
2005 GG3, Class A2 SEQ, VRN, 4.31%, 1/1/08, Final
Maturity 8/10/42 5,928,378
2,000,000 LB-UBS Commercial Mortgage Trust, Series 2003 C3,
Class A3 SEQ, 3.85%, 5/15/27 1,948,250
1,000,000 LB-UBS Commercial Mortgage Trust, Series 2003 C5,
Class A2 SEQ, 3.48%, 7/15/27 990,912
5,000,000 LB-UBS Commercial Mortgage Trust, Series 2004 C4,
Class A2, VRN, 4.57%, 1/11/08, Final Maturity
6/15/29 4,987,910
3,832,374 LB-UBS Commercial Mortgage Trust, Series 2005 C2,
Class A2 SEQ, 4.82%, 4/15/30 3,823,043
2,590,000 LB-UBS Commercial Mortgage Trust, Series 2005 C3,
Class A3 SEQ, 4.65%, 7/30/30 2,548,348
Principal Amount Value
$6,523,112 Lehman Brothers Floating Rate Commercial Mortgage
Trust, Series 2007 LLFA, Class A1, VRN, 5.33%,
1/15/08, resets monthly off the 1-month LIBOR plus
0.30% with no caps, Final Maturity 6/15/22
(Acquired 8/3/07, Cost $6,523,112)(2) $6,276,813
2,000,000 Merrill Lynch Mortgage Trust STRIPS - COUPON,
Series 2006 C1, Class A2, VRN, 5.80%, 1/1/08, Final
Maturity 5/12/39 2,033,470
5,000,000 Morgan Stanley Capital I, Series 2004 HQ3, Class A2
SEQ, 4.05%, 1/13/41 4,952,160
2,055,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2004 AR4, Class A6, 3.81%,
6/25/34 2,031,028
1,805,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2004 AR7, Class A6, 3.94%,
7/25/34 1,784,782
1,000,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2005 AR4, Class A3, 4.59%,
4/25/35 991,839
5,407,091 Wells Fargo Mortgage Backed Securities Trust,
Series 2007-11, Class A19 SEQ, 6.00%, 8/25/37 5,432,348
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TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $77,484,294) 77,308,442
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Corporate Bonds -- 10.1%
2,000,000 ABN AMRO Bank N.V., VRN, 5.54%, 1/28/08, resets
monthly off the Consumer Price Index Year over Year
plus 2.00% with no caps, Final Maturity 9/27/08 2,007,000
2,000,000 Barclays Bank plc, VRN, 5.29%, 1/15/08, resets monthly
off the Consumer Price Index Year over Year plus
1.75% with no caps, Final Maturity 3/17/08 2,007,420
2,000,000 Barclays Bank plc, VRN, 5.37%, 1/28/08, resets monthly
off the Consumer Price Index Year over Year plus
1.83% with no caps, Final Maturity 7/28/08 2,014,440
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9
VP Inflation Protection
Principal Amount Value
$187,000 Hartford Life Insurance Co., VRN, 5.74%, 1/15/08,
resets monthly off the Consumer Price Index Year
Over Year plus 2.20% with no caps, Final Maturity
10/15/08 $ 185,485
706,000 HSBC Finance Corp., VRN, 4.62%, 1/10/08, resets
monthly off the Consumer Price Index Year over Year
plus 1.08% with no caps, Final Maturity 9/10/09 688,738
3,000,000 HSBC Finance Corp., VRN, 4.65%, 1/10/08, resets
monthly off the Consumer Price Index Year over Year
plus 1.11% with no caps, Final Maturity 2/10/10 2,897,971
1,067,000 HSBC Finance Corp., VRN, 4.73%, 1/10/08, resets
monthly off the Consumer Price Index Year over Year
plus 1.19% with no caps, Final Maturity 2/10/09 1,051,432
9,500,000 International Bank for Reconstruction &
Development, 7.625%, 1/19/23 12,513,238
40,000 John Hancock Life Insurance Co., VRN, 4.67%,
1/15/08, resets monthly off the Consumer Price
Index Year over Year plus 1.13% with no caps, Final
Maturity 6/15/10 39,106
179,000 John Hancock Life Insurance Co., VRN, 5.16%,
1/15/08, resets monthly off the Consumer Price
Index Year over Year plus 1.62% with no caps, Final
