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: 12-31-2008
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
ANNUAL REPORT
DECEMBER 31, 2008
[american century investments logo and text logo ®]
AMERICAN CENTURY VARIABLE PORTFOLIOS II
VP INFLATION PROTECTION FUND
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
FINANCIAL STATEMENTS
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . 8
Statement of Assets and Liabilities . . . . . . . . . . . . . . . 14
Statement of Operations . . . . . . . . . . . . . . . . . . . . . 15
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . 16
Notes to Financial Statements . . . . . . . . . . . . . . . . . . 17
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . 22
Report of Independent Registered Public Accounting Firm . . . . . 24
OTHER INFORMATION
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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 Investments or any
other person in the American Century Investments organization. Any such opinions
are subject to change at any time based upon market or other conditions and
American Century Investments 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 Investments funds are
based on numerous factors, may not be relied upon as an indication of trading
intent on behalf of any American Century Investments 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 Investments by third party
vendors. To the best of American Century Investments' 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
QUALITY REIGNED IN CHALLENGING CLIMATE
The credit crunch of 2007 evolved into a full-blown crisis in 2008, pushing the
economy into recession and prompting a series of unprecedented government and
central bank interventions, corporate acquisitions, takeovers, and failures in
the financial sector. Businesses and consumers faced stringent borrowing
standards, and banks stopped lending to each other. These events derailed the
markets, unleashed systemic risk and widespread loss of confidence, and tipped
the global economy into recession. The Federal Reserve (the Fed) took
extraordinary action, including slashing the federal funds rate target from
4.25% at the beginning of the period to an unprecedented range of 0% to 0.25%.
Against this backdrop of fear and uncertainty, quality was king. Demand for
safe-haven Treasuries exploded, pushing prices higher, sending yields to
historic lows, and elevating Treasuries to the top of the performance hierarchy
for the second-consecutive year.
INFLATION SENTIMENT WEIGHED ON TIPS
Inflation worries and the lingering threat of stagflation (stalled economic
growth and rising inflation) helped Treasury inflation-protected securities
(TIPS) outperform in the first half of the period. But, a rapidly deteriorating
global economy sent oil and other commodity prices tumbling in the second half
of the year, which eased inflationary pressures. This, combined with investor
demand for the most liquid securities (nominal Treasuries), caused TIPS to lag.
Headline inflation, as measured by the year-to-year change in the Consumer Price
Index, ended 2008 at 0.1%, compared with 5.5% at the end of July. 2008's
inflation rate marked the smallest increase in consumer prices since 1954 and
pushed inflation well below the Fed's target long-term range of 1% to 2%.
The yield difference (or breakeven rate) between 10-year TIPS and nominal
10-year Treasuries started the year at 2.33 percentage points, peaked at 2.45
percentage points in July, and fell to 0.09 percentage point by December 31. The
year-end breakeven rate, which represents investors' expectations for long-term
inflation, suggests concerns regarding inflation have been mostly eliminated and
the potential for deflation has moved into the spotlight.
U.S. Fixed-Income Total Returns For the 12 months ended December 31, 2008
CITIGROUP BOND MARKET INDICES
Citigroup US Broad Investment-Grade Bond Index 7.02%
Citigroup US Inflation-Linked Securities Index -1.17%
TREASURY BELLWETHERS
3-Month Treasury Bill 2.24%
10-Year Treasury Note 20.06%
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2
PERFORMANCE
VP Inflation Protection
Total Returns as of December 31, 2008
Average Annual Returns
Since Inception
1 year 5 years Inception Date
CLASS II -1.59% 3.30% 3.68% 12/31/02
CITIGROUP US
INFLATION-LINKED
SECURITIES INDEX(1) -1.17% 4.31% 4.96% --
Class I -1.26% -- 4.11% 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.
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 index 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 index 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 2008
Class II 5.61%* 5.81% 1.56% 1.59% 9.49% -1.59%
Citigroup US
Inflation-Linked
Securities Index 8.26% 8.40% 2.86% 0.40% 11.61% -1.17%
* 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 index 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 index do not.
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4
PORTFOLIO COMMENTARY
VP Inflation Protection
Portfolio Managers: Brian Howell, Jim Platz, and Bob Gahagan
PERFORMANCE SUMMARY
VP Inflation Protection returned -1.26%* for the 12 months ended December 31,
2008. The portfolio's benchmark, the Citigroup US Inflation-Linked Securities
Index, returned -1.17%. Portfolio returns reflect operating expenses, while
benchmark returns do not.
In the flight-to-quality environment that characterized the 12-month period,
virtually everything in the U.S. bond market that wasn't a nominal Treasury bond
experienced underperformance and spread widening. Deflationary expectations as
the year progressed hurt Treasury inflation-protected securities (TIPS), which
stumbled on the dramatic drop in the rate of inflation and its resulting impact
on breakeven yields. This led to the lowest calendar-year performance for the
portfolio and its benchmark since the portfolio's inception in 2004. This
climate helped create attractive valuations for long-term investors.
MARKET BACKDROP
Inflation jumped from one extreme to another during the period, triggering two
distinct scenarios for the portfolio. In the first half of the year, strong
worldwide demand led to soaring prices for oil and other commodities. In the
U.S., this was prominently on display, as food prices jumped, gasoline prices
surpassed $4 a gallon, and inflation skyrocketed. Additionally, the Federal
Reserve's (the Fed's) anti-recession bias further stoked inflationary pressures,
steepening the Treasury yield curve. In this environment, TIPS were the
best-performing domestic fixed-income securities for the first six months of
2008, due to their hedge against inflation, longer duration, and high quality.
