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 811-3706
---------------------------------------------
AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
- --------------------------------------------------------------------------------
(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)
WILLIAM M. LYONS, 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
-----------------------------
Date of fiscal year end: 08-31
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Date of reporting period: 08-31-2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
[front cover]
AMERICAN CENTURY INVESTMENTS
Annual Report
August 31, 2006
[photo of fall scene]
California Tax-Free Money Market Fund
California Limited-Term Tax-Free Fund
California Tax-Free Bond Fund
California Long-Term Tax-Free Fund
[american century investments logo and text logo]
Our Message to You
[photo of James E. Stowers III and James E. Stowers, Jr.]
/s/James E. Stowers, Jr.
James E. Stowers, Jr.
FOUNDER
AMERICAN CENTURY COMPANIES, INC.
/s/James E. Stowers III
James E. Stowers III
CHAIRMAN OF THE BOARD
AMERICAN CENTURY COMPANIES, INC.
We are pleased to provide you with the annual report for the American Century
California Tax-Free Money Market, California Limited-Term Tax-Free, California
Tax-Free Bond and California Long-Term Tax-Free funds for the year ended August
31, 2006. We hope you find this information helpful in monitoring your
investment. Another useful resource we offer is our Web site,
americancentury.com, where we post quarterly portfolio commentaries, the views
of our senior investment officers, and other communications about investments,
portfolio strategy, and the markets.
Our Web site presents American Century's strategic collaboration with Lance
Armstrong and the Lance Armstrong Foundation (LAF). Our campaign, featuring
Lance, is designed to encourage investors to take a more active role in planning
their financial futures and make every investment decision count.
American Century's collaboration with Lance Armstrong and the LAF is a perfect
fit. Like members of our family, Lance is a cancer survivor and shares our
values of optimism, focus, and determination. In addition, Lance and our family
have dedicated our success to improving lives, through the LAF and the Stowers
Institute for Medical Research, respectively. To learn more about American
Century's collaboration with Lance Armstrong and the LAF, please visit
www.lanceface.com on the Web and click on the links to related sites.
Besides this exciting collaboration, we've enjoyed other good news--in January,
American Century was named, for the seventh consecutive year, one of Fortune
magazine's 100 Best Companies to Work For in America. Fostering a positive work
environment can benefit fund investors as well as our company--it helps us
continue to attract and retain talented people.
As always, we deeply appreciate your investment with American Century
Investments.
Table of Contents
Market Perspectiv . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CALIFORNIA TAX-FREE MONEY MARKET
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CALIFORNIA LIMITED-TERM TAX-FREE
Performanc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CALIFORNIA TAX-FREE BOND
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CALIFORNIA LONG-TERM TAX-FREE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Shareholder Fee Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . 40
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . . . 42
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 44
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . 53
OTHER INFORMATION
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Approval of Management Agreements for California
Tax-Free Money Market, California Limited-Term Tax-Free,
California Tax-Free Bond and California Long-Term Tax-Free. . . . . . . . . . 57
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
The opinions expressed in the Market Perspective and each of the Portfolio
Commentaries 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 David MacEwen]
BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME
REACHING AN INFLECTION POINT
The 12 months ended August 31, 2006, provided two economic growth spurts, an
inflation scare, and the elevation of short-term interest rates to levels unseen
since the U.S. economy sputtered in 2001. Comparisons with 2001 hold some
merit--while the Wall Street consensus does not predict a downturn of the
magnitude of what happened five years ago, our 12-month reporting period
concluded with economic growth and interest rates teetering toward possible
declines in the next 12 months.
After two years of steady, mostly predictable, short-term interest rate hikes by
the Federal Reserve (the Fed) to harness inflation as the economy grew, the Fed
finally paused on August 8, 2006. We believe the Fed halted to assess the impact
of its 17 increases (which pushed its overnight rate target to a five-year high
of 5.25%) and to try to avoid repeating the mistake it had made in previous
cycles of pushing rates too high, tipping the economy into "hard landings."
INFLATION REMAINED A THREAT
Rising inflation complicated matters for the Fed--the 12-month percentage change
in the U.S. Labor Department's core consumer price index for August 2006 was
2.8%, the highest rate since November 2001. Some, including a voting member of
the Fed's interest rate policy committee, believed inflation at this level
warranted continued interest rate hikes. But the consensus forecasted instead
that the largely energy price-driven inflation threat would diminish as economic
growth declined. Indeed, inflation appeared to moderate at the end of the
reporting period as economic growth eased and energy prices fell.
CHALLENGING CONDITIONS FOR BONDS
Higher inflation and rising interest rates during much of the 12-month reporting
period caused price declines for most U.S. bonds. Generally speaking, however,
coupon returns offset price depreciation, resulting in modestly positive total
returns for the period. Longer-term taxable investment-grade securities, which
posted negative returns, were a notable exception. On the other hand, economic
growth and strong demand boosted high-yield and municipal sector returns, while
the Fed's seven rate hikes during the 12 months increased the yields and appeal
of money market securities.
U.S. FIXED-INCOME TOTAL RETURNS
For the 12 months ended August 31, 2006
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LEHMAN BROTHERS MUNICIPAL MARKET INDICES
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Municipal Bond 3.03%
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3-Year Municipal Bond 2.27%
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5-Year General Obligation (GO) 2.32%
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Long-Term Municipal Bond (22+ years) 4.08%
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Non-Investment-Grade (High-Yield) 8.26%
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TAXABLE MARKET RETURNS
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Lehman Brothers U.S. Aggregate Index 1.71%
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Lehman Brothers U.S. Treasury Index 0.79%
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3-Month Treasury Bill 4.37%
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10-Year Treasury Note -2.09%
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2
California Tax-Free Money Market - Performance
TOTAL RETURNS AS OF AUGUST 31, 2006
-------------------------------
AVERAGE ANNUAL RETURNS
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SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
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CALIFORNIA TAX-FREE
MONEY MARKET 2.70% 1.36% 2.16% 3.14% 11/9/83
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LIPPER CALIFORNIA
TAX-EXEMPT MONEY
MARKET FUNDS
AVERAGE RETURNS(1) 2.58% 1.23% 2.04% 3.25%(2) --
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Fund's Lipper Ranking
as of 8/31/06(1) 22 of 64 15 of 53 7 of 36 2 of 2(2) --
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Fund's Lipper Ranking
as of 9/30/06(1) 22 of 64 17 of 56 7 of 36 2 of 2(2) --
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(1) Data provided by Lipper Inc. - A Reuters Company. ©2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(2) Since 11/30/83, the date nearest the fund's inception for which data are
available.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. To obtain performance data current to the most recent month end, please
call 1-800-345-2021 or visit americancentury.com. Investment income may be
subject to certain state and local taxes and, depending on your tax status, the
federal alternative minimum tax (AMT). Capital gains are not exempt from state
and federal income tax.
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.
The 7-day current yield more closely reflects the current earnings of the fund
than the total return.
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3
California Tax-Free Money Market - Portfolio Commentary
PORTFOLIO MANAGER: TODD PARDULA
PERFORMANCE SUMMARY
California Tax-Free Money Market returned 2.70% for the 12 months ended August
31, 2006, outperforming the 2.58% average return of the 64 funds in Lipper's
"California Tax-Exempt Money Market Funds" category. The performance data on
page 3 show that the fund has generally outpaced its Lipper group average over
the long term, ranking in the top 29% of the group for the five-year period
ended August 31, 2006, and in the top 20% for the 10-year period ended August
31. California Tax-Free Money Market has offered very competitive returns
without investing in securities that are subject to the Alternative Minimum Tax
(AMT), unlike many of its Lipper peers.
MARKET PERSPECTIVE
As the Federal Reserve (the Fed) pushed short-term U.S. interest rates up 1.75
percentage points over the course of the year, money market yields rose
accordingly. Municipal money market yields also displayed their typical seasonal
fluctuations. Yields spiked in late December 2005 when money market supply
increased as dealers tried to clear their inventory before year end. But yields
fell again in early January as bond maturities and calls boosted demand for
money market securities. A similar cycle played out in April and May of 2006, as
investors withdrew funds from their money market accounts to pay taxes, causing
demand for money markets to plummet and yields to spike.
In June, the anticipation of a significant volume of bond maturities and calls
led to falling yields early in the month. But when the proceeds from those
maturities and calls failed to enter the short end of the muni market to the
extent that was expected and crossover buyers--such as corporations-- exited the
market, short muni yields jumped to their highest levels of the one-year period.
PORTFOLIO POSITIONING & STRATEGY
California Tax-Free Money Market's weighted average maturity (WAM) fell
throughout much of the period until June, when the majority of one-year notes
are issued in California. We took advantage of note season to extend the WAM by
participating in several note deals, primarily the Los Angeles City Tax and
Revenue Anticipation Notes (TRANs). These purchases pushed the WAM up to 36
days. By the end of August, California Tax-Free Money Market's WAM was 32 days,
about a week longer than the average WAM of its peers.
YIELDS AS OF AUGUST 31, 2006
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7-DAY CURRENT YIELD
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3.01%
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7-DAY EFFECTIVE YIELD
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3.06%
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7-DAY TAX-EQUIVALENT CURRENT YIELDS*
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31.98% Tax Bracket 4.43%
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34.70% Tax Bracket 4.61%
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39.23% Tax Bracket 4.95%
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41.05% Tax Bracket 5.11%
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*The tax brackets indicated are for combined state and federal income tax.
Actual tax-equivalent yields may be lower, if alternative minimum tax is
applicable.
(continued)
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4
California Tax-Free Money Market - Portfolio Commentary
The portfolio's seven-day current yield rose from 1.98% to 3.01% during the
period, with some seasonal fluctuations along the way as described in the Market
Perspective section on the previous page. The portfolio's yield hit a high of
3.43% at the end of June when muni yields peaked, then fell back to more normal
levels in July, finishing the period at 3.01% on August 31. Most of the
portfolio's holdings remained in variable rate demand notes (VRDNs), short-term,
floating-rate municipal notes, which allowed the portfolio to capture higher
yields more quickly as interest rates rose. VRDNs made up 90.7% of the portfolio
at the end of August 2006.
HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY
California Tax-Free Money Market is designed to supply the "cash" component in a
diversified investment portfolio, offering capital preservation and liquidity.
California Tax-Free Money Market provides current income that is exempt from
federal and California state income taxes, investing in high-quality, very
short-term debt securities issued by cities, counties, and other municipalities.
PORTFOLIO COMPOSITION BY CREDIT RATING
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
A-1+ 67% 74%
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A-1 33% 26%
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PORTFOLIO COMPOSITION BY MATURITY
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
1-30 days 91% 96%
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31-90 days -- --
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91-180 days 1% 4%
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More than 180 days 8% --
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5
California Tax-Free Money Market - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES -- 99.3%
CALIFORNIA -- 99.3%
- --------------------------------------------------------------------------------
$ 8,580,628 ABN AMRO Leasetops
Certificates Trust Rev., Series
2003-1, VRDN, 3.59%, 9/6/06
(Ambac) (SBBPA: ABN AMRO
Bank N.V.) (Acquired 1/29/03,
Cost $8,580,628)(1) $ 8,580,628
- --------------------------------------------------------------------------------
5,000,000 ABN AMRO Munitops
Certificate Trust GO, VRDN,
3.69%, 6/14/07 (CIFG-TCRS)
(SBBPA: ABN AMRO Bank N.V.) 5,000,000
- --------------------------------------------------------------------------------
6,000,000 ABN AMRO Munitops
Certificate Trust Rev., Series
2003-17, VRDN, 3.44%,
9/7/06 (MBIA) (SBBPA: ABN
AMRO Bank N.V.) 6,000,000
- --------------------------------------------------------------------------------
5,000,000 ABN AMRO Munitops
Certificate Trust Rev., Series
2005-32, VRDN, 3.44%,
9/7/06 (Ambac) (SBBPA: ABN
AMRO Bank N.V.) (Acquired
8/16/05, Cost $5,000,000)(1) 5,000,000
- --------------------------------------------------------------------------------
5,000,000 ABN AMRO Munitops
Certificate Trust Rev., Series
2006-11, VRDN, 3.44%,
9/7/06 (MBIA) (SBBPA: ABN
AMRO Bank N.V.) (Acquired
3/28/06, Cost $5,000,000)(1) 5,000,000
- --------------------------------------------------------------------------------
4,000,000 ABN AMRO Munitops
Certificate Trust Rev., Series
2006-19, VRDN, 3.44%,
9/7/06 (MBIA) (SBBPA: ABN
AMRO Bank N.V.) (Acquired
5/5/06, Cost $4,000,000)(1) 4,000,000
- --------------------------------------------------------------------------------
1,685,000 Alameda-Contra Costa Schools
Financing Auth. COP, Series
1997 D, VRDN, 3.37%, 9/7/06
(LOC: Bank of Nova Scotia) 1,685,000
- --------------------------------------------------------------------------------
2,550,000 Alameda-Contra Costa Schools
Financing Auth. COP, Series
1999 G, (Capital Improvements
Financing Projects), VRDN,
3.39%, 9/7/06 (Ambac)
(SBBPA: Dexia Credit Local) 2,550,000
- --------------------------------------------------------------------------------
4,310,000 Alameda-Contra Costa Schools
Financing Auth. COP, Series
1999 H, (Capital Improvements
Financing Projects), VRDN,
3.39%, 9/7/06 (Ambac)
(SBBPA: Dexia Credit Local) 4,310,000
- --------------------------------------------------------------------------------
635,000 Alameda-Contra Costa Schools
Financing Auth. COP, Series
2000 I, VRDN, 3.29%, 9/7/06
(Ambac) (SBBPA: KBC Bank
N.V.) 635,000
- --------------------------------------------------------------------------------
4,605,000 Apple Valley COP, (Public
Facilities Financing), VRDN,
3.41%, 9/7/06 (LOC: California
State Teacher's Retirement) 4,605,000
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 7,220,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations COP,
(Lucile Salter Packard
Children's Hospital at
Stanford), VRDN, 3.45%,
9/6/06 (Ambac) (SBBPA:
Bayerische Landesbank) $ 7,220,000
- --------------------------------------------------------------------------------
2,945,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations Rev.,
(Institute Defense Analyses),
VRDN, 3.40%, 9/7/06 (Ambac)
(SBBPA: Wachovia Bank N.A.) 2,945,000
- --------------------------------------------------------------------------------
5,000,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations Rev.,
(The Thacher School), VRDN,
3.42%, 9/7/06 (SBBPA:
Keybank, N.A.) 5,000,000
- --------------------------------------------------------------------------------
2,925,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations Rev.,
Series 2002 A, (Hamilin
School), VRDN, 3.33%, 9/7/06
(LOC: BNP Paribas) 2,925,000
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5,000,000 Auburn Union School District
COP, VRDN, 3.40%, 9/7/06
(FSA) (SBBPA: Dexia Credit
Local) 5,000,000
- --------------------------------------------------------------------------------
2,300,000 Barstow Multifamily Housing
Rev., (Desert Vista
Apartments), VRDN, 3.30%,
9/6/06 (LOC: FHLB) 2,300,000
- --------------------------------------------------------------------------------
7,500,000 California Community College
Financing Auth. GO, Series
2006 A, 4.50%, 6/29/07 (FSA) 7,552,529
- --------------------------------------------------------------------------------
3,295,000 California Department of Water
Resources & Power Supply
Rev., (PT 748), VRDN, 3.47%,
9/7/06 (LOC: Merrill Lynch
Capital Services, Inc.)
(Acquired 2/27/03, Cost
$3,295,000)(1) 3,295,000
- --------------------------------------------------------------------------------
6,000,000 California Department of Water
Resources & Power Supply
Rev., Series 2002 C16, VRDN,
3.36%, 9/7/06 (LOC: Bank of
New York) 6,000,000
- --------------------------------------------------------------------------------
3,600,000 California Department of Water
Resources & Power Supply
Rev., Series 2005 F5, VRDN,
3.48%, 9/1/06 (LOC: Citibank
N.A.) 3,600,000
- --------------------------------------------------------------------------------
5,400,000 California Department of Water
Resources Rev., Series
2002 B2, VRDN, 3.48%,
9/1/06 (LOC: BNP Paribas) 5,400,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
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6
California Tax-Free Money Market - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,600,000 California Department of Water
Resources Rev., Series
2002 B5, VRDN, 3.47%,
9/1/06 (LOC: Bayerische
Landesbank, Westdeutsche
Landesbank AG) $ 5,600,000
- --------------------------------------------------------------------------------
4,895,000 California Department of Water
Resources Rev., Series
2002 C7, VRDN, 3.27%,
9/7/06 (FSA) (SBBPA: Dexia
Credit Local) 4,895,000
- --------------------------------------------------------------------------------
2,700,000 California Economic
Development Financing Auth.
Rev., (Volk Enterprises Inc.),
VRDN, 3.32%, 9/7/06 (LOC:
JPMorgan Chase Bank)
(Acquired 3/8/04, Cost
$2,700,000)(1) 2,700,000
- --------------------------------------------------------------------------------
1,350,000 California Economic Recovery
Rev., Series 2004 C1, VRDN,
3.48%, 9/1/06 (SBBPA:
Landesbank
Baden-Wuerttemberg) 1,350,000
- --------------------------------------------------------------------------------
470,000 California Economic Recovery
Rev., Series 2004 C16, VRDN,
3.28%, 9/6/06 (FSA) (SBBPA:
Dexia Credit Local) 470,000
- --------------------------------------------------------------------------------
3,000,000 California Economic Recovery
Rev., Series 2004 C21, VRDN,
3.37%, 9/6/06 (XLCA)
(SBBPA: Dexia Credit Local) 3,000,000
- --------------------------------------------------------------------------------
9,900,000 California Educational
Facilities Auth. Rev., (Chapman
University), VRDN, 3.35%,
9/6/06 (LOC: Allied Irish
Bank plc) 9,900,000
- --------------------------------------------------------------------------------
275,000 California Educational
Facilities Auth. Rev., (Mount
St. Mary's College), VRDN,
3.46%, 9/6/06 (LOC: Allied
Irish Bank plc) 275,000
- --------------------------------------------------------------------------------
3,660,000 California Educational
Facilities Auth. Rev., Series
2002 A, (Art Center Design
College), VRDN, 3.30%, 9/7/06
(LOC: Allied Irish Bank plc) 3,660,000
- --------------------------------------------------------------------------------
8,005,000 California Educational
Facilities Auth. Rev., Series
2002 B, (Art Center Design
College), VRDN, 3.40%, 9/7/06
(LOC: Allied Irish Bank plc) 8,005,000
- --------------------------------------------------------------------------------
5,000,000 California GO, (PA 1164),
VRDN, 3.46%, 9/7/06 (LOC:
Merrill Lynch Capital Services,
Inc.) (Acquired 7/10/03, Cost
$5,000,000)(1) 5,000,000
- --------------------------------------------------------------------------------
4,325,000 California GO, (PA 1357),
VRDN, 3.46%, 9/7/06 (LOC:
Merrill Lynch Capital
Services, Inc.) 4,325,000
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 3,195,000 California GO, (PT 2831),
VRDN, 3.43%, 9/7/06 (Ambac)
(SBBPA: Dexia Credit Local)
(Acquired 7/5/05-6/28/06,
Cost $3,195,000)(1) $ 3,195,000
- --------------------------------------------------------------------------------
5,000,000 California GO, Series 2003 C3,
VRDN, 3.33%, 9/7/06 (LOC:
Landesbank Hessen-Thuringen
Girozentrale, Bank of America
N.A., Bank of Nova Scotia) 5,000,000
- --------------------------------------------------------------------------------
1,900,000 California GO, Series 2003 C4,
VRDN, 3.36%, 9/7/06 (LOC:
Landesbank Hessen-Thuringen
Girozentrale, Bank of America
N.A., Bank of Nova Scotia) 1,900,000
- --------------------------------------------------------------------------------
10,000,000 California GO, Series 2005 B1,
VRDN, 3.27%, 9/6/06 (LOC:
Bank of America N.A.) 10,000,000
- --------------------------------------------------------------------------------
4,500,000 California Health Facilities
Financing Auth. Rev., Series
2006 C, (Kaiser Permanente),
VRDN, 3.32%, 9/6/06 4,500,000
- --------------------------------------------------------------------------------
12,660,000 California Housing Finance
Agency Rev., Series 2001 F,
(Multifamily Housing III),
VRDN, 3.35%, 9/6/06
(SBBPA: FNMA) 12,660,000
- --------------------------------------------------------------------------------
11,100,000 California Housing Finance
Agency Rev., Series 2002 B,
(Multifamily Housing III),
VRDN, 3.32%, 9/7/06
(SBBPA: FNMA) 11,100,000
- --------------------------------------------------------------------------------
4,000,000 California Infrastructure &
Economic Development Bank
Rev., (Academy of Motion
Picture Arts and Sciences
Obligated Group), VRDN,
3.40%, 9/7/06 (Ambac)
(SBBPA: JPMorgan Chase
Bank) 4,000,000
- --------------------------------------------------------------------------------
4,600,000 California Infrastructure &
Economic Development Bank
Rev., (Humane Society),
VRDN, 3.43%, 9/7/06 (LOC:
Comerica Bank) 4,600,000
- --------------------------------------------------------------------------------
2,830,000 California Infrastructure &
Economic Development Bank
Rev., (Rural Community
Assistance), VRDN, 3.43%,
9/7/06 (LOC: Bank of the
West) 2,830,000
- --------------------------------------------------------------------------------
4,000,000 California Infrastructure &
Economic Development Bank
Rev., Series 2003 A, VRDN,
3.32%, 9/6/06 (LOC: Wells
Fargo Bank, N.A.) 4,000,000
- --------------------------------------------------------------------------------
5,465,000 California Public Works Board
Rev., Series 2001 (PA 814),
VRDN, 3.44%, 9/7/06 (MBIA)
(SBBPA: Merrill Lynch Capital
Services, Inc.) (Acquired
5/26/05, Cost $5,465,000)(1) 5,465,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
7
California Tax-Free Money Market - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 4,000,000 California School Cash Reserve
Program Auth. Rev., Series
2006 A, 4.50%, 7/6/07 $ 4,032,606
- --------------------------------------------------------------------------------
19,500,000 California Statewide
Communities Development
Auth. Rev., Series 2004 M,
VRDN, 3.32%, 9/6/06 19,500,000
- --------------------------------------------------------------------------------
4,000,000 California Statewide
Communities Development
Auth. Rev., Series 2006 A,
(National Center for
International Schools), VRDN,
3.36%, 9/7/06 (LOC: Allied
Irish Bank plc) 4,000,000
- --------------------------------------------------------------------------------
5,535,000 California Statewide
Communities Development
Auth. Special Tax Rev., VRDN,
3.47%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.)
(Acquired 8/6/01-3/13/03,
Cost $5,535,000)(1) 5,535,000
- --------------------------------------------------------------------------------
3,150,000 California Statewide Financing
Auth. Rev., VRDN, 3.47%,
9/7/06 (LOC: Merrill Lynch
Capital Services, Inc.)
(Acquired 2/17/05-1/12/06,
Cost $3,150,000)(1) 3,150,000
- --------------------------------------------------------------------------------
1,900,000 City of Davis Special Tax Rev.,
(Community Facilities District
No. 1999-2), VRDN, 3.33%,
9/7/06 (LOC: Wells Fargo
Bank, N.A.) 1,900,000
- --------------------------------------------------------------------------------
3,675,000 City of Fremont COP, (Building
& Equipment Financing),
VRDN, 3.32%, 9/7/06 (LOC:
KBC Bank N.V.) 3,675,000
- --------------------------------------------------------------------------------
7,000,000 City of Los Angeles Rev.,
4.50%, 6/29/07 7,041,721
- --------------------------------------------------------------------------------
1,000,000 City of Novato Rev.,
(Nova-Ro III Senior Housing),
VRDN, 3.30%, 9/7/06 (LOC:
Bank of the West) 1,000,000
- --------------------------------------------------------------------------------
12,085,000 City of Reedley COP, VRDN,
3.39%, 9/7/06 (LOC: U.S.
Bank N.A.) 12,085,000
- --------------------------------------------------------------------------------
4,700,000 City of San Jose Rev., Series
1985 B, (Foxchase), VRDN,
3.38%, 9/7/06 (LOC: FNMA) 4,700,000
- --------------------------------------------------------------------------------
5,995,000 City of Vallejo COP, Series
2001, (Golf Course Facilities
Financing), VRDN, 3.37%,
9/7/06 (LOC: Union Bank of
California N.A.) 5,995,000
- --------------------------------------------------------------------------------
26,195,000 City of Vallejo COP, VRDN,
3.37%, 9/7/06 (LOC: Union
Bank of California N.A.) 26,194,999
- --------------------------------------------------------------------------------
6,000,000 City of Vallejo Rev., Series
2001 A, VRDN, 3.40%, 9/6/06
(LOC: JPMorgan Chase Bank) 6,000,000
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 9,800,000 City of Whittier Rev., (Whittier
College), VRDN, 3.47%, 9/7/06
(RADIAN) (SBBPA: Bank of
New York) $ 9,800,000
- --------------------------------------------------------------------------------
7,000,000 Coachella Valley Unified
School District COP, VRDN,
3.42%, 9/7/06 (FSA) (SBBPA:
Dexia Credit Local) 7,000,000
- --------------------------------------------------------------------------------
1,500,000 County of Ventura GO, 4.50%,
7/2/07 1,509,634
- --------------------------------------------------------------------------------
5,000,000 Delano COP, VRDN, (Delano
Regional Medical Center),
3.42%, 9/7/06 (LOC:
Comerica Bank) 5,000,000
- --------------------------------------------------------------------------------
3,800,000 Diamond Bar Public Financing
Auth. Lease Rev., Series
2002 A, (Community/Senior
Center), VRDN, 3.55%, 9/6/06
(LOC: Union Bank of
California N.A.) 3,800,000
- --------------------------------------------------------------------------------
1,100,000 East Bay Municipal Utility
District Rev., Series 2005 B2,
VRDN, 3.26%, 9/6/06 (XLCA)
(SBBPA: Dexia Credit Local) 1,100,000
- --------------------------------------------------------------------------------
3,600,000 East Bay Municipal Utility
District - Wastewater System,
3.51%, 9/1/06 (SBBPA:
Westdeutsche Landesbank AG
and JPMorgan Chase Bank)
(Acquired 8/1/06, Cost
$3,600,000)(1) 3,600,000
- --------------------------------------------------------------------------------
6,200,000 El Monte COP, Series 2003 A,
(Community Improvement),
VRDN, 3.41%, 9/7/06 (LOC:
California State Teacher's
Retirement) 6,200,000
- --------------------------------------------------------------------------------
2,080,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (DB 195), VRDN, 3.47%,
9/7/06 (FGIC) (LIQ FAC:
Deutsche Bank A.G.) 2,080,000
- --------------------------------------------------------------------------------
6,875,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (PA 1206), VRDN,
3.44%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.) 6,875,000
- --------------------------------------------------------------------------------
3,530,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (PA 1236), VRDN,
3.47%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.)
(Acquired 1/15/04, Cost
$3,530,000)(1) 3,530,000
- --------------------------------------------------------------------------------
2,735,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (PA 1237), VRDN,
3.47%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.) 2,735,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
8
California Tax-Free Money Market - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,865,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (PT 2338), VRDN,
3.47%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.)
(Acquired 8/20/04-10/6/05,
Cost $2,865,000)(1) $ 2,865,000
- --------------------------------------------------------------------------------
2,080,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., (PT 3572), VRDN,
3.47%, 9/7/06 (LOC: Merrill
Lynch Capital Services, Inc.)
(Acquired 8/17/06, Cost
$2,080,000)(1) 2,080,000
- --------------------------------------------------------------------------------
22,455,000 Inland Valley Development
Agency Tax Allocation Rev.,
VRDN, 3.40%, 9/6/06 (LOC:
California State Teacher's
Retirement) 22,455,000
- --------------------------------------------------------------------------------
12,918,218 Koch Certificates Trust Rev.,
Series 1999-2, VRDN, 3.46%,
9/7/06 (Ambac) (MBIA)
(SBBPA: State Street Bank &
Trust Co.) (Acquired 2/11/00-
12/2/04, Cost $12,918,218)(1) 12,918,218
- --------------------------------------------------------------------------------
3,425,000 Long Beach Unified School
District COP, VRDN, 3.41%,
9/7/06 (Ambac) (SBBPA:
Dexia Credit Local) 3,425,000
- --------------------------------------------------------------------------------
4,915,000 Los Angeles GO, (PT 1476),
VRDN, 3.44%, 9/7/06 (MBIA)
(SBBPA: Merrill Lynch Capital
Services, Inc.) 4,915,000
- --------------------------------------------------------------------------------
4,330,000 San Bernardino County
Multifamily Housing Auth. Rev.,
Series 1993 A, (Rialto
Heritage), VRDN, 3.39%,
9/7/06 (LOC: FHLB) 4,330,000
- --------------------------------------------------------------------------------
4,970,000 San Diego County COP,
(Friends of Chabad), VRDN,
3.40%, 9/7/06 (LOC:
Comerica Bank) 4,970,000
- --------------------------------------------------------------------------------
17,000,000 San Diego Unified School
District GO, Series 2006 A,
4.50%, 7/24/07 17,116,911
- --------------------------------------------------------------------------------
7,560,000 San Francisco City & County
Redevelopment Agency
Community Facilities District
No. 4 Rev., VRDN, 3.33%,
9/7/06 (LOC: Bank of
America N.A.) 7,560,000
- --------------------------------------------------------------------------------
2,100,000 San Francisco City & County
Redevelopment Agency Rev.,
(South Harbor), VRDN, 3.41%,
9/7/06 (LOC: Dexia Credit
Local) 2,100,000
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$26,055,000 San Mateo County Housing
Auth. Rev., VRDN, 3.49%,
9/7/06 (LOC: FHLMC) $ 26,055,000
- --------------------------------------------------------------------------------
595,000 Southern California Logistics
Airport Auth. Housing
Set-Aside Rev., (Southern
California Logistics Airport),
3.625%, 12/1/06 (XLCA) 595,099
- --------------------------------------------------------------------------------
2,225,000 Southern California Logistics
Airport Auth. Tax Allocation
Rev., (Southern California
Logistics Airport), 3.625%,
12/1/06 (XLCA) 2,225,370
- --------------------------------------------------------------------------------
6,750,000 Temecula Public Financing
Auth. Community Facilities
District No. 1-2 Special Tax,
Series 2002 A, (Harveston),
VRDN, 3.33%, 9/7/06 (LOC:
Bank of America N.A.) 6,750,000
- --------------------------------------------------------------------------------
1,200,000 Triunfo County Sanitation
District Rev., VRDN, 3.35%,
9/6/06 (LOC: BNP Paribas) 1,200,000
- --------------------------------------------------------------------------------
2,975,000 Victor Valley Community
College District COP, VRDN,
3.42%, 9/7/06 (LOC: BNP
Paribas and Union Bank of
California N.A.) 2,975,000
- --------------------------------------------------------------------------------
14,000,000 Victorville Joint Powers
Finance Auth. Rev., Series
2005 A, (Cogeneration Facility),
VRDN, 3.41%, 9/6/06 (LOC:
Fortis Bank SA N.V.) 14,000,000
- --------------------------------------------------------------------------------
8,400,000 Western Placer Unified School
District COP, VRDN, 3.35%,
9/7/06 (LOC: Bank of
America N.A.) 8,400,000
- --------------------------------------------------------------------------------
3,000,000 Westminister COP, Series
1998 A, (Civic Center), VRDN,
3.33%, 9/7/06 (Ambac)
(SBBPA: Wachovia Bank N.A.) 3,000,000
- --------------------------------------------------------------------------------
1,500,000 Westminster Redevelopment
Agency Tax Allocation Rev.,
VRDN, 3.33%, 9/7/06 (Ambac)
(SBBPA: Landesbank
Hessen-Thuringen Girozentrale) 1,500,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 99.3% 526,507,715
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.7% 3,505,090
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $530,012,805
================================================================================
See Notes to Financial Statements. (continued)
- ------
9
California Tax-Free Money Market - Schedule of Investments
AUGUST 31, 2006
NOTES TO SCHEDULE OF INVESTMENTS
Ambac = Ambac Assurance Corporation
CIFG-TCRS = CDC IXIS Financial Guaranty North America --
Transferable Custodial Receipts
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
FSA = Financial Security Assurance, Inc.