Maturity 11/15/10 176,195
2,139,000 Lehman Brothers Holdings Inc., VRN, 4.83%, 1/10/08,
resets monthly off the Consumer Price Index Year
over Year plus 2.07% with no caps, Final Maturity
11/10/15 1,829,016
4,160,000 Lehman Brothers Holdings Inc., VRN, 4.22%, 1/23/08,
resets monthly off the Consumer Price Index Year
over Year plus 1.46% with no caps, Final Maturity
3/23/12 3,803,155
4,760,000 Merrill Lynch & Co., Inc., VRN, 3.92%, 1/2/08,
resets monthly off the Consumer Price Index plus
1.16% with no caps, Final Maturity 3/2/09 4,606,728
Principal Amount Value
$4,359,000 Morgan Stanley, VRN, 4.86%, 1/2/08, resets monthly off
the Consumer Price Index Year over Year plus 2.10%
with no caps, Final Maturity 12/1/17 $3,941,233
2,125,000 Principal Life Income Fundings Trusts, VRN, 3.81%,
1/1/08, resets monthly off the Consumer Price Index
Year over Year plus 1.05% with no caps, Final
Maturity 4/1/08 2,126,467
303,000 Prudential Financial, Inc., VRN, 4.76%, 1/2/08,
resets monthly off the Consumer Price Index Year
over Year plus 2.00% with no caps, Final Maturity
11/2/20 257,241
10,939,600 SLM Corporation, 1.32%, 1/25/10 10,262,658
490,000 SLM Corporation, VRN, 4.91%, 1/2/08, resets monthly
off the Consumer Price Index Year over Year plus
2.15% with no caps, Final Maturity 2/1/14 386,894
1,500,000 SLM Corporation, VRN, 4.96%, 1/15/08, resets monthly
off the Consumer Price Index Year over Year plus
2.20% with no caps, Final Maturity 6/15/09 1,431,450
8,824,560 Toyota Motor Credit Corp. Inflation Indexed Bonds,
1.22%, 10/1/09 8,835,717
------------
TOTAL CORPORATE BONDS
(Cost $62,123,906) 61,061,584
------------
Zero-Coupon U.S. Treasury Securities & Equivalents(4) -- 1.8%
5,000,000 AID (Israel), 4.70%, 5/1/15 3,687,164
45,000 Federal Judiciary, 5.34%, 2/15/08 44,822
242,000 Federal Judiciary, 4.41%, 8/15/11 213,723
56,000 Federal Judiciary, 4.88%, 8/15/12 47,443
4,351,000 Federal Judiciary, 4.85%, 8/15/13 3,521,072
91,000 Federal Judiciary, 5.43%, 2/15/23 43,787
353,000 REFCORP STRIPS - COUPON, 3.61%, 10/15/08 344,414
2,000,000 REFCORP STRIPS - COUPON, 4.51%, 1/15/14 1,596,838
- ------
10
VP Inflation Protection
Principal Amount Value
$ 232,000 REFCORP STRIPS - COUPON, 4.84%, 4/15/16 $ 163,914
142,000 REFCORP STRIPS - COUPON, 4.87%, 7/15/17 93,631
442,000 REFCORP STRIPS - COUPON, 4.91%, 1/15/18 282,933
475,000 REFCORP STRIPS - COUPON, 4.94%, 4/15/19 283,744
500,000 TVA STRIPS - COUPON, 5.28%, 4/15/08 495,104
110,000 TVA STRIPS - COUPON, 4.95%, 10/15/08 107,075
100,000 TVA STRIPS - COUPON, 4.77%, 4/15/12 85,974
132,000 TVA STRIPS - COUPON, 5.28%, 10/15/09 124,362
------------
TOTAL ZERO-COUPON U.S. TREASURY SECURITIES & EQUIVALENTS
(Cost $10,678,552) 11,136,000
------------
U.S. Government Agency Mortgage- Backed Securities(3) -- 1.7%
714,812 FHLMC, 4.50%, 5/1/19 702,813
3,975,834 FHLMC, 5.00%, 4/1/21 3,980,354
368,561 FHLMC, 5.50%, 12/1/33 368,513
1,019,017 FNMA, 5.00%, 9/1/20 1,020,177
127,698 GNMA, 6.00%, 6/20/17 130,682
129,833 GNMA, 6.00%, 7/20/17 132,867
851,284 GNMA, 6.00%, 5/15/24 874,938
2,876,541 GNMA, 5.50%, 9/20/34 2,884,032
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $10,011,965) 10,094,376
------------
Zero-Coupon U.S. Government Agency Securities(4) -- 1.4%
125,000 FICO STRIPS - COUPON, 4.40%, 11/30/08 121,127
113,000 FICO STRIPS - COUPON, 5.27%, 2/3/10 105,461
101,000 FICO STRIPS - COUPON, 5.27%, 5/2/10 93,281
Principal Amount Value