The second half of the year marked a notable change in inflation expectations
and the environment for TIPS. After peaking at $147 a barrel in July, oil prices
tumbled to $45 at the end of December on sagging worldwide demand and bleak
global economic growth prospects. Oil wasn't the only commodity to do an
about-face. The Rogers International Commodities Index, a measure of various
energy, agricultural, and metals products, returned -54.63% in the second half
of the year. These factors helped push the annual inflation rate (as measured by
the year-to-year change in the Consumer Price Index) to a 54-year low of 0.1% at
year end.
Asset Allocation
% of net % of net
assets as of assets as of
12/31/08 6/30/08
U.S. Treasury Securities & Equivalents 52.7% 54.9%
U.S. Government Agency
Mortgage-Backed Securities 21.2% 11.3%
U.S. Government Agency
Securities & Equivalents 14.9% 11.4%
Corporate Bonds 5.2% 7.2%
Commercial Mortgage-Backed Securities 4.3% 6.7%
Municipal Securities 3.2% --
Collateralized Mortgage Obligations 1.6% 2.5%
Sovereign Governments & Agencies 0.6% 0.7%
Asset-Backed Securities --(1) --(1)
Cash and Equivalents(2) (3.7)% 5.3%
(1) Category is less than 0.05% of total net assets.
(2) Includes commercial paper, temporary cash investments 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
More significant for TIPS investors, the yield difference (or breakeven rate)
between 10-year TIPS and nominal 10-year Treasuries fell to 0.09 percentage
point by year end. This figure suggests concerns regarding long-term inflation
have virtually disappeared, and given the weak economic environment, the
potential for deflation has surfaced.
PORTFOLIO POSITIONING
Approximately 53% of the portfolio was invested in TIPS, nearly fully invested
as allowed by IRS portfolio diversification regulations for insurance products
(55% of the portfolio). We invested the remainder of the portfolio in
high-quality agency, mortgage, corporate, and municipal securities--sectors we
believe offer attractive long-term value. In addition, we complemented our
spread-sector investments with inflation swaps, or strategies that synthetically
create inflation-linked exposure. Over time, we expect our swap strategy may
provide total returns greater than those of TIPS.
In addition, we maintained a yield-curve-steepening bias during the first nine
months of the period, which contributed positively to performance, as the slope
of the yield curve steepened during this time frame. We removed this bias in
November, when the curve was at its steepest point and before it subsequently
flattened on dramatic Fed easing and tumbling inflation expectations.
OUTLOOK
We believe the current breakeven rate is an overreaction--it seems highly
unlikely overall inflation will remain below 1% for the next 10 years. The
unprecedented steps the government has taken to avoid a severe economic downturn
eventually may lead to significantly higher inflation and a weaker dollar than
are currently priced into the market. Over time, we believe our strategy of
investing in spread sectors and inflation swaps will lead to outperformance
relative to TIPS.
Due to the unexpected death of portfolio manager Seth Plunkett on November 9,
2008, co-portfolio managers Brian Howell, Jim Platz, and Bob Gahagan assumed his
responsibilities. Our team structure means the management process and objectives
for this portfolio remain the same, despite the loss of a cherished colleague.
Portfolio at a Glance
As of As of
12/31/08 6/30/08
30-Day SEC Yield
Class I -3.19% 6.50%*
Class II -3.43% 6.26%*
Weighted Average Life 8.8 years 9.4 years
Average Duration (effective) 5.6 years 6.3 years
* The above-average 30-day SEC yields as of June 30, 2008, primarily resulted
from elevated inflation readings. 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, 2008 to December 31, 2008.
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
7/1/08 12/31/08 7/1/08 - 12/31/08 Expense Ratio*
ACTUAL
Class I $1,000 $951.10 $2.40 0.49%
Class II $1,000 $950.10 $3.63 0.74%
HYPOTHETICAL
Class I $1,000 $1,022.67 $2.49 0.49%
Class II $1,000 $1,021.42 $3.76 0.74%
* Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
184, the number of days in the most recent fiscal half-year, divided by 366, to
reflect the one-half year period.