GO = General Obligation
LIQ FAC = Liquidity Facilities
LOC = Letter of Credit
MBIA = MBIA Insurance Corporation
RADIAN = Radian Asset Assurance, Inc.
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown
is effective August 31, 2006.
XLCA = XL Capital Ltd.
(1) 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 August 31, 2006, was
$75,913,846, which represented 14.3% of total net assets. None of the
restricted securities are considered to be illiquid.
See Notes to Financial Statements.
- ------
10
California Limited-Term Tax-Free - Performance
TOTAL RETURNS AS OF AUGUST 31, 2006
------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CALIFORNIA
LIMITED-TERM
TAX-FREE 2.68% 2.70% 3.88% 4.09% 6/1/92
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
3-YEAR MUNICIPAL
BOND INDEX(1) 2.27% 2.93% 4.16% 4.48%(2) --
- --------------------------------------------------------------------------------
LIPPER CALIFORNIA
SHORT-INTERMEDIATE
MUNICIPAL DEBT FUNDS
AVERAGE RETURNS(1) 2.49% 2.73% 3.59% 4.15%(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 8/31/06(1) 7 of 18 6 of 11 1 of 6 2 of 2(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 9/30/06(1) 7 of 18 7 of 11 2 of 7 2 of 2(3) --
- --------------------------------------------------------------------------------
(1) Data provided by Lipper Inc. - A Reuters Company. ©2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(2) Since 5/31/92, the date nearest the fund's inception for which data are
available.
(3) Since 6/4/92, the date nearest the fund's inception for which data are
available.
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
(continued)
- ------
11
California Limited-Term Tax-Free - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made August 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended August 31
- ------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------
California Limited-
Term Tax-Free 5.42% 5.40% 2.26% 5.44% 6.94% 4.91% 1.87% 2.75% 1.33% 2.68%
- ------------------------------------------------------------------------------------------
Lehman Brothers
3-Year Municipal
Bond Index 5.65% 5.76% 2.92% 4.72% 8.05% 5.71% 3.06% 2.83% 0.84% 2.27%
- ------------------------------------------------------------------------------------------
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
- ------
12
California Limited-Term Tax-Free - Portfolio Commentary
PORTFOLIO MANAGER: ALAN KRUSS
MR. KRUSS, VICE PRESIDENT AND PORTFOLIO MANAGER, JOINED AMERICAN CENTURY
INVESTMENTS IN 1997 AND BECAME A PORTFOLIO MANAGER IN 2001. IN APRIL 2006, MR.
KRUSS TOOK OVER CALIFORNIA LIMITED-TERM TAX-FREE'S TEAM-LEADER ROLE FROM ROBERT
MILLER, WHO REMAINS ON THE TEAM BUT NOW CONCENTRATES HIS DAY-TO-DAY EFFORTS ON
MANAGING OTHER MUNICIPAL PORTFOLIOS.
PERFORMANCE SUMMARY
California Limited-Term Tax-Free (Cal Limited-Term) returned 2.68% for the 12
months ended August 31, 2006. The bulk of this return stemmed from income, with
the fund's net asset value finishing slightly below where it began but above the
period's lows. Cal Limited-Term's modest gain reflected the challenging backdrop
for U.S. bonds, which contended with inflation running at its quickest pace
since 1991, erratic U.S. economic growth, and short-term interest rates at their
highest levels since 2001.
By comparison, the average return of the fund's peer group (18 California
short-intermediate municipal debt funds tracked by Lipper) was 2.49% while the
Lehman Brothers 3-Year Municipal Bond Index returned 2.27%, both performance
gauges underperforming Cal Limited-Term.
In the Market Perspective (page 2), we discuss the U.S. economic and broad bond
market backdrop for those returns. The Portfolio Positioning & Strategy section
on the next page highlights some of the strategies that we employed to help Cal
Limited-Term achieve its superior performance results for the 12 months.
YIELD SUMMARY
One of Cal Limited-Term's key objectives is to seek high current income that is
exempt from California and federal income taxes (the fund also seeks safety of
principal). With the Federal Reserve (the Fed) increasing short-term interest
rates seven times during the 12 months--from 3.50% in September 2005 to 5.25% by
the end of June 2006--in 25-basis-point (0.25%) increments, the fund's 30-day
SEC yield rose accordingly.
As of August 31, 2006, Cal Limited-Term's 30-day SEC yield was 3.29%, which
translated into the attractive tax-equivalent yields shown in the table at top
and was up from 2.90% as of August 31, 2005. By comparison, the Lipper group
average 30-day SEC yield was 3.13% at the end of the period, and it's worth
noting that we achieved Cal
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/06 8/31/05
- --------------------------------------------------------------------------------
Weighted Average
Maturity 3.9 yrs 4.3 yrs
- --------------------------------------------------------------------------------
Average Duration
(Modified) 3.3 yrs 3.1 yrs
- --------------------------------------------------------------------------------
YIELDS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
3.29%
- --------------------------------------------------------------------------------
30-DAY TAX-EQUIVALENT YIELDS*
- --------------------------------------------------------------------------------
31.98% Tax Bracket 4.84%
- --------------------------------------------------------------------------------
34.70% Tax Bracket 5.04%
- --------------------------------------------------------------------------------
39.23% Tax Bracket 5.41%
- --------------------------------------------------------------------------------
41.05% Tax Bracket 5.58%
- --------------------------------------------------------------------------------
*The tax brackets indicated are for combined state and federal income tax.
Actual tax-equivalent yields may be lower, if alternative minimum tax is
applicable.
(continued)
- ------
13
California Limited-Term Tax-Free - Portfolio Commentary
Limited-Term's higher yield without purchasing bonds subject to the alternative
minimum tax.
PORTFOLIO POSITIONING & STRATEGY
Turning to portfolio-specific strategies, the foundations of our multi-layered,
repeatable investment approach remained central to our efforts and included
careful security selection, diligent investment monitoring, and thorough credit
analysis with the help of our long-tenured municipal credit research team.
Continuing a previously established trend, we actively emphasized lower-rated
investment-grade municipal bonds during the second half of the 12 months. The
generally higher yields of these securities propped up Cal Limited-Term's total
return amid the backdrop of rising short-term interest rates and bond yields
while simultaneously helping us to limit the portfolio's sensitivity to interest
rates. Lower-rated municipal bonds outperformed their higher-grade counterparts,
generally rewarding these efforts.
However, as the period began winding down, we felt that the contracted yield gap
between higher- and lower-rated investment-grade municipal bonds made the latter
less appealing from a risk/return standpoint than was previously the case. So
although we continued to examine any attractive opportunities that arose, we
didn't attempt to further increase the portfolio's allotment in municipal bonds
rated either single-A or BBB.
CALIFORNIA LIMITED-TERM TAX-FREE'S PLACE IN YOUR PORTFOLIO
Cal Limited-Term is designed to be a core bond holding and seeks safety of
principal and high current income by investing in debt securities issued by
cities, counties and municipalities, and U.S. territories.
Because municipal bonds typically don't move in lock-step with equities under
various economic and market scenarios, Cal Limited-Term potentially offers
diversification benefits for investors. But it's important to keep in mind that
even diversification does not ensure against losses.
PORTFOLIO COMPOSITION BY CREDIT RATING
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
AAA 61% 53%
- --------------------------------------------------------------------------------
AA 4% 4%
- --------------------------------------------------------------------------------
A 8% 17%
- --------------------------------------------------------------------------------
BBB 23% 23%
- --------------------------------------------------------------------------------
Not Rated 4% 3%
- --------------------------------------------------------------------------------
Ratings provided by independent research companies. These ratings are listed in
Standard & Poor's format even if they were provided by other sources.
TOP FIVE SECTORS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
% OF FUND
INVESTMENTS
- --------------------------------------------------------------------------------
General Obligation (GO) 30%
- --------------------------------------------------------------------------------
Electric Revenue 12%
- --------------------------------------------------------------------------------
Land Based 8%
- --------------------------------------------------------------------------------
Certificate of Participation
(COPs)/Leases 8%
- --------------------------------------------------------------------------------
Hospital Revenue 7%
- --------------------------------------------------------------------------------
- ------
14
California Limited-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 98.6%
CALIFORNIA -- 79.8%
- --------------------------------------------------------------------------------
$2,740,000 Alameda Unified School District
GO, 5.50%, 7/1/08 (FSA) $ 2,838,594
- --------------------------------------------------------------------------------
890,000 Alameda Unified School District
GO, 5.50%, 7/1/09 (FSA) 938,434
- --------------------------------------------------------------------------------
1,545,000 Alameda Unified School District
GO, 5.50%, 7/1/10 (FSA) 1,656,302
- --------------------------------------------------------------------------------
3,000,000 California Department of Water
Resources Power Supply Rev.,
Series 2002 A, 5.50%, 5/1/08 3,092,459
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/10 210,166
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/11 212,000
- --------------------------------------------------------------------------------
195,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/12 208,278
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/13 214,820
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/14 215,424
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/15 216,200
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/16 215,212
- --------------------------------------------------------------------------------
200,000 California Educational Facilities
Auth. Rev., (University of the
Pacific), 5.00%, 11/1/17 214,544
- --------------------------------------------------------------------------------
4,275,000 California GO, 6.50%, 2/1/08
(Ambac)(1) 4,447,282
- --------------------------------------------------------------------------------
2,500,000 California GO, 4.50%, 10/1/08
(FSA) 2,551,000
- --------------------------------------------------------------------------------
2,500,000 California GO, 5.00%, 12/1/09
(Ambac) 2,613,725
- --------------------------------------------------------------------------------
3,000,000 California GO, 5.00%, 3/1/10
(XLCA) 3,138,479
- --------------------------------------------------------------------------------
1,000,000 California GO, 5.50%, 3/1/11
(XLCA) 1,078,070
- --------------------------------------------------------------------------------
5,000,000 California GO, Series 2004 A,
5.00%, 7/1/11 (MBIA)(1) 5,324,899
- --------------------------------------------------------------------------------
1,075,000 California Infrastructure &
Economic Development Bank
Rev., Series 2006 A, (California
Science Center Phase II),
4.25%, 5/1/13 (FGIC) 1,114,883
- --------------------------------------------------------------------------------
1,350,000 California Infrastructure &
Economic Development Bank
Rev., Series 2006 B, (California
Science Center Phase II),
4.50%, 5/1/11 (FGIC) 1,404,351
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 600,000 California Public Works Board
Lease Rev., Series 1993 A,
(Various University of
California Projects), 5.50%,
6/1/10 $ 632,640
- --------------------------------------------------------------------------------
2,000,000 California Public Works Board
Lease Rev., Series 2005 A,
(Department General
Services - Butterfield),
5.00%, 6/1/09 2,070,720
- --------------------------------------------------------------------------------
1,450,000 California Public Works Board
Lease Rev., Series 2005 A,
(Department General
Services - Butterfield),
5.00%, 6/1/15 1,564,405
- --------------------------------------------------------------------------------
1,000,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 5.00%, 7/1/12(2) 1,072,210
- --------------------------------------------------------------------------------
2,000,000 Capistrano Unified School
District Community Facilities
District No. 87-1 Special Tax
Rev., 5.00%, 9/1/18 (Ambac) 2,168,320
- --------------------------------------------------------------------------------
1,130,000 Carson Redevelopment
Agency Residential Mortgage
COP, (Area No. 1), 5.50%,
10/1/11 (MBIA) 1,230,536
- --------------------------------------------------------------------------------
895,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.00%, 2/1/07 897,730
- --------------------------------------------------------------------------------
895,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.125%, 2/1/08 904,201
- --------------------------------------------------------------------------------
1,245,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.125%, 2/1/09 1,266,115
- --------------------------------------------------------------------------------
675,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.25%, 2/1/10 692,624
- --------------------------------------------------------------------------------
860,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.25%, 2/1/11 887,417
- --------------------------------------------------------------------------------
1,110,000 Central California Joint
Powers Health Financing Auth.
COP, (Community Hospitals),
5.25%, 2/1/13 1,110,755
- --------------------------------------------------------------------------------
1,070,000 Chaffey Community College
District GO, Series 2002 A,
4.25%, 7/1/11 (FSA) 1,106,080
- --------------------------------------------------------------------------------
310,000 Coachella Valley Improvement
Bond Act 1915 Recreation &
Park District Special Tax Rev.,
(District 1), 4.875%, 9/2/07
(MBIA) 314,343
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
15
California Limited-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$2,065,000 Coast Community College
District GO, Series 2006 B,
(2002 Election), 5.00%,
8/1/17 (FSA) $ 2,262,538
- --------------------------------------------------------------------------------
500,000 Del Mar Race Track Auth.
Rev., 5.00%, 8/15/08 511,385
- --------------------------------------------------------------------------------
1,415,000 Del Mar Race Track Auth.
Rev., 5.00%, 8/15/10 1,470,468
- --------------------------------------------------------------------------------
1,190,000 Imperial Irrigation District
COP, (Water Systems),
5.50%, 7/1/09 (Ambac) 1,252,451
- --------------------------------------------------------------------------------
1,755,000 Industry Urban Development
Agency Rev., 4.50%, 5/1/11
(MBIA) 1,774,323
- --------------------------------------------------------------------------------
825,000 Irvine Unified School District
Financing Auth. Special Tax
Rev., Series 2006 A, 4.50%,
9/1/13 826,229
- --------------------------------------------------------------------------------
635,000 Irvine Unified School District
Financing Auth. Special Tax
Rev., Series 2006 A, 4.75%,
9/1/16 639,528
- --------------------------------------------------------------------------------
105,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
3.00%, 2/1/08 103,630
- --------------------------------------------------------------------------------
110,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
3.80%, 2/1/10 108,889
- --------------------------------------------------------------------------------
120,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
4.00%, 2/1/11 119,435
- --------------------------------------------------------------------------------
125,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
4.30%, 2/1/13 125,714
- --------------------------------------------------------------------------------
750,000 Long Beach Bond Finance
Auth. GO, Series 2002 A,
(North Long Beach
Redevelopment), 5.00%,
8/1/10 (Ambac) 789,503
- --------------------------------------------------------------------------------
2,315,000 Long Beach Bond Finance
Auth. GO, Series 2002 A,
(North Long Beach
Redevelopment), 5.00%,
8/1/11 (Ambac) 2,463,322
- --------------------------------------------------------------------------------
500,000 Los Angeles Community
Redevelopment Agency
Parking System Rev.,
(Cinerama Dome Public
Package Project), 4.75%,
7/1/07 (ACA) 503,980
- --------------------------------------------------------------------------------
615,000 Los Angeles Community
Redevelopment Agency
Parking System Rev.,
(Cinerama Dome Public
Package Project), 4.875%,
7/1/08 (ACA) 626,187
- --------------------------------------------------------------------------------
2,100,000 Los Angeles County
Metropolitan Transportation
Auth. Sales Tax Rev., Series
2001 B, (Proposal A), 5.25%,
7/1/11 (FSA) 2,262,498
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$3,130,000 Los Angeles Department of
Water & Power Rev., Series
2001 AA1, (Power Systems),
5.25%, 7/1/10 (MBIA)(1) $ 3,327,627
- --------------------------------------------------------------------------------
575,000 Lynwood Public Financing
Auth. COP, 4.125%, 9/1/12
(Ambac) 591,848
- --------------------------------------------------------------------------------
1,550,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/09 1,567,267
- --------------------------------------------------------------------------------
1,255,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/11 1,276,172
- --------------------------------------------------------------------------------
1,690,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/13 1,719,761
- --------------------------------------------------------------------------------
3,000,000 Oakland Joint Powers
Financing Auth. Lease Rev.,
(Convention Centers), 5.25%,
10/1/08 (Ambac) 3,103,589
- --------------------------------------------------------------------------------
1,225,000 Oceanside COP, Series 2003 A,
5.00%, 4/1/11 (Ambac) 1,298,157
- --------------------------------------------------------------------------------
650,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
3.50%, 8/15/10 629,993
- --------------------------------------------------------------------------------
760,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
3.80%, 8/15/11 741,768
- --------------------------------------------------------------------------------
825,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
3.90%, 8/15/12 803,369
- --------------------------------------------------------------------------------
700,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
4.10%, 8/15/13 685,839
- --------------------------------------------------------------------------------
1,135,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
4.25%, 8/15/14 1,116,919
- --------------------------------------------------------------------------------
1,230,000 Orange County Refunding
Recovery Rev., Series 1995 A,
6.00%, 6/1/08 (MBIA) 1,283,763
- --------------------------------------------------------------------------------
275,000 Orange County Special
Assessment, 4.30%, 9/2/14 269,836
- --------------------------------------------------------------------------------
325,000 Orange County Special
Assessment, 4.45%, 9/2/15 319,628
- --------------------------------------------------------------------------------
250,000 Orange County Special
Assessment, 4.55%, 9/2/16 245,783
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
16
California Limited-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$1,800,000 Poway Unified School District
Special Tax Rev., (Community
Facilities District No. 1),
5.00%, 10/1/07 (MBIA) $ 1,829,268
- --------------------------------------------------------------------------------
585,000 Rancho Water District
Financing Auth. Rev., Series
2001 A, 5.00%, 8/1/07 (FSA) 592,950
- --------------------------------------------------------------------------------
1,650,000 Riverside Sewer Rev., 7.00%,
8/1/07 (FGIC) 1,701,167
- --------------------------------------------------------------------------------
3,800,000 Sacramento County Sanitation
District Auth. Rev., Series
2000 A, 5.10%, 12/1/09 3,977,307
- --------------------------------------------------------------------------------
2,585,000 Sacramento Municipal Utility
District Electric Rev., Series
2002 Q, 5.00%, 8/15/09 (FSA) 2,692,562
- --------------------------------------------------------------------------------
3,000,000 Sacramento Municipal Utility
District Electric Rev., Series
2003 S, 5.00%, 11/15/11
(MBIA) 3,212,009
- --------------------------------------------------------------------------------
1,005,000 San Bernardino County
Redevelopment Agency Tax
Allocation Rev., Series 2005 A,
(San Sevaine), 5.00%, 9/1/15
(RADIAN) 1,076,255
- --------------------------------------------------------------------------------
715,000 San Diego Community College
District GO, (Election of 2002),
3.28%, 5/1/08 (FSA)(3) 671,914
- --------------------------------------------------------------------------------
420,000 San Diego Community College
District GO, (Election of 2002),
3.44%, 5/1/09 (FSA)(3) 380,096
- --------------------------------------------------------------------------------
2,000,000 San Ramon Valley Unified
School District GO, (Election of
2002), 4.50%, 8/1/14 (MBIA) 2,120,440
- --------------------------------------------------------------------------------
2,000,000 Santa Clara County Financing
Auth. Lease Rev., Series
2000 B, (Multiple Facilities),
5.50%, 5/15/07 (Ambac) 2,027,460
- --------------------------------------------------------------------------------
1,210,000 Shasta Lake Public Finance
Auth. Rev., 3.75%, 4/1/09 1,203,490
- --------------------------------------------------------------------------------
1,000,000 Shasta Lake Public Finance
Auth. Rev., 4.00%, 4/1/12 999,480
- --------------------------------------------------------------------------------
1,530,000 Shasta Lake Public Finance
Auth. Rev., 4.50%, 4/1/15 1,556,117
- --------------------------------------------------------------------------------
1,250,000 South Orange County Public
Financing Auth. Special Tax
Rev., Series 1994 C, (Foothill
Area), 7.50%, 8/15/07 (FGIC) 1,295,838
- --------------------------------------------------------------------------------
2,000,000 South Orange County Public
Financing Auth. Special Tax
Rev., Series 2003 A, (Senior
Lien), 5.00%, 9/1/12 (MBIA) 2,154,580
- --------------------------------------------------------------------------------
1,080,000 South Tahoe Joint Powers
Financing Auth. Rev., Series
2005 A, 5.00%, 10/1/13
(Ambac) 1,171,303
- --------------------------------------------------------------------------------
1,195,000 South Tahoe Joint Powers
Financing Auth. Rev., Series
2005 A, 5.00%, 10/1/15
(Ambac) 1,308,573
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 730,000 Turlock COP, (Emanuel Medical
Center Inc.), 3.75%, 10/15/07 $ 728,562
- --------------------------------------------------------------------------------
755,000 Turlock COP, (Emanuel Medical
Center Inc.), 4.00%, 10/15/08 754,623
- --------------------------------------------------------------------------------
785,000 Turlock COP, (Emanuel Medical
Center Inc.), 4.25%, 10/15/09 789,004
- --------------------------------------------------------------------------------
820,000 Turlock COP, (Emanuel Medical
Center Inc.), 4.50%, 10/15/10 831,324
- --------------------------------------------------------------------------------
895,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.00%, 10/15/12 933,700
- --------------------------------------------------------------------------------
985,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.00%, 10/15/14 1,030,359
- --------------------------------------------------------------------------------
2,175,000 Turlock Irrigation District Rev.,
Series 2003 A, 5.00%, 1/1/13
(MBIA) 2,346,608
- --------------------------------------------------------------------------------
1,000,000 Val Verde Unified School
District COP, 5.00%, 1/1/14
(FGIC)(2) 1,087,800
- --------------------------------------------------------------------------------
1,145,000 Val Verde Unified School
District COP, 5.25%, 1/1/15,
Prerefunded at 100% of Par
(FGIC)(2) 1,269,908
- --------------------------------------------------------------------------------
122,387,314
- --------------------------------------------------------------------------------
GUAM -- 3.4%
- --------------------------------------------------------------------------------
5,000,000 Guam Government Limited
Obligation Rev., Series 2001 A,
5.00%, 12/1/09 (FSA)(1) 5,221,200
- --------------------------------------------------------------------------------
NORTHERN MARIANA ISLANDS -- 1.7%
- --------------------------------------------------------------------------------
1,075,000 Northern Mariana Islands
Commonwealth GO, Series
2000 A, 5.50%, 6/1/07 (ACA) 1,087,373
- --------------------------------------------------------------------------------
1,430,000 Northern Mariana Islands
Commonwealth GO, Series
2000 A, 5.75%, 6/1/10 (ACA) 1,509,966
- --------------------------------------------------------------------------------
2,597,339
- --------------------------------------------------------------------------------
PUERTO RICO -- 11.9%
- --------------------------------------------------------------------------------
1,500,000 Childrens Trust Fund Tobacco
Settlement Rev., 5.00%,
7/1/08(2) 1,538,070
- --------------------------------------------------------------------------------
7,342,000 Government Development
Bank of Puerto Rico Rev.,
3.85%, 10/5/06 (Acquired
1/20/06, Cost $7,342,000)(4) 7,340,605
- --------------------------------------------------------------------------------
2,000,000 Government Development
Bank of Puerto Rico Rev.,
4.00%, 11/10/06 (Acquired
8/11/06, Cost $2,000,000)(4) 1,999,540
- --------------------------------------------------------------------------------
1,000,000 Government Development
Bank of Puerto Rico Rev.,
Series 2006 B, 5.00%,
12/1/15 1,068,480
- --------------------------------------------------------------------------------
1,750,000 Puerto Rico Commonwealth
GO, Series 2004 A, 5.00%,
7/1/12 1,824,883
- --------------------------------------------------------------------------------
1,500,000 Puerto Rico Electric Power
Auth. Rev., Series 1999 FF,
5.25%, 7/1/09 (MBIA) 1,569,120
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
17
California Limited-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$1,315,000 Puerto Rico Municipal Finance
Agency Rev., Series 2002 A,
4.50%, 8/1/10 (FSA) $ 1,357,987
- --------------------------------------------------------------------------------
1,500,000 Puerto Rico Public Buildings
Auth. Rev., Series 2002 C,
(Government Facilities),
5.50%, 7/1/10 1,584,330
- --------------------------------------------------------------------------------
18,283,015
- --------------------------------------------------------------------------------
U.S. VIRGIN ISLANDS -- 1.8%
- --------------------------------------------------------------------------------
500,000 Virgin Islands Public Finance
Auth. Rev., 5.00%, 10/1/14 524,015
- --------------------------------------------------------------------------------
500,000 Virgin Islands Public Finance
Auth. Rev., 5.25%, 10/1/14 533,710
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 170,000 Virgin Islands Public Finance
Auth. Rev., 5.25%, 10/1/15 $ 182,362
- --------------------------------------------------------------------------------
1,500,000 Virgin Islands Public Finance
Auth. Rev., Series 1998 C,
(Senior Lien Fund), 5.50%,
10/1/07 1,526,685
- --------------------------------------------------------------------------------
2,766,772
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 98.6%
(Cost $149,237,389) 151,255,640
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.4% 2,152,067
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $153,407,707
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
57 U.S. Treasury
2-Year Notes December 2006 $11,647,594 $16,794
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
61 U.S. Treasury
10-Year Notes December 2006 $6,549,875 $(27,778)
==================================
NOTES TO SCHEDULE OF INVESTMENTS
ACA = American Capital Access
Ambac = Ambac Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance, Inc.
GO = General Obligation
MBIA = MBIA Insurance Corporation
RADIAN = Radian Asset Assurance, Inc.
XLCA = XL Capital Ltd.
(1) Security, or a portion thereof, has been segregated for futures contracts.
(2) Escrowed to maturity in U.S. government securities or state and local
government securities.
(3) Security is a zero-coupon municipal bond. The rate indicated is the yield
to maturity at purchase. Zero-coupon securities are issued at a substantial
discount from their value at maturity.
(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 restricted securities at August 31, 2006, was $9,340,145,
which represented 6.1% of total net assets.
See Notes to Financial Statements.
- ------
18
California Tax-Free Bond - Performance
TOTAL RETURNS AS OF AUGUST 31, 2006
-------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CALIFORNIA
TAX-FREE BOND 2.58% 3.71% 4.86% 6.01% 11/9/83
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
5-YEAR GO INDEX 2.32% 3.78% 4.88% 6.48%(1) --
- --------------------------------------------------------------------------------
LIPPER CALIFORNIA
INTERMEDIATE
MUNICIPAL DEBT FUNDS
AVERAGE RETURNS(2) 2.38% 3.44% 4.64% 6.02%(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 8/31/06(2) 19 of 49 11 of 30 4 of 16 1 of 1(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 9/30/06(2) 19 of 49 8 of 31 4 of 16 1 of 1(3) --
- --------------------------------------------------------------------------------
(1) Since 10/31/83, the date nearest the fund's inception for which data are
available.
(2) Data provided by Lipper Inc. - A Reuters Company. ©2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(3) Since 11/10/83, the date nearest the fund's inception for which data are
available.
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
(continued)
- ------
19
California Tax-Free Bond - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made August 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended August 31
- ------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------
California
Tax-Free Bond 7.39% 7.00% 0.74% 6.95% 8.22% 5.63% 1.91% 5.13% 3.36% 2.58%
- ------------------------------------------------------------------------------------------
Lehman Brothers
5-Year GO Index 6.68% 6.81% 2.21% 5.33% 8.99% 6.56% 3.57% 4.58% 1.96% 2.32%
- ------------------------------------------------------------------------------------------
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
- ------
20
California Tax-Free Bond - Portfolio Commentary
PORTFOLIO MANAGER: ROBERT MILLER
PERFORMANCE SUMMARY
California Tax-Free Bond (Cal Tax-Free Bond) returned 2.58% for the 12 months
ended August 31, 2006. Income comprised the bulk of this return, with the fund's
net asset value finishing below where it began but above the period's lows. Cal
Tax-Free Bond's modest gain reflected the challenging backdrop for municipal
securities, which contended with inflation running at its quickest pace since
1991, erratic U.S. economic growth, and short-term interest rates at their
highest levels since 2001.
By comparison, Cal Tax-Free Bond's Lipper peer group (comprised of 49 California
intermediate municipal debt funds) and the Lehman Brothers 5-Year GO Index
underperformed: the Lipper group average returned 2.38% while the Lehman index
returned 2.32%. In addition, the fund's five- and 10-year returns for the
periods ended August 31, 2006, also outpaced the returns of the Lipper group
average.
YIELD SUMMARY
Seeking high current income that is exempt from California and federal income
taxes is one of Cal Tax-Free Bond's key objectives (the fund also seeks safety
of principal). As of August 31, 2006, Cal Tax-Free Bond's 30-day SEC yield was
3.52%--which translated into the attractive tax-equivalent yields in the table
at top-- compared with the 3.10% Lipper group average. We feel that it's also
worth noting that we achieved Cal Tax-Free Bond's higher income stream without
purchasing bonds subject to the alternative minimum tax.
MUNICIPAL MARKET REVIEW
Heightened inflation concerns on the heels of record crude oil prices, erratic
U.S. economic growth, and seven additional short-term interest rate increases by
the Federal Reserve (the Fed) in 25-basis-point increments (0.25%) dampened the
performance of municipal bonds. Yields on short-term securities rose the most in
that environment, while yields on municipal bonds maturing in 20 or more years
edged narrowly lower, and bonds carrying non-investment-grade ratings (BB and
lower) produced substantially higher returns than their investment-grade
counterparts.