$485,000 FICO STRIPS - COUPON, 4.58%, 11/30/10 $438,742
3,038,000 FICO STRIPS - COUPON, 5.10%, 4/6/11 2,718,810
1,763,000 FICO STRIPS - COUPON, 4.83%, 3/26/12 1,514,984
2,000,000 FICO STRIPS -- COUPON, 4.39%, 10/6/12 1,675,554
900,000 Government Trust Certificates, 2.87%, 5/15/08 888,719
1,000,000 Government Trust Certificates, 3.06%, 11/15/08 970,522
------------
TOTAL ZERO-COUPON U.S. GOVERNMENT AGENCY SECURITIES
(Cost $8,245,503) 8,527,200
------------
Sovereign Governments & Agencies -- 0.9%
5,000,000 KfW, 4.75%, 5/15/12 5,161,310
(Cost $4,884,371)
------------
Asset-Backed Securities(3)(5)
156,813 Atlantic City Electric Transition Funding LLC,
Series 2003-1, Class A1 SEQ, 2.89%, 7/20/11 154,839
(Cost $156,817)
------------
Commercial Paper(5)(6)
143,000 Rabobank USA Financial Corp., 3.48%, 1/2/08 142,956
(Cost $142,986)
------------
TOTAL INVESTMENT SECURITIES -- 99.3%
(Cost $581,056,641) 602,193,933
------------
OTHER ASSETS AND LIABILITIES -- 0.7% 4,149,189
------------
TOTAL NET ASSETS -- 100.0% $606,343,122
============
- ------
11
VP Inflation Protection
Swap Agreements
Notional Expiration Unrealized
Amount Description of Agreement Date Gain (Loss)
CREDIT DEFAULT
$4,750,000 Pay quarterly a fixed rate equal to June 2010 $ 96,071
0.20% multiplied by the notional
amount and receive from Merrill Lynch
International upon each default event
of HSBC Finance Corp., par value of
the proportional notional amount.
TOTAL RETURN
44,000,000 Pay a fixed rate equal to 2.4875% and July 2010 (39,830)
receive the return of the U.S. CPI Urban Consumers NSA Index
upon the termination date with Barclays Bank plc.
20,000,000 Pay a fixed rate equal to 1.13% and January 2012 437,850
receive the return of the U.S. CPI Urban Consumers NSA Index
upon the termination date with Barclays Bank plc.
35,000,000 Pay a fixed rate equal to 1.14% and March 2012 297,224
receive the return of the U.S. CPI Urban Consumers NSA Index
upon the termination date with Barclays Bank plc.
20,000,000 Pay a fixed rate equal to 1.21% and June 2014 (224,390)
receive the return of the U.S. CPI Urban Consumers NSA Index
upon the termination date with Barclays Bank plc.
20,000,000 Pay a fixed rate equal to 1.31% and April 2017 179,381
receive the return of the U.S. CPI Urban Consumers NSA Index
upon the termination date with Barclays Bank plc.
30,100,000 Pay a fixed rate equal to 2.895% and December 4,647
receive the return of the U.S. CPI 2027
Urban Consumers NSA Index upon the termination date with
Barclays Bank plc.
----------
$750,953
==========
Notes to Schedule of Investments
AID = Agency for International Development
CPI = Consumer Price Index
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
GMAC = General Motors Acceptance Corporation
GNMA = Government National Mortgage Association
LB-UBS = Lehman Brothers Inc. -- UBS AG
LIBOR = London Interbank Offered Rate
NSA = Not Seasonally Adjusted
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, 2007.
(1) Security, or a portion thereof, has been segregated for swap agreements.
(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, 2007 was $15,351,569,
which represented 2.5% of total net assets.
(3) Final maturity indicated, unless otherwise noted.
(4) The rate indicated is the yield to maturity at purchase. These securities
are issued at a substantial discount from their value at maturity.
(5) Category is less than 0.05% of total net assets.