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7
SCHEDULE OF INVESTMENTS
VP Inflation Protection
DECEMBER 31, 2008
Principal Amount Value
U.S. Treasury Securities and Equivalents -- 52.7%
FIXED-RATE U.S. TREASURY SECURITIES AND EQUIVALENTS -- 52.2%
$ 1,500,000 AID (Egypt), 4.45%, 9/15/15(1) $ 1,622,880
36,996,190 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/15/25(1) 36,371,916
42,773,864 U.S. Treasury Inflation Indexed Bonds, 2.00%,
1/15/26(1) 40,304,358
21,908,172 U.S. Treasury Inflation Indexed Bonds, 2.375%,
1/15/27(1) 22,016,004
11,299,215 U.S. Treasury Inflation Indexed Bonds, 1.75%,
1/15/28(1) 10,442,949
24,236,262 U.S. Treasury Inflation Indexed Bonds, 3.625%,
4/15/28(1) 28,880,923
27,158,407 U.S. Treasury Inflation Indexed Bonds, 3.875%,
4/15/29(1) 33,551,252
19,198,746 U.S. Treasury Inflation Indexed Bonds, 3.375%,
4/15/32(1) 23,678,965
5,985,713 U.S. Treasury Inflation Indexed Notes, 4.25%,
1/15/10(1) 5,880,496
3,858,300 U.S. Treasury Inflation Indexed Notes, 0.875%,
4/15/10(1) 3,627,408
248,870 U.S. Treasury Inflation Indexed Notes, 3.50%,
1/15/11(1) 244,340
11,183,980 U.S. Treasury Inflation Indexed Notes, 2.375%,
4/15/11(1) 10,926,234
3,750,547 U.S. Treasury Inflation Indexed Notes, 3.375%,
1/15/12(1) 3,711,286
1,013,916 U.S. Treasury Inflation Indexed Notes, 2.00%,
4/15/12(1) 989,044
8,431,640 U.S. Treasury Inflation Indexed Notes, 3.00%,
7/15/12(1) 8,266,304
10,246,300 U.S. Treasury Inflation Indexed Notes, 0.625%,
4/15/13(1) 9,799,633
4,716,720 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/13(1) 4,442,193
4,020,303 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/15/14(1) 3,810,495
16,200,195 U.S. Treasury Inflation Indexed Notes, 2.00%,
7/15/14(1) 15,325,644
17,126,722 U.S. Treasury Inflation Indexed Notes, 1.625%,
1/15/15(1) 15,887,723
25,608,890 U.S. Treasury Inflation Indexed Notes, 1.875%,
7/15/15(1) 24,198,404
31,807,606 U.S. Treasury Inflation Indexed Notes, 2.00%,
1/15/16(1) 30,470,700
25,201,400 U.S. Treasury Inflation Indexed Notes, 2.50%,
7/15/16(1) 25,010,424
Principal Amount Value
$21,371,207 U.S. Treasury Inflation Indexed Notes, 2.375%,
1/15/17(1) $21,209,256
22,497,774 U.S. Treasury Inflation Indexed Notes, 2.625%,
7/15/17(1) 23,061,995
30,754,955 U.S. Treasury Inflation Indexed Notes, 1.625%,
1/15/18(1) 29,200,415
10,043,300 U.S. Treasury Inflation Indexed Notes, 1.375%,
7/15/18(1) 9,395,979
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442,327,220
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ZERO-COUPON U.S. TREASURY SECURITIES AND EQUIVALENTS(2) -- 0.5%
5,000,000 AID (Israel), 4.70%, 5/1/15(1) 4,206,750
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TOTAL U.S. TREASURY SECURITIES AND EQUIVALENTS
(Cost $452,372,331) 446,533,970
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U.S. Government Agency Mortgage-Backed Securities(3) -- 21.2%
FIXED-RATE U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 20.3%
645,121 FHLMC, 4.50%, 5/1/19(1) 662,344
3,340,880 FHLMC, 5.00%, 4/1/21(1) 3,438,944
22,462,748 FHLMC, 5.00%, 5/1/23(1) 23,094,012
321,577 FHLMC, 5.50%, 12/1/33(1) 330,032
4,559,890 FHLMC, 5.50%, 12/1/36(1) 4,673,369
1,951,798 FHLMC, 5.50%, 1/1/38(1) 2,000,371
38,001,502 FHLMC, 5.50%, 4/1/38(1) 38,945,084
851,445 FNMA, 5.00%, 9/1/20(1) 876,437
33,758,284 FNMA, 5.50%, 9/1/35(1) 34,651,152
9,243,915 FNMA, 5.50%, 7/1/36(1) 9,488,406
24,326,171 FNMA, 5.50%, 2/1/37(1) 24,969,570
7,390,178 FNMA, 6.00%, 10/1/37(1) 7,617,556
9,685,892 FNMA, 6.00%, 10/1/37(1) 9,983,904
3,035,036 FNMA, 6.00%, 6/1/38(1) 3,128,114
4,587,434 FNMA, 6.00%, 7/1/38(1) 4,728,119
110,883 GNMA, 6.00%, 6/20/17(1) 115,212
97,430 GNMA, 6.00%, 7/20/17(1) 101,235
640,677 GNMA, 6.00%, 5/15/24(1) 665,658
2,495,101 GNMA, 5.50%, 9/20/34(1) 2,570,766
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172,040,285
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ADJUSTABLE-RATE U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES -- 0.9%
7,233,782 FHLMC, VRN, 5.76%, 1/1/12, Final Maturity
1/1/38(1) 7,408,078
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TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $173,959,838) 179,448,363
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8
VP Inflation Protection
Principal Amount Value
U.S. Government Agency Securities and Equivalents -- 14.9%
FIXED-RATE U.S. GOVERNMENT AGENCY SECURITIES -- 13.7%
$ 8,500,000 Bank of America Corp., 3.125%, 6/15/12(1)(6) $ 8,840,255
4,000,000 FAMCA, 4.875%, 1/14/11(1)(4) 4,261,474
3,750,000 FAMCA, 5.50%, 7/15/11(1)(4) 3,994,301
1,000,000 FAMCA, 5.40%, 10/14/11(1) 1,103,714
3,974,000 FAMCA, 6.71%, 7/28/14(1) 4,833,338
2,000,000 FFCB, 4.875%, 12/16/15(1) 2,253,136
5,000,000 FFCB, 4.875%, 1/17/17(1) 5,644,250
1,030,000 FHLB, 4.875%, 5/17/17(1) 1,166,448
2,000,000 FHLMC, 5.625%, 3/15/11(1) 2,180,924
14,402,000 FHLMC, 5.00%, 1/30/14(1) 16,118,171
4,400,000 FHLMC, 4.50%, 4/2/14(1) 4,836,480
18,244,000 FNMA, 6.625%, 11/15/30(1) 26,428,569