In addition, unlike the Treasury yield curve (a graph showing the relationship
between bond yields and maturities), the municipal bond yield curve didn't
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/06 8/31/05
- --------------------------------------------------------------------------------
Weighted Average
Maturity 8.9 yrs 9.6 yrs
- --------------------------------------------------------------------------------
Average Duration
(Modified) 4.9 yrs 4.7 yrs
- --------------------------------------------------------------------------------
YIELDS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
3.52%
- --------------------------------------------------------------------------------
30-DAY TAX-EQUIVALENT YIELDS*
- --------------------------------------------------------------------------------
31.98% Tax Bracket 5.17%
- --------------------------------------------------------------------------------
34.70% Tax Bracket 5.39%
- --------------------------------------------------------------------------------
39.23% Tax Bracket 5.79%
- --------------------------------------------------------------------------------
41.05% Tax Bracket 5.97%
- --------------------------------------------------------------------------------
*The tax brackets indicated are for combined state and federal income tax.
Actual tax-equivalent yields may be lower, if alternative minimum tax is
applicable.
(continued)
- ------
21
California Tax-Free Bond - Portfolio Commentary
invert, which meant that investors could still earn additional income by taking
on more maturity risk. This drove up demand for municipal bonds, enabling them
to generally outperform taxable fixed-income securities.
PORTFOLIO POSITIONING & STRATEGY
With regard to portfolio-specific strategies, the foundations of our
multi-layered, repeatable investment approach remained central to our efforts
and included active security selection, diligent investment monitoring, and
thorough credit analysis with the help of our long-tenured municipal credit
research team.
For much of the 12 months, we positioned the portfolio to benefit from a
diminishing gap between the yields of short- and long-term municipal bonds, a
strategy for which we were rewarded. To accomplish this "barbell" bond maturity
structure (relative to the fund's Lipper peer group), we generally emphasized
short- and long-term bonds, while comparatively underweighting intermediate-term
securities.
Toward the end of the period, the yield-curve flattening appeared largely at an
end in light of moderating U.S. economic activity, the Fed on hold regarding
short-term interest rates, and optimism for diminished inflation going forward.
As a result, we adopted what we considered to be a "curve-neutral" approach
regarding the portfolio's bond maturity structure by adding intermediate-
maturity securities and simultaneously reducing short- and long-maturity
holdings. While doing so, we also adjusted Cal Tax-Free Bond's interest rate
sensitivity, electing a more in-line duration (a widely used gauge of interest
rate sensitivity) compared with the fund's Lipper peers.
CALIFORNIA TAX-FREE BOND'S PLACE IN YOUR PORTFOLIO
Cal Tax-Free Bond is designed to be a core bond holding and seeks safety of
principal and high current income by investing in debt securities issued by
cities, counties and municipalities, and U.S. territories.
Because municipal bonds typically don't move in lock-step with equities under
various economic and market scenarios, Cal Tax-Free Bond potentially offers
diversification benefits for investors. But it's important to keep in mind that
even diversification does not ensure against losses.
PORTFOLIO COMPOSITION BY CREDIT RATING
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
AAA 69% 70%
- --------------------------------------------------------------------------------
AA 5% 5%
- --------------------------------------------------------------------------------
A 9% 8%
- --------------------------------------------------------------------------------
BBB 16% 16%
- --------------------------------------------------------------------------------
Not Rated 1% 1%
- --------------------------------------------------------------------------------
Ratings provided by independent research companies. These ratings are listed in
Standard & Poor's format even if they were provided by other sources.
TOP FIVE SECTORS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
% OF FUND
INVESTMENTS
- --------------------------------------------------------------------------------
General Obligation (GO) 25%
- --------------------------------------------------------------------------------
Prerefunded 14%
- --------------------------------------------------------------------------------
Tax Allocation Revenue 11%
- --------------------------------------------------------------------------------
Electric Revenue 10%
- --------------------------------------------------------------------------------
Certificate of Participation
(COPs)/Leases 10%
- --------------------------------------------------------------------------------
- ------
22
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 99.3%
CALIFORNIA -- 88.2%
- --------------------------------------------------------------------------------
$5,565,000 Acalanes Union High School
District GO, Series 2005 B,
5.25%, 8/1/24 (FSA) $ 6,058,270
- --------------------------------------------------------------------------------
3,335,000 Alameda County COP, (Santa
Rita Jail), 5.375%, 6/1/09
(MBIA)(1) 3,407,470
- --------------------------------------------------------------------------------
1,385,000 Alameda County COP, Series
2001 A, 5.375%, 12/1/15
(MBIA) 1,507,642
- --------------------------------------------------------------------------------
1,000,000 Antelope Valley Community
College District GO, 5.00%,
8/1/18 (MBIA) 1,090,490
- --------------------------------------------------------------------------------
3,925,000 Banning Utility Auth. Rev.,
(Refunding and Improvement
Projects), 5.25%, 11/1/35
(FGIC) 4,241,002
- --------------------------------------------------------------------------------
1,085,000 California Department of Water
Resources Central Valley Rev.,
Series 1998 U, 5.125%,
12/1/08, Prerefunded at
101% of Par(1) 1,135,094
- --------------------------------------------------------------------------------
7,000,000 California Department of Water
Resources & Power Supply
Rev., Series 2002 A, 5.375%,
5/1/12, Prerefunded at 101%
of Par (XLCA)(1)(2) 7,713,229
- --------------------------------------------------------------------------------
3,750,000 California Department of Water
Resources & Power Supply
Rev., Series 2002 A, 5.50%,
5/1/12 4,085,625
- --------------------------------------------------------------------------------
1,250,000 California Department of Water
Resources Rev., Series 2001 W,
5.50%, 12/1/17 1,357,450
- --------------------------------------------------------------------------------
1,255,000 California Educational Facilities
Auth. Rev., (College Arts),
5.00%, 6/1/26 1,280,313
- --------------------------------------------------------------------------------
4,000,000 California Educational Facilities
Auth. Rev., (Golden Gate
University), 5.50%, 10/1/18 4,143,760
- --------------------------------------------------------------------------------
1,070,000 California Educational Facilities
Auth. Rev., (Scripps College),
5.25%, 8/1/16 1,134,168
- --------------------------------------------------------------------------------
1,605,000 California Educational Facilities
Auth. Rev., Series 2000 B,
(Pooled College & University
Projects), 6.625%, 6/1/20 1,734,925
- --------------------------------------------------------------------------------
2,500,000 California Educational Facilities
Auth. Rev., Series 2004 C,
(Lutheran University), 5.00%,
10/1/24 2,591,550
- --------------------------------------------------------------------------------
990,000 California GO, 8.00%, 11/1/07
(FGIC) 1,016,780
- --------------------------------------------------------------------------------
4,480,000 California GO, 6.00%, 10/1/09
(Ambac) 4,801,126
- --------------------------------------------------------------------------------
3,350,000 California GO, 5.75%, 4/1/10
(Ambac) 3,596,393
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$7,650,000 California GO, 5.25%, 10/1/10,
Prerefunded at 100% of Par
(FGIC-TCRS)(1)(2) $ 8,147,555
- --------------------------------------------------------------------------------
5,000,000 California GO, 5.50%, 4/1/12
(MBIA) 5,481,750
- --------------------------------------------------------------------------------
2,350,000 California GO, 5.25%, 10/1/14
(FGIC-TCRS) 2,496,123
- --------------------------------------------------------------------------------
7,590,000 California GO, 5.00%, 6/1/16(2) 8,158,718
- --------------------------------------------------------------------------------
5,000,000 California GO, 5.00%, 3/1/24 5,280,600
- --------------------------------------------------------------------------------
2,000,000 California Health Facilities
Financing Auth. Rev., Series
1998 A, (Kaiser Permanente),
5.25%, 6/1/11 (FSA) 2,094,700
- --------------------------------------------------------------------------------
2,000,000 California Health Facilities
Financing Auth. Rev., Series
2006 A, (Kaiser Permanente),
5.25%, 4/1/39 2,105,140
- --------------------------------------------------------------------------------
1,000,000 California Infrastructure &
Economic Development Bank
Rev., Series 2000 A, (Scripps
Research Institute), 5.625%,
7/1/20 1,036,160
- --------------------------------------------------------------------------------
1,045,000 California Infrastructure &
Economic Development Bank
Rev., Series 2006 A, (California
Science Center Phase II),
4.25%, 5/1/14 (FGIC) 1,084,574
- --------------------------------------------------------------------------------
1,530,000 California Infrastructure &
Economic Development Bank
Rev., Series 2006 B, (California
Science Center Phase II),
4.50%, 5/1/13 (FGIC) 1,609,239
- --------------------------------------------------------------------------------
1,075,000 California Mobilehome Park
Financing Auth. Rev., Series
2000 A, (Union City Tropics),
5.375%, 8/15/14 (ACA) 1,133,566
- --------------------------------------------------------------------------------
2,000,000 California Public Works Board
Lease Rev., Series 2005 A,
(Department General
Services - Butterfield),
5.00%, 6/1/23 2,100,320
- --------------------------------------------------------------------------------
650,000 California Special Districts
Association Finance Corp. COP,
Series 2005 RR, 5.00%,
8/1/25 (XLCA) 699,589
- --------------------------------------------------------------------------------
3,100,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 5.25%, 7/1/12,
Prerefunded at 101% of Par(1) 3,389,416
- --------------------------------------------------------------------------------
1,500,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 6.00%, 7/1/12,
Prerefunded at 101% of Par(1) 1,697,880
- --------------------------------------------------------------------------------
1,250,000 California State University
System Rev., Series 2002 A,
5.375%, 11/1/18 (Ambac) 1,360,488
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
23
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$3,230,000 California Statewide
Communities Development
Auth. Rev., Series 2000 B,
(Brentwood School), 5.75%,
10/1/20 (FSA) $ 3,366,048
- --------------------------------------------------------------------------------
2,500,000 California Statewide
Communities Development
Auth. Rev., Series 2001 C,
(Kaiser Permanente), VRDN,
5.25%, 8/1/31 2,643,450
- --------------------------------------------------------------------------------
1,695,000 California Statewide
Communities Development
Auth. Rev., Series 2002 B,
5.20%, 10/1/18 (FSA) 1,827,820
- --------------------------------------------------------------------------------
3,115,000 Capistrano Unified School
District Community Facilities
District No. 87-1 Special Tax
Rev., 5.00%, 9/1/18 (Ambac) 3,377,158
- --------------------------------------------------------------------------------
2,100,000 Castaic Lake Water Agency
Rev., Series 2001 A, 5.375%,
8/1/17 (MBIA) 2,257,500
- --------------------------------------------------------------------------------
1,000,000 Central Coast Water Auth.
Rev., Series 2006 A, 5.00%,
10/1/16 (FSA)(3) 1,102,350
- --------------------------------------------------------------------------------
2,075,000 Chabot Las Positas Community
College District COP, 5.50%,
12/1/10 (FSA)(1) 2,177,609
- --------------------------------------------------------------------------------
3,000,000 Chino Ontario Upland Water
Facilities Auth. COP, Series
1997 A, (Agua de Lejos),
5.20%, 10/1/15 (FGIC) 3,106,890
- --------------------------------------------------------------------------------
1,220,000 Coronado Community
Development Agency Tax
Allocation Rev., 6.00%, 9/1/06
(FSA) 1,244,400
- --------------------------------------------------------------------------------
2,300,000 Eastern Municipal Water
District COP, Series 2001 A,
5.25%, 7/1/13 (FGIC) 2,464,749
- --------------------------------------------------------------------------------
1,095,000 El Segundo Unified School
District GO, 5.375%, 9/1/12,
Prerefunded at 100% of Par
(FGIC)(1) 1,202,639
- --------------------------------------------------------------------------------
1,020,000 El Segundo Unified School
District GO, 5.375%, 9/1/12,
Prerefunded at 100% of Par
(FGIC)(1) 1,120,266
- --------------------------------------------------------------------------------
1,000,000 Folsom Cordova Unified
School District No. 2 Facilities
Improvement GO, Series
2002 A, 5.375%, 10/1/15
(MBIA) 1,088,390
- --------------------------------------------------------------------------------
1,225,000 Folsom Cordova Unified
School District No. 2 Facilities
Improvement GO, Series
2002 A, 5.375%, 10/1/16
(MBIA) 1,333,278
- --------------------------------------------------------------------------------
1,225,000 Folsom Public Financing Auth.
Lease Rev., (City Hall &
Community Center), 5.25%,
10/1/14 (FSA) 1,337,026
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$1,290,000 Folsom Public Financing Auth.
Lease Rev., (City Hall &
Community Center), 5.25%,
10/1/15 (FSA) $ 1,407,971
- --------------------------------------------------------------------------------
2,615,000 Foster City Community
Development Agency Single
Family Mortgage Rev., 4.25%,
9/1/08 2,631,684
- --------------------------------------------------------------------------------
2,760,000 Foster City Community
Development Agency Single
Family Mortgage Rev., 4.40%,
9/1/09 2,796,763
- --------------------------------------------------------------------------------
1,150,000 Franklin-McKinley School
District GO, Series 2005 A,
(Election of 2004), 5.00%,
8/1/25 (FGIC) 1,219,989
- --------------------------------------------------------------------------------
2,550,000 Fremont Union High School
District GO, Series 2000 B,
5.25%, 9/1/10, Prerefunded
at 100% of Par(1) 2,717,688
- --------------------------------------------------------------------------------
2,500,000 Glendora Unified School
District GO, Series 2006 A,
(Election of 2005), 5.25%,
8/1/30 (MBIA) 2,718,425
- --------------------------------------------------------------------------------
7,350,000 Imperial Irrigation District
COP, (Electrical System),
6.50%, 11/1/07 (MBIA-IBC)(2) 7,496,852
- --------------------------------------------------------------------------------
1,675,000 Imperial Irrigation District
COP, (Water Systems),
5.50%, 7/1/16 (Ambac) 1,802,216
- --------------------------------------------------------------------------------
790,000 Irvine Unified School District
Financing Auth. Special Tax
Rev., Series 2006 A, 5.00%,
9/1/20 799,614
- --------------------------------------------------------------------------------
2,715,000 Irvine Unified School District
Special Tax Rev., (Community
Facilities District No. 86-1),
5.50%, 11/1/10 (Ambac) 2,825,365
- --------------------------------------------------------------------------------
475,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
5.30%, 2/1/14 496,494
- --------------------------------------------------------------------------------
500,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
5.40%, 2/1/14 523,370
- --------------------------------------------------------------------------------
1,390,000 Loma Linda Rev., Series
2005 A, (University Medical
Center), 4.00%, 12/1/06 1,390,473
- --------------------------------------------------------------------------------
1,480,000 Loma Linda Rev., Series
2005 A, (University Medical
Center), 4.00%, 12/1/07 1,481,391
- --------------------------------------------------------------------------------
1,795,000 Loma Linda Rev., Series
2005 A, (University Medical
Center), 4.00%, 12/1/10 1,788,466
- --------------------------------------------------------------------------------
1,000,000 Loma Linda Rev., Series
2005 A, (University Medical
Center), 4.00%, 12/1/11 994,150
- --------------------------------------------------------------------------------
1,965,000 Loma Linda Rev., Series
2005 A, (University Medical
Center), 4.00%, 12/1/12 1,948,494
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
24
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$2,030,000 Long Beach Bond Finance
Auth. Lease Rev., (Plaza
Parking Facility), 5.25%,
11/1/16 $ 2,134,504
- --------------------------------------------------------------------------------
2,500,000 Los Altos School District GO,
5.00%, 8/1/19 (Ambac) 2,713,375
- --------------------------------------------------------------------------------
1,030,000 Los Angeles Community
Redevelopment Agency
Parking System Rev.,
(Cinerama Dome Public
Package Project), 5.30%,
7/1/13 (ACA) 1,076,031
- --------------------------------------------------------------------------------
1,155,000 Los Angeles Convention and
Exhibition Center Auth. Lease
Rev., Series 1993 A, 6.00%,
8/15/10 (MBIA-IBC) 1,257,795
- --------------------------------------------------------------------------------
185,000 Los Angeles County
Metropolitan Transportation
Auth. Rev., Series 1997 A,
(Proposal A), 5.25%, 7/1/12
(MBIA) 189,270
- --------------------------------------------------------------------------------
3,000,000 Los Angeles County
Metropolitan Transportation
Auth. Sales Tax Rev., Series
2001 B, (Proposal A), 5.25%,
7/1/13 (FSA) 3,240,120
- --------------------------------------------------------------------------------
6,680,000 Los Angeles County
Metropolitan Transportation
Auth. Sales Tax Rev., Series
2001 B, (Proposal A), 5.25%,
7/1/16 (FSA) 7,202,309
- --------------------------------------------------------------------------------
3,500,000 Los Angeles Unified School
District GO, 5.50%, 7/1/12
(MBIA) 3,855,600
- --------------------------------------------------------------------------------
3,115,000 Los Angeles Unified School
District GO, Series 1999 C,
5.50%, 7/1/09, Prerefunded
at 101% of Par (MBIA)(1) 3,317,132
- --------------------------------------------------------------------------------
8,000,000 Los Angeles Unified School
District GO, Series 2000 D,
5.625%, 7/1/10, Prerefunded
at 100% of Par (FGIC)(1)(2) 8,617,839
- --------------------------------------------------------------------------------
5,000,000 Los Angeles Unified School
District GO, Series 2002 E,
5.00%, 7/1/11 (MBIA) 5,324,900
- --------------------------------------------------------------------------------
3,000,000 Los Angeles Unified School
District GO, Series 2003 F,
(Election of 1997), 5.00%,
7/1/16 (FSA) 3,226,860
- --------------------------------------------------------------------------------
1,390,000 Los Gatos Joint Union High
School District GO, Series
2002 C, 5.375%, 6/1/12,
Prerefunded at 101% of Par
(FSA)(1) 1,533,309
- --------------------------------------------------------------------------------
3,000,000 Metropolitan Water District of
Southern California Rev., Series
1992 B, 8.00%, 7/1/08(1) 3,238,890
- --------------------------------------------------------------------------------
2,920,000 Metropolitan Water District of
Southern California Rev., Series
2001 A, 5.125%, 7/1/09(1) 3,053,619
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$1,520,000 Mojave Unified School District
No. 1 Facilities Improvement
GO, 5.25%, 8/1/20 (FGIC) $ 1,641,190
- --------------------------------------------------------------------------------
4,670,000 Mount Diablo Unified School
District No. 202 GO, (Election
of 2002), 5.00%, 6/1/27
(MBIA) 4,939,179
- --------------------------------------------------------------------------------
1,485,000 Mountain View COP, (Capital
Projects), 5.25%, 8/1/18 1,596,984
- --------------------------------------------------------------------------------
1,615,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/10 1,637,788
- --------------------------------------------------------------------------------
1,745,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/12 1,775,956
- --------------------------------------------------------------------------------
1,085,000 Murrieta Valley Unified School
District Public Financing Auth.
Special Tax Rev., Series
2006 A, 4.00%, 9/1/14 1,101,948
- --------------------------------------------------------------------------------
4,900,000 Norco Redevelopment Agency
Tax Allocation Rev., 5.00%,
3/1/26 (Ambac) 5,140,296
- --------------------------------------------------------------------------------
4,565,000 Oceanside Community
Development Commission Rev.,
(Downtown Redevelopment),
5.20%, 9/1/17 4,756,456
- --------------------------------------------------------------------------------
1,310,000 Oceanside COP, Series 2003 A,
5.00%, 4/1/12 (Ambac) 1,401,975
- --------------------------------------------------------------------------------
2,210,000 Orange County Local
Transportation Auth. Sales Tax
Rev., Series 1997 A, 5.70%,
2/15/08 (Ambac) 2,279,416
- --------------------------------------------------------------------------------
1,805,000 Orange County Public
Financing Auth. Lease Rev.,
(Juvenile Justice Center
Facility), 5.375%, 6/1/15
(Ambac) 1,982,305
- --------------------------------------------------------------------------------
1,000,000 Orange County Public
Financing Auth. Lease Rev.,
(Juvenile Justice Center
Facility), 5.375%, 6/1/16
(Ambac) 1,098,230
- --------------------------------------------------------------------------------
3,030,000 Orange County Public
Financing Auth. Lease Rev.,
(Juvenile Justice Center
Facility), 5.375%, 6/1/17
(Ambac) 3,306,033
- --------------------------------------------------------------------------------
500,000 Palo Verde Community College
District No. 2004-1 GO, 6.00%,
8/1/30 (RADIAN) 571,980
- --------------------------------------------------------------------------------
1,450,000 Perris Public Financing Auth.
Tax Allocation Rev., 5.35%,
10/1/36 1,470,344
- --------------------------------------------------------------------------------
1,830,000 Pomona Public Financing Auth.
Rev., Series 2001 AD, (Merged
Redevelopment), 4.75%,
2/1/13 (MBIA) 1,913,045
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
25
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$1,720,000 Poway Redevelopment Agency
Tax Allocation Rev., (Paguay),
5.25%, 6/15/26 (Ambac) $ 1,830,252
- --------------------------------------------------------------------------------
1,650,000 Poway Unified School District
Special Tax Rev., (Community
Facilities District No. 6-4),
5.125%, 9/1/35 1,666,583
- --------------------------------------------------------------------------------
8,000,000 Sacramento City Financing
Auth. Lease Rev., Series
1993 A, 5.40%, 11/1/20
(Ambac)(2) 9,060,719
- --------------------------------------------------------------------------------
2,500,000 Sacramento City Financing
Auth. Rev., 5.00%, 12/1/16
(FGIC) 2,729,350
- --------------------------------------------------------------------------------
4,045,000 Sacramento City Financing
Auth. Rev., Series 2002 A,
(City Hall), 5.25%, 12/1/12,
Prerefunded at 100% of Par
(FSA)(1) 4,426,727
- --------------------------------------------------------------------------------
1,245,000 Sacramento City Financing
Auth. Rev., Series 2002 A,
(City Hall), 5.25%, 12/1/15
(FSA) 1,355,419
- --------------------------------------------------------------------------------
1,430,000 Sacramento City Financing
Auth. Tax Allocation Rev.,
Series 2005 A, 5.00%,
12/1/24 (FGIC) 1,511,796
- --------------------------------------------------------------------------------
1,890,000 Sacramento Municipal Utility
District Electric Rev., Series
1992 C, 5.75%, 11/15/07
(MBIA)(1) 1,893,572
- --------------------------------------------------------------------------------
3,105,000 Sacramento Municipal Utility
District Electric Rev., Series
1997 K, 5.70%, 7/1/17
(Ambac) 3,605,247
- --------------------------------------------------------------------------------
5,005,000 Sacramento Municipal Utility
District Electric Rev., Series
2001 O, 5.25%, 8/15/11
(MBIA) 5,400,946
- --------------------------------------------------------------------------------
3,500,000 San Bernardino County
Redevelopment Agency Tax
Allocation Rev., Series 2005 A,
(San Sevaine), 5.00%, 9/1/25
(RADIAN) 3,637,550
- --------------------------------------------------------------------------------
1,695,000 San Buenaventura County
COP, Series 2002 B, 5.50%,
1/1/15 (Ambac) 1,859,601
- --------------------------------------------------------------------------------
1,790,000 San Buenaventura County
COP, Series 2002 B, 5.50%,
1/1/16 (Ambac) 1,969,322
- --------------------------------------------------------------------------------
2,030,000 San Diego Redevelopment
Agency Tax Allocation Rev.,
(Horton Plaza), 5.70%,
11/1/17 2,168,405
- --------------------------------------------------------------------------------
2,635,000 San Diego Redevelopment
Agency Tax Allocation Rev.,
(Horton Plaza), 5.80%,
11/1/21 2,815,471
- --------------------------------------------------------------------------------
1,460,000 San Diego Redevelopment
Agency Tax Allocation Rev.,
(North Park), 5.90%, 9/1/25 1,545,176
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$2,255,000 San Francisco City & County
Educational Facilities Unified
School District GO, Series
1999 B, 5.50%, 6/15/12 $ 2,331,738
- --------------------------------------------------------------------------------
3,000,000 San Jose Redevelopment
Agency Tax Allocation Rev.,
Series 2005 A, 5.00%, 8/1/25
(MBIA) 3,155,190
- --------------------------------------------------------------------------------
1,570,000 San Marcos Public Facilities
Auth. Tax Allocation Rev.,
Series 2006 A (Project Area
No. 3), 5.00%, 8/1/20
(Ambac) 1,679,508
- --------------------------------------------------------------------------------
2,455,000 San Marcos Public Facilities
Auth. Tax Allocation Rev.,
Series 2006 A (Project Area
No. 3), 5.00%, 8/1/25
(Ambac) 2,593,487
- --------------------------------------------------------------------------------
2,680,000 San Mateo County
Transportation District Sales
Tax Rev., Series 1993 A,
5.25%, 6/1/18 (MBIA) 3,030,437
- --------------------------------------------------------------------------------
1,500,000 San Mateo Union High School
District GO, 5.00%, 9/1/24
(FSA) 1,585,530
- --------------------------------------------------------------------------------
3,250,000 San Ramon Valley Unified
School District GO, (Election
of 2002), 4.50%, 8/1/16
(MBIA) 3,445,520
- --------------------------------------------------------------------------------
1,000,000 San Ramon Valley Unified
School District GO, (Election
of 2002), 5.00%, 8/1/21
(MBIA) 1,077,350
- --------------------------------------------------------------------------------
3,350,000 Santa Barbara County GO,
5.375%, 10/1/17 (Ambac) 3,665,470
- --------------------------------------------------------------------------------
2,075,000 Santa Clara Valley Water
District Rev., Series 2000 A,
5.20%, 2/1/13 2,189,187
- --------------------------------------------------------------------------------
1,120,000 Santa Fe Springs Community
Development Commission Tax
Allocation Rev., Series 2002 A,
5.375%, 9/1/16 (MBIA) 1,201,558
- --------------------------------------------------------------------------------
1,250,000 Santa Monica-Malibu Unified
School District GO, 5.25%,
8/1/13 1,377,025
- --------------------------------------------------------------------------------
2,780,000 Scotts Valley Redevelopment
Agency Tax Allocation Rev.,
5.00%, 8/1/29 (Ambac) 2,929,953
- --------------------------------------------------------------------------------
2,400,000 Shasta Lake Public Finance
Auth. Rev., 5.00%, 4/1/19 2,474,232
- --------------------------------------------------------------------------------
2,130,000 Shasta Lake Public Finance
Auth. Rev., 5.00%, 4/1/22 2,182,185
- --------------------------------------------------------------------------------
1,310,000 South Tahoe Joint Powers
Financing Auth. Rev., Series
2005 A, 5.00%, 10/1/17
(Ambac) 1,421,167
- --------------------------------------------------------------------------------
1,445,000 South Tahoe Joint Powers
Financing Auth. Rev., Series
2005 A, 5.00%, 10/1/19
(Ambac) 1,553,866
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
26
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$2,000,000 Southern California Public
Power Auth. Rev., 6.75%,
7/1/10 (GIC: Pittsburgh
National Bank) $ 2,197,640
- --------------------------------------------------------------------------------
5,000,000 Southern California Public
Power Auth. Rev., Series
2002 A, (Southern
Transmission), 5.25%, 7/1/17
(FSA) 5,393,500
- --------------------------------------------------------------------------------
3,325,000 Southern California Public
Power Auth. Rev., Series
2002 A, (Southern
Transmission), 5.25%, 7/1/18
(FSA) 3,586,678
- --------------------------------------------------------------------------------
1,975,000 Southwestern Community
College District GO, 5.625%,
8/1/11, Prerefunded at 101%
of Par (Ambac)(1) 2,180,124
- --------------------------------------------------------------------------------
2,770,000 Stockton Community Facilities
District GO, (No. 1 Weston
Ranch), 5.40%, 9/1/09,
Prerefunded at 102% of Par(1) 2,966,282
- --------------------------------------------------------------------------------
325,000 Stockton Community Facilities
District GO, (No. 1 Weston
Ranch), 5.50%, 9/1/09,
Prerefunded at 102% of Par(1) 348,946
- --------------------------------------------------------------------------------
1,475,000 Sweetwater Auth. Water Rev.,
5.25%, 4/1/10 (Ambac) 1,509,899
- --------------------------------------------------------------------------------
1,080,000 Sweetwater Auth. Water Rev.,
5.25%, 4/1/14, Prerefunded
at 101% of Par (FSA)(1) 1,154,714
- --------------------------------------------------------------------------------
1,135,000 Sweetwater Auth. Water Rev.,
5.25%, 4/1/15, Prerefunded
at 101% of Par (FSA)(1) 1,213,519
- --------------------------------------------------------------------------------
1,195,000 Sweetwater Auth. Water Rev.,
5.25%, 4/1/16, Prerefunded
at 101% of Par (FSA)(1) 1,277,670
- --------------------------------------------------------------------------------
855,000 Turlock COP, (Emanuel Medical
Center Inc.), 4.50%, 10/15/11 868,133
- --------------------------------------------------------------------------------
1,035,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.50%, 10/15/15 1,116,465
- --------------------------------------------------------------------------------
1,090,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.50%, 10/15/16 1,172,698
- --------------------------------------------------------------------------------
1,150,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.50%, 10/15/17 1,233,847
- --------------------------------------------------------------------------------
2,505,000 Val Verde Unified School
District COP, 5.25%, 1/1/19,
Prerefunded at 100% of Par
(FGIC)(1) 2,778,270
- --------------------------------------------------------------------------------
2,640,000 Val Verde Unified School
District COP, 5.25%, 1/1/20,
Prerefunded at 100% of Par
(FGIC)(1) 2,927,998
- --------------------------------------------------------------------------------
1,415,000 Val Verde Unified School
District COP, 5.25%, 1/1/22,
Prerefunded at 100% of Par
(FGIC)(1) 1,569,362
- --------------------------------------------------------------------------------
1,000,000 Val Verde Unified School
District COP, 5.25%, 1/1/23,
Prerefunded at 100% of Par
(FGIC)(1) 1,109,090
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$2,980,000 Val Verde Unified School
District COP, 5.25%, 1/1/24,
Prerefunded at 100% of Par
(FGIC)(1) $ 3,305,088
- --------------------------------------------------------------------------------
3,000,000 Ventura County Public
Financing COP, 4.75%,
8/15/11 (FSA) 3,097,830
- --------------------------------------------------------------------------------
1,500,000 West Sacramento Financing
Auth. Special Tax Rev., Series
2006 A, 5.00%, 9/1/18 (XLCA) 1,633,635
- --------------------------------------------------------------------------------
1,500,000 West Sacramento Financing
Auth. Special Tax Rev., Series
2006 A, 5.00%, 9/1/19 (XLCA) 1,620,060
- --------------------------------------------------------------------------------
1,500,000 West Sacramento Financing
Auth. Special Tax Rev., Series
2006 A, 5.00%, 9/1/20 (XLCA) 1,610,400
- --------------------------------------------------------------------------------
381,296,148
- --------------------------------------------------------------------------------
NORTHERN MARIANA ISLANDS -- 0.7%
- --------------------------------------------------------------------------------
1,485,000 Northern Mariana Islands
Commonwealth GO, Series
2000 A, 5.50%, 6/1/08 (ACA) 1,522,645
- --------------------------------------------------------------------------------
1,555,000 Northern Mariana Islands
Commonwealth GO, Series
2000 A, 5.50%, 6/1/09 (ACA) 1,611,991
- --------------------------------------------------------------------------------
3,134,636
- --------------------------------------------------------------------------------
PUERTO RICO -- 9.9%
- --------------------------------------------------------------------------------
5,000,000 Children's Trust Fund Tobacco
Settlement Rev., 5.00%,
7/1/08(1) 5,126,900
- --------------------------------------------------------------------------------
1,000,000 Government Development
Bank of Puerto Rico Rev.,
4.00%, 11/10/06 (Acquired
8/11/06, Cost $1,000,000)(4) 999,770
- --------------------------------------------------------------------------------
1,500,000 Government Development
Bank of Puerto Rico Rev.,
Series 2006 B, 5.00%,
12/1/15 1,602,720
- --------------------------------------------------------------------------------
2,000,000 Puerto Rico Commonwealth
GO, Series 2006 A, 5.25%,
7/1/26 2,133,580
- --------------------------------------------------------------------------------
5,490,000 Puerto Rico Commonwealth
GO, Series 2006 B, 5.25%,
7/1/17 5,961,646
- --------------------------------------------------------------------------------
3,000,000 Puerto Rico Commonwealth
Infrastructure Financing Auth.