(6) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
12
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2007
ASSETS
Investment securities, at value (cost of $581,056,641) $602,193,933
Receivable for investments sold 2,992,136
Unrealized appreciation on swap agreements 1,015,173
Interest receivable 5,090,568
------------
611,291,810
------------
LIABILITIES
Disbursements in excess of demand deposit cash 1,553,383
Payable for investments purchased 2,766,596
Unrealized depreciation on swap agreements 264,220
Accrued management fees 248,264
Distribution fees payable 116,225
------------
4,948,688
------------
NET ASSETS $606,343,122
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) $594,040,091
Accumulated net realized loss on investment transactions (9,585,531)
Net unrealized appreciation on investments 21,888,562
------------
$606,343,122
============
CLASS I, $0.01 PAR VALUE
Net assets $55,277,233
Shares outstanding 5,239,457
Net asset value per share $10.55
CLASS II, $0.01 PAR VALUE
Net assets $551,065,889
Shares outstanding 52,254,623
Net asset value per share $10.55
See Notes to Financial Statements.
- ------
13
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007
INVESTMENT INCOME (LOSS)
INCOME:
Interest $28,878,057
-------------
EXPENSES:
Management fees 2,667,242
Distribution fees -- Class II 1,260,454
Directors' fees and expenses 64,763
Other expenses 793
-------------
3,993,252
-------------
NET INVESTMENT INCOME (LOSS) 24,884,805
-------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investment transactions (4,594,610)
Change in net unrealized appreciation
(depreciation) on investments 30,596,697
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 26,002,087
-------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $50,886,892
=============
See Notes to Financial Statements.
- ------
14
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Increase (Decrease) in Net Assets 2007 2006
OPERATIONS
Net investment income (loss) $24,884,805 $15,803,250
Net realized gain (loss) (4,594,610) (3,685,042)
Change in net unrealized appreciation (depreciation) 30,596,697 (3,464,415)
------------ ------------
Net increase (decrease) in net assets resulting
from operations 50,886,892 8,653,793
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Class I (2,146,223) (1,216,198)
Class II (22,744,318) (15,885,793)
------------ ------------
Decrease in net assets from distributions (24,890,541) (17,101,991)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets from capital
share transactions 57,558,294 83,772,753
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 83,554,645 75,324,555
NET ASSETS
Beginning of period 522,788,477 447,463,922
------------ ------------
End of period $606,343,122 $522,788,477
============ ============
See Notes to Financial Statements.
- ------
15
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
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. The fund normally invests over 50% of its
assets in inflation-adjusted 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 and
shareholder servicing expenses and arrangements. All shares of the fund
represent an equal pro rata interest in the net 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 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 as determined by, or in
accordance with procedures adopted by, the Board of Directors or its designee if
such determination would materially impact a fund's net asset value. Certain
other circumstances may cause the fund to use alternative procedures to 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 -- For financial reporting purposes, 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.
- ------
16
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
SWAP AGREEMENTS -- The fund may enter into swap agreements in order to attempt
to obtain or preserve a particular return or spread at a lower cost than
obtaining a return or spread through purchases and/or sales of instruments in
other markets; protect against currency fluctuations; attempt to manage duration
to protect against any increase in the price of securities the fund anticipates
purchasing at a later date; or gain exposure to certain markets in the most
economical way possible. A basic swap agreement is a contract in which two
parties agree to exchange the returns earned or realized on predetermined
investments or instruments. Credit default swaps enable an investor to buy/sell
protection against a credit event of a specific issuer. The seller of credit
protection against a security or basket of securities receives an up-front or
periodic payment to compensate against potential default events. The fund may
enhance returns by selling protection or attempt to mitigate credit risk by
buying protection. The fund will segregate cash, cash equivalents or other
appropriate liquid securities on its records in amounts sufficient to meet
requirements. Unrealized gains are reported as an asset and unrealized losses
are reported as a liability on the Statement of Assets and Liabilities. Swap
agreements are valued daily and changes in value, including the periodic amounts
of interest to be paid or received on swaps, are recorded as unrealized
appreciation (depreciation) on investments. Realized gain or loss is recorded
upon receipt or payment of a periodic settlement or termination of swap
agreements. The risks of entering into swap agreements include the possible lack
of liquidity, failure of the counterparty to meet its obligations, and that
there may be unfavorable changes in the underlying investments and instruments.
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. The fund is no longer subject to examination by tax authorities
for years prior to 2004. At this time, management has not identified any
uncertain tax positions that would materially impact the financial statements.