5,200,000 Goldman Sachs Group LP, 3.25%, 6/15/12(1)(6) 5,429,689
2,845,000 PEFCO, 4.97%, 8/15/13(1) 3,120,072
4,000,000 PEFCO, 4.55%, 5/15/15(1) 4,384,616
13,800,000 TVA Inflation Index Notes, 6.79%, 5/23/12(1) 15,854,240
1,750,000 TVA Inflation Index Notes, 4.875%, 12/15/16(1) 1,957,352
3,550,000 TVA Inflation Index Notes, 4.50%, 4/1/18(1) 3,923,836
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116,330,865
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ADJUSTABLE-RATE U.S. GOVERNMENT AGENCY SECURITIES -- 1.2%
10,070,000 FNMA, VRN, 6.08%, 1/17/09, 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) 10,070,000
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TOTAL U.S. GOVERNMENT AGENCY SECURITIES AND EQUIVALENTS
(Cost $116,667,286) 126,400,865
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Corporate Bonds -- 5.2%
2,190,000 Altria Group, Inc., 8.50%, 11/10/13(1) 2,270,515
1,000,000 AT&T, Inc., 6.70%, 11/15/13(1) 1,060,420
770,000 AT&T, Inc., 5.10%, 9/15/14(1) 757,823
706,000 HSBC Finance Corp., VRN, 4.74%, 1/10/09, resets
monthly off the Consumer Price Index Year over
Year plus 1.08% with no caps, Final Maturity
9/10/09(1) 630,825
Principal Amount Value
$ 3,000,000 HSBC Finance Corp., VRN, 4.77%, 1/12/09, resets
monthly off the Consumer Price Index Year over
Year plus 1.11% with no caps, Final Maturity
2/10/10(1) $ 2,613,360
1,067,000 HSBC Finance Corp., VRN, 4.85%, 1/12/09, resets
monthly off the Consumer Price Index Year over
Year plus 1.19% with no caps, Final Maturity
2/10/09(1) 1,046,994
9,500,000 International Bank for Reconstruction &
Development, 7.625%, 1/19/23(1) 13,543,561
40,000 John Hancock Life Insurance Co., VRN, 4.79%,
1/15/09, resets monthly off the Consumer Price
Index Year over Year plus 1.13% with no caps,
Final Maturity 6/15/10(1) 36,287
179,000 John Hancock Life Insurance Co., VRN, 5.28%,
1/15/09, resets monthly off the Consumer Price
Index Year over Year plus 1.62% with no caps,
Final Maturity 11/15/10(1) 159,387
1,000,000 Pacific Gas & Electric Co., 6.25%, 12/1/13(1) 1,035,167
303,000 Prudential Financial, Inc., VRN, 6.94%, 1/2/09,
resets monthly off the Consumer Price Index Year
over Year plus 2.00% with no caps, Final
Maturity 11/2/20(1) 110,928
490,000 SLM Corp., VRN, 7.09%, 1/2/09, resets monthly
off the Consumer Price Index Year over Year plus
2.15% with no caps, Final Maturity 2/1/14(1) 260,553
1,500,000 SLM Corp., VRN, 7.14%, 1/15/09, resets monthly
off the Consumer Price Index Year over Year plus
2.20% with no caps, Final Maturity 6/15/09(1) 1,164,960
11,340,200 SLM Corp., 1.32%, 1/25/10(1) 9,671,149
670,000 Time Warner Cable, Inc., 8.25%, 2/14/14(1) 680,392
9,147,760 Toyota Motor Credit Corp. Inflation Indexed
Bonds, VRN, 1.22%, 10/1/09, Final Maturity
10/1/09(1) 9,143,186
-------------
TOTAL CORPORATE BONDS
(Cost $44,730,076) 44,185,507
-------------
- ------
9
VP Inflation Protection
Principal Amount Value
Commercial Mortgage-Backed Securities(3) -- 4.3%
$ 2,430,000 Banc of America Commercial Mortgage, Inc.,
Series 2004-2, Class A3 SEQ, 4.05%, 11/10/38(1) $ 2,308,016
871,728 Banc of America Large Loan, Series 2005 MIB1,
Class A1, VRN, 1.35%, 1/15/09, resets monthly off the 1-month
LIBOR plus 0.15% with no caps,
Final Maturity 3/15/22(1)(4) 739,131
287,407 Bear Stearns Commercial Mortgage Securities
Trust, Series 2003 T12, Class A2 SEQ, 3.88%,
8/13/39(1) 284,779
7,000,000 Credit Suisse Mortgage Capital Certificates,
Series 2007 TF2A, Class A1, VRN, 1.38%, 1/15/09, resets monthly
off the 1-month LIBOR plus 0.18% with no caps, Final Maturity
4/15/22(1)(4) 5,640,504
4,053,917 GMAC Commercial Mortgage Securities, Inc.,
Series 2005 C1, Class A2 SEQ, 4.47%, 5/10/43(1) 3,915,729
2,999,150 Greenwich Capital Commercial Funding Corp.,
Series 2005 GG3, Class A2 SEQ, 4.31%, 8/10/42(1) 2,840,370
5,500,000 LB-UBS Commercial Mortgage Trust, Series 2003
C3, Class A3 SEQ, 3.85%, 5/15/27(1) 5,066,970
9,003 LB-UBS Commercial Mortgage Trust, Series 2003
C5, Class A2 SEQ, 3.48%, 7/15/27(1) 8,950
2,519,608 LB-UBS Commercial Mortgage Trust, Series 2004
C4, Class A2, VRN, 4.57%, 1/15/09, Final
Maturity 6/15/29(1) 2,498,777
3,679,107 LB-UBS Commercial Mortgage Trust, Series 2005
C2, Class A2 SEQ, 4.82%, 4/15/30(1) 3,496,941
2,590,000 LB-UBS Commercial Mortgage Trust, Series 2005
C3, Class A3 SEQ, 4.65%, 7/15/30(1) 2,271,388
Principal Amount Value
$ 5,485,005 Lehman Brothers Floating Rate Commercial
Mortgage Trust, Series 2007 LLFA, Class A1, VRN,
1.50%, 1/15/09, resets monthly off the 1-month
LIBOR plus 0.30% with no caps, Final Maturity
6/15/22(1)(4) $ 4,143,257
2,964,007 Morgan Stanley Capital I, Series 2004 HQ3, Class
A2 SEQ, 4.05%, 1/13/41(1) 2,820,529
-------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $39,751,141) 36,035,341
-------------
Municipal Securities -- 3.2%
8,000,000 California Educational Facilities Auth. Rev.,
Series 2007 T1, (Stanford University), 5.00%,
3/15/39 8,034,240
4,000,000 Massachusetts Bay Transportation Auth. Sales