Special Tax Rev., Series
1998 A, 5.50%, 7/1/08
(Ambac) 3,104,670
- --------------------------------------------------------------------------------
3,700,000 Puerto Rico Electric Power
Auth. Rev., Series 2002 II,
5.375%, 7/1/18 (MBIA) 4,028,782
- --------------------------------------------------------------------------------
2,655,000 Puerto Rico Electric Power
Auth. Rev., Series 2002 KK,
5.25%, 7/1/13 (FSA) 2,910,570
- --------------------------------------------------------------------------------
3,140,000 Puerto Rico Electric Power
Auth. Rev., Series 2002 KK,
5.50%, 7/1/14 (FSA) 3,517,742
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
27
California Tax-Free Bond - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$1,450,000 Puerto Rico Municipal Finance
Agency GO, Series 1999 B,
6.00%, 8/1/09, Prerefunded
at 101% of Par (FSA)(1) $ 1,562,404
- --------------------------------------------------------------------------------
3,325,000 Puerto Rico Municipal Finance
Agency GO, Series 2005 A,
5.25%, 8/1/25 3,537,767
- --------------------------------------------------------------------------------
3,090,000 Puerto Rico Public Buildings
Auth. Rev., Series 1995 A,
6.25%, 7/1/09 (Ambac) 3,312,387
- --------------------------------------------------------------------------------
4,670,000 Puerto Rico Public Buildings
Auth. Rev., Series 2002 C,
(Government Facilities),
5.25%, 7/1/11 4,937,638
- --------------------------------------------------------------------------------
42,736,576
- --------------------------------------------------------------------------------
U.S. VIRGIN ISLANDS -- 0.5%
- --------------------------------------------------------------------------------
500,000 Virgin Islands Public Finance
Auth. Rev., 5.25%, 10/1/22 527,410
- --------------------------------------------------------------------------------
500,000 Virgin Islands Public Finance
Auth. Rev., 5.25%, 10/1/23 527,060
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$1,050,000 Virgin Islands Public Finance
Auth. Rev., Series 1998 A,
5.50%, 10/1/13 $ 1,085,910
- --------------------------------------------------------------------------------
2,140,380
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL SECURITIES
(Cost $413,191,434) 429,307,740
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES -- 0.7%
CALIFORNIA -- 0.7%
- --------------------------------------------------------------------------------
2,900,000 California Department of Water
Resources & Power Supply
Rev., Series 2005 F5, VRDN,
3.48%, 9/1/06 (LOC: Citibank N.A.)
(Cost $2,900,000) 2,900,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 100.0%
(Cost $416,091,434) 432,207,740
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES(5) (155,389)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $432,052,351
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
156 U.S. Treasury
2-Year Notes December 2006 $31,877,625 $45,937
===================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
86 U.S. Treasury
10-Year Notes December 2006 $9,234,250 $(39,162)
===================================
NOTES TO SCHEDULE OF INVESTMENTS
ACA = American Capital Access
Ambac = Ambac Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FGIC-TCRS = Financial Guaranty Insurance Co. --
Transferable Custodial Receipts
FSA = Financial Security Assurance, Inc.
GIC = Guaranteed Investment Contract
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corporation
MBIA-IBC = MBIA Insured Bond Certificates
RADIAN = Radian Asset Assurance, Inc.
VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown
is effective August 31, 2006.
XLCA = XL Capital Ltd.
(1) Escrowed to maturity in U.S. government securities or state and local
government securities.
(2) Security, or a portion thereof, has been segregated for a when-issued
security and/or futures contracts.
(3) When-issued security.
(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 restricted securities at August 31, 2006 was $999,770,
which represented 0.2% of total net assets.
(5) Category is less than 0.05% of total net assets.
See Notes to Financial Statements.
- ------
28
California Long-Term Tax-Free - Performance
TOTAL RETURNS AS OF AUGUST 31, 2006
------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CALIFORNIA LONG-TERM
TAX-FREE 2.89% 4.39% 5.68% 7.18% 11/9/83
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
LONG-TERM MUNICIPAL
BOND INDEX 4.08% 6.37% 7.05% 9.00%(1) --
- --------------------------------------------------------------------------------
LIPPER CALIFORNIA
MUNICIPAL DEBT FUNDS
AVERAGE RETURNS(2) 2.81% 4.28% 5.35% 7.20%(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 8/31/06(2) 50 of 121 43 of 98 20 of 70 1 of 1(3) --
- --------------------------------------------------------------------------------
Fund's Lipper Ranking
as of 9/30/06(2) 48 of 121 42 of 97 23 of 73 1 of 1(3) --
- --------------------------------------------------------------------------------
(1) Since 10/31/83, the date nearest the fund's inception for which data are
available.
(2) Data provided by Lipper Inc. - A Reuters Company. ©2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(3) Since 11/10/83, the date nearest the fund's inception for which data are
available.
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
(continued)
- ------
29
California Long-Term Tax-Free - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made August 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended August 31
- ------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ------------------------------------------------------------------------------------------
California
Long-Term
Tax-Free 9.70% 9.25% -1.85% 7.79% 10.55% 5.14% 1.81% 6.83% 5.38% 2.89%
- ------------------------------------------------------------------------------------------
Lehman Brothers
Long-Term
Municipal
Bond Index 11.24% 10.51% -2.14% 7.34% 12.35% 5.62% 2.62% 9.24% 10.52% 4.08%
- ------------------------------------------------------------------------------------------
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline.
Investment income may be subject to certain state and local taxes and, depending
on your tax status, the federal alternative minimum tax (AMT). Capital gains are
not exempt from state and federal income tax.
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.
- ------
30
California Long-Term Tax-Free - Portfolio Commentary
PORTFOLIO MANAGERS: DAVID MACEWEN AND ROBERT MILLER
PERFORMANCE SUMMARY
California Long-Term Tax-Free (Cal Long-Term) returned 2.89% for the 12 months
ended August 31, 2006. This modest gain reflected a challenging backdrop for
U.S. bonds that included higher inflation, rising short-term interest rates, and
erratic U.S. economic growth. By comparison, the average return of the 121
California Municipal Debt Funds tracked by Lipper was narrowly lower at 2.81%.
Based on those returns, Cal Long-Term outperformed the Lipper group average for
the year ended August 31, 2006, as well as for the trailing five and 10 years;
however, the fund underperformed the Lehman Brothers Long-Term Municipal Bond
Index over those same periods. The higher returns of the Lehman index are
traceable to its comparatively longer duration (a widely used gauge of
sensitivity to interest rates) and the outperformance of the longest-term
municipal securities.
After the yield information that follows, we briefly discuss the municipal
market's performance before highlighting the strategies that we employed for Cal
Long-Term during the report period.
YIELD SUMMARY
One of Cal Long-Term's key objectives is to seek high current income that is
exempt from California and federal income taxes (the fund also seeks safety of
principal). As of August 31, 2006, the fund's 30-day SEC yield was 3.86%, which
translated into the attractive tax-equivalent yields shown in the table above.
By comparison, the Lipper group average 30-day SEC yield was 3.40% at the end of
the period. It's worth noting that we achieved Cal Long-Term's higher yield
without purchasing bonds subject to the alternative minimum tax, and that all
else held equal, a higher yield can translate into better peer-compared
performance.
MUNICIPAL MARKET REVIEW
The economic and market backdrop (detailed in the Market Perspective on page 2)
dampened the performance of municipal bonds. With the Federal Reserve ratcheting
up interest rates in an attempt to contain inflation, short-term bond yields
rose accordingly. Yields on intermediate-term municipal securities also
increased, while long-term bond yields edged lower.
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/06 8/31/05
- --------------------------------------------------------------------------------
Weighted Average
Maturity 15.9 yrs 17.9 yrs
- --------------------------------------------------------------------------------
Average Duration
(Modified) 5.8 yrs 5.7 yrs
- --------------------------------------------------------------------------------
YIELDS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
3.86%
- --------------------------------------------------------------------------------
30-DAY TAX-EQUIVALENT YIELDS*
- --------------------------------------------------------------------------------
31.98% Tax Bracket 5.67%
- --------------------------------------------------------------------------------
34.70% Tax Bracket 5.91%
- --------------------------------------------------------------------------------
39.23% Tax Bracket 6.35%
- --------------------------------------------------------------------------------
41.05% Tax Bracket 6.55%
- --------------------------------------------------------------------------------
*The tax brackets indicated are for combined state and federal income tax.
Actual tax-equivalent yields may be lower, if alternative minimum tax is
applicable.
(continued)
- ------
31
California Long-Term Tax-Free - Portfolio Commentary
In that environment, and unlike the Treasury yield curve (a graph showing the
relationship between bond yields and maturities), the municipal bond yield curve
didn't invert, which meant that investors could still earn additional income by
taking on more maturity risk. This attracted investors and helped the municipal
market generally outperform the taxable market. Generally healthy economic
conditions, which translated into relatively solid tax revenues and credit
quality for municipal issuers, also benefited municipal securities.
PORTFOLIO POSITIONING & STRATEGY
On the portfolio front, the foundations of our multi-layered, repeatable
investment approach remained central to our efforts and included active security
selection, diligent investment monitoring, and thorough credit analysis with the
help of our long-tenured municipal credit research team.
During much of the period, we emphasized lower-rated investment-grade municipal
bonds and positioned the portfolio to benefit from a diminishing gap between the
yields of short- and long-term municipal bonds. From the credit-quality side,
that meant selectively adding single-A and BBB securities that we believed to be
attractive values. We also employed a bond maturity structure that more heavily
concentrated the portfolio in long-term securities rather than in short- or
intermediate-term bonds. Generally speaking, the market rewarded both of these
strategies.
Given the currently narrow gap between the yields of higher- and lower-rated
investment-grade bonds, and that the U.S. economy appears at an inflection
point, we've adopted what we consider to be a more in-line position compared
with Cal Long-Term's peer group where these strategies are concerned.
CALIFORNIA LONG-TERM TAX-FREE'S PLACE IN YOUR PORTFOLIO
Cal Long-Term is designed to be a core bond holding and seeks safety of
principal and high current income by investing in debt securities issued by
cities, counties and municipalities, and U.S. territories.
Because municipal bonds typically don't move in lock-step with equities, Cal
Long-Term potentially offers diversification benefits for investors. But it's
important to keep in mind that even diversification does not ensure against
losses.
PORTFOLIO COMPOSITION BY CREDIT RATING
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
AAA 56% 62%
- --------------------------------------------------------------------------------
AA 8% 9%
- --------------------------------------------------------------------------------
A 14% 7%
- --------------------------------------------------------------------------------
BBB 17% 18%
- --------------------------------------------------------------------------------
Not Rated 5% 4%
- --------------------------------------------------------------------------------
Ratings provided by independent research companies. These ratings are listed in
Standard & Poor's format even if they were provided by other sources.
TOP FIVE SECTORS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
% OF FUND
INVESTMENTS
- --------------------------------------------------------------------------------
Certificate of Participation
(COPs)/Leases 22%
- --------------------------------------------------------------------------------
General Obligation (GO) 12%
- --------------------------------------------------------------------------------
Hospital Revenue 10%
- --------------------------------------------------------------------------------
Tax Allocation Revenue 9%
- --------------------------------------------------------------------------------
Land Based 8%
- --------------------------------------------------------------------------------
- ------
32
California Long-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 98.9%
CALIFORNIA -- 93.1%
- --------------------------------------------------------------------------------
$ 5,235,000 Antioch Public Financing Auth.
Lease Rev., Series 2002 A,
(Municipal Facilities), 5.50%,
1/1/32 (MBIA) $ 5,550,621
- --------------------------------------------------------------------------------
4,730,000 Antioch Public Financing Auth.
Lease Rev., Series 2002 B,
(Municipal Facilities), 5.625%,
1/1/22 (MBIA) 5,067,722
- --------------------------------------------------------------------------------
6,005,000 Antioch Public Financing Auth.
Lease Rev., Series 2002 B,
(Municipal Facilities), 5.625%,
1/1/27 (MBIA) 6,399,168
- --------------------------------------------------------------------------------
1,395,000 Avenal Public Financing Auth.
Rev., 5.00%, 9/1/25 1,431,089
- --------------------------------------------------------------------------------
820,000 Banning COP, (Wastewater
System, Refunding &
Improvement), 8.00%, 1/1/19
(Ambac) 963,746
- --------------------------------------------------------------------------------
4,135,000 Bell Community
Redevelopment Agency Tax
Allocation Rev., (Bell
Redevelopment Project Area),
5.625%, 10/1/33 (RADIAN) 4,457,199
- --------------------------------------------------------------------------------
1,205,000 Berryessa Union School
District GO, Series 2001 B,
(Election of 1999), 5.375%,
8/1/17, Prerefunded at 101%
of Par (FSA)(1) 1,316,655
- --------------------------------------------------------------------------------
1,205,000 Berryessa Union School
District GO, Series 2001 B,
(Election of 1999), 5.375%,
8/1/18, Prerefunded at 101%
of Par (FSA)(1) 1,316,655
- --------------------------------------------------------------------------------
3,500,000 Big Bear Lake Water Rev.,
6.00%, 4/1/22 (MBIA) 4,152,890
- --------------------------------------------------------------------------------
5,000,000 California County Tobacco
Securitization Agency Rev.,
5.25%, 6/1/46 5,043,450
- --------------------------------------------------------------------------------
7,000,000 California Educational Facilities
Auth. Rev., (Golden Gate
University), 5.00%, 10/1/36 7,037,800
- --------------------------------------------------------------------------------
2,000,000 California Educational Facilities
Auth. Rev., (University of
Pacific), 5.25%, 11/1/34 2,105,920
- --------------------------------------------------------------------------------
8,570,000 California Educational Facilities
Auth. Rev., (University of
Southern California), 5.50%,
10/1/27 9,055,919
- --------------------------------------------------------------------------------
1,920,000 California Educational Facilities
Auth. Rev., (Western University
Health Sciences), 6.00%,
10/1/32 2,038,656
- --------------------------------------------------------------------------------
1,220,000 California Educational Facilities
Auth. Rev., Series 2004 C,
(Lutheran University), 5.00%,
10/1/29 1,257,991
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,000,000 California Educational Facilities
Auth. Rev., Series 2005 A,
(University La Verne), 5.00%,
6/1/35 (GO of University) $ 2,035,320
- --------------------------------------------------------------------------------
5,000,000 California GO, 5.375%,
10/1/10, Prerefunded at
100% of Par (XLCA-ICR)(1) 5,362,550
- --------------------------------------------------------------------------------
3,000,000 California GO, 6.125%,
10/1/11 (Ambac) 3,350,400
- --------------------------------------------------------------------------------
13,185,000 California GO, 5.00%, 2/1/33(2) 13,625,774
- --------------------------------------------------------------------------------
8,000,000 California GO, 5.00%, 6/1/34 8,287,680
- --------------------------------------------------------------------------------
3,000,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Kaiser Permanente),
7.15%, 10/1/09(3) 2,658,360
- --------------------------------------------------------------------------------
240,000 California Health Facilities
Financing Auth. Rev., Series
1992 A, 6.75%, 3/1/20
(California Mortgage Insurance) 240,535
- --------------------------------------------------------------------------------
5,165,000 California Health Facilities
Financing Auth. Rev., Series
1993 C, (St. Francis Memorial
Hospital), 5.875%, 11/1/23(1) 6,197,690
- --------------------------------------------------------------------------------
7,500,000 California Infrastructure &
Economic Development Bank
Rev., Series 2003 A, (The
J. Paul Getty Trust), VRDN,
3.90%, 12/1/11 7,577,100
- --------------------------------------------------------------------------------
4,000,000 California Public Works Board
Lease Rev., Series 1993 A,
(Department of Corrections),
5.00%, 12/1/19 (Ambac) 4,308,440
- --------------------------------------------------------------------------------
6,000,000 California Public Works Board
Lease Rev., Series 2005 A,
(Department of General
Services - Butterfield),
5.25%, 6/1/30 6,346,560
- --------------------------------------------------------------------------------
2,400,000 California Public Works Board
Rev., Series 2003 C,
(Department Corrections),
5.00%, 6/1/24 2,499,744
- --------------------------------------------------------------------------------
3,240,000 California Statewide
Communities Development
Auth. COP, (Gemological
Institute), 6.75%, 5/1/10
(Connie Lee)(1) 3,469,262
- --------------------------------------------------------------------------------
9,815,000 California Statewide
Communities Development
Auth. Rev., Series 1998 A,
(Sherman Oaks Project),
5.00%, 8/1/22 (Ambac)(2) 10,516,183
- --------------------------------------------------------------------------------
5,000,000 California Statewide
Communities Development
Auth. Rev., Series 2001 C,
(Kaiser Permanente), VRDN,
5.25%, 8/1/31 5,286,900
- --------------------------------------------------------------------------------
6,500,000 California Statewide
Communities Development
Auth. Rev., Series 2005 A,
(Sutter Health), 5.00%,
11/15/43 6,658,080
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
33
California Long-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 California Statewide
Communities Development
Auth. Rev., Series 2005 A,
(Thomas Jefferson School of
Law), 4.875%, 10/1/35 $ 1,010,570
- --------------------------------------------------------------------------------
10,000,000 California Statewide
Communities Development
Auth. Rev., Series 2006 B,
(Kaiser Permanente), 5.25%,
3/1/45(2) 10,452,599
- --------------------------------------------------------------------------------
6,060,000 Campbell Redevelopment
Agency Tax Allocation Rev.,
Series 2005 A, 5.00%,
10/1/32 (Ambac) 6,325,004
- --------------------------------------------------------------------------------
5,695,000 Capistrano Unified School
District Community Facilities
Special Tax Rev., (Refunding
Issue 1988-1), 6.50%, 9/1/14
(FSA) 5,888,858
- --------------------------------------------------------------------------------
1,520,000 Castaic Lake Water Agency
COP, Series 1994 A, (Water
System Improvement), 7.00%,
8/1/12 (MBIA) 1,787,201
- --------------------------------------------------------------------------------
1,320,000 Coalinga Public Financing
Auth. Local Obligation Rev.,
Series 1998 A, 6.375%,
9/15/21 (Ambac) 1,651,188
- --------------------------------------------------------------------------------
2,615,000 Concord Joint Powers
Financing Auth. Lease Rev.,
(Concord Avenue Parking
Structure), 5.125%, 3/1/23 2,721,718
- --------------------------------------------------------------------------------
2,580,000 Concord Joint Powers
Financing Auth. Lease Rev.,
(Police Facilities), 5.25%,
8/1/13 2,817,386
- --------------------------------------------------------------------------------
2,200,000 Contra Costa Water District
Rev., Series 1992 E, 6.25%,
10/1/12 (Ambac) 2,398,528
- --------------------------------------------------------------------------------
3,590,000 Fontana Redevelopment
Agency Tax Allocation Rev.,
(Sierra Corridor), 5.50%,
9/1/34 3,760,166
- --------------------------------------------------------------------------------
2,225,000 Fresno Sewer Rev., Series
1993 A1, 6.25%, 9/1/14
(Ambac) 2,612,773
- --------------------------------------------------------------------------------
5,010,000 Hillsborough School District
GO, Series 2006 B, (Election
of 2002), 4.87%, 9/1/30(3) 1,641,777
- --------------------------------------------------------------------------------
5,335,000 Hillsborough School District
GO, Series 2006 B, (Election
of 2002), 4.88%, 9/1/31(3) 1,661,959
- --------------------------------------------------------------------------------
5,000,000 Huntington Beach Union High
School District GO, (Election
of 2004), 5.00%, 8/1/31
(MBIA)(3) 1,563,650
- --------------------------------------------------------------------------------
9,350,000 Imperial Irrigation District
COP, (Water Systems), 5.50%,
7/1/29 (Ambac)(2) 10,046,013
- --------------------------------------------------------------------------------
3,000,000 Independent Cities Lease
Finance Auth. Rev., Series
2006 A, (San Juan Mobile
Estates), 5.125%, 5/15/41 3,044,460
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 5,000,000 Irvine Unified School District
Financing Auth. Special Tax
Rev., Series 2006 A, 5.125%,
9/1/36 $ 5,054,600
- --------------------------------------------------------------------------------
1,815,000 Kern High School District GO,
7.15%, 8/1/14 (MBIA)(1) 2,240,127
- --------------------------------------------------------------------------------
1,340,000 Kern High School District GO,
Series 1992 C, 6.25%, 8/1/13
(MBIA)(1) 1,555,217
- --------------------------------------------------------------------------------
3,630,000 Kern High School District GO,
Series 1993 D, 7.00%, 8/1/17
(MBIA)(1) 3,939,857
- --------------------------------------------------------------------------------
1,250,000 Lancaster Financing Auth.
Rev., (Projects No. 5 & 6),
5.60%, 2/1/34 1,318,988
- --------------------------------------------------------------------------------
1,335,000 Little Lake City School District
GO, Series 2000 A, 6.125%,
7/1/10, Prerefunded at 101%
of Par (FSA)(1) 1,475,869
- --------------------------------------------------------------------------------
2,240,000 Lodi Unified School District
COP, Series 2005 A, (Aspire),
5.00%, 8/1/32 (FGIC) 2,332,445
- --------------------------------------------------------------------------------
1,605,000 Long Beach Bond Finance
Auth. Lease Rev., (Plaza
Parking Facility), 5.25%,
11/1/21 1,676,005
- --------------------------------------------------------------------------------
8,000,000 Metropolitan Water District of
Southern California Rev.,
5.75%, 8/10/18 9,314,560
- --------------------------------------------------------------------------------
1,915,000 Mid-Peninsula Regional Open
Space District Financing Auth.
Rev., 5.90%, 9/1/14 (Ambac) 1,936,774
- --------------------------------------------------------------------------------
9,525,000 Modesto, Stockton, Redding
Public Power Agency Rev.,
Series 1989 D, (San Juan),
6.75%, 7/1/20 (MBIA)(1)(2) 11,393,518
- --------------------------------------------------------------------------------
1,065,000 Mountain View School District
Santa Clara County GO, Series
2000 B, 6.125%, 7/1/10,
Prerefunded at 101% of Par
(FSA)(1) 1,175,355
- --------------------------------------------------------------------------------
1,000,000 New Haven Unified School
District GO, 12.00%, 8/1/18
(FSA) 1,748,960
- --------------------------------------------------------------------------------
6,000,000 Northern Inyo County Local
Hospital District GO, 5.60%,
8/1/35 6,450,300
- --------------------------------------------------------------------------------
6,110,000 Oakland Redevelopment
Agency Tax Allocation Rev.,
(Central District), 5.50%,
2/1/14 (Ambac) 6,558,352
- --------------------------------------------------------------------------------
1,680,000 Oceanside COP, Series 2003 A,
5.25%, 4/1/17 (Ambac) 1,810,822
- --------------------------------------------------------------------------------
7,130,000 Ontario COP, (Water System
Improvement), 5.00%, 7/1/29
(MBIA) 7,432,027
- --------------------------------------------------------------------------------
4,650,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A,
(No. 04-1-Ladera Ranch),
5.20%, 8/15/34 4,724,447
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
34
California Long-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 850,000 Orange County Improvement
Board Act of 1915 Special
Assessment, 5.00%, 9/2/26 $ 864,391
- --------------------------------------------------------------------------------
1,250,000 Orange County Improvement
Board Act of 1915 Special
Assessment, 5.05%, 9/2/33 1,258,300
- --------------------------------------------------------------------------------
2,000,000 Orange County Special
Assessment, 5.00%, 9/2/28 2,010,800
- --------------------------------------------------------------------------------
2,000,000 Orange County Special
Assessment, 5.10%, 9/2/33 2,012,200
- --------------------------------------------------------------------------------
3,100,000 Oxnard School District GO,
Series 2001 A, 5.75%, 8/1/22
(MBIA) 3,679,483
- --------------------------------------------------------------------------------
2,550,000 Pasadena COP, (Old Pasadena
Parking Facility), 6.25%,
1/1/18 2,892,108
- --------------------------------------------------------------------------------
1,450,000 Perris Public Financing Auth.
Tax Allocation Rev., 5.35%,
10/1/36 1,470,344
- --------------------------------------------------------------------------------
2,500,000 Pico Rivera Water Auth. Rev.,
Series 1999 A, (Water
Systems), 5.50%, 5/1/29
(MBIA) 2,898,100
- --------------------------------------------------------------------------------
1,130,000 Pomona COP, Series 2002 AE,
(Mission Promenade), 5.375%,
10/1/19 (Ambac) 1,195,992
- --------------------------------------------------------------------------------
1,000,000 Pomona Unified School District
GO, Series 2000 A, 6.55%,
8/1/29 (MBIA) 1,305,590
- --------------------------------------------------------------------------------
1,000,000 Pomona Unified School District
GO, Series 2001 A, 6.15%,
8/1/30 (MBIA) 1,218,640
- --------------------------------------------------------------------------------
1,110,000 Poway Redevelopment Agency
COP, (Paguay Redevelopment),
5.375%, 12/15/20 (Ambac) 1,201,864
- --------------------------------------------------------------------------------
5,525,000 Poway Unified School District
Special Tax Rev., (Community
Facilities District No. 6-4),
5.125%, 9/1/35 5,580,526
- --------------------------------------------------------------------------------
585,000 Redlands Unified School
District COP, 6.00%, 9/1/12
(FSA) 586,112
- --------------------------------------------------------------------------------
2,500,000 Riverside County COP, Series
2005 A, (Family Law), 5.00%,
11/1/36 (FGIC) 2,605,300
- --------------------------------------------------------------------------------
1,580,000 Riverside Redevelopment
Agency Rev., Series 2004 A,
(Tax Allocation), 5.00%,
8/1/28 (FGIC) 1,652,949
- --------------------------------------------------------------------------------
2,000,000 RNR School Financing Auth.
Special Tax Rev., Series
2006 A, (Community Facilities
District No. 92-1), 5.00%,
9/1/36 (Ambac) 2,095,420
- --------------------------------------------------------------------------------
1,500,000 Sacramento City Financing
Auth. Lease Rev., Series
1993 A, 5.40%, 11/1/20
(Ambac) 1,698,885
- --------------------------------------------------------------------------------
1,915,000 Sacramento City Financing
Auth. Rev., 5.60%, 6/1/10,
Prerefunded at 101% of Par(1) 2,075,266
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 Saddleback Valley Unified
School District Public
Financing Auth. Special Tax
Rev., Series 1997 A, 6.00%,
9/1/16 (FSA) $ 1,172,070
- --------------------------------------------------------------------------------
4,640,000 San Diego County COP,
(Burnham Institute), 6.25%,
9/1/09, Prerefunded at 101%
of Par(1) 5,036,952
- --------------------------------------------------------------------------------
10,400,000 San Diego County COP, Linked
Security, ARC, YCC, 5.625%,
9/1/12 (Ambac) 10,834,511
- --------------------------------------------------------------------------------
4,185,000 San Francisco City & County
Redevelopment Financing
Auth. Tax Allocation Rev.,
(Mission Bay North Project D),
5.00%, 8/1/35 4,254,555
- --------------------------------------------------------------------------------
2,715,000 San Marcos Public Facilities
Auth. Rev., Series 2000 A,
(Tax Increment Project Area 3),
6.75%, 10/1/10 3,096,729
- --------------------------------------------------------------------------------
3,535,000 San Mateo County Joint
Powers Auth. Lease Rev.,
(Capital Projects Program),
6.50%, 7/1/15 (MBIA) 4,166,775
- --------------------------------------------------------------------------------
4,000,000 San Mateo County Joint
Powers Auth. Lease Rev.,
(Capital Projects Program),
6.00%, 7/1/19 (MBIA) 4,767,760
- --------------------------------------------------------------------------------
3,355,000 Santa Barbara County GO,
5.50%, 10/1/22 (Ambac) 3,670,773
- --------------------------------------------------------------------------------
2,000,000 Santa Margarita-Dana Point
Auth. Rev., Series 1994 B,
(Improvement Districts 3, 3A,
4, 4A), 7.25%, 8/1/14 (MBIA) 2,475,420
- --------------------------------------------------------------------------------
1,285,000 Santa Rosa Redevelopment
Agency Tax Allocation Rev.,
Series 2005 A, 5.00%, 8/1/25
(Ambac) 1,354,403
- --------------------------------------------------------------------------------
1,150,000 Santa Rosa Redevelopment
Agency Tax Allocation Rev.,
Series 2005 A, 5.00%, 8/1/27
(Ambac) 1,209,490
- --------------------------------------------------------------------------------
2,470,000 Shasta Lake Public Finance
Auth. Rev., 5.00%, 4/1/25 2,521,747
- --------------------------------------------------------------------------------
2,430,000 Sierra Joint Community
College District GO, Series
2005 A, 5.00%, 8/1/29 (FGIC) 2,553,857
- --------------------------------------------------------------------------------
2,500,000 South Coast Air Quality
Management District Building
Corp. Rev., (Installment Sale
Headquarters), 6.00%, 8/1/11
(Ambac) 2,769,625
- --------------------------------------------------------------------------------
2,705,000 South Gate COP, Series 2002 A,
5.50%, 9/1/21 (Ambac) 2,978,989
- --------------------------------------------------------------------------------
2,000,000 South Gate Public Financing
Auth. Tax Allocation Rev.,
(Redevelopment Project No. 1),
5.75%, 9/1/22 (XLCA) 2,231,400
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
35
California Long-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,315,000 South Tahoe Joint Powers
Financing Auth. Rev., Series
2005 A, 5.00%, 10/1/28
(Ambac) $ 2,438,390
- --------------------------------------------------------------------------------
7,315,000 Southern California Public
Power Auth. Rev., (Multiple
Projects), 6.75%, 7/1/12 (FSA) 8,510,929
- --------------------------------------------------------------------------------
3,730,000 Southern California Public
Power Auth. Rev., (Multiple
Projects), 6.75%, 7/1/13 (FSA) 4,392,635
- --------------------------------------------------------------------------------
2,000,000 Southern Orange County
Finance Auth. Special Tax Rev.,
Series 1994 A, 7.00%, 9/1/11
(MBIA) 2,308,820
- --------------------------------------------------------------------------------
1,370,000 Stanton Redevelopment
Agency Tax Allocation Rev.,
(Community Development),
5.45%, 12/1/17 (Ambac) 1,403,483
- --------------------------------------------------------------------------------
2,850,000 Stockton Health Facilities Auth.