Accordingly, no provision has been made for federal or state income taxes.
Interest and penalties associated with any federal or state income tax
obligations, if any, are recorded as interest expense.
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 paydown losses, interest on swap agreements, 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, 2007, the fund has accumulated net realized capital loss
carryovers for federal income tax purposes of $(8,009,558), which may be used to
offset future taxable gains. Capital loss carryovers of $(721,603), $(3,476,419)
and $(3,811,536) expire in 2013, 2014 and 2015, respectively.
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.
- ------
17
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 fund 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, 2007 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, 2007, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
Prior to December 12, 2007, the fund had 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
Purchases of investment securities, excluding short-term investments, for the
year ended December 31, 2007, totaled $566,657,300, of which $485,021,174
represented U.S. Treasury and Agency obligations.
Sales of investment securities, excluding short-term investments, for the year
ended December 31, 2007, totaled $523,402,427, of which $480,234,500 represented
U.S. Treasury and Agency obligations.
As of December 31, 2007, 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 $582,632,999
=============
Gross tax appreciation of investments $22,327,240
Gross tax depreciation of investments (2,766,306)
-------------
Net tax appreciation (depreciation) of investments $19,560,934
=============
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.
- ------
18
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
Year ended Year ended
December 31, 2007 December 31, 2006
Shares Amount Shares Amount
CLASS I/SHARES
AUTHORIZED 250,000,000 250,000,000
============ ===========
Sold 2,080,742 $21,237,789 1,264,516 $12,833,670
Issued in
reinvestment of
distributions 211,089 2,146,223 120,190 1,216,198
Redeemed (928,167) (9,494,128) (338,808) (3,426,598)
------------ ------------- ----------- ------------
1,363,664 13,889,884 1,045,898 10,623,270
------------ ------------- ----------- ------------
CLASS II/SHARES
AUTHORIZED 250,000,000 250,000,000
============ ===========
Sold 12,261,922 124,922,667 13,857,984 140,732,274
Issued in
reinvestment of
distributions 2,241,654 22,744,318 1,571,323 15,885,793
Redeemed (10,219,134) (103,998,575) (8,234,158) (83,468,584)
------------ ------------- ----------- ------------
4,284,442 43,668,410 7,195,149 73,149,483
------------ ------------- ----------- ------------
Net increase
(decrease) 5,648,106 $57,558,294 8,241,047 $83,772,753
============ ============= =========== ============
5. BANK LINE OF CREDIT
Effective December 12, 2007, the fund, along with certain other funds managed by
ACIM or ACGIM, has a $500,000,000 unsecured bank line of credit agreement with
Bank of America, N.A. Prior to December 12, 2007, the fund, along with certain
other funds managed by ACIM or ACGIM, had 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, which is subject to annual renewal, bear interest at the Federal
Funds rate plus 0.40%. The fund did not borrow from the line during the year
ended December 31, 2007.
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. Management has
concluded that the adoption of FIN 48 will not materially impact the financial
statements.
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 that adopting FAS 157 will have on the financial statement
disclosures.
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19
FINANCIAL HIGHLIGHTS
VP Inflation Protection
Class I
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
2007 2006 2005 2004(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period $10.09 $10.26 $10.55 $10.07
------- ------- ------- --------
Income From Investment Operations
Net Investment Income (Loss) 0.49 0.34(2) 0.47 0.24
Net Realized and Unrealized
Gain (Loss) 0.46 (0.15) (0.28) 0.48
------- ------- ------- --------
Total From Investment Operations 0.95 0.19 0.19 0.72
------- ------- ------- --------
Distributions
From Net Investment Income (0.49) (0.36) (0.47) (0.24)
From Net Realized Gains -- -- (0.01) --
------- ------- ------- --------
Total Distributions (0.49) (0.36) (0.48) (0.24)
------- ------- ------- --------
Net Asset Value, End of Period $10.55 $10.09 $10.26 $10.55
======= ======= ======= ========
TOTAL RETURN(3) 9.66% 1.90% 1.81% 7.37%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average
Net Assets 0.50% 0.50% 0.50% 0.49%(4)
Ratio of Net Investment Income (Loss) to
Average Net Assets 4.75% 3.37% 4.85% 3.52%(4)
Portfolio Turnover Rate 109% 96% 82% 108%(5)
Net Assets, End of Period
(in thousands) $55,277 $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.