Tax. Rev., Series 2006 A, 5.25%, 7/1/33 4,128,880
5,000,000 Massachusetts Bay Transportation Auth. Sales
Tax. Rev., Series 2006 A, 5.25%, 7/1/34 5,142,500
8,800,000 Massachusetts Health & Educational Facilities
Auth. Rev., Series 2002 K, (Massachusetts Institute of
Technology), 5.50%, 7/1/32 (GO of
Institute) 9,480,680
-------------
TOTAL MUNICIPAL SECURITIES
(Cost $25,235,296) 26,786,300
-------------
Collateralized Mortgage Obligations(3) -- 1.6%
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.8% 1,129,780
FHLMC, Series 2508, Class UL SEQ, 5.00%,
12/15/16(1) 1,150,837 3,000,000 FNMA, Series 2003-92, Class PD,
4.50%, 3/25/17(1) 3,060,385
753,296 GNMA, Series 2003-46, Class PA, 5.00%, 5/20/29(1) 760,586
2,000,000 GNMA, Series 2005-24, Class UB SEQ, 5.00%,
1/20/31(1) 2,023,584
-------------
6,995,392
-------------
- ------
10
VP Inflation Protection
Principal Amount Value
PRIVATE SPONSOR COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.8%
$ 3,097,749 Banc of America Alternative Loan Trust, Series
2007-2, Class 2A4, 5.75%, 6/25/37(1) $ 1,933,147
2,055,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2004 AR4, Class A6, VRN,
3.79%, 1/2/09, Final Maturity 6/25/34(1) 1,974,056
1,921,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2004 AR7, Class A6, VRN,
3.94%, 1/2/09, Final Maturity 7/25/34(1) 1,883,268
1,000,000 Washington Mutual Mortgage Pass-Through
Certificates, Series 2005 AR4, Class A3, VRN,
4.59%, 1/2/09, Final Maturity 4/25/35(1) 937,868
-------------
6,728,339
-------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $14,807,747) 13,723,731
-------------
Principal Amount/Shares Value
Sovereign Governments & Agencies -- 0.6%
$ 5,000,000 KfW, 4.75%, 5/15/12(1)
(Cost $4,908,534) $ 5,353,075
-------------
Asset-Backed Securities(3)(5)
61,226 Atlantic City Electric Transition Funding LLC, Series 2003-1,
Class A1 SEQ, 2.89%, 7/20/11(1)
(Cost $61,221) 61,128
-------------
Temporary Cash Investments(5)
86,893 JPMorgan U.S. Treasury Plus Money Market Fund
Agency Shares
(Cost $86,893) 86,893
-------------
TOTAL INVESTMENT SECURITIES -- 103.7%
(Cost $872,580,363) 878,615,173
-------------
OTHER ASSETS AND LIABILITIES -- (3.7)% (31,269,090)
-------------
TOTAL NET ASSETS -- 100.0% $ 847,346,083
=============
Futures Contracts
Expiration Underlying Face Unrealized Gain
Contracts Sold Date Amount at Value (Loss)
500 U.S. Treasury
2-Year Notes March 2009 $109,031,250 $(1,704,251)
================= ==============
- ------
11
VP Inflation Protection
Swap Agreements
Expiration Unrealized
Notional Amount Description of Agreement Date Gain (Loss)
CREDIT DEFAULT -- BUY PROTECTION
$ 4,750,000 Pay quarterly a fixed rate equal June 2010
to 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 of
HSBC Finance Corp., 7.00%,
5/15/12. $ 424,311
-------------
TOTAL RETURN
44,000,000 Pay a fixed rate equal to July 2010
2.4875% and receive the return
of the U.S. CPI Urban Consumers
NSA Index upon the termination
date with Barclays Bank plc. (3,445,515)
20,000,000 Pay a fixed rate equal to 1.13% January 2012
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (1,879,442)
35,000,000 Pay a fixed rate equal to 1.14% March 2012
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (3,662,603)
33,275,000 Pay a fixed rate equal to 3.065% July 2013
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Bank of America N.A. (5,198,211)
13,000,000 Pay a fixed rate equal to 1.52% November 2013
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with UBS AG. (1,099,863)
20,000,000 Pay a fixed rate equal to 1.21% June 2014
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (2,641,045)
20,000,000 Pay a fixed rate equal to 1.31% April 2017
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (2,192,423)
40,000,000 Pay a fixed rate equal to 2.77% April 2018
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (4,507,383)
30,100,000 Pay a fixed rate equal to 2.895% December 2027
and receive the return of the
U.S. CPI Urban Consumers NSA
Index upon the termination date
with Barclays Bank plc. (5,224,258)
-------------
(29,850,743)
-------------
$(29,426,432)
=============
- ------
12
VP Inflation Protection
Notes to Schedule of Investments
AID = Agency for International Development
CPI = Consumer Price Index
Equivalent = Security whose principal payments are secured by US Treasuries or
backed by the full faith and credit of the United States
FAMCA = Federal Agricultural Mortgage Corporation
FFCB = Federal Farm Credit Bank
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GMAC = General Motors Acceptance Corporation
GNMA = Government National Mortgage Association
GO = General Obligation
LB-UBS = Lehman Brothers, Inc. -- UBS AG
LIBOR = London Interbank Offered Rate
NSA = Not Seasonally Adjusted
PEFCO = Private Export 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
TVA = Tennessee Valley Authority
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective December 31, 2008.