Rev., Series 1997 A, (Dameron
Hospital Association), 5.70%,
12/1/14 2,954,966
- --------------------------------------------------------------------------------
2,000,000 Taft Public Financing Auth.
Lease Rev., Series 1997 A,
(Community Correctional
Facility), 6.05%, 1/1/17 2,032,240
- --------------------------------------------------------------------------------
2,885,000 Torrance COP, Series 2005 B,
(Refinancing & Public
Improvement), 5.25%, 6/1/34
(Ambac) 3,069,092
- --------------------------------------------------------------------------------
1,215,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.50%, 10/15/18 1,299,819
- --------------------------------------------------------------------------------
1,285,000 Turlock COP, (Emanuel Medical
Center Inc.), 5.50%, 10/15/19 1,371,995
- --------------------------------------------------------------------------------
2,500,000 Ukiah Electric Rev., 6.25%,
6/1/18 (MBIA) 2,898,650
- --------------------------------------------------------------------------------
1,000,000 University of California Rev.,
Series 2004 A, (UCLA Medical
Center), 5.50%, 5/15/24
(Ambac) 1,090,710
- --------------------------------------------------------------------------------
1,000,000 University of California Rev.,
Series 2005 F, 4.75%,
5/15/35 (FSA) 1,019,650
- --------------------------------------------------------------------------------
1,445,000 Walnut Valley Unified School
District GO, Series 1992 B,
6.00%, 8/1/10 (Ambac)(1) 1,578,590
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 3,020,000 Watsonville Insured Hospital
Rev., Series 1996 A,
(Community Hospital), 6.20%,
7/1/12 (California Mortgage
Insurance)(1) $ 3,309,950
- --------------------------------------------------------------------------------
4,525,000 Woodland COP, (Wastewater
System Reference), 5.75%,
3/1/12 (Ambac) 5,002,252
- --------------------------------------------------------------------------------
415,217,629
- --------------------------------------------------------------------------------
PUERTO RICO -- 5.8%
- --------------------------------------------------------------------------------
21,500,000 Government Development
Bank of Puerto Rico Rev.,
3.85%, 10/3/06 (Acquired
1/17/06, Cost $21,500,000)(4) 21,496,345
- --------------------------------------------------------------------------------
4,000,000 Puerto Rico Electric Power
Auth. Rev., Series 2002 II,
5.375%, 7/1/17 (XLCA) 4,355,440
- --------------------------------------------------------------------------------
25,851,785
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL SECURITIES
(Cost $416,237,921) 441,069,414
- --------------------------------------------------------------------------------
MUNICIPAL DERIVATIVES -- 0.3%
CALIFORNIA -- 0.3%
- --------------------------------------------------------------------------------
1,000,000 San Diego County Water Auth.
Rev. COP, (Registration Rites),
Yield Curve Notes, Inverse
Floater, 5.95%, 4/22/09
(FGIC)(5)
(Cost $1,017,671) 1,106,780
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.1%
593,000 Federated California Municipal
Cash Trust
(Cost $593,000) 593,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 99.3%
(Cost $417,848,592) 442,769,194
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 0.7% 3,230,546
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $445,999,740
================================================================================
See Notes to Financial Statements. (continued)
- ------
36
California Long-Term Tax-Free - Schedule of Investments
AUGUST 31, 2006
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
162 U.S. Treasury
2-Year Notes December 2006 $33,103,688 $47,730
===================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
90 U.S. Treasury
10-Year Notes December 2006 $9,663,750 $(40,984)
===================================
SWAP AGREEMENTS
Unrealized
Notional Amount Description of Agreement Expiration Date Gain (Loss)
- ----------------------------------------------------------------------------------------------------
INTEREST RATE SWAP
- ----------------------------------------------------------------------------------------------------
$13,000,000 Receive semiannually a variable rate based on the October 2016 $(299,022)
weekly Bond Market Association Index and pay ============
semiannually a fixed rate equal to 4.137% with
Morgan Stanley Capital Services, Inc.
NOTES TO SCHEDULE OF INVESTMENTS
ARC = Auction Rate Certificate
Ambac = Ambac Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance, Inc.
GO = General Obligation
MBIA = MBIA Insurance Corporation
RADIAN = Radian Asset Assurance, Inc.
VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown
is effective August 31, 2006.
XLCA = XL Capital Ltd.
XLCA-ICR = XL Capital Ltd. -- Insured Custodial Receipts
YCC = Yield Curve Certificate
(1) Escrowed to maturity in U.S. government securities or state and local
government securities.
(2) Security, or a portion thereof, has been segregated for a futures
contracts and/or swap agreement.
(3) Security is a zero-coupon municipal bond. The rate indicated is the yield
to maturity at purchase. Zero-coupon securities are issued at a substantial
discount from their value at maturity.
(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 restricted securities at August 31, 2006 was $21,496,345,
which represented 4.8% of total net assets.
(5) Inverse floaters have interest rates that move inversely to market interest
rates. Inverse floaters typically have durations longer than long-term
bonds, which may cause their value to be more volatile than long-term bonds
when interest rates change. Final maturity is indicated.
See Notes to Financial Statements.
- ------
37
Shareholder Fee Examples (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 March 1, 2006 to August 31, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond Fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
American Century may charge you a $12.50 semiannual account maintenance fee if
the value of those shares is less than $10,000. We will redeem shares
automatically in one of your accounts to pay the $12.50 fee. In determining your
total eligible investment amount, we will include your investments in all
PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered
under your Social Security number. PERSONAL ACCOUNTS include individual
accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell
Education Savings Accounts and IRAs (including traditional, Roth, Rollover,
SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you
have only business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee. We will not
charge the fee as long as you choose to manage your accounts exclusively online.
If you are subject to the Account Maintenance Fee, your account value could be
reduced by the fee amount.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(continued)
- ------
38
Shareholder Fee Examples (Unaudited)
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD(1) ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 3/1/06 - EXPENSE
3/1/06 8/31/06 8/31/06 RATIO(1)
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE MONEY MARKET INVESTOR CLASS SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual
(after waiver)(2) $1,000 $1,015.00 $2.59 0.51%
- --------------------------------------------------------------------------------
Actual
(before waiver) $1,000 $1,015.00(3) $2.64 0.52%
- --------------------------------------------------------------------------------
Hypothetical
(after waiver)(2) $1,000 $1,022.63 $2.60 0.51%
- --------------------------------------------------------------------------------
Hypothetical
(before waiver) $1,000 $1,022.58 $2.65 0.52%
- --------------------------------------------------------------------------------
CALIFORNIA LIMITED-TERM TAX-FREE INVESTOR CLASS SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual $1,000 $1,017.20 $2.49 0.49%
- --------------------------------------------------------------------------------
Hypothetical $1,000 $1,022.74 $2.50 0.49%
- --------------------------------------------------------------------------------
CALIFORNIA TAX-FREE BOND INVESTOR CLASS SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual $1,000 $1,018.40 $2.49 0.49%
- --------------------------------------------------------------------------------
Hypothetical $1,000 $1,022.74 $2.50 0.49%
- --------------------------------------------------------------------------------
CALIFORNIA LONG-TERM TAX-FREE INVESTOR CLASS SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual $1,000 $1,018.30 $2.49 0.49%
- --------------------------------------------------------------------------------
Hypothetical $1,000 $1,022.74 $2.50 0.49%
- --------------------------------------------------------------------------------
(1) 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.
(2) During the six months ended August 31, 2006, the investment advisor waived a
portion of the class's management fee.
(3) Ending account value assumes the return after waiver. The return would have
been lower had fees not been waived and would have resulted in a lower
ending account value.
- ------
39
Statement of Assets and Liabilities
AUGUST 31, 2006
- ----------------------------------------------------------------------------------------------------
CALIFORNIA CALIFORNIA CALIFORNIA
TAX-FREE LIMITED-TERM CALIFORNIA LONG-TERM
MONEY MARKET TAX-FREE TAX-FREE BOND TAX-FREE
- ----------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------
Investment securities, at value
(cost of $526,507,715,
$149,237,389, $416,091,434
and $417,848,592, respectively) $526,507,715 $151,255,640 $432,207,740 $442,769,194
- -----------------------------------
Cash 959,304 580,531 1,935,206 --
- -----------------------------------
Receivable for variation margin
on futures contracts -- -- 9,094 9,281
- -----------------------------------
Interest receivable 2,789,449 1,730,763 5,399,245 6,087,297
- -----------------------------------
Prepaid portfolio insurance 41,188 -- -- --
- ----------------------------------------------------------------------------------------------------
530,297,656 153,566,934 439,551,285 448,865,772
- ----------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------
Disbursements in excess of
demand deposit cash -- -- -- 182,947
- -----------------------------------
Payable for investments purchased -- -- 6,987,523 1,658,973
- -----------------------------------
Payable for variation margin
on futures contracts -- 3,609 -- --
- -----------------------------------
Unrealized depreciation
on swap agreements -- -- -- 299,022
- -----------------------------------
Accrued management fees 211,023 63,394 175,856 183,148
- -----------------------------------
Dividends payable 73,828 92,224 335,555 541,942
- ----------------------------------------------------------------------------------------------------
284,851 159,227 7,498,934 2,866,032
- ----------------------------------------------------------------------------------------------------
NET ASSETS $530,012,805 $153,407,707 $432,052,351 $445,999,740
====================================================================================================
CAPITAL SHARES
- ----------------------------------------------------------------------------------------------------
Outstanding (unlimited number
of shares authorized) 530,098,344 14,698,076 38,747,902 39,267,244
====================================================================================================
NET ASSET VALUE PER SHARE $1.00 $10.44 $11.15 $11.36
====================================================================================================
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Capital paid in $530,098,344 $152,896,160 $416,574,672 $420,644,152
- -----------------------------------
Accumulated undistributed net
investment income (loss) -- 38,268 -- (918)
- -----------------------------------
Accumulated undistributed net
realized gain (loss) on
investment transactions (85,539) (1,533,988) (645,402) 728,180
- -----------------------------------
Net unrealized appreciation
on investments -- 2,007,267 16,123,081 24,628,326
- ----------------------------------------------------------------------------------------------------
$530,012,805 $153,407,707 $432,052,351 $445,999,740
====================================================================================================
See Notes to Financial Statements.
- ------
40
Statement of Operations
YEAR ENDED AUGUST 31, 2006
- ----------------------------------------------------------------------------------------------------
CALIFORNIA CALIFORNIA CALIFORNIA
TAX-FREE LIMITED-TERM CALIFORNIA LONG-TERM
MONEY MARKET TAX-FREE TAX-FREE BOND TAX-FREE
- ----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------
INCOME:
- -----------------------------------
Interest $17,456,253 $ 6,597,442 $19,955,906 $22,504,041
- ----------------------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------
Management fees 2,718,650 803,580 2,098,107 2,210,777
- -----------------------------------
Trustees' fees and expenses 26,657 8,026 20,750 21,951
- -----------------------------------
Portfolio insurance 101,639 -- -- --
- -----------------------------------
Other expenses 11,656 636 943 897
- ----------------------------------------------------------------------------------------------------
2,858,602 812,242 2,119,800 2,233,625
- ----------------------------------------------------------------------------------------------------
Amount waived (7,101) -- -- --
- ----------------------------------------------------------------------------------------------------
2,851,501 812,242 2,119,800 2,233,625
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 14,604,752 5,785,200 17,836,106 20,270,416
- ----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- ----------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- -----------------------------------
Investment transactions 13,452 (322,556) (633,490) 1,301,092
- -----------------------------------
Futures and swaps transactions -- 501,837 57,990 590,632
- ----------------------------------------------------------------------------------------------------
13,452 179,281 (575,500) 1,891,724
- ----------------------------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED
APPRECIATION (DEPRECIATION) ON:
- -----------------------------------
Investments -- (1,974,141) (6,337,779) (9,787,316)
- -----------------------------------
Futures and swaps -- 99,652 96,979 45,899
- ----------------------------------------------------------------------------------------------------
-- (1,874,489) (6,240,800) (9,741,417)
- ----------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS) 13,452 (1,695,208) (6,816,300) (7,849,693)
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $14,618,204 $ 4,089,992 $11,019,806 $12,420,723
====================================================================================================
See Notes to Financial Statements.
- ------
41
Statement of Changes in Net Assets
YEARS ENDED AUGUST 31, 2006 AND AUGUST 31, 2005
- ----------------------------------------------------------------------------------------------------
CALIFORNIA TAX-FREE CALIFORNIA LIMITED-TERM
MONEY MARKET TAX-FREE
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------------
OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income $ 14,604,752 $ 9,237,822 $ 5,785,200 $ 6,064,310
- -----------------------------------
Net realized gain (loss) 13,452 (58,216) 179,281 (775,383)
- -----------------------------------
Change in net unrealized
appreciation (depreciation) -- -- (1,874,489) (2,639,000)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 14,618,204 9,179,606 4,089,992 2,649,927
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------
From net investment income (14,639,943) (9,239,818) (5,785,200) (6,064,310)
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- ----------------------------------------------------------------------------------------------------
Proceeds from shares sold 347,736,527 396,325,080 25,403,653 37,323,721
- -----------------------------------
Proceeds from reinvestment
of distributions 13,208,510 7,618,474 4,598,750 4,769,915
- -----------------------------------
Payments for shares redeemed (448,266,306) (387,409,633) (56,315,956) (77,212,251)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from capital
share transactions (87,321,269) 16,533,921 (26,313,553) (35,118,615)
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS (87,343,008) 16,473,709 (28,008,761) (38,532,998)
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 617,355,813 600,882,104 181,416,468 219,949,466
- ----------------------------------------------------------------------------------------------------
End of period $ 530,012,805 $ 617,355,813 $153,407,707 $181,416,468
====================================================================================================
Undistributed net
investment income -- $35,191 $38,268 --
====================================================================================================
TRANSACTIONS IN SHARES OF THE FUNDS
- ----------------------------------------------------------------------------------------------------
Sold 347,736,527 396,325,080 2,435,151 3,516,615
- -----------------------------------
Issued in reinvestment
of distributions 13,208,510 7,618,474 441,405 450,191
- -----------------------------------
Redeemed (448,266,306) (387,409,633) (5,401,175) (7,283,420)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease)
in shares of the funds (87,321,269) 16,533,921 (2,524,619) (3,316,614)
====================================================================================================
See Notes to Financial Statements. (continued)
- ------
42
Statement of Changes in Net Assets
YEARS ENDED AUGUST 31, 2006 AND AUGUST 31, 2005
- ----------------------------------------------------------------------------------------------------
CALIFORNIA TAX-FREE BOND CALIFORNIA LONG-TERM TAX-FREE
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005 2006 2005
- ----------------------------------------------------------------------------------------------------
OPERATIONS
- ----------------------------------------------------------------------------------------------------
Net investment income $ 17,836,106 $ 16,984,277 $ 20,270,416 $ 20,699,015
- -----------------------------------
Net realized gain (loss) (575,500) 1,072,107 1,891,724 9,883,190
- -----------------------------------
Change in net unrealized
appreciation (depreciation) (6,240,800) (4,316,232) (9,741,417) (6,109,073)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 11,019,806 13,740,152 12,420,723 24,473,132
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------
From net investment income (17,836,106) (16,984,277) (20,295,458) (20,699,015)
- -----------------------------------
From net realized gains (94,332) -- (9,266,373) --
- ----------------------------------------------------------------------------------------------------
Decrease in net assets
from distributions (17,930,438) (16,984,277) (29,561,831) (20,699,015)
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- ----------------------------------------------------------------------------------------------------
Proceeds from shares sold 80,506,950 64,497,591 31,375,500 39,091,188
- -----------------------------------
Proceeds from reinvestment
of distributions 13,772,910 12,613,777 20,711,757 13,833,162
- -----------------------------------
Payments for shares redeemed (91,203,590) (56,635,099) (64,900,152) (49,635,245)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from capital
share transactions 3,076,270 20,476,269 (12,812,895) 3,289,105
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS (3,834,362) 17,232,144 (29,954,003) 7,063,222
NET ASSETS
- ----------------------------------------------------------------------------------------------------
Beginning of period 435,886,713 418,654,569 475,953,743 468,890,521
- ----------------------------------------------------------------------------------------------------
End of period $432,052,351 $435,886,713 $445,999,740 $475,953,743
====================================================================================================
Accumulated undistributed net
investment income (loss) -- -- $(918) $25,042
====================================================================================================
TRANSACTIONS IN SHARES OF THE FUNDS
- ----------------------------------------------------------------------------------------------------
Sold 7,245,872 5,691,790 2,752,233 3,331,527
- -----------------------------------
Issued in reinvestment
of distributions 1,239,909 1,111,967 1,826,737 1,178,722
- -----------------------------------
Redeemed (8,221,693) (4,999,187) (5,710,155) (4,238,058)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease)
in shares of the funds 264,088 1,804,570 (1,131,185) 272,191
====================================================================================================
See Notes to Financial Statements.
- ------
43
Notes to Financial Statements
AUGUST 31, 2006
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the
trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as
an open-end management investment company. California Tax-Free Money Market Fund
(Tax-Free Money Market), California Limited-Term Tax-Free Fund (Limited-Term),
California Tax-Free Bond Fund (formerly California Intermediate-Term Tax-Free
Fund) (Tax-Free Bond), and California Long-Term Tax-Free Fund (Long-Term)
(collectively, the funds) are four funds in a series issued by the trust. The
funds are diversified under the 1940 Act. The funds' investment objectives are
to seek safety of principal and high current income that is exempt from federal
and California income taxes. Tax-Free Money Market, Limited-Term and Long-Term
invest primarily in municipal obligations with maturities based on the maturity
range described in that fund's name. Tax-Free Bond invests primarily in
municipal obligations of all maturity ranges. The following is a summary of the
funds' significant accounting policies.
SECURITY VALUATIONS -- Securities of Tax-Free Money Market are valued at
amortized cost, which approximates current market value. Securities of
Limited-Term, Tax-Free Bond and Long-Term 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 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 the
funds determine that the market price of a portfolio security is not readily
available, or that the valuation methods mentioned above do not reflect the
security's fair value, such security is valued at its fair value as determined
by, or in accordance with procedures adopted by, the Board of Trustees or its
designee if such fair value determination would materially impact a fund's net
asset value. Circumstances that may cause the fund to fair value a security
include: an event occurred after the close of the exchange on which a portfolio
security principally trades (but before the close of the New York Stock
Exchange) that was likely to have changed the value of the security; a security
has been declared in default; or trading in a security has been halted during
the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The funds may engage in securities
transactions on a when-issued or forward commitment basis. Under these
arrangements, the securities' prices and yields are fixed on the date of the
commitment, but payment and delivery are scheduled for a future date. During
this period, securities are subject to market fluctuations. The funds will
segregate cash, cash equivalents or other appropriate liquid securities on their
records in amounts sufficient to meet the purchase price.
FUTURES CONTRACTS -- Limited-Term, Tax-Free Bond and Long-Term may enter into
futures contracts in order to manage the funds' 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, Limited-Term, Tax-Free Bond and Long-Term are 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 Limited-Term, Tax-Free Bond and Long-Term. The
variation margin is equal to the daily change in the contract value and is
recorded as unrealized gains and losses. Limited-Term, Tax-Free Bond and
Long-Term recognize 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 -- Limited-Term, Tax-Free Bond and Long-Term may enter into a
swap agreement 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 funds anticipate 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. Limited-Term,
Tax-Free Bond and Long-Term will segregate cash, cash equivalents or other
appropriate liquid securities on their records in amounts sufficient to meet
requirements. Unrealized gains are reported as an asset
(continued)
- ------
44
Notes to Financial Statements
AUGUST 31, 2006
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 futures and 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 and
instruments.
INCOME TAX STATUS -- It is each fund's policy to distribute substantially all
net investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are
declared daily and paid monthly. Distributions from net realized gains, if any,
are generally declared and paid annually. Tax-Free Money Market does not expect
to realize any long-term capital gains, and accordingly, does not expect to pay
any capital gains distributions.
INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and
trustees are indemnified against certain liabilities arising out of the
performance of their duties to the funds. In addition, in the normal course of
business, the funds enter into contracts that provide general indemnifications.
The funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the funds. 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 trust has entered into a Management Agreement with
American Century Investment Management, Inc., (ACIM) (the investment advisor),
under which ACIM provides the funds with investment advisory and management
services in exchange for a single, unified management fee (the fee). The
Agreement provides that all expenses of the funds, except brokerage commissions,
taxes, portfolio insurance, interest, fees and expenses of those trustees 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 each specific class
of shares of each fund and paid monthly in arrears. The fee consists of (1) an
Investment Category Fee based on the daily net assets of the funds and certain
other accounts managed by the investment advisor that are in the same broad
investment category as each 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 0.1570% to 0.2700% for Tax-Free Money Market
and from 0.1625% to 0.2800% for Limited-Term, Tax-Free Bond, and Long-Term. The
rates for the Complex Fee range from 0.2500% to 0.3100%. Effective August 1,
2006 through July 31, 2007, ACIM has voluntarily agreed to waive 0.016% of its
management fee for Tax-Free Money Market. The waiver had no impact on the ratio
of operating expenses to average net assets and the ratio of net investment
income to average net assets. For the year ended August 31, 2006, the effective
annual management fee was 0.49% for each of the funds.
MONEY MARKET INSURANCE -- Tax-Free Money Market, along with other money market
funds managed by ACIM, has entered into an insurance agreement with Ambac
Assurance Corporation (Ambac). Ambac provides limited coverage for certain loss
events including issuer defaults as to payment of principal or interest and
insolvency of a credit enhancement provider. Tax-Free Money Market pays annual
premiums to Ambac, which are amortized daily over one year. For the year ended
August 31, 2006, the annualized ratio of money market insurance expense to
average net assets was 0.02%.
RELATED PARTIES -- Certain officers and trustees of the trust are also officers
and/or directors, and, as a group, controlling stockholders of American Century
Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the
distributor of the trust, American Century Investment Services, Inc., and the
trust's transfer agent, American Century Services, LLC.
(continued)
- ------
45
Notes to Financial Statements
AUGUST 31, 2006
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Limited-Term, Tax-Free Bond and Long-Term have a bank line of credit agreement
with JPMorgan Chase Bank (JPMCB). JPMCB is a custodian of the funds and a wholly
owned subsidiary of J.P. Morgan Chase & Co. (JPM). JPM is an equity investor in
ACC.
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the year ended
August 31, 2006, were as follows:
- --------------------------------------------------------------------------------
LIMITED-TERM TAX-FREE BOND LONG-TERM
- --------------------------------------------------------------------------------
Cost of purchases $26,800,663 $153,031,121 $139,176,816
- --------------------------------------------------------------------------------
Proceeds from sales $40,365,082 $145,518,719 $187,955,632
- --------------------------------------------------------------------------------
All investment transactions for Tax-Free Money Market were considered short-term
during the year ended August 31, 2006.
4. BANK LINE OF CREDIT
Limited-Term, Tax-Free Bond and Long-Term, along with certain other funds
managed by ACIM or American Century Global Investment Management, Inc., have a
$500,000,000 unsecured bank line of credit agreement with JPMCB. Limited-Term,
Tax-Free Bond and Long-Term may borrow money for temporary or emergency purposes
to fund shareholder redemptions. Borrowings under the agreement bear interest at
the Federal Funds rate plus 0.50%. Limited-Term, Tax-Free Bond and Long-Term did
not borrow from the line during the year ended August 31, 2006.
5. RISK FACTORS
The funds concentrate their investments in a single state and therefore may have
more exposure to credit risk related to the state of California than a fund with
a broader geographical diversification. Income may be subject to state and local
taxes and, if applicable, the alternative minimum tax.
6. CORPORATE EVENT
On May 26, 2005, the Trustees approved a name and policy change for California
Intermediate-Term Tax-Free Fund. Effective January 1, 2006, the fund was renamed
to California Tax-Free Bond Fund and its investment policy was broadened to
allow its portfolio to hold investment-grade securities of all maturity ranges.
(continued)
- ------
46
Notes to Financial Statements
AUGUST 31, 2006
7. FEDERAL TAX INFORMATION
The tax character of distributions paid during the years ended August 31, 2006
and August 31, 2005 were as follows:
- --------------------------------------------------------------------------------
TAX-FREE MONEY MARKET LIMITED-TERM
- --------------------------------------------------------------------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
DISTRIBUTIONS PAID FROM
- --------------------------------------------------------------------------------
Exempt income $14,639,943 $9,239,818 $5,785,200 $6,064,310
- --------------------------------------------------------------------------------
Long-term capital gains -- -- -- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAX-FREE BOND LONG-TERM
- --------------------------------------------------------------------------------
2006 2005 2006 2005
- --------------------------------------------------------------------------------
DISTRIBUTIONS PAID FROM
- --------------------------------------------------------------------------------
Exempt income $17,836,106 $16,984,277 $20,596,706 $20,699,015
- --------------------------------------------------------------------------------
Long-term capital gains $94,332 -- $8,965,125 --
- --------------------------------------------------------------------------------
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
As of August 31, 2006, the components of distributable earnings on a tax-basis
and the federal tax cost of investments were as follows:
- -----------------------------------------------------------------------------------------------------
TAX-FREE
MONEY MARKET LIMITED-TERM TAX-FREE BOND LONG-TERM
- -----------------------------------------------------------------------------------------------------
Federal tax cost of investments $526,507,715 $149,237,389 $416,091,434 $417,848,592
=====================================================================================================
Gross tax appreciation of investments -- $2,218,769 $16,150,786 $24,951,812
- -------------------------------------
Gross tax depreciation of investments -- (200,518) (34,480) (31,210)
- -----------------------------------------------------------------------------------------------------
Net tax appreciation
(depreciation) of investments -- $2,018,251 $16,116,306 $24,920,602
=====================================================================================================
Net tax appreciation
(depreciation) on derivatives -- -- -- (299,022)
- -----------------------------------------------------------------------------------------------------
Net tax appreciation (depreciation) -- $2,018,251 $16,116,306 $24,621,580
=====================================================================================================
Undistributed exempt income -- $38,268 -- $(918)
- -------------------------------------
Accumulated long-term gains -- -- -- $734,926
- -------------------------------------
Accumulated capital losses $(83,841) $(1,311,283) -- --
- -------------------------------------
Capital loss deferrals $(1,698) $(233,689) $(638,627) --
- -----------------------------------------------------------------------------------------------------
The cost of investments for federal income tax purposes was the same as the cost
for financial statement purposes.
The accumulated capital losses listed above represent net capital loss
carryovers that may be used to offset future realized capital gains for federal
income tax purposes. The capital loss carryovers expire as follows:
- --------------------------------------------------------------------------------
2013 2014
- --------------------------------------------------------------------------------
Tax-Free Money Market -- $(83,841)
- --------------------------------------------------------------------------------
Limited-Term $(905,690) $(405,593)
- --------------------------------------------------------------------------------
The capital loss deferrals represent net capital losses incurred in the
ten-month period ended August 31, 2006. The funds have elected to treat such
losses as having been incurred in the following fiscal year for federal income
tax purposes.
(continued)
- ------
47
Notes to Financial Statements
AUGUST 31, 2006
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109" (the Interpretation). The Interpretation 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. The
Interpretation 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 recently begun to evaluate the application of the Interpretation
to each fund, and is not in a position at this time to estimate the significance
of its impact, if any, on each fund's financial statements.
9. OTHER TAX INFORMATION (UNAUDITED)
The following information is provided pursuant to provisions of the Internal
Revenue Code.
The funds hereby designate exempt interest and capital gain distributions for
the fiscal year ended August 31, 2006, as follows:
- --------------------------------------------------------------------------------
TAX-FREE
MONEY MARKET LIMITED-TERM TAX-FREE BOND LONG-TERM
- --------------------------------------------------------------------------------
Exempt interest
distributions $14,767,159 $5,770,787 $17,866,517 $20,300,781
- --------------------------------------------------------------------------------
Long-term
capital gains -- -- $92,462 $8,965,125
- --------------------------------------------------------------------------------
Long-Term hereby designates $300,330 of qualified short-term capital gains
distributions for purposes of Internal Revenue Code Section 871 for the fiscal
year ended August 31, 2006.
- ------
48
California Tax-Free Money Market - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.03 0.02 0.01 0.01 0.01
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.03) (0.02) (0.01) (0.01) (0.01)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================
TOTAL RETURN(1) 2.70% 1.54% 0.58% 0.73% 1.24%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.52% 0.52% 0.52% 0.51% 0.51%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 2.64% 1.53% 0.57% 0.76% 1.24%
- -------------------------
Net Assets, End of Period
(in thousands) $530,013 $617,356 $600,882 $621,747 $528,188
- --------------------------------------------------------------------------------
(1) Total return assumes reinvestment of net investment income and capital gains
distributions, if any.
See Notes to Financial Statements.