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20
VP Inflation Protection
Class II
For a Share Outstanding Throughout the Years Ended December 31
2007 2006 2005 2004 2003
PER-SHARE DATA
Net Asset Value, Beginning
of Period $10.08 $10.26 $10.55 $10.31 $10.00
------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss) 0.46 0.32(1) 0.45 0.35 0.24
Net Realized and
Unrealized Gain (Loss) 0.47 (0.16) (0.28) 0.25 0.31
------- -------- -------- -------- --------
Total From
Investment Operations 0.93 0.16 0.17 0.60 0.55
------- -------- -------- -------- --------
Distributions
From Net
Investment Income (0.46) (0.34) (0.45) (0.35) (0.24)
From Net Realized Gains -- -- (0.01) (0.01) --(2)
------- -------- -------- -------- --------
Total Distributions (0.46) (0.34) (0.46) (0.36) (0.24)
------- -------- -------- -------- --------
Net Asset Value,
End of Period $10.55 $10.08 $10.26 $10.55 $10.31
======= ======== ======== ======== ========
TOTAL RETURN(3) 9.49% 1.59% 1.56% 5.81% 5.61%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average
Net Assets 0.75% 0.75% 0.75% 0.74% 0.74%(4)
Ratio of Net Investment
Income (Loss) to Average
Net Assets 4.50% 3.12% 4.60% 3.40% 2.00%(4)
Portfolio Turnover Rate 109% 96% 82% 108% 198%
Net Assets, End of Period
(in thousands) $551,066 $483,692 $418,424 $199,885 $33,829
(1) Computed using average shares outstanding throughout the period.
(2) Per-share amount was less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. 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) ACIM waived its distribution fee from December 31, 2002 through March 31,
2003. Had fees not been waived, the annualized ratio of operating expenses to
average net assets and the annualized ratio of net investment income (loss) to
average net assets would have been 0.75% and 1.99%, respectively.
See Notes to Financial Statements.
- ------
21
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, 2007, 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, 2007 by correspondence with the custodian and
brokers, provides a reasonable basis for our opinion.
Pricewaterhouse Coopers LLP
Kansas City, Missouri
February 11, 2008
- ------
22
PROXY VOTING RESULTS
A special meeting of shareholders was held on July 27, 2007, to vote on the
following proposal. The proposal received the required number of votes of the
American Century Variable Portfolios II, Inc. and was adopted. A summary of
voting results is listed below the proposal.
PROPOSAL:
To elect eight Directors to the Board of Directors of American Century Variable
Portfolios II, Inc. (the proposal was voted on by all shareholders of funds
issued by American Century Variable Portfolios II, Inc.).
Jonathan S. Thomas For: 46,983,881
Withhold: 1,138,541
Abstain: 0
Broker Non-Vote: 0
John Freidenrich For: 46,858,380
Withhold: 1,264,042
Abstain: 0
Broker Non-Vote: 0
Ronald J. Gilson For: 46,961,585
Withhold: 1,160,837
Abstain: 0
Broker Non-Vote: 0
Kathryn A. Hall For: 46,950,231
Withhold: 1,172,191
Abstain: 0
Broker Non-Vote: 0
Peter F. Pervere For: 46,998,955
Withhold: 1,123,467
Abstain: 0
Broker Non-Vote: 0
Myron S. Scholes For: 46,980,765
Withhold: 1,141,657
Abstain: 0
Broker Non-Vote: 0
John B. Shoven For: 46,978,484
Withhold: 1,143,938
Abstain: 0
Broker Non-Vote: 0
Jeanne D. Wohlers For: 46,956,710
Withhold: 1,165,712
Abstain: 0
Broker Non-Vote: 0
- ------
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 directors and/or officers of, or
ownership interest in, 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 or the advisor); 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, directors 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 in the American Century family of funds
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.