(1) Security, or a portion thereof, has been segregated for futures contracts
and/or swap agreements. At the period end, the aggregated value of securities
pledged was $139,307,000.
(2) The rate indicated is the yield to maturity at purchase. These securities
are issued at a substantial discount from their value at maturity.
(3) Final maturity indicated, unless otherwise noted.
(4) 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 these securities at December 31, 2008 was $18,778,667, which
represented 2.2% of total net assets.
(5) Category is less than 0.05% of total net assets.
(6) The debt is guaranteed under the Federal Deposit Insurance Corporation's
(FDIC) Temporary Liquidity Guarantee Program and is backed by the full faith and
credit of the United States. The expiration date of the FDIC's guarantee is the
earlier of the maturity date of the debt or June 30, 2012.
Industry classifications are unaudited.
See Notes to Financial Statements.
- ------
13
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008
ASSETS
Investment securities, at value (cost of $872,580,363) $878,615,173
Cash 1,047,343
Receivable for investments sold 5,717
Receivable for capital shares sold 83,869
Receivable for variation margin on futures contracts 15,625
Unrealized appreciation on swap agreements 424,311
Interest receivable 7,425,797
------------
887,617,835
------------
LIABILITIES
Payable for capital shares redeemed 9,903,246
Unrealized depreciation on swap agreements 29,850,743
Accrued management fees 353,646
Distribution fees payable 162,259
Dividends payable 1,858
------------
40,271,752
------------
NET ASSETS $847,346,083
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) $891,322,470
Accumulated net investment loss (143,058)
Accumulated net realized loss on investment transactions (18,737,456)
Net unrealized depreciation on investments (25,095,873)
------------
$847,346,083
============
CLASS I, $0.01 PAR VALUE
Net assets $90,844,701
Shares outstanding 9,165,490
Net asset value per share $9.91
CLASS II, $0.01 PAR VALUE
Net assets $756,501,382
Shares outstanding 76,375,018
Net asset value per share $9.91
See Notes to Financial Statements.
- ------
14
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008
INVESTMENT INCOME (LOSS)
INCOME:
Interest $40,438,087
-------------
EXPENSES:
Management fees 3,828,365
Distribution fees -- Class II 1,736,644
Directors' fees and expenses 68,920
Other expenses 1,881
-------------
5,635,810
-------------
NET INVESTMENT INCOME (LOSS) 34,802,277
-------------
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
Investment transactions (7,976,600)
Futures and swaps transactions (1,134,459)
-------------
(9,111,059)
-------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
Investments (15,102,482)
Futures and swaps (31,881,953)
-------------
(46,984,435)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (56,095,494)
-------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(21,293,217)
=============
See Notes to Financial Statements.
- ------
15
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
Increase (Decrease) in Net Assets 2008 2007
OPERATIONS
Net investment income (loss) $ 34,802,277 $ 24,884,805
Net realized gain (loss) (9,111,059) (4,594,610)
Change in net unrealized appreciation
(depreciation) (46,984,435) 30,596,697
------------ ------------
Net increase (decrease) in net assets resulting
from operations (21,293,217) 50,886,892
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Class I (4,545,420) (2,146,223)
Class II (30,440,780) (22,744,318)
From return of capital:
Class I (319,743) --
Class II (2,141,327) --
------------ ------------
Decrease in net assets from distributions (37,447,270) (24,890,541)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets from capital
share transactions 299,743,448 57,558,294
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 241,002,961 83,554,645
NET ASSETS
Beginning of period 606,343,122 522,788,477
------------ ------------
End of period $847,346,083 $606,343,122
============ ============
Accumulated net investment loss $(143,058) --
============ ============
See Notes to Financial Statements.
- ------
16
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 at the
time of purchase 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 at the time of purchase 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 the Board of Directors or its designee, in accordance
with procedures adopted by the Board of Directors, 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.
- ------
17
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 certain other funds in the
American Century Investments family of funds, 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.
FUTURES CONTRACTS -- The fund may enter into futures contracts in order to
manage the fund's exposure to changes in market conditions. One of the risks of
entering into futures contracts is the possibility that the change in value of
the contract may not correlate with the changes in value of the underlying
securities. Upon entering into a futures contract, the fund is required to
deposit either cash or securities in an amount equal to a certain percentage of
the contract value (initial margin). Subsequent payments (variation margin) are
made or received daily, in cash, by the fund. The variation margin is equal to
the daily change in the contract value and is recorded as unrealized gains and
losses. The fund recognizes a realized gain or loss when the contract is closed
or expires. Net realized and unrealized gains or losses occurring during the
holding period of futures contracts are a component of realized gain (loss) on
futures and swaps transactions and unrealized appreciation (depreciation) on
futures and swaps, respectively.
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 at current market value as provided by a commercial
pricing service and/or independent brokers. Changes in value, including the
periodic amounts of interest to be paid or received on swaps, are recorded as
unrealized appreciation (depreciation) on swaps. 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 or 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 2005. At this time, management believes there are no
uncertain tax positions which, based on their technical merit, would not be
sustained upon examination and for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly change in the next
twelve months. 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.