- ------
49
California Limited-Term Tax-Free - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.53 $10.71 $10.70 $10.82 $10.69
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.37 0.32 0.28 0.30 0.35
- -------------------------
Net Realized and
Unrealized Gain (Loss) (0.09) (0.18) 0.01 (0.10) 0.16
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.28 0.14 0.29 0.20 0.51
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.37) (0.32) (0.28) (0.30) (0.35)
- -------------------------
From Net Realized Gains -- -- --(1) (0.02) (0.03)
- --------------------------------------------------------------------------------
Total Distributions (0.37) (0.32) (0.28) (0.32) (0.38)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.44 $10.53 $10.71 $10.70 $10.82
================================================================================
TOTAL RETURN(2) 2.68% 1.33% 2.75% 1.87% 4.91%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.49% 0.49% 0.50% 0.51% 0.51%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 3.50% 3.01% 2.59% 2.78% 3.30%
- -------------------------
Portfolio Turnover Rate 18% 78% 55% 34% 50%
- -------------------------
Net Assets, End of Period
(in thousands) $153,408 $181,416 $219,949 $228,030 $205,066
- --------------------------------------------------------------------------------
(1) Per-share amount was less than $0.005.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any.
See Notes to Financial Statements.
- ------
50
California Tax-Free Bond - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $11.33 $11.41 $11.28 $11.55 $11.47
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.46 0.46 0.44 0.45 0.47
- -------------------------
Net Realized and
Unrealized Gain (Loss) (0.18) (0.08) 0.13 (0.23) 0.15
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.28 0.38 0.57 0.22 0.62
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.46) (0.46) (0.44) (0.45) (0.47)
- -------------------------
From Net Realized Gains --(1) -- -- (0.04) (0.07)
- --------------------------------------------------------------------------------
Total Distributions (0.46) (0.46) (0.44) (0.49) (0.54)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $11.15 $11.33 $11.41 $11.28 $11.55
================================================================================
TOTAL RETURN(2) 2.58% 3.36% 5.13% 1.91% 5.63%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.49% 0.49% 0.50% 0.51% 0.51%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 4.13% 4.02% 3.87% 3.89% 4.13%
- -------------------------
Portfolio Turnover Rate 34% 34% 20% 25% 41%
- -------------------------
Net Assets, End of Period
(in thousands) $432,052 $435,887 $418,655 $451,131 $477,494
- --------------------------------------------------------------------------------
(1) Per-share amount was less than $0.005.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any.
See Notes to Financial Statements.
- ------
51
California Long-Term Tax-Free - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $11.78 $11.69 $11.43 $11.75 $11.70
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment Income 0.51 0.52 0.51 0.53 0.53
- -------------------------
Net Realized and
Unrealized Gain (Loss) (0.19) 0.09 0.26 (0.32) 0.05
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.32 0.61 0.77 0.21 0.58
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.51) (0.52) (0.51) (0.53) (0.53)
- -------------------------
From Net Realized Gains (0.23) -- --(1) -- --
- --------------------------------------------------------------------------------
Total Distributions (0.74) (0.52) (0.51) (0.53) (0.53)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $11.36 $11.78 $11.69 $11.43 $11.75
================================================================================
TOTAL RETURN(2) 2.89% 5.38% 6.83% 1.81% 5.14%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.49% 0.49% 0.50% 0.51% 0.51%
- -------------------------
Ratio of Net Investment
Income to Average
Net Assets 4.46% 4.40% 4.39% 4.54% 4.58%
- -------------------------
Portfolio Turnover Rate 33% 36% 19% 23% 43%
- -------------------------
Net Assets, End of Period
(in thousands) $446,000 $475,954 $468,891 $497,165 $327,150
- --------------------------------------------------------------------------------
(1) Per-share amount was less than $0.005.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any.
See Notes to Financial Statements.
- ------
52
Report of Independent Registered Public Accounting Firm
To the Trustees of the American Century California Tax-Free and Municipal Funds
and Shareholders of the California Tax-Free Money Market Fund, California
Limited-Term Tax-Free Fund, California Tax-Free Bond Fund and California
Long-Term Tax-Free Fund:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules 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 California Tax-Free Money
Market Fund, California Limited-Term Tax-Free Fund, California Tax-Free Bond
Fund and California Long-Term Tax-Free Fund (four of the five funds in the
American Century California Tax-Free and Municipal Funds, hereafter referred to
as the "Funds") at August 31, 2006, the results of each of their operations for
the year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the five
years in the period then ended, 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 Funds' 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 August 31, 2006 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
October 12, 2006
- ------
53
Management
The individuals listed below serve as trustees or officers of the funds. Each
trustee 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 trustees 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 trustees. Those listed as interested trustees are "interested"
primarily by virtue of their engagement as officers of American Century
Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries,
including the funds' investment advisor, American Century Investment Management,
Inc. (ACIM); the funds' principal underwriter, American Century Investment
Services, Inc. (ACIS); and the funds' transfer agent, American Century Services,
LLC (ACS).
The other trustees (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity
for eight registered investment companies in the American Century family of
funds.
All persons named as officers of the funds also serve in similar capacities for
the other 14 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless
otherwise noted. Only officers with policy-making functions are listed. No
officer is compensated for his or her service as an officer of the funds. The
listed officers are interested persons of the funds and are appointed or
re-appointed on an annual basis.
INDEPENDENT TRUSTEES
- --------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis
Management Company, LLC (April 2004 to present); Partner and Founder, Bay
Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware &
Freidenrich (1968 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Trustee, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, Stanford Law School (1979 to present); Marc and Eva Stern
Professor of Law and Business, Columbia University School of Law (1992 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
(continued)
- ------
54
Management
INDEPENDENT TRUSTEES (CONTINUED)
- --------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to
present); President and Managing Director, Laurel Management Company, LLC (1996
to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Oak Hill Platinum
Partners, and a Partner, Oak Hill Capital Management (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1981
to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: 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: Trustee
FIRST YEAR OF SERVICE: 2002
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford
University (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to
present); Director, Watson Wyatt Worldwide (2002 to present); Director,
Palmsource Inc. (2002 to present)
- --------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1984
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
Windy Hill Productions, LP (educational software)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Quintus Corporation (automation
solutions, 1995 to present)
- --------------------------------------------------------------------------------
INTERESTED TRUSTEE
- --------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Trustee, President
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer, ACIM, ACGIM, ACIS and other ACC subsidiaries;
President, ACIM, ACGIM and other ACC subsidiaries; Executive Vice President,
ACS; Director, ACC, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
(continued)
- ------
55
Management
OFFICERS
- --------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Chief Administrative Officer, ACC (February 2006 to
present). Also serves as: President, ACS; Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer, ACIM, ACGIM, ACS, ACIS and other
ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November
2005)
- --------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Chief Compliance Officer and Senior Vice President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM,
ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995
to August 2006); Treasurer and Chief Financial Officer, various American Century
funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS
- --------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 1998
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial
Officer
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller, various American Century funds (1997 to September 2006
- --------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUND: Controller
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present)
- --------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President, ACC (August
2006 to present); Vice President, ACC and certain ACC subsidiaries (October 2001
to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006).
Also serves as: Senior Vice President, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
The SAI has additional information about the funds' trustees and is available
without charge, upon request, by calling 1-800-345-2021.
- ------
56
Approval of Management Agreements for California Tax-Free Money Market,
California Limited-Term Tax-Free, California Tax-Free Bond and California
Long-Term Tax-Free
Under Section 15(c) of the Investment Company Act, contracts for investment
advisory services are required to be reviewed, evaluated and approved by a
majority of a fund's independent directors or trustees (the "Directors") each
year. At American Century, this process is referred to as the "15(c) Process."
As a part of this process, the board reviews fund performance, shareholder
services, audit and compliance information, and a variety of other reports from
the advisor concerning fund operations. In addition to this annual review, the
board of directors oversees and evaluates on a continuous basis at its quarterly
meetings the nature and quality of significant services performed by the
advisor, fund performance, audit and compliance information, and a variety of
other reports relating to fund operations. The board, or committees of the
board, also holds special meetings as needed.
Under a Securities and Exchange Commission rule, each fund is required to
disclose in its annual or semiannual report, as appropriate, the material
factors and conclusions that formed the basis for the board's approval or
renewal of any advisory agreements within the fund's most recently completed
fiscal half-year period.
ANNUAL CONTRACT REVIEW PROCESS
As part of the annual 15(c) Process undertaken during the most recent fiscal
half-year period, the Directors reviewed extensive data and information compiled
by the advisor and certain independent providers of evaluative data (the "15(c)
Providers") concerning California Tax-Free Money Market, California Limited-Term
Tax-Free, California Tax-Free Bond and California Long-Term Tax-Free (the
"funds") and the services provided to the funds under the management agreement.
The information considered and the discussions held at the meetings included,
but were not limited to:
* the nature, extent and quality of investment management, shareholder services
and other services provided to the funds under the management agreement;
* reports on the advisor's activities relating to the wide range of programs and
services the advisor provides to the funds and its shareholders on a routine
and non-routine basis;
* data comparing the cost of owning the funds to the cost of owning a similar
funds;
* data comparing the funds' performance to appropriate benchmarks and/or a peer
group of other mutual funds with similar investment objectives and strategies;
* financial data showing the profitability of the funds to the advisor and the
overall profitability of the advisor; and
* data comparing services provided and charges to other investment management
clients of the advisor.
In keeping with its practice, the funds' board of directors held two regularly
scheduled meetings and one special meeting to review and discuss the information
provided by the advisor and to complete its negotiations with the advisor
regarding the renewal of the management agreement, including the setting of the
applicable advisory fee. The board also had the benefit of the advice of its
independent counsel throughout the period.
(continued)
- ------
57
Approval of Management Agreements for California Tax-Free Money Market,
California Limited-Term Tax-Free, California Tax-Free Bond and California
Long-Term Tax-Free
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, the
15(c) Providers, and the board's independent counsel, and evaluated such
information for each fund for which the board has responsibility. The Directors
did not identify any single factor as being all-important or controlling, and
each Director may have attributed different levels of importance to different
factors. In deciding to renew the agreement under the terms ultimately
determined by the board to be appropriate, the Directors' decision was based on
the following factors.
NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management
agreement, the advisor is responsible for providing or arranging for all
services necessary for the operation of the funds. The board noted that under
the management agreement, the advisor provides or arranges at its own expense a
wide variety of services including:
* fund construction and design
* portfolio security selection
* initial capitalization/funding
* securities trading
* custody of fund assets
* daily valuation of the funds' portfolio
* shareholder servicing and transfer agency, including shareholder
confirmations, recordkeeping and communications
* legal services
* regulatory and portfolio compliance
* financial reporting
* marketing and distribution
The Directors noted that many of these services have expanded over time both in
terms of quantity and complexity in response to shareholder demands, competition
in the industry and the changing regulatory environment. In performing their
evaluation, the Directors considered information received in connection with the
annual review, as well as information provided on an ongoing basis at their
regularly scheduled board and committee meetings.
INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services
provided is quite complex and allows fund shareholders access to professional
money management, instant diversification of their investments within an asset
class, the opportunity to easily diversify among asset classes, and liquidity.
In evaluating investment performance, the board expects the advisor to manage
the funds in accordance with its investment objectives and approved strategies.
In providing these services, the advisor utilizes teams of investment
professionals (portfolio managers, analysts, research assistants, and securities
traders) who require extensive information technology, research, training,
compliance and other systems to conduct their business. At each quarterly
meeting the Directors review investment performance information for the funds,
together with comparative information for appropriate benchmarks and peer groups
of funds managed similarly to the funds. The Directors also review detailed
performance information during the 15(c) Process comparing the funds'
performance with that of similar funds not managed by the advisor.
(continued)
- ------
58
Approval of Management Agreements for California Tax-Free Money Market,
California Limited-Term Tax-Free, California Tax-Free Bond and California
Long-Term Tax-Free
If performance concerns are identified, the Directors discuss with the advisor
the reasons for such results (e.g., market conditions, security selection) and
any efforts being undertaken to improve performance. California Tax-Free Money
Market's performance for both the one and three year periods was above the
median for its peer group. California Limited-Term Tax-Free's and California
Long-Term Tax-Free's performance fell below the median for both the one and
three year periods during the past year. The board discussed the funds'
performance with the advisor and was satisfied with the efforts being undertaken
by the advisor. California Tax-Free Bond's performance was above the median for
the one year period and just below the median for the three year period.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the funds with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors review reports and evaluations of such services at their regular
quarterly meetings, including the annual meeting concerning contract review, and
reports to the board. These reports include, but are not limited to, information
regarding the operational efficiency and accuracy of the shareholder and
transfer agency services provided, staffing levels, shareholder satisfaction (as
measured by external as well as internal sources), technology support, new
products and services offered to fund shareholders, securities trading
activities, portfolio valuation services, auditing services, and legal and
operational compliance activities. Certain aspects of shareholder and transfer
agency service level efficiency and the quality of securities trading activities
are measured by independent third party providers and are presented in
comparison to other fund groups not managed by the advisor.
COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor
provides detailed information concerning its cost of providing various services
to the funds, its profitability in managing the funds, its overall
profitability, and its financial condition. The Directors have reviewed with the
advisor the methodology used to prepare this financial information. This
financial information regarding the advisor is considered in order to evaluate
the advisor's financial condition, its ability to continue to provide services
under the management agreement, and the reasonableness of the current management
fee.
ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment
to providing quality services to shareholders and to conducting its business
ethically. They noted that the advisor's practices generally meet or exceed
industry best practices and that the advisor was not implicated in the industry
scandals of 2003 and 2004.
ECONOMIES OF SCALE. The Directors review reports provided by the advisor on
economies of scale for the complex as a whole and the year-over-year changes in
revenue, costs, and profitability. The Directors concluded that economies of
scale are difficult to measure and predict with precision, especially on a
fund-by-fund basis. This analysis is also complicated by the additional services
and content provided by the advisor and its reinvestment in its ability to
provide and
(continued)
- ------
59
Approval of Management Agreements for California Tax-Free Money Market,
California Limited-Term Tax-Free, California Tax-Free Bond and California
Long-Term Tax-Free
expand those services. Accordingly, the Directors also seek to evaluate
economies of scale by reviewing other information, such as year-over-year
profitability of the advisor generally, the profitability of its management of
the funds specifically, the expenses incurred by the advisor in providing
various functions to the funds, and the breakpoint fees of competitive funds not
managed by the advisor. The Directors believe the advisor is appropriately
sharing economies of scale through its competitive fee structure, fee
breakpoints as the fund complex and the funds increase in size, and through
reinvestment in its business to provide shareholders additional content and
services. In particular, separate breakpoint schedules based on the size of the
entire fund complex and on the size of the funds reflect the complexity of
assessing economies of scale.
COMPARISON TO OTHER FUNDS' FEES. The funds pay the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the funds, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the funds'
independent directors (including their independent legal counsel). Under the
unified fee structure, the advisor is responsible for providing all investment
advisory, custody, audit, administrative, compliance, recordkeeping, marketing
and shareholder services, or arranging and supervising third parties to provide
such services. By contrast, most other funds are charged a variety of fees,
including an investment advisory fee, a transfer agency fee, an administrative
fee, distribution charges and other expenses. Other than their investment
advisory fees and Rule 12b-1 distribution fees, all other components of the
total fees charged by these other funds may be increased without shareholder
approval. The board believes the unified fee structure is a benefit to fund
shareholders because it clearly discloses to shareholders the cost of owning
fund shares, and, since the unified fee cannot be increased without a vote of
fund shareholders, it shifts to the advisor the risk of increased costs of
operating the fund and provides a direct incentive to minimize administrative
inefficiencies. Part of the Directors' analysis of fee levels involves reviewing
certain evaluative data compiled by an independent provider and comparing the
funds' unified fee to the total expense ratio of other funds in the funds' peer
group. The unified fees of California Tax-Free Money Market and California
Limited-Term Tax Free were below the median of the total expense ratios of their
peer groups. The unified fee of California Tax-Free Bond was in the lowest
quartile of the total expense ratios of its peer group. The unified fee of
California Long-Term Tax-Free was slightly above the lowest quartile of the
total expense ratios of its peer group.
COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The
Directors also requested and received information from the advisor concerning
the nature of the services, fees, and profitability of its advisory services to
advisory clients other than the funds. They observed that these varying types of
client accounts require different services and involve different regulatory and
entre-
(continued)
- ------
60
Approval of Management Agreements for California Tax-Free Money Market,
California Limited-Term Tax-Free, California Tax-Free Bond and California
Long-Term Tax-Free
preneurial risks than the management of the funds. The Directors analyzed this
information and concluded that the fees charged and services provided to the
funds were reasonable by comparison.
COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information
from the advisor concerning collateral benefits it receives as a result of its
relationship with the funds. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use the fund or shareholder
information to generate profits in other lines of business, and therefore does
not derive any significant collateral benefits from them. The Directors noted
that the advisor receives proprietary research from broker-dealers that execute
fund portfolio transactions and concluded that this research is likely to
benefit fund shareholders. The Directors also determined that the advisor is
able to provide investment management services to certain clients other than the
funds, at least in part, due to its existing infrastructure built to serve the
fund complex. The Directors concluded, however, that the assets of those other
clients are not material to the analysis and, in any event, are included with
the assets of the funds to determine breakpoints in the funds' fee schedule,
provided they are managed using the same investment team and strategy.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the Directors, in the absence of particular
circumstances and assisted by the advice of legal counsel that is independent of
the advisor, taking into account all of the factors discussed above and the
information provided by the advisor concluded that the investment management
agreement between each of California Limited-Term Tax-Free, California Tax-Free
Bond and California Long-Term Tax-Free and the advisor is fair and reasonable in
light of the services provided and should be renewed.
The Directors of California Tax-Free Money Market negotiated a one-year waiver
by the advisor of a portion of the management fee. This waiver was proposed by
the Directors based on their review of the fund's percentile rank in its peer
group universe and the fact that the Directors seek as a general rule to have
total expense ratios of fixed income and money market funds in the lowest 25th
percentile of the fees of comparable funds. The advisor accepted the principle
of the fee waiver based on the fact that the lower fee will result in increased
competitiveness of the fund within its peer group universe. The fee waiver,
effective August 1, 2006, will result in a lowering of the management fee of the
fund by 0.016 percentage points below the current management fee. Following
these negotiations with the advisor, the Directors concluded that the investment
management agreement between the fund and the advisor is fair and reasonable in
light of the services provided and should be renewed.
- ------
61
Additional Information
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the funds' investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the funds. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-345-2021. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The funds file their 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 funds' Forms N-Q are available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The funds also make their complete schedule
of portfolio holdings for the most recent quarter of their fiscal year available
on their Web site at americancentury.com and, upon request, by calling
1-800-345-2021.
- ------
62
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 LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of those securities
included in the Lehman Brothers Municipal Bond Index that have maturities
between two and four years.
The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of
investment-grade U.S. municipal securities, with maturities of four to six
years, that are general obligations of a state or local government.
The LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of those
securities included in the Lehman Brothers Municipal Bond Index that have
maturities greater than 22 years.
The LEHMAN BROTHERS MUNICIPAL BOND INDEX is a market value-weighted index
designed for the long-term tax-exempt bond market.
The LEHMAN BROTHERS NON-INVESTMENT-GRADE MUNICIPAL BOND INDEX is composed of
non-investment-grade U.S. municipal securities with a remaining maturity of one
year or more.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of the
U.S. Treasury with a remaining maturity of one year or more.
- ------
63
Notes
- ------
64
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTOR SERVICES REPRESENTATIVE:
1-800-345-2021 or 816-531-5575
BUSINESS, NOT-FOR-PROFIT,
EMPLOYER-SPONSORED RETIREMENT PLANS:
1-800-345-3533
BANKS AND TRUST COMPANIES, BROKER-DEALERS,
FINANCIAL PROFESSIONALS, INSURANCE COMPANIES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0610 ©2006 American Century Proprietary Holdings, Inc.
SH-ANN-51539N All rights reserved.
[front cover]
AMERICAN CENTURY INVESTMENTS
Annual Report
August 31, 2006
[photo of fall scene]
California High-Yield Municipal Fund
[american century investments logo and text logo]
Our Message to You
[photo of James E. Stowers III and James E. Stowers, Jr.]
/s/James E. Stowers, Jr.
James E. Stowers, Jr.
FOUNDER
AMERICAN CENTURY COMPANIES, INC.
/s/James E. Stowers III
James E. Stowers III
CHAIRMAN OF THE BOARD
AMERICAN CENTURY COMPANIES, INC.
We are pleased to provide you with the annual report for the American Century
California High-Yield Municipal Fund for the year ended August 31, 2006. We hope
you find this information helpful in monitoring your investment. Another useful
resource we offer is our Web site, americancentury.com, where we post quarterly
portfolio commentaries, the views of our senior investment officers, and other
communications about investments, portfolio strategy, and the markets.
Our Web site presents American Century's strategic collaboration with Lance
Armstrong and the Lance Armstrong Foundation (LAF). Our campaign, featuring
Lance, is designed to encourage investors to take a more active role in planning
their financial futures and make every investment decision count.
American Century's collaboration with Lance Armstrong and the LAF is a perfect
fit. Like members of our family, Lance is a cancer survivor and shares our
values of optimism, focus, and determination. In addition, Lance and our family
have dedicated our success to improving lives, through the LAF and the Stowers
Institute for Medical Research, respectively. To learn more about American
Century's collaboration with Lance Armstrong and the LAF, please visit
www.lanceface.com on the Web and click on the links to related sites.
Besides this exciting collaboration, we've enjoyed other good news--in January,
American Century was named, for the seventh consecutive year, one of Fortune
magazine's 100 Best Companies to Work For in America. Fostering a positive work
environment can benefit fund investors as well as our company--it helps us
continue to attract and retain talented people.
As always, we deeply appreciate your investment with American Century
Investments.
Table of Contents
Market Perspective 2
U.S. Fixed-Income Total Returns 2
CALIFORNIA HIGH-YIELD MUNICIPAL
Performance 3
Portfolio Commentary 5
Portfolio at a Glance 5
Yields 5
Portfolio Composition by Credit Rating 6
Top Five Sectors 6
Shareholder Fee Example 7
Schedule of Investments 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities 16
Statement of Operations 17
Statement of Changes in Net Assets 18
Notes to Financial Statements 19
Financial Highlights 24
Report of Independent Registered Public Accounting Firm 28
OTHER INFORMATION
Management 29
Approval of Management Agreement for
California High-Yield Municipal 32
Share Class Information 37
Additional Information 38
Index Definitions 39
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 David MacEwen]
BY DAVID MACEWEN, CHIEF INVESTMENT OFFICER, FIXED INCOME
REACHING AN INFLECTION POINT
The 12 months ended August 31, 2006, provided two economic growth spurts, an
inflation scare, and the elevation of short-term interest rates to levels unseen
since the U.S. economy sputtered in 2001. Comparisons with 2001 hold some
merit--while the Wall Street consensus does not predict a downturn of the
magnitude of what happened five years ago, our 12-month reporting period
concluded with economic growth and interest rates teetering toward possible
declines in the next 12 months.
After two years of steady, mostly predictable, short-term interest rate hikes by
the Federal Reserve (the Fed) to harness inflation as the economy grew, the Fed
finally paused on August 8, 2006. We believe the Fed halted to assess the impact
of its 17 increases (which pushed its overnight rate target to a five-year high
of 5.25%) and to try to avoid repeating the mistake it had made in previous
cycles of pushing rates too high, tipping the economy into "hard landings."
INFLATION REMAINED A THREAT
Rising inflation complicated matters for the Fed--the 12-month percentage change
in the U.S. Labor Department's core consumer price index for August 2006 was
2.8%, the highest rate since November 2001. Some, including a voting member of
the Fed's interest rate policy committee, believed inflation at this level
warranted continued interest rate hikes. But the consensus forecasted instead
that the largely energy price-driven inflation threat would diminish as economic
growth declined. Indeed, inflation appeared to moderate at the end of the
reporting period as economic growth eased and energy prices fell.
CHALLENGING CONDITIONS FOR BONDS
Higher inflation and rising interest rates during much of the 12-month reporting
period caused price declines for most U.S. bonds. Generally speaking, however,
coupon returns offset price depreciation, resulting in modestly positive total
returns for the period. Longer-term taxable investment-grade securities, which
posted negative returns, were a notable exception. On the other hand, economic
growth and strong demand boosted high-yield and municipal sector returns, while
the Fed's seven rate hikes during the 12 months increased the yields and appeal
of money market securities.
U.S. FIXED-INCOME TOTAL RETURNS
For the 12 months ended August 31, 2006
- --------------------------------------------------------------------------------
LEHMAN BROTHERS MUNICIPAL MARKET INDICES
- --------------------------------------------------------------------------------
Municipal Bond 3.03%
- --------------------------------------------------------------------------------
3-Year Municipal Bond 2.27%
- --------------------------------------------------------------------------------
5-Year General Obligation (GO) 2.32%
- --------------------------------------------------------------------------------
Long-Term Municipal Bond (22+ years) 4.08%
- --------------------------------------------------------------------------------
Non-Investment-Grade (High-Yield) 8.26%
- --------------------------------------------------------------------------------
TAXABLE MARKET RETURNS
- --------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Index 1.71%
- --------------------------------------------------------------------------------
Lehman Brothers U.S. Treasury Index 0.79%
- --------------------------------------------------------------------------------
3-Month Treasury Bill 4.37%
- --------------------------------------------------------------------------------
10-Year Treasury Note -2.09%
- --------------------------------------------------------------------------------
- ------
2
California High-Yield Municipal - Performance
TOTAL RETURNS AS OF AUGUST 31, 2006
-------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
INVESTOR CLASS 3.80% 6.24% 6.72% 6.51% 12/30/86
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
LONG-TERM MUNICIPAL
BOND INDEX 4.08% 6.37% 7.05% 7.71%(1) --
- --------------------------------------------------------------------------------
LIPPER CALIFORNIA
MUNICIPAL DEBT FUNDS
AVERAGE RETURNS(2) 2.81% 4.28% 5.35% 6.17%(1) --
- --------------------------------------------------------------------------------
Investor Class's
Lipper Ranking
as of 8/31/06(2) 14 of 121 4 of 98 1 of 70 4 of 25(1) --
as of 9/30/06(2) 11 of 121 4 of 97 2 of 73 4 of 25(1) --
- --------------------------------------------------------------------------------
A Class 1/31/03
No sales charge* 3.54% -- -- 6.27%(3)
With sales charge* -1.14% -- -- 4.92%(3)
- --------------------------------------------------------------------------------
B Class 1/31/03
No sales charge* 2.77% -- -- 5.48%(3)
With sales charge* -1.23% -- -- 4.75%(3)
- --------------------------------------------------------------------------------
C Class 2.76% -- -- 5.56%(3) 1/31/03
- --------------------------------------------------------------------------------
*Sales charges include initial sales charges and contingent deferred sales
charges (CDSCs), as applicable. A Class shares have a 4.50% maximum initial
sales charge for fixed income funds and may be subject to a maximum CDSC of
1.00%. B Class shares redeemed within six years of purchase are subject to a
CDSC that declines from 5.00% during the first year after purchase to 0.00% the
sixth year after purchase. C Class shares redeemed within 12 months of purchase
are subject to a maximum CDSC of 1.00%. Please see the Share Class Information
page for more about the applicable sales charges for each share class. The SEC
requires that mutual funds provide performance information net of maximum sales
charges in all cases where charges could be applied.
(1) Since 12/31/86, the date nearest the Investor Class's inception for which
data are available.
(2) Data provided by Lipper Inc. - A Reuters Company. ©2006 Reuters. All
rights reserved. Any copying, republication or redistribution of Lipper
content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Lipper. Lipper shall not be
liable for any errors or delays in the content, or for any actions taken in
reliance thereon.
Lipper Fund Performance -- Performance data is total return, and is
preliminary and subject to revision.
Lipper Rankings -- Rankings are based only on the universe shown and are
based on average annual total returns. This listing might not represent the
complete universe of funds tracked by Lipper.
The data contained herein has been obtained from company reports, financial
reporting services, periodicals and other resources believed to be reliable.
Although carefully verified, data on compilations is not guaranteed by
Lipper and may be incomplete. No offer or solicitations to buy or sell any
of the securities herein is being made by Lipper.
(3) Class returns would have been lower if distribution and service fees had
not been voluntarily waived from 1/31/03 to 3/10/03, 2/19/03, and 3/4/03 for
A Class, B Class, and C Class shares, respectively.
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline. In
addition, the lower-rated securities in which the fund invests are subject to
greater credit risk, default risk and liquidity risk. Investment income may be
subject to certain state and local taxes and, depending on your tax status, the
federal alternative minimum tax (AMT). Capital gains are not exempt from state
and federal income tax.
Unless otherwise indicated, performance reflects Investor Class 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.
(continued)
- ------
3
California High-Yield Municipal - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made August 31, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended August 31
- ----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------
Investor Class 10.61% 9.35% 0.26% 6.70% 9.50% 6.07% 3.35% 8.48% 9.65% 3.80%
- ----------------------------------------------------------------------------------------------------
Lehman Brothers
Long-Term Municipal
Bond Index 11.24% 10.51% -2.14% 7.34% 12.35% 5.62% 2.62% 9.24% 10.52% 4.08%
- ----------------------------------------------------------------------------------------------------
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 1-800-345-2021 or visit
americancentury.com. As interest rates rise, bond values will decline. In
addition, the lower-rated securities in which the fund invests are subject to
greater credit risk, default risk and liquidity risk. Investment income may be
subject to certain state and local taxes and, depending on your tax status, the
federal alternative minimum tax (AMT). Capital gains are not exempt from state
and federal income tax.
Unless otherwise indicated, performance reflects Investor Class 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.
- ------
4
California High-Yield Municipal - Portfolio Commentary
PORTFOLIO MANAGER: STEVEN PERMUT
PERFORMANCE SUMMARY
California High-Yield Municipal (Cal High-Yield) returned 3.80%* for the 12
months ended August 31, 2006, its lowest fiscal-year total return since 2003.
The fund's net asset value per share declined as interest rates rose (the fund's
yield climbed from 3.94% on August 31, 2005, to 4.03% a year later) but the
total return remained positive as the yield offset price declines in the
portfolio.
The Lehman Brothers Long-Term Municipal Bond Index returned 4.08%, also its
lowest trailing 12-month return since 2003 for periods ended August 31. Both the
fund and the index significantly outpaced the 2.81% average return of the fund's
Lipper group (121 primarily investment-grade California municipal debt funds
tracked by Lipper Inc.). They also outperformed the Lipper group average for the
five-year, 10-year, and since-inception periods ended August 31, 2006.