INTERESTED DIRECTOR
JONATHAN S. THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Director (since 2007) and President (since 2007)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: President and Chief Executive
Officer, ACC (March 2007 to present); Chief Administrative Officer, ACC
(February 2006 to February 2007); Executive Vice President, ACC (November 2005
to February 2007). Also serves as: President, Chief Executive Officer and
Director, ACS; Executive Vice President, ACIM and ACGIM; Director, ACIM,
ACGIM, ACIS and other ACC subsidiaries. Managing Director, Morgan Stanley
(March 2000 to November 2005)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 105
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
INDEPENDENT DIRECTORS
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Director (since 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 2006)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 39
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- ------
24
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Director (since 1995) and Chairman of the Board
(since 2005)
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: 39
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
PETER F. PERVERE, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1947
POSITION(S) HELD WITH FUND: Director (since 2007)
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: 39
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 (since 1980)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Platinum Grove Asset
Management, L.P., and a Partner, Oak Hill Capital Management (1999 to
present); Frank E. Buck Professor of Finance-Emeritus, Stanford Graduate
School of Business (1996 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 39
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 (since 2002)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford
University (1973 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 39
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Director, Cadence Design Systems (1992
to present)
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Director (since 1984)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 39
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
OFFICERS
BARRY FINK, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Executive Vice President (since 2007) PRINCIPAL
OCCUPATION(S) DURING PAST 5 YEARS: Chief Operating Officer and Executive Vice
President, ACC (September 2007 to present); President, ACS LLC (October 2007 to
present); Managing Director, Morgan Stanley (2000 to 2007); Global General
Counsel, Morgan Stanley (2000 to 2006). Also serves as: Director, ACC, ACS, ACIS
and other ACC subsidiaries
- ------
25
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Chief Compliance Officer (since 2006) and Senior
Vice President (since 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); and Treasurer and Chief Financial
Officer, various American Century funds (July 2000 to August 2006). Also serves
as: Senior Vice President, ACS
CHARLES A. ETHERINGTON, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUND: General Counsel (since 2007) and Senior Vice
President (since 2006) PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Attorney,
ACC (February 1994 to present); Vice President, ACC (November 2005 to present);
General Counsel, ACC (March 2007 to present). Also serves as: General Counsel,
ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries; and Senior Vice President,
ACIM, ACGIM and ACS
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 (all since 2006)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); and Controller, various American Century funds (1997 to September
2006)
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer (since 2000)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Financial Officer and Chief
Accounting Officer, ACC (March 2007 to present); Vice President, ACC (October
2001 to present); Vice President, certain ACC subsidiaries (October 2001 to
August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006).
Also serves as: Chief Financial Officer, Chief Accounting Officer and Senior
Vice President, ACIM, ACGIM, ACS and other ACC subsidiaries; and Chief
Accounting Officer and Senior Vice President, ACIS
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
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.
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28
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 was the benchmark for VP Inflation Protection prior to June
2007. It consists of a mix of three Citigroup (formerly Salomon Smith Barney)
indices in the following proportions: 55% Citigroup US Inflation-Linked
Securities Index, 25% Citigroup Government-Sponsored 1- to 3-Year Index, and 20%
Citigroup 15-Year Mortgage Index.
The CITIGROUP 15-YEAR MORTGAGE INDEX measures the performance of the 15-year
maturity sector of the mortgage component of the USBIG (US 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 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 US BROAD INVESTMENT-GRADE (BIG) BOND INDEX is a market-
capitalization-weighted index that includes fixed-rate Treasury, government-
sponsored, mortgage, asset-backed, and investment-grade issues with a maturity
of one year or longer.
The CITIGROUP US 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).
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29
NOTES
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30
NOTES
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31
NOTES
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32
[back cover]
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.
American Century Investment Services, Inc., Distributor
©2008 American Century Proprietary Holdings, Inc. All rights reserved.
0802
SH-ANN-58070
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) Peter F. Pervere, 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 2006: $18,845
FY 2007: $20,185
(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 2006: $0
FY 2007: $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 2006: $0
FY 2007: $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 2006: $0*
FY 2007: $0
* This amount has been restated as certain prior year services related
to review of federal and state income tax forms and federal excise tax
forms that were paid in advance were refunded as management changed
service providers.
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 2006: $0
FY 2007: $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 2006: $0
FY 2007: $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 2006: $0
FY 2007: $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 2006: $253,580*
FY 2007: $84,400
* This amount has been restated as certain prior year services related
to review of federal and state income tax forms and federal excise tax
forms that were paid in advance were refunded as management changed
service providers.
(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.
By: /s/ Jonathan S. Thomas
---------------------------------------
Name: Jonathan S. Thomas
Title: President
Date: February 15, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Jonathan S. Thomas
---------------------------------------
Name: Jonathan S. Thomas
Title: President
(principal executive officer)
Date: February 15, 2008
By: /s/ Robert J. Leach
---------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: February 15, 2008