- ------
18
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, 2008, the fund has accumulated net realized capital loss
carryovers for federal income tax purposes of $(10,505,309), which may be used
to offset future taxable gains. Capital loss carryovers of $(721,603),
$(3,476,419), $(3,811,535) and $(2,495,752) expire in 2013, 2014, 2015 and 2016,
respectively.
The fund has elected to treat $(7,813,145) of net capital losses incurred in the
two-month period ended December 31, 2008, 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 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 Investments 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, 2008 was 0.48% 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, 2008, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors 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.
Effective May 15, 2008, the fund is eligible to invest in a money market fund
for temporary purposes, which is managed by J.P Morgan Investment Management,
Inc. (JPMIM). JPMIM is a wholly owned subsidiary of JPMorgan Chase & Co. (JPM).
JPM is an equity investor in ACC. JPMorgan Chase Bank is a custodian of the fund
and a wholly owned subsidiary of JPM.
- ------
19
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for the
year ended December 31, 2008, totaled $667,317,134, of which $480,926,225
represented U.S. Treasury and Agency obligations.
Sales of investment securities, excluding short-term investments, for the year
ended December 31, 2008, totaled $356,583,129, of which $248,933,382 represented
U.S. Treasury and Agency obligations.
As of December 31, 2008, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
Federal tax cost of investments $874,844,815
=============
Gross tax appreciation of investments $22,238,915
Gross tax depreciation of investments (18,468,557)
-------------
Net tax appreciation (depreciation) of investments $3,770,358
=============
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
Year ended Year ended
December 31, 2008 December 31, 2007
Shares Amount Shares Amount
CLASS I/
SHARES
AUTHORIZED 250,000,000 250,000,000
============ ============
Sold 8,387,913 $89,512,577 2,080,742 $21,237,789
Issued in
reinvestment of
distributions 462,552 4,865,163 211,089 2,146,223
Redeemed (4,924,432) (48,906,593) (928,167) (9,494,128)
------------ ------------- ------------ -------------
3,926,033 45,471,147 1,363,664 13,889,884
------------ ------------- ------------ -------------
CLASS II/
SHARES
AUTHORIZED 250,000,000 250,000,000
============ ============
Sold 43,783,025 453,101,513 12,261,922 124,922,667
Issued in
reinvestment of
distributions 3,090,387 32,582,107 2,241,654 22,744,318
Redeemed (22,753,017) (231,411,319) (10,219,134) (103,998,575)
------------ ------------- ------------ -------------
24,120,395 254,272,301 4,284,442 43,668,410
------------ ------------- ------------ -------------
Net increase
(decrease) 28,046,428 $ 299,743,448 5,648,106 $57,558,294
============ ============= ============ =============
5. FAIR VALUE MEASUREMENTS
The fund's securities valuation process is based on several considerations and
may use multiple inputs to determine the fair value of the positions held by the
fund. In conformity with accounting principles generally accepted in the United
States of America, the inputs used to determine a valuation are classified into
three broad levels as follows:
* Level 1 valuation inputs consist of actual quoted prices based on an active
market;
* Level 2 valuation inputs consist of significant direct or indirect observable
market data; or
* Level 3 valuation inputs consist of significant unobservable inputs such as a
fund's own assumptions.
The level classification is based on the lowest level input that is significant
to the fair valuation measurement. The valuation inputs are not an indication of
the risks associated with investing in these securities or other financial
instruments.
- ------
20
The following is a summary of the valuation inputs used to determine the fair
value of the fund's securities and other financial instruments as of December
31, 2008:
Unrealized Gain
Value of (Loss) on
Investment Other Financial
Valuation Inputs Securities Instruments*
Level 1 - Quoted Prices $ 86,893 $ (1,704,251)
Level 2 - Other Significant
Observable Inputs 878,528,280 (29,426,432)
Level 3 - Significant Unobservable
Inputs -- --
------------- --------------
$878,615,173 $(31,130,683)
============= ==============
*Includes futures contracts and swap agreements.
6. BANK LINE OF CREDIT
The fund, along with certain other funds in the American Century Investments
family of funds, had a $500,000,000 unsecured bank line of credit agreement with
Bank of America, N.A. The line expired December 10, 2008, and was not renewed.
The agreement allowed the fund to borrow money for temporary or emergency
purposes to fund shareholder redemptions. Borrowings under the agreement were
subject to interest at the Federal Funds rate plus 0.40%. The fund did not
borrow from the line during the year ended December 31, 2008.
7. INTERFUND LENDING
The fund, along with certain other funds in the American Century Investments
family of funds, may participate in an interfund lending program, pursuant to an
Exemptive Order issued by the Securities and Exchange Commission (SEC). This
program provides an alternative credit facility allowing the fund to borrow from
or lend to other funds in the American Century Investments family of funds that
permit such transactions. Interfund lending transactions are subject to each
fund's investment policies and borrowing and lending limits. The interfund loan
rate earned/paid on interfund lending transactions is determined daily based on
the average of certain current market rates. Interfund lending transactions
normally extend only overnight, but can have a maximum duration of seven days.
The program is subject to annual approval by the Board of Directors. During the
year ended December 31, 2008, the fund did not utilize the program.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (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. The adoption of FAS 157 did not materially impact the
determination of fair value.
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities -- an
amendment of FASB Statement No. 133" (FAS 161). FAS 161 is effective for interim
periods beginning after November 15, 2008. FAS 161 amends and expands
disclosures about derivative instruments and hedging activities. FAS 161
requires qualitative disclosures about the objectives and strategies of
derivative instruments, quantitative disclosures about the fair value amounts of
and gains and losses on derivative instruments, and disclosures of
credit-risk-related contingent features in hedging activities. Management is
currently evaluating the impact that adopting FAS 161 will have on the financial
statement disclosures.