MUNICIPAL VS. TREASURY MARKET BEHAVIOR
Compared with the Treasury market, the municipal bond market was a relatively
favorable area in which to be invested for the 12 months ended August 31, 2006.
Long-term Treasury yields jumped 60-70 basis points during the period, with
corresponding bond price declines. By contrast, comparable AAA-rated general
obligation municipal bond yields rose considerably less, and even declined
slightly at the longest maturities.
Slower supply growth and sustained demand helped drive the municipal market's
outperformance. As interest rates rose, municipal issuance and refinancing
activity dwindled, limiting the increase in available bonds. Meanwhile investor
demand persisted because: 1) municipal credit quality typically improves with
economic expansion, 2) long-term municipal yields still compensated investors
for taking more maturity risk, unlike in the Treasury market, and 3) the
municipal market is typically less volatile than the Treasury market in rising
interest rate environments.
PUTTING FUND PERFORMANCE IN FURTHER CONTEXT
Cal High-Yield benefited largely from three factors: 1) the relative stability
of the municipal market, 2) outperformance in the high-yield municipal sector
PORTFOLIO AT A GLANCE
- --------------------------------------------------------------------------------
AS OF AS OF
8/31/06 8/31/05
- --------------------------------------------------------------------------------
Weighted Average
Maturity 18.3 yrs 20.4 yrs
- --------------------------------------------------------------------------------
Average Duration
(Modified) 5.6 yrs 5.9 yrs
- --------------------------------------------------------------------------------
YIELDS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
30-DAY SEC YIELD
- --------------------------------------------------------------------------------
Investor Class 4.03%
- --------------------------------------------------------------------------------
A Class 3.61%
- --------------------------------------------------------------------------------
B Class 3.04%
- --------------------------------------------------------------------------------
C Class 3.04%
- --------------------------------------------------------------------------------
INVESTOR CLASS 30-DAY TAX-EQUIVALENT YIELDS(1)
- --------------------------------------------------------------------------------
31.98% Tax Bracket 5.92%
- --------------------------------------------------------------------------------
34.70% Tax Bracket 6.17%
- --------------------------------------------------------------------------------
39.23% Tax Bracket 6.63%
- --------------------------------------------------------------------------------
41.05% Tax Bracket 6.84%
- --------------------------------------------------------------------------------
(1) The tax brackets indicated are for combined state and federal income tax.
Actual tax-equivalent yields may be lower, if alternative minimum tax
is applicable.
*All fund returns and yields referenced in this commentary are for Investor
Class shares.
(continued)
- ------
5
California High-Yield Municipal - Portfolio Commentary
(which gave the fund an advantage over its largely investment-grade Lipper
group), and 3) disciplined management, including thorough credit analysis,
careful security selection, and diligent investment monitoring.
Two key features work in the high-yield municipal sector's favor in rising
interest rate environments: 1) greater sensitivity to economic growth and
improving credit quality than the broader municipal market, and 2) the high
yields help cushion against price declines. The resulting investor clamor for
high-yield municipals pushed municipal credit spreads (the yield difference
between high-yield and investment-grade municipals) to the lowest levels since
1999. High-yield corporate municipal bonds, particularly those issued in the
airline and tobacco sectors, performed especially well.
PORTFOLIO STRATEGY & OUTLOOK
We continued to overweight unrated bonds that met our credit quality criteria,
and land-secured bonds issued where we believe housing demand is greater than
supply. Unrated bonds boosted the fund's yield, while land-secured bonds provide
appreciation potential as the economy grows and/or projects are developed and
their credit risk diminishes.
We consider these strategies "all-weather." We believe land-secured bonds
provide lower long-term volatility than corporate municipal bonds, even as we
face a cooling housing market. The portfolio's land-secured bonds are backed by
special assessment taxes that don't fluctuate with property values. Corporate
municipal bonds, on the other hand, are subject to corporate profit volatility
and litigation risk.
HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY
Cal High-Yield is designed to offer high-net-worth California residents high
levels of state and federal tax-free current income, capital appreciation
potential, and portfolio diversification benefits. The fund is best suited for
those accustomed to higher-risk securities and share-price fluctuation.
High-yield municipal bonds typically behave differently than equity, taxable,
and investment-grade bond investments under various economic and market
scenarios. Diversification does not ensure against loss, however.
PORTFOLIO COMPOSITION BY CREDIT RATING
- --------------------------------------------------------------------------------
% OF FUND % OF FUND
INVESTMENTS INVESTMENTS
AS OF AS OF
8/31/06 2/28/06
- --------------------------------------------------------------------------------
AAA 44% 34%
- --------------------------------------------------------------------------------
A 3% 1%
- --------------------------------------------------------------------------------
BBB 13% 16%
- --------------------------------------------------------------------------------
BB 1% 1%
- --------------------------------------------------------------------------------
Unrated 39% 48%
- --------------------------------------------------------------------------------
Ratings provided by independent research companies. These ratings are listed in
Standard & Poor's format even if they were provided by other sources.
TOP FIVE SECTORS AS OF AUGUST 31, 2006
- --------------------------------------------------------------------------------
% OF FUND
INVESTMENTS
- --------------------------------------------------------------------------------
Land Based 36%
- --------------------------------------------------------------------------------
Prerefunded 17%
- --------------------------------------------------------------------------------
Tax Allocation Revenue 8%
- --------------------------------------------------------------------------------
General Obligation (GO) 7%
- --------------------------------------------------------------------------------
Certificate of Participation
(COPs)/Leases 5%
- --------------------------------------------------------------------------------
- ------
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 March 1, 2006 to August 31, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
If you hold Investor Class shares of any American Century fund, or Institutional
Class shares of the American Century Diversified Bond Fund, in an American
Century account (i.e., not a financial intermediary or retirement plan account),
American Century may charge you a $12.50 semiannual account maintenance fee if
the value of those shares is less than $10,000. We will redeem shares
automatically in one of your accounts to pay the $12.50 fee. In determining your
total eligible investment amount, we will include your investments in all
PERSONAL ACCOUNTS (including American Century Brokerage accounts) registered
under your Social Security number. PERSONAL ACCOUNTS include individual
accounts, joint accounts, UGMA/UTMA accounts, personal trusts, Coverdell
Education Savings Accounts and IRAs (including traditional, Roth, Rollover,
SEP-, SARSEP- and SIMPLE-IRAs), and certain other retirement accounts. If you
have only business, business retirement, employer-sponsored or American Century
Brokerage accounts, you are currently not subject to this fee. We will not
charge the fee as long as you choose to manage your accounts exclusively online.
If you are subject to the Account Maintenance Fee, your account value could be
reduced by the fee amount.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(continued)
- ------
7
Shareholder Fee Example (Unaudited)
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 3/1/06 - EXPENSE
3/1/06 8/31/06 8/31/06 RATIO*
- --------------------------------------------------------------------------------
CALIFORNIA HIGH-YIELD MUNICIPAL SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,023.30 $2.65 0.52%
- --------------------------------------------------------------------------------
A Class $1,000 $1,022.00 $3.92 0.77%
- --------------------------------------------------------------------------------
B Class $1,000 $1,018.20 $7.73 1.52%
- --------------------------------------------------------------------------------
C Class $1,000 $1,018.10 $7.73 1.52%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Investor Class $1,000 $1,022.58 $2.65 0.52%
- --------------------------------------------------------------------------------
A Class $1,000 $1,021.32 $3.92 0.77%
- --------------------------------------------------------------------------------
B Class $1,000 $1,017.54 $7.73 1.52%
- --------------------------------------------------------------------------------
C Class $1,000 $1,017.54 $7.73 1.52%
- --------------------------------------------------------------------------------
*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.
- ------
8
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 97.8%
CALIFORNIA -- 94.0%
- --------------------------------------------------------------------------------
$ 1,000,000 ABC Unified School District GO,
Series 2000 B, 6.14%, 8/1/21
(FGIC)(1) $ 519,410
- --------------------------------------------------------------------------------
2,000,000 Alameda Public Financing Auth.
Local Agency Rev., Series
1996 A, (Community Facilities
District No. 1), 7.00%, 8/1/19 2,063,500
- --------------------------------------------------------------------------------
1,200,000 Anaheim Public Financing Auth.
Lease Rev., Series 1997 A,
6.00%, 9/1/24 (FSA) 1,462,512
- --------------------------------------------------------------------------------
830,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations COP,
(Eskaton Gold River Lodge),
6.375%, 11/15/08,
Prerefunded at 102% of Par(2) 873,716
- --------------------------------------------------------------------------------
3,000,000 Association of Bay Area
Governments Finance Auth. for
Nonprofit Corporations COP,
(Eskaton Gold River Lodge),
6.375%, 11/15/08,
Prerefunded at 102% of Par(2) 3,231,270
- --------------------------------------------------------------------------------
2,500,000 Beaumont Financing Auth.
Local Agency Rev., Series
2003 A, 6.875%, 9/1/27 2,807,500
- --------------------------------------------------------------------------------
2,875,000 Beaumont Financing Auth.
Local Agency Rev., Series
2004 D, 5.80%, 9/1/35 3,039,191
- --------------------------------------------------------------------------------
855,000 Beaumont Financing Auth.
Local Agency Rev., Series
2005 C, 5.50%, 9/1/29 888,661
- --------------------------------------------------------------------------------
4,000,000 Beaumont Financing Auth.
Local Agency Rev., Series
2005 C, 5.50%, 9/1/35 4,108,000
- --------------------------------------------------------------------------------
3,700,000 Beaumont Financing Auth.
Local Agency Rev., Series
2006 A, 5.35%, 9/1/36 3,751,652
- --------------------------------------------------------------------------------
1,190,000 Berryessa Unified School
District GO, Series 2000 A,
6.18%, 8/1/21 (FSA)(1) 618,098
- --------------------------------------------------------------------------------
1,220,000 Berryessa Unified School
District GO, Series 2000 A,
6.05%, 8/1/22 (FSA)(1) 602,692
- --------------------------------------------------------------------------------
1,000,000 Berryessa Unified School
District GO, Series 2000 A,
6.06%, 8/1/23 (FSA)(1) 471,040
- --------------------------------------------------------------------------------
1,505,000 California Educational
Facilities Auth. Rev., (Western
University Health Sciences),
6.00%, 10/1/21 1,613,571
- --------------------------------------------------------------------------------
4,000,000 California Health Facilities
Financing Auth. Rev., Series
1989 A, (Kaiser Permanente),
7.15%, 10/1/12 (Ambac)(1) 3,192,720
- --------------------------------------------------------------------------------
2,500,000 California Health Facilities
Financing Auth. Rev., Series
1998 A, (Kaiser Permanente),
5.50%, 6/1/22 (FSA)(2)(3) 2,628,875
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 4,410,000 California Mobilehome Park
Financing Auth. Rev., Series
2000 B, (Union City Tropics),
7.30%, 8/15/35 $ 4,753,715
- --------------------------------------------------------------------------------
1,905,000 California Mobilehome Park
Financing Auth. Rev., Series
2001 B, (Rancho Vallecitos -
San Marcos), 6.75%, 11/15/36 2,043,189
- --------------------------------------------------------------------------------
6,345,000 California Mobilehome Park
Financing Auth. Rev., Series
2003 B, (Palomar Estates
E&W), 7.00%, 9/15/36(3) 6,926,837
- --------------------------------------------------------------------------------
2,000,000 California Public Works Board
Lease Rev., Series 1993 D,
(Department of Corrections),
5.25%, 6/1/15 (FSA) 2,192,360
- --------------------------------------------------------------------------------
6,000,000 California Public Works Board
Lease Rev., Series 2005 A,
(Department of General
Services - Butterfield), 5.25%,
6/1/30 6,346,560
- --------------------------------------------------------------------------------
1,375,000 California State and Local
Government Financing Auth.
Rev., Series 1997 B, (Marin
Valley Mobile Country),
7.50%, 10/1/24 1,442,251
- --------------------------------------------------------------------------------
2,500,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 6.00%, 7/1/12,
Prerefunded at 101% of Par(2) 2,829,800
- --------------------------------------------------------------------------------
4,630,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 6.00%, 7/1/12,
Prerefunded at 101% of Par(2) 5,240,790
- --------------------------------------------------------------------------------
2,455,000 California State University
Fresno Association Inc. Rev.,
(Auxiliary Organization Event
Center), 7.00%, 7/1/12,
Prerefunded at 102% of Par(2) 2,887,055
- --------------------------------------------------------------------------------
10,000,000 California State University Rev.,
5.00%, 11/1/30 (MBIA)(3) 10,559,999
- --------------------------------------------------------------------------------
10,000,000 California Statewide
Communities Development
Auth. Rev., Series 2006 B,
(Kaiser Permanente), 5.25%,
3/1/45(3) 10,452,599
- --------------------------------------------------------------------------------
2,000,000 California Statewide
Communities Development
Auth. Rev., (Thomas Jefferson
School of Law), 7.75%,
10/1/11, Prerefunded at
101% of Par(2) 2,352,000
- --------------------------------------------------------------------------------
2,780,000 California Statewide
Communities Development
COP, (Sonoma County Indian
Health), 6.40%, 9/1/29 2,930,120
- --------------------------------------------------------------------------------
1,945,000 California Statewide
Communities Development
COP, (Windward School),
6.90%, 9/1/23 1,986,954
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
9
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 4,070,000 Capistrano Unified School
District No. 90-2 Community
Facilities Special Tax Rev.,
6.00%, 9/1/13, Prerefunded
at 100% of Par(2) $ 4,646,719
- --------------------------------------------------------------------------------
6,250,000 Capistrano Unified School
District No. 90-2 Community
Facilities Special Tax Rev.,
6.00%, 9/1/33 6,617,250
- --------------------------------------------------------------------------------
2,180,000 Capistrano Unified School
District No. 98-2 Community
Facilities Special Tax Rev.,
5.00%, 9/1/23 (FGIC) 2,317,144
- --------------------------------------------------------------------------------
1,000,000 Carmel Unified School District
GO, 5.50%, 8/1/25 (MBIA) 1,066,160
- --------------------------------------------------------------------------------
1,075,000 Cathedral City Public Financing
Auth. Rev., Series 2000 A,
6.00%, 8/1/23 (MBIA)(1) 506,368
- --------------------------------------------------------------------------------
1,075,000 Cathedral City Public Financing
Auth. Rev., Series 2000 A,
6.00%, 8/1/24 (MBIA)(1) 482,632
- --------------------------------------------------------------------------------
1,085,000 Cathedral City Public Financing
Auth. Rev., Series 2000 A,
6.05%, 8/1/25 (MBIA)(1) 463,252
- --------------------------------------------------------------------------------
1,085,000 Cathedral City Public Financing
Auth. Rev., Series 2000 A,
6.05%, 8/1/26 (MBIA)(1) 441,150
- --------------------------------------------------------------------------------
1,700,000 Chino Valley Unified School
District COP, Series 2001 A,
5.375%, 9/1/20 (FSA) 1,837,122
- --------------------------------------------------------------------------------
2,140,000 Chula Vista Community
Facilities District No. 01-1
Area A Special Tax Rev.,
6.10%, 9/1/10, Prerefunded
at 102% of Par(2) 2,365,535
- --------------------------------------------------------------------------------
2,175,000 Chula Vista Community
Facilities District No. 01-1
Area B Special Tax Rev., (San
Miguel), 5.45%, 9/1/36 2,233,834
- --------------------------------------------------------------------------------
3,600,000 Chula Vista Community
Facilities District No. 06-1
Eastlake Woods Area A
Special Tax Rev., 6.20%,
9/1/33 3,850,092
- --------------------------------------------------------------------------------
3,705,000 Chula Vista Community
Facilities District No. 12
Special Tax Rev., (McMillin
Otay Ranch Area I), 5.25%,
9/1/36 3,756,944
- --------------------------------------------------------------------------------
2,670,000 Chula Vista Community
Facilities District No. 13-I
Special Tax Rev., (Otay Ranch
Village Seven), 5.35%, 9/1/36 2,735,442
- --------------------------------------------------------------------------------
7,715,000 Chula Vista Community
Facilities District No. 99-1
Special Tax Rev., 7.625%,
9/1/09, Prerefunded at 102%
of Par(2) 8,741,557
- --------------------------------------------------------------------------------
2,000,000 City of Lincoln Community
Facilities District No. 2003-1
Special Tax Rev., 6.00%,
9/1/34 2,135,320
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,780,000 Clovis Public Financing Auth.
Lease Rev., (Corporate Yard),
5.375%, 3/1/20 (Ambac) $ 1,915,494
- --------------------------------------------------------------------------------
520,000 Corcoran COP, 8.75%, 6/1/16
(Acquired 4/28/92, Cost
$520,000)(4) 601,437
- --------------------------------------------------------------------------------
2,000,000 Corona Department of Water
& Power COP, 5.00%, 9/1/35
(MBIA) 2,090,660
- --------------------------------------------------------------------------------
1,150,000 Duarte Unified School District
GO, Series 1999 B, 6.08%,
11/1/23 (FSA)(1) 535,705
- --------------------------------------------------------------------------------
3,650,000 El Dorado County Community
Facilities District No. 1992-1
Special Tax Rev., 5.60%,
9/1/09 3,724,679
- --------------------------------------------------------------------------------
2,500,000 El Dorado County Community
Facilities District No. 2001-1
Special Tax Rev., 6.30%,
9/1/31 2,683,475
- --------------------------------------------------------------------------------
1,000,000 El Segundo Unified School
District GO, 5.375%, 9/1/12,
Prerefunded at 100% of Par
(FGIC)(2) 1,098,300
- --------------------------------------------------------------------------------
5,000,000 Fillmore Redevelopment
Agency Tax Allocation Rev.,
Series 2006 A, (Central City
Redevelopment), 5.375%,
5/1/31 5,073,950
- --------------------------------------------------------------------------------
4,225,000 Florin Resource Conservation
District COP, Series 1999 A,
(Elk Grove Water Works),
6.75%, 9/1/09, Prerefunded
at 102% of Par(2) 4,696,933
- --------------------------------------------------------------------------------
3,785,000 Folsom Public Financing Auth.
Rev., Series 1997 A, 6.875%,
9/2/19 3,872,206
- --------------------------------------------------------------------------------
2,495,000 Folsom Special Tax Rev.,
(Community Facilities District
No. 7), 5.75%, 9/1/14 2,653,907
- --------------------------------------------------------------------------------
4,250,000 Folsom Special Tax Rev.,
(Community Facilities District
No. 10), 7.00%, 9/1/24 4,588,938
- --------------------------------------------------------------------------------
6,500,000 Folsom Special Tax Rev.,
(Community Facilities District
No. 14), 6.30%, 9/1/32 6,971,055
- --------------------------------------------------------------------------------
3,000,000 Foothill-De Anza Community
College District GO, 6.16%,
8/1/21 (MBIA)(1) 1,558,230
- --------------------------------------------------------------------------------
3,000,000 Fullerton Community Facilities
District No. 1 Special Tax Rev.,
(Amerige Heights), 6.20%,
9/1/32 3,190,860
- --------------------------------------------------------------------------------
5,000,000 Fullerton Unified School
District Community Facilities
District No. 1 Special Tax Rev.,
6.375%, 9/1/31 5,407,850
- --------------------------------------------------------------------------------
1,600,000 Glendale Electric Works Rev.,
5.875%, 2/1/10, Prerefunded
at 101% of Par (MBIA)(2) 1,738,496
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
10
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,630,000 Glendale Unified School
District GO, Series 1999 C,
6.00%, 9/1/22 (FSA) $ 2,831,616
- --------------------------------------------------------------------------------
3,920,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., Series 2003 A-1, 6.25%,
6/1/33 4,303,258
- --------------------------------------------------------------------------------
4,930,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., Series 2003 A-1, 6.75%,
6/1/39 5,566,069
- --------------------------------------------------------------------------------
3,000,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., Series 2005 A, 5.00%,
6/1/35 (FGIC) 3,126,030
- --------------------------------------------------------------------------------
11,650,000 Golden State Tobacco
Securitization Corp. Settlement
Rev., Series 2005 A, 5.00%,
6/1/38 (FGIC)(3) 12,113,669
- --------------------------------------------------------------------------------
3,285,000 Hawaiian Gardens COP, Series
2000 A, 8.00%, 6/1/10,
Prerefunded at 102% of Par(2) 3,785,470
- --------------------------------------------------------------------------------
2,775,000 Hawaiian Gardens
Redevelopment Agency Tax
Allocation Rev., Series 2006 B,
(Redevelopment Project No. 1),
5.40%, 12/1/25 2,818,124
- --------------------------------------------------------------------------------
2,670,000 Hemet Unified School District
Special Tax Rev., (Community
Facilities District No. 2005-2),
5.25%, 9/1/30 2,714,990
- --------------------------------------------------------------------------------
2,000,000 Highland Special Tax Rev.,
(Community Facilities District
No. 01-1), 6.45%, 9/1/28 2,125,520
- --------------------------------------------------------------------------------
5,000,000 Huntington Beach Union High
School District GO, (Election of
2004), 5.00%, 8/1/31 (MBIA)(1) 1,563,650
- --------------------------------------------------------------------------------
5,000,000 Imperial Irrigation District COP,
(Water Systems), 5.50%,
7/1/29 (Ambac) 5,372,200
- --------------------------------------------------------------------------------
500,000 Independent Cities Lease
Finance Auth. Rev., Series
2006 B, (San Juan Mobile
Estates), 5.55%, 5/15/31 502,600
- --------------------------------------------------------------------------------
1,150,000 Independent Cities Lease
Finance Auth. Rev., Series
2006 B, (San Juan Mobile
Estates), 5.85%, 5/15/41 1,167,664
- --------------------------------------------------------------------------------
2,000,000 Indio Redevelopment Agency
Tax Allocation Rev., Series
2004 B, (Sub-Merged Project
Area), 6.50%, 8/15/34 2,194,180
- --------------------------------------------------------------------------------
5,000,000 Irvine Unified School District
Financing Auth. Special Tax
Rev., Series 2005 A, 5.00%,
9/1/34 (Ambac) 5,221,750
- --------------------------------------------------------------------------------
1,000,000 Laguna Salada Union School
District GO, Series 2000 C,
6.12%, 8/1/29 (FGIC)(1) 360,660
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,100,000 Lake Elsinore Community
Facilities District No. 1 Special
Tax Rev., Series 2006 A,
(Serenity), 5.35%, 9/1/36 $ 1,122,583
- --------------------------------------------------------------------------------
5,000,000 Lake Elsinore Community
Facilities District No. 2 Special
Tax Rev., Series 2005 A,
(Alberhill Ranch Improvement
Area A), 5.45%, 9/1/36 5,118,750
- --------------------------------------------------------------------------------
1,225,000 Lake Elsinore Community
Facilities District No. 3 Special
Tax Rev., Series 2005 A,
(Rosetta Canyon Improvement
Area 1), 5.25%, 9/1/35 1,241,868
- --------------------------------------------------------------------------------
2,500,000 Lake Elsinore School Financing
Auth. Rev., (Horsethief Canyon),
5.625%, 9/1/16 2,591,875
- --------------------------------------------------------------------------------
1,325,000 Lake Elsinore Special Tax Rev.,
Series 2006 A, (Community
Facilities District No. 2003-2),
5.15%, 9/1/36(5) 1,325,716
- --------------------------------------------------------------------------------
1,245,000 Lake Elsinore Unified School
District Community Facilities
District No.1 Special Tax Rev.,
(Improvement Area A), 5.40%,
9/1/35 1,271,195
- --------------------------------------------------------------------------------
2,000,000 Los Angeles Community
Facilities District No. 3 Special
Tax Rev., (Cascades Business
Park and Golf Course), 6.40%,
9/1/22 2,069,360
- --------------------------------------------------------------------------------
11,000,000 Los Angeles Community
Redevelopment Agency Auth.
Lease Rev., (Vermont
Manchester Social Services),
5.00%, 9/1/37 (Ambac) 11,434,719
- --------------------------------------------------------------------------------
1,500,000 Los Angeles Unified School
District GO, Series 2003 A,
5.00%, 1/1/28 (MBIA) 1,576,920
- --------------------------------------------------------------------------------
5,455,000 Manteca Unified School
District GO, (Election of 2004),
4.92%, 8/1/30 (MBIA)(1) 1,783,240
- --------------------------------------------------------------------------------
7,225,000 Menlo Park Community
Development Agency
Multifamily Rev., (Las Pulgas),
5.55%, 6/1/10, Prerefunded
at 102% of Par (Ambac)(2) 7,880,597
- --------------------------------------------------------------------------------
2,105,000 Milpitas Improvement Bond
Act 1915 Special Assessment,
Series 1996 A, (Local
Improvement District 18),
6.75%, 9/2/16 2,174,233
- --------------------------------------------------------------------------------
4,000,000 Moreno Valley Unified School
District Special Tax Rev.,
(Community Facilities District
No. 2002-1), 6.20%, 9/1/32 4,314,120
- --------------------------------------------------------------------------------
4,100,000 Murrieta Community Facilities
District No. 2000-1 Special
Tax Rev., (Greer Ranch),
6.375%, 9/1/30 4,419,267
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
11
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,920,000 Murrieta Community Facilities
District No. 2000-2 Special
Tax Rev., Series 2004 A, (The
Oaks Improvement Area),
6.00%, 9/1/34 $ 2,044,685
- --------------------------------------------------------------------------------
1,810,000 Murrieta Community Facilities
District No. 2003-3 Special
Tax Rev., (Creekside Village
Improvement Area No. 1),
5.20%, 9/1/35 1,825,295
- --------------------------------------------------------------------------------
3,500,000 Oceanside Community
Development Commission Tax
Allocation Rev., (Downtown
Redevelopment), 5.70%,
9/1/25 3,724,105
- --------------------------------------------------------------------------------
2,980,000 Oceanside Community
Facilities District Special Tax
Rev., Series 2002 A, (No.
2001-1 Morrow Hills
Development), 6.20%, 9/1/32 3,196,110
- --------------------------------------------------------------------------------
1,000,000 Oceanside Community
Facilities District Special Tax
Rev., Series 2004 A, (No.
2001-1 Morrow Hills
Development), 5.50%, 9/1/29 1,036,310
- --------------------------------------------------------------------------------
2,000,000 Orange County Community
Facilities District Special Tax
Rev., Series 1999 A, (No. 99-1
Ladera Ranch), 6.50%,
8/15/09, Prerefunded at
102% of Par(2) 2,205,820
- --------------------------------------------------------------------------------
2,200,000 Orange County Community
Facilities District Special Tax
Rev., Series 1999 A, (No. 99-1
Ladera Ranch), 6.70%,
8/15/09, Prerefunded at
102% of Par(2) 2,438,656
- --------------------------------------------------------------------------------
4,590,000 Orange County Community
Facilities District Special Tax
Rev., Series 2000 A, (No. 01-1
Ladera Ranch), 6.25%,
8/15/08, Prerefunded at
100% of Par(2) 4,832,260
- --------------------------------------------------------------------------------
2,400,000 Orange County Community
Facilities District Special Tax
Rev., Series 2002 A, (No. 01-1
Ladera Ranch), 6.00%,
8/15/10, Prerefunded at
101% of Par(2) 2,643,048
- --------------------------------------------------------------------------------
2,300,000 Orange County Community
Facilities District Special Tax
Rev., Series 2005 A, (No. 04-1-
Ladera Ranch), 5.20%,
8/15/34 2,336,823
- --------------------------------------------------------------------------------
3,000,000 Oxnard School District GO,
Series 2001 A, 5.75%, 8/1/30
(MBIA) 3,535,080
- --------------------------------------------------------------------------------
1,150,000 Pacifica COP, (Public Safety
Building), 5.80%, 11/1/20
(MBIA) 1,244,369
- --------------------------------------------------------------------------------
10,000,000 Palmdale Water District COP,
5.00%, 10/1/34 (FGIC)(3) 10,404,099
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,630,000 Palomar Pomerado Health
Care District COP, (Indian
Health Council Inc.), 6.25%,
10/1/29 $ 2,754,425
- --------------------------------------------------------------------------------
3,000,000 Perris Public Financing Auth.
Special Tax Rev., Series
2004 A, 6.125%, 9/1/34 3,252,420
- --------------------------------------------------------------------------------
1,450,000 Perris Public Financing Auth.
Tax Allocation Rev., 5.35%,
10/1/36 1,470,344
- --------------------------------------------------------------------------------
1,000,000 Perris Union High School
District GO, Series 2000 A,
6.40%, 9/1/24 (FGIC)(1) 447,450
- --------------------------------------------------------------------------------
1,000,000 Perris Union High School
District GO, Series 2000 A,
6.40%, 3/1/25 (FGIC)(1) 435,350
- --------------------------------------------------------------------------------
2,900,000 Pittsburg Redevelopment
Agency Tax Allocation Rev.,
(Los Medanos Community
Development), 6.20%, 8/1/25
(Ambac)(1) 1,231,340
- --------------------------------------------------------------------------------
1,750,000 Placer County Water Agency
Rev., (Capital Improvement),
5.50%, 7/1/09, Prerefunded
at 101% of Par (Ambac)(2) 1,863,558
- --------------------------------------------------------------------------------
2,640,000 Placer Union High School
District GO, Series 2000 A,
6.20%, 8/1/16 (FGIC)(1) 1,763,230
- --------------------------------------------------------------------------------
1,600,000 Placer Union High School
District GO, Series 2000 A,
6.28%, 8/1/18 (FGIC)(1) 965,952
- --------------------------------------------------------------------------------
2,925,000 Placer Union High School
District GO, Series 2000 A,
6.35%, 8/1/21 (FGIC)(1) 1,519,274
- --------------------------------------------------------------------------------
2,100,000 Placer Union High School
District GO, Series 2000 A,
6.37%, 8/1/22 (FGIC)(1) 1,037,421
- --------------------------------------------------------------------------------
3,525,000 Placer Union High School
District GO, Series 2000 A,
6.39%, 8/1/23 (FGIC)(1) 1,660,416
- --------------------------------------------------------------------------------
1,000,000 Placer Union High School
District GO, Series 2000 A,
6.40%, 8/1/24 (FGIC)(1) 449,120
- --------------------------------------------------------------------------------
4,835,000 Pleasant Valley School District-
Ventura County GO, Series
2002 A, 5.85%, 8/1/31 (MBIA) 5,870,275
- --------------------------------------------------------------------------------
1,700,000 Poway Unified School District
Special Tax Rev., (Community
Facilities District No. 6-4),
5.125%, 9/1/35 1,717,085
- --------------------------------------------------------------------------------
2,000,000 Rancho Cordova Community
Facilities District No. 2003-1
Special Tax Rev., (Sunridge
Anatolia), 5.50%, 9/1/37 2,052,080
- --------------------------------------------------------------------------------
2,400,000 Rancho Cucamonga
Community Facilities District
No. 2004-01 Special Tax Rev.,
(Rancho Etiwanda Estates),
5.375%, 9/1/36 2,444,616
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
12
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,815,000 Redondo Beach Public
Financing Auth. Rev., (South
Bay Center Redevelopment),
7.125%, 7/1/08 $ 1,854,494
- --------------------------------------------------------------------------------
1,485,000 Rialto Community Facilities
District No. 2006-1 Special
Tax Rev., (Elm Park), 5.35%,
9/1/36 1,521,397
- --------------------------------------------------------------------------------
1,000,000 Richmond Joint Powers
Financing Auth. Rev., Series
1995 A, 5.25%, 5/15/13 1,014,490
- --------------------------------------------------------------------------------
1,700,000 Richmond Wastewater Rev.,
6.18%, 8/1/23 (FGIC)(1) 800,768
- --------------------------------------------------------------------------------
2,905,000 Richmond Wastewater Rev.,
6.20%, 8/1/26 (FGIC)(1) 1,182,538
- --------------------------------------------------------------------------------
2,365,000 Riverside County COP, 5.75%,
11/1/31 (MBIA) 2,601,878
- --------------------------------------------------------------------------------
2,040,000 Riverside County Improvement
Bond Act 1915 Special
Assessment, (District No. 168 -
Rivercrest), 6.70%, 9/2/26 2,179,434
- --------------------------------------------------------------------------------
3,000,000 Riverside County Public
Financing Auth. Tax Allocation
Rev., Series 2005 A,
(Redevelopment), 5.00%,
10/1/35 (XLCA) 3,120,930
- --------------------------------------------------------------------------------
2,000,000 Riverside Unified School
District Special Tax Rev.,
(Community Facilities District
No. 13, Improvement Area 1),
5.375%, 9/1/34 2,050,180
- --------------------------------------------------------------------------------
4,765,000 Riverside Unified School
District Special Tax Rev.,
Series 2000 A, (Community
Facilities District No. 7),
7.00%, 5/31/30 5,227,682
- --------------------------------------------------------------------------------
1,000,000 Riverside Unified School
District Special Tax Rev.,
Series 2005 A, (Community
Facilities District No. 15,
Improvement Area 2), 5.25%,
9/1/30 1,016,850
- --------------------------------------------------------------------------------
4,315,000 Rohnert Park Finance Auth.