- ------
21
FINANCIAL HIGHLIGHTS
VP Inflation Protection
Class I
For a Share Outstanding Throughout the Years Ended December 31
(except as noted)
2008 2007 2006 2005 2004(1)
PER-SHARE DATA
Net Asset Value,
Beginning of Period $10.55 $10.09 $10.26 $10.55 $10.07
------- ------- ------- ------- --------
Income From
Investment Operations
Net Investment
Income (Loss) 0.49(2) 0.49 0.34(2) 0.47 0.24
Net Realized and
Unrealized Gain (Loss) (0.60) 0.46 (0.15) (0.28) 0.48
------- ------- ------- ------- --------
Total From
Investment Operations (0.11) 0.95 0.19 0.19 0.72
------- ------- ------- ------- --------
Distributions
From Net
Investment Income (0.50) (0.49) (0.36) (0.47) (0.24)
From Net
Realized Gains -- -- -- (0.01) --
From Return
of Capital (0.03) -- -- -- --
------- ------- ------- ------- --------
Total
Distributions (0.53) (0.49) (0.36) (0.48) (0.24)
------- ------- ------- ------- --------
Net Asset Value,
End of Period $9.91 $10.55 $10.09 $10.26 $10.55
======= ======= ======= ======= =======
TOTAL RETURN(3) (1.26)% 9.66% 1.90% 1.81% 7.37%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating
Expenses to Average
Net Assets 0.49% 0.50% 0.50% 0.50% 0.49%(4)
Ratio of Net Investment Income
(Loss) to
Average Net Assets 4.62% 4.75% 3.37% 4.85% 3.52%(4)
Portfolio Turnover Rate 49% 109% 96% 82% 108%(5)
Net Assets, End of Period (in
thousands) $90,845 $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.
- ------
22
VP Inflation Protection
Class II
For a Share Outstanding Throughout the Years Ended December 31
2008 2007 2006 2005 2004
PER-SHARE DATA
Net Asset Value, Beginning
of Period $10.55 $10.08 $10.26 $10.55 $10.31
-------- -------- -------- -------- --------
Income From
Investment Operations
Net Investment
Income (Loss) 0.45(1) 0.46 0.32(1) 0.45 0.35
Net Realized
and Unrealized
Gain (Loss) (0.59) 0.47 (0.16) (0.28) 0.25
-------- -------- -------- -------- --------
Total From
Investment Operations (0.14) 0.93 0.16 0.17 0.60
-------- -------- -------- -------- --------
Distributions
From Net
Investment Income (0.47) (0.46) (0.34) (0.45) (0.35)
From Net
Realized Gains -- -- -- (0.01) (0.01)
From Return
of Capital (0.03) -- -- -- --
-------- -------- -------- -------- --------
Total Distributions (0.50) (0.46) (0.34) (0.46) (0.36)
-------- -------- -------- -------- --------
Net Asset Value,
End of Period $9.91 $10.55 $10.08 $10.26 $10.55
======== ======== ======== ======== ========
TOTAL RETURN(2) (1.59)% 9.49% 1.59% 1.56% 5.81%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets 0.74% 0.75% 0.75% 0.75% 0.74%
Ratio of Net Investment
Income (Loss) to Average
Net Assets 4.37% 4.50% 3.12% 4.60% 3.40%
Portfolio Turnover Rate 49% 109% 96% 82% 108%
Net Assets, End of Period
(in thousands) $756,501 $551,066 $483,692 $418,424 $199,885
(1) Computed using average shares outstanding throughout the period.
(2) 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.
See Notes to Financial Statements.
- ------
23
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, 2008, 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 audits. We conducted our
audits of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2008 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 13, 2009
- ------
24
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
Investments 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 Investments 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: 111
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 (money management firm) (April 2004 to present); Partner
and Founder, Bay Partners (venture capital firm) (1976 to 2006)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 41
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- ------
25
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: 41
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
FREDERICK L.A. GRAUER, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Director (since 2008)
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Advisor, Barclays Global
Investors (asset manager) (2003 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY DIRECTOR: 41
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: 41
OTHER DIRECTORSHIPS HELD BY 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. (asset manager) (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: 41
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Dimensional Fund Advisors (investment advisor)
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: 41
OTHER DIRECTORSHIPS HELD BY DIRECTOR: Cadence Design Systems; Exponent
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: 41
OTHER DIRECTORSHIPS HELD BY DIRECTOR: None
- ------
26
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
(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
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 Investments 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); Controller, various American Century
Investments 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.
- ------
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 Investments' 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.
- ------
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 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).
The ROGERS INTERNATIONAL COMMODITIES INDEX (RICI) was developed by Jim Rogers in
1998. It represents the value of a basket of 35 commodities used in the global
economy, including agricultural and energy products, metals, and minerals.
- ------
29
NOTES
- ------
30
NOTES
- ------
31
NOTES
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32
[back cover]
[american century investments logo and text logo (R)]
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
©2009 American Century Proprietary Holdings, Inc. All rights reserved.
0902
CL-ANN-64266
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 2007: $20,185
FY 2008: $32,476
(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 2007: $0
FY 2008: $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 2007: $0
FY 2008: $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 2007: $0
FY 2008: $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 2007: $0
FY 2008: $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 2007: $0
FY 2008: $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 2007: $0
FY 2008: $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 2007: $84,400
FY 2008: $100,922
(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. INVESTMENTS.
(a) The schedule of investments is included as part of the report to
stockholders filed under Item 1 of this Form.
(b) Not applicable.
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 17, 2009
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 17, 2009
By: /s/ Robert J. Leach
----------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: February 17, 2009