Rev., Series 2001 A, (Las
Casitas de Sonoma), 6.40%,
4/15/36 4,632,713
- --------------------------------------------------------------------------------
5,000,000 Romoland School District
Special Tax Rev., (Community
Facilities District No. 1,
Improvement Area 1), 5.40%,
9/1/36 5,112,600
- --------------------------------------------------------------------------------
3,250,000 Roseville Special Tax Rev.,
(Fiddyment Ranch Community
Facilities District No. 1),
5.25%, 9/1/36 3,291,633
- --------------------------------------------------------------------------------
1,600,000 Roseville Special Tax Rev.,
(Westpark Community
Facilities District No. 1, Public
Facilities), 5.25%, 9/1/37 1,633,072
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 635,000 Sacramento County Special
Tax Rev., (Community
Facilities District No. 1),
5.60%, 9/1/07 $ 641,972
- --------------------------------------------------------------------------------
645,000 Sacramento County Special
Tax Rev., (Community
Facilities District No. 1),
5.70%, 9/1/08 659,338
- --------------------------------------------------------------------------------
1,500,000 Sacramento County Special
Tax Rev., (Community
Facilities District No. 1),
6.30%, 9/1/21 1,544,655
- --------------------------------------------------------------------------------
4,000,000 Sacramento Municipal Utilities
District Electric Rev., Series
1997 K, 5.25%, 7/1/24
(Ambac) 4,563,960
- --------------------------------------------------------------------------------
4,000,000 Sacramento Special Tax Rev.,
(North Natomas Community
Facilities), 6.30%, 9/1/26 4,221,000
- --------------------------------------------------------------------------------
1,975,000 San Buenaventura COP,
(Wastewater Revenue),
5.00%, 3/1/29 (MBIA) 2,059,609
- --------------------------------------------------------------------------------
3,765,000 San Diego District No. 97-1
Special Assessment,
(4-S Ranch), 6.25%, 9/2/12 3,915,073
- --------------------------------------------------------------------------------
1,250,000 San Francisco City and County
Redevelopment Agency Lease
Rev., (George R. Moscone),
7.05%, 7/1/13(1) 941,563
- --------------------------------------------------------------------------------
1,500,000 San Marcos Public Facilities
Auth. Special Tax Rev.,
(Area 3-A), 5.00%, 10/1/10,
Prerefunded at 102% of Par
(Ambac)(2) 1,613,595
- --------------------------------------------------------------------------------
2,790,000 San Marcos Public Facilities
Auth. Special Tax Rev., Series
2004 A, 5.45%, 9/1/24 2,869,682
- --------------------------------------------------------------------------------
5,000,000 San Marcos Public Facilities
Auth. Special Tax Rev., Series
2004 A, 5.00%, 9/1/34 (FGIC) 5,190,900
- --------------------------------------------------------------------------------
3,005,000 Santa Barbara County Rev.,
5.50%, 9/1/22 (Ambac) 3,285,036
- --------------------------------------------------------------------------------
2,875,000 Santa Monica Redevelopment
Agency Tax Allocation Rev.,
Series 2006 A, (Earthquake
Recovery Redevelopment),
5.00%, 7/1/28 (FGIC) 3,033,643
- --------------------------------------------------------------------------------
2,000,000 Saugus Union School District
Special Tax Rev., (Community
Facilities District No. 2005-1),
5.30%, 9/1/36 2,037,980
- --------------------------------------------------------------------------------
7,755,000 Shasta Lake Public Finance
Auth. Rev., (Electrical
Enterprise), 6.25%, 4/1/13,
Prerefunded at 102% of Par(2) 9,049,929
- --------------------------------------------------------------------------------
2,160,000 Soledad Special Assessment,
(Diamond Ridge Assessment
District No. 02-01), 6.75%,
9/2/33 2,361,247
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
13
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
$ 500,000 Southern California Public
Power Auth. Rev., 6.75%,
7/1/10 (FSA) $ 556,175
- --------------------------------------------------------------------------------
2,400,000 Southern California Public
Power Auth. Rev.,
(Transmission), 6.35%,
7/1/14 (MBIA)(1) 1,766,616
- --------------------------------------------------------------------------------
1,250,000 Southern California Public
Power Auth. Rev.,
(Transmission), 6.35%,
7/1/15 (MBIA)(1) 878,713
- --------------------------------------------------------------------------------
1,200,000 Southwestern Community
College District GO, 5.625%,
8/1/11, Prerefunded at 101%
of Par (Ambac)(2) 1,324,632
- --------------------------------------------------------------------------------
4,195,000 Stockton Community Facilities
District Special Tax Rev.,
(Spanos Park West
No. 2001-1), 6.375%, 9/1/12,
Prerefunded at 102% of Par(2) 4,836,164
- --------------------------------------------------------------------------------
5,000,000 Sunnyvale Special Tax Rev.,
(Community Facilities District
No. 1), 7.75%, 8/1/32 5,461,750
- --------------------------------------------------------------------------------
2,690,000 Tahoe-Truckee Unified School
District GO, Series 1999 A,
(Improvement District No. 2),
6.19%, 8/1/22 (FGIC)(1) 1,328,887
- --------------------------------------------------------------------------------
2,220,000 Tahoe-Truckee Unified School
District GO, Series 1999 A,
(Improvement District No. 2),
6.19%, 8/1/23 (FGIC)(1) 1,045,709
- --------------------------------------------------------------------------------
2,000,000 Tustin Unified School District
Special Tax Rev., (Community
Facilities District No. 97-1),
6.375%, 9/1/08, Prerefunded
at 102% of Par(2) 2,151,700
- --------------------------------------------------------------------------------
1,500,000 University of California Rev.,
Series 2003 A, 5.00%,
5/15/23 (Ambac) 1,581,870
- --------------------------------------------------------------------------------
2,500,000 Val Verde Unified School
District Special Tax Rev.,
5.40%, 9/1/30 2,591,325
- --------------------------------------------------------------------------------
2,600,000 Val Verde Unified School
District Special Tax Rev.,
5.45%, 9/1/36 2,690,298
- --------------------------------------------------------------------------------
2,500,000 West Basin Municipal Water
District COP, Series 2003 A,
5.00%, 8/1/30 (MBIA) 2,604,425
- --------------------------------------------------------------------------------
1,740,000 West Sacramento Special Tax
Rev., 5.30%, 9/1/35 1,773,043
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 1,000,000 West Sacramento Special Tax
Rev., (Community Facilities
District No. 10), 6.20%,
9/1/09, Prerefunded at 102%
of Par(2) $ 1,085,130
- --------------------------------------------------------------------------------
3,235,000 West Sacramento Special Tax
Rev., (Community Facilities
District No. 10), 6.75%,
9/1/09, Prerefunded at 102%
of Par(2) 3,560,182
- --------------------------------------------------------------------------------
2,080,000 Westlands Water District COP,
Series 2005 A, 5.00%, 9/1/25
(MBIA) 2,183,501
- --------------------------------------------------------------------------------
2,270,000 Yuba City Redevelopment
Agency Tax Allocation Rev.,
5.70%, 9/1/24 2,399,912
- --------------------------------------------------------------------------------
2,000,000 Yuba City Redevelopment
Agency Tax Allocation Rev.,
6.00%, 9/1/31 2,135,300
- --------------------------------------------------------------------------------
2,895,000 Yuba City Unified School
District GO, 6.05%, 9/1/24
(FGIC)(1) 1,294,905
- --------------------------------------------------------------------------------
1,500,000 Yuba City Unified School
District GO, 6.05%, 3/1/25
(FGIC)(1) 652,560
- --------------------------------------------------------------------------------
497,040,880
- --------------------------------------------------------------------------------
PUERTO RICO -- 3.8%
- --------------------------------------------------------------------------------
500,000 Government Development
Bank of Puerto Rico Rev.,
3.85%, 10/3/06 (Acquired
8/23/06, Cost $499,865)(4) 499,915
- --------------------------------------------------------------------------------
12,000,000 Government Development
Bank of Puerto Rico Rev.,
3.87%, 10/6/06 (Acquired
1/24/06, Cost $12,000,000)(4) 11,997,839
- --------------------------------------------------------------------------------
1,000,000 Government Development
Bank of Puerto Rico Rev.,
3.90%, 11/1/06 (Acquired
8/25/06, Cost $1,000,000)(4) 1,000,000
- --------------------------------------------------------------------------------
3,569,000 Government Development
Bank of Puerto Rico Rev.,
4.00%, 11/10/06 (Acquired
8/11/06, Cost $3,569,000)(4) 3,568,179
- --------------------------------------------------------------------------------
3,000,000 Puerto Rico Commonwealth
GO, Series 2006 A, 5.25%,
7/1/30 3,185,580
- --------------------------------------------------------------------------------
20,251,513
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL SECURITIES
(Cost $486,131,277) 517,292,393
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
14
California High-Yield Municipal - Schedule of Investments
AUGUST 31, 2006
Principal Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM MUNICIPAL SECURITIES -- 0.6%
CALIFORNIA -- 0.6%
- --------------------------------------------------------------------------------
$ 2,465,000 California Economic Recovery
Rev., Series 2004 C1, VRDN,
3.48%, 9/1/06 (SBBPA:
Landesbank
Baden-Wuerttemberg) $ 2,465,000
- --------------------------------------------------------------------------------
600,000 California GO, Series 2004-3A,
(Daily Kindergarten University),
VRDN, 3.43%, 9/1/06 (LOC:
Citibank N.A., California State
Teacher's Retirement) 600,000
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM MUNICIPAL SECURITIES
(Cost $3,065,000) 3,065,000
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS(6)
$ 14,000 Federated California Municipal
Cash Trust
(Cost $14,000) $ 14,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 98.4%
(Cost $489,210,277) 520,371,393
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.6% 8,652,737
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $529,024,130
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
187 U.S. Treasury
2-Year Notes December 2006 $38,212,281 $55,095
=================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
103 U.S. Treasury
10-Year Notes December 2006 $11,059,625 $(46,904)
=================================
NOTES TO SCHEDULE OF INVESTMENTS
Ambac = Ambac Assurance Corporation
COP = Certificates of Participation
FGIC = Financial Guaranty Insurance Co.
FSA = Financial Security Assurance, Inc.
GO = General Obligation
LOC = Letter of Credit
MBIA = MBIA Insurance Corporation
SBBPA = Standby Bond Purchase Agreement
VRDN = Variable Rate Demand Note. Interest reset date is indicated. Rate shown
is effective August 31, 2006.
XLCA = XL Capital Ltd.
(1) Security is a zero-coupon municipal bond. The rate indicated is the yield to
maturity at purchase. Zero-coupon securities are issued at a substantial
discount from their value at maturity.
(2) Escrowed to maturity in U.S. government securities or state and local
government securities.
(3) Security, or a portion thereof, has been segregated for a when-issued
security and/or futures contracts.
(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 restricted securities at August 31, 2006, was
$17,667,370, which represented 3.3% of total net assets.
(5) When-issued security.
(6) Category is less than 0.05% of total net assets.
See Notes to Financial Statements.
- ------
15
Statement of Assets and Liabilities
AUGUST 31, 2006
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $489,210,277) $520,371,393
- -----------------------------------------------------------
Cash 702,145
- -----------------------------------------------------------
Receivable for capital shares sold 379,639
- -----------------------------------------------------------
Receivable for variation margin on futures contracts 10,922
- -----------------------------------------------------------
Interest receivable 9,744,183
- --------------------------------------------------------------------------------
531,208,282
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 1,325,000
- -----------------------------------------------------------
Accrued management fees 227,581
- -----------------------------------------------------------
Distribution fees payable 19,510
- -----------------------------------------------------------
Service fees (and distribution fees -- A Class) payable 25,276
- -----------------------------------------------------------
Dividends payable 586,785
- --------------------------------------------------------------------------------
2,184,152
- --------------------------------------------------------------------------------
NET ASSETS $529,024,130
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital paid in $500,706,302
- -----------------------------------------------------------
Accumulated net realized loss on investment transactions (2,851,479)
- -----------------------------------------------------------
Net unrealized appreciation on investments 31,169,307
- --------------------------------------------------------------------------------
$529,024,130
================================================================================
INVESTOR CLASS
- --------------------------------------------------------------------------------
Net assets $406,063,374
- -----------------------------------------------------------
Shares outstanding 39,626,581
- -----------------------------------------------------------
Net asset value per share $10.25
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
Net assets $90,421,305
- -----------------------------------------------------------
Shares outstanding 8,823,955
- -----------------------------------------------------------
Net asset value per share $10.25
- -----------------------------------------------------------
Maximum offering price (net asset value divided by 0.955) $10.73
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
Net assets $1,263,135
- -----------------------------------------------------------
Shares outstanding 123,267
- -----------------------------------------------------------
Net asset value per share $10.25
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
Net assets $31,276,316
- -----------------------------------------------------------
Shares outstanding 3,052,167
- -----------------------------------------------------------
Net asset value per share $10.25
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
16
Statement of Operations
YEAR ENDED AUGUST 31, 2006
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- -----------------------------------------------------------
Interest $25,300,922
- --------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------
Management fees 2,453,270
- -----------------------------------------------------------
Distribution fees:
- -----------------------------------------------------------
B Class 9,153
- -----------------------------------------------------------
C Class 166,568
- -----------------------------------------------------------
Service fees:
- -----------------------------------------------------------
B Class 3,051
- -----------------------------------------------------------
C Class 55,523
- -----------------------------------------------------------
Distribution and service fees -- A Class 163,802
- -----------------------------------------------------------
Trustees' fees and expenses 22,521
- -----------------------------------------------------------
Other expenses 977
- --------------------------------------------------------------------------------
2,874,865
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 22,426,057
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- -----------------------------------------------------------
Investment transactions (415,600)
- -----------------------------------------------------------
Futures transactions (528,438)
- --------------------------------------------------------------------------------
(944,038)
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
- -----------------------------------------------------------
Investments (3,163,172)
- -----------------------------------------------------------
Futures 8,191
- --------------------------------------------------------------------------------
(3,154,981)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (4,099,019)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $18,327,038
================================================================================
See Notes to Financial Statements.
- ------
17
Statement of Changes in Net Assets
YEARS ENDED AUGUST 31, 2006 AND AUGUST 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 22,426,057 $ 18,882,595
- ------------------------------------------------
Net realized gain (loss) (944,038) 1,770,165
- ------------------------------------------------
Change in net unrealized
appreciation (depreciation) (3,154,981) 14,556,017
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 18,327,038 35,208,777
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- ------------------------------------------------
Investor Class (18,559,723) (17,425,141)
- ------------------------------------------------
A Class (2,980,323) (983,796)
- ------------------------------------------------
B Class (46,349) (39,343)
- ------------------------------------------------
C Class (839,662) (434,315)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (22,426,057) (18,882,595)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 97,324,569 67,256,969
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 93,225,550 83,583,151
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 435,798,580 352,215,429
- --------------------------------------------------------------------------------
End of period $529,024,130 $435,798,580
================================================================================
See Notes to Financial Statements.
- ------
18
Notes to Financial Statements
AUGUST 31, 2006
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century California Tax-Free and Municipal Funds (the
trust) is registered under the Investment Company Act of 1940 (the 1940 Act) as
an open-end management investment company. California High-Yield Municipal Fund
(the fund) is one fund in a series issued by the trust. The fund is
non-diversified under the 1940 Act. The fund's investment objective is to seek
high current income that is exempt from federal and California income taxes. The
fund pursues this objective by investing a portion of its assets in lower-rated
and unrated municipal securities. The following is a summary of the fund's
significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue the Investor Class, the A
Class, the B Class and the C Class. The A Class may incur an initial sales
charge. The A Class, B Class and C Class may be subject to a contingent deferred
sales charge. The share classes differ principally in their respective sales
charges and shareholder servicing and distribution expenses and arrangements.
All shares of the fund represent an equal pro rata interest in the assets of the
class to which such shares belong, and have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except for class
specific expenses and exclusive rights to vote on matters affecting only
individual classes. Income, non-class specific expenses, and realized and
unrealized capital gains and losses of the fund are allocated to each class of
shares based on their relative net assets.
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 the fund determines that the market price of a portfolio security is
not readily available, or that the valuation methods mentioned above do not
reflect the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Trustees or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Interest income is recorded on the accrual basis and
includes accretion of discounts and amortization of premiums.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The fund may engage in securities
transactions on a when-issued or forward commitment basis. Under these
arrangements, the securities' prices and yields are fixed on the date of the
commitment, but payment and delivery are scheduled for a future date. During
this period, securities are subject to market fluctuations. The fund will
segregate cash, cash equivalents or other appropriate liquid securities on its
records in amounts sufficient to meet the purchase price.
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 transactions and unrealized appreciation (depreciation) on futures,
respectively.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are
declared daily and paid monthly. Distributions from net realized gains, if any,
are generally declared and paid annually.
(continued)
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19
Notes to Financial Statements
AUGUST 31, 2006
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INDEMNIFICATIONS -- Under the trust's organizational documents, its officers and
trustees 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 trust has entered into a Management Agreement with
American Century Investment Management, Inc. (ACIM) (the investment advisor),
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 trustees 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 0.1925% to 0.3100% and the rates for the Complex Fee range from
0.2500% to 0.3100%. For the year ended August 31, 2006, the effective annual
management fee for the Investor Class, A Class, B Class and C Class was 0.52%.
DISTRIBUTION AND SERVICE FEES -- The Board of Trustees has adopted a separate
Master Distribution and Individual Shareholder Services Plan for each of the A
Class, B Class and C Class (collectively, the plans), pursuant to Rule 12b-1 of
the 1940 Act. The plans provide that the B Class and C Class will pay American
Century Investment Services, Inc. (ACIS) the following annual distribution and
service fees:
- --------------------------------------------------------------------------------
B & C
- --------------------------------------------------------------------------------
Distribution Fee 0.75%
- --------------------------------------------------------------------------------
Service Fee 0.25%
- --------------------------------------------------------------------------------
The plans provide that the A Class will pay ACIS an annual distribution and
service fee of 0.25%. The fees are computed and accrued daily based on each
class's daily net assets and paid monthly in arrears. The distribution fee
provides compensation for expenses incurred in connection with distributing
shares of the classes 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. The service fee provides compensation for
individual shareholder services rendered by broker/dealers or other independent
financial intermediaries. Fees incurred under the plans during the year ended
August 31, 2006, are detailed in the Statement of Operations.
RELATED PARTIES -- Certain officers and trustees of the trust are also officers
and/or directors, and, as a group, controlling stockholders of American Century
Companies, Inc. (ACC), the parent of the trust's investment advisor, ACIM, the
distributor of the trust, ACIS, and the trust's transfer agent, American Century
Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
(continued)
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20
Notes to Financial Statements
AUGUST 31, 2006
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term investments,
for the year ended August 31, 2006, were $182,791,077 and $111,694,236,
respectively.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows (unlimited number of shares
authorized):
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
INVESTOR CLASS
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 2006
- -----------------------------------------------
Sold 6,289,033 $ 64,031,626
- -----------------------------------------------
Issued in reinvestment of distributions 1,331,569 13,540,526
- -----------------------------------------------
Redeemed (4,436,367) (45,131,273)
- --------------------------------------------------------------------------------
Net increase (decrease) 3,184,235 $ 32,440,879
================================================================================
YEAR ENDED AUGUST 31, 2005
- -----------------------------------------------
Sold 5,223,497 $ 52,921,371
- -----------------------------------------------
Issued in reinvestment of distributions 1,274,569 12,921,094
- -----------------------------------------------
Redeemed (3,522,582) (35,580,703)
- --------------------------------------------------------------------------------
Net increase (decrease) 2,975,484 $ 30,261,762
================================================================================
A CLASS
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 2006
- -----------------------------------------------
Sold 6,445,448 $ 65,600,146
- -----------------------------------------------
Issued in reinvestment of distributions 214,323 2,178,624
- -----------------------------------------------
Redeemed (1,659,077) (16,887,862)
- --------------------------------------------------------------------------------
Net increase (decrease) 5,000,694 $ 50,890,908
================================================================================
YEAR ENDED AUGUST 31, 2005
- -----------------------------------------------
Sold 3,047,060 $31,021,215
- -----------------------------------------------
Issued in reinvestment of distributions 67,666 689,449
- -----------------------------------------------
Redeemed (449,123) (4,554,585)
- --------------------------------------------------------------------------------
Net increase (decrease) 2,665,603 $27,156,079
================================================================================
B CLASS
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 2006
- -----------------------------------------------
Sold 19,771 $ 201,349
- -----------------------------------------------
Issued in reinvestment of distributions 2,102 21,376
- -----------------------------------------------
Redeemed (10,418) (105,427)
- --------------------------------------------------------------------------------
Net increase (decrease) 11,455 $ 117,298
================================================================================
YEAR ENDED AUGUST 31, 2005
- -----------------------------------------------
Sold 33,039 $ 333,373
- -----------------------------------------------
Issued in reinvestment of distributions 1,834 18,630
- -----------------------------------------------
Redeemed (10,246) (103,264)
- --------------------------------------------------------------------------------
Net increase (decrease) 24,627 $ 248,739
================================================================================
(continued)
- ------
21
Notes to Financial Statements
AUGUST 31, 2006
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, 2006
- -----------------------------------------------
Sold 1,813,898 $18,456,678
- -----------------------------------------------
Issued in reinvestment of distributions 34,808 353,889
- -----------------------------------------------
Redeemed (485,633) (4,935,083)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,363,073 $13,875,484
================================================================================
YEAR ENDED AUGUST 31, 2005
- -----------------------------------------------
Sold 1,094,937 $11,131,724
- -----------------------------------------------
Issued in reinvestment of distributions 18,991 193,083
- -----------------------------------------------
Redeemed (171,473) (1,734,418)
- --------------------------------------------------------------------------------
Net increase (decrease) 942,455 $ 9,590,389
================================================================================
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or American Century
Global Investment Management, Inc., has a $500,000,000 unsecured bank line of
credit agreement with JPMCB. The fund may borrow money for temporary or
emergency purposes to fund shareholder redemptions. Borrowings under the
agreement bear interest at the Federal Funds rate plus 0.50%. The fund did not
borrow from the line during the year ended August 31, 2006.
6. RISK FACTORS
The fund concentrates its investments in a single state and therefore may have
more exposure to credit risk related to the state of California than a fund with
a broader geographical diversification. The fund invests primarily in
lower-rated debt securities, which are subject to substantial risks including
price volatility, liquidity risk, and default risk. Income may be subject to
state and local taxes and, if applicable, the alternative minimum tax.
7. FEDERAL TAX INFORMATION
The tax character of distributions paid during the years ended August 31, 2006
and August 31, 2005 were as follows:
- --------------------------------------------------------------------------------
2006 2005
- --------------------------------------------------------------------------------
DISTRIBUTIONS PAID FROM
- --------------------------------------------------------------------------------
Exempt income $22,426,057 $18,882,595
- --------------------------------------------------------------------------------
Long-term capital gains -- --
- --------------------------------------------------------------------------------
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 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.
(continued)
- ------
22
Notes to Financial Statements
AUGUST 31, 2006
7. FEDERAL TAX INFORMATION (CONTINUED)
As of August 31, 2006, the components of distributable earnings on a tax-basis
and the federal tax cost of investments were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $489,210,277
================================================================================
Gross tax appreciation of investments $31,175,985
- -----------------------------------------------------------
Gross tax depreciation of investments (14,869)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $31,161,116
================================================================================
Accumulated capital losses $(994,256)
- -----------------------------------------------------------
Capital loss deferral $(1,849,032)
- --------------------------------------------------------------------------------
The cost of investments for federal income tax purposes was the same as the cost
for financial reporting purposes.
The accumulated capital losses listed above represent net capital loss
carryovers that may be used to offset future realized capital gains for federal
income tax purposes. The capital loss carryovers expire in 2009.
The capital loss deferrals represent net capital losses incurred in the
ten-month period ended August 31, 2006. The fund has elected to treat such
losses as having been incurred in the following fiscal year for federal income
tax purposes.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes -- an Interpretation of FASB
Statement No. 109" (the Interpretation). The Interpretation 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. The
Interpretation 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 recently begun to evaluate the application of the Interpretation
to the fund, and is not in a position at this time to estimate the significance
of its impact, if any, on the fund's financial statements.
9. OTHER TAX INFORMATION (UNAUDITED)
The following information is provided pursuant to provisions of the Internal
Revenue Code.
The fund hereby designates $22,309,537 of exempt interest distributions for the
fiscal year ended August 31, 2006.
- ------
23
California High-Yield Municipal - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31
- --------------------------------------------------------------------------------
INVESTOR CLASS
- --------------------------------------------------------------------------------
2006 2005 2004 2003 2002
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $10.36 $9.93 $9.65 $9.84 $9.79
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment
Income (Loss) 0.49 0.51 0.52 0.52 0.52
- -------------------------
Net Realized and
Unrealized Gain (Loss) (0.11) 0.43 0.28 (0.19) 0.05
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.38 0.94 0.80 0.33 0.57
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.49) (0.51) (0.52) (0.52) (0.52)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.25 $10.36 $9.93 $9.65 $9.84
================================================================================
TOTAL RETURN(1) 3.80% 9.65% 8.48% 3.35% 6.07%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.52% 0.52% 0.53% 0.54% 0.54%
- -------------------------
Ratio of Net Investment
Income (Loss) to
Average Net Assets 4.80% 4.99% 5.30% 5.24% 5.37%
- -------------------------
Portfolio Turnover Rate 25% 13% 19% 30% 32%
- -------------------------
Net Assets, End of Period
(in thousands) $406,063 $377,534 $332,434 $334,032 $373,061
- --------------------------------------------------------------------------------
(1) 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.
- ------
24
California High-Yield Municipal - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
2006 2005 2004 2003(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.36 $9.93 $9.65 $9.79
- --------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------
Net Investment Income (Loss) 0.46 0.48 0.50 0.29
- ------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.11) 0.43 0.28 (0.14)
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.35 0.91 0.78 0.15
- --------------------------------------------------------------------------------
Distributions
- ------------------------------------
From Net Investment Income (0.46) (0.48) (0.50) (0.29)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.25 $10.36 $9.93 $9.65
================================================================================
TOTAL RETURN(2) 3.54% 9.38% 8.21% 1.48%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to
Average Net Assets 0.77% 0.77% 0.78% 0.78%(3)
- ------------------------------------
Ratio of Net Investment
Income (Loss) to Average Net Assets 4.55% 4.74% 5.05% 5.04%(3)
- ------------------------------------
Portfolio Turnover Rate 25% 13% 19% 30%(4)
- ------------------------------------
Net Assets, End of Period
(in thousands) $90,421 $39,608 $11,499 $1,286
- --------------------------------------------------------------------------------
(1) January 31, 2003 (commencement of sale) through August 31, 2003.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any, and does not include any applicable sales charges.
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.
(3) Annualized.
(4) Portfolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended August 31, 2003.
See Notes to Financial Statements.
- ------
25
California High-Yield Municipal - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
2006 2005 2004 2003(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.36 $9.93 $9.65 $9.79
- --------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------
Net Investment Income (Loss) 0.39 0.40 0.42 0.25
- ------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.11) 0.43 0.28 (0.14)
- --------------------------------------------------------------------------------
Total From Investment Operations 0.28 0.83 0.70 0.11
- --------------------------------------------------------------------------------
Distributions
- ------------------------------------
From Net Investment Income (0.39) (0.40) (0.42) (0.25)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.25 $10.36 $9.93 $9.65
================================================================================
TOTAL RETURN(2) 2.77% 8.57% 7.40% 1.05%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to
Average Net Assets 1.52% 1.52% 1.53% 1.53%(3)
- ------------------------------------
Ratio of Net Investment
Income (Loss) to Average Net Assets 3.80% 3.99% 4.30% 4.43%(3)
- ------------------------------------
Portfolio Turnover Rate 25% 13% 19% 30%(4)
- ------------------------------------
Net Assets, End of Period
(in thousands) $1,263 $1,158 $866 $352
- --------------------------------------------------------------------------------
(1) January 31, 2003 (commencement of sale) through August 31, 2003.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any, and does not include any applicable sales charges.
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.
(3) Annualized.
(4) Portfolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended August 31, 2003.
See Notes to Financial Statements.
- ------
26
California High-Yield Municipal - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED AUGUST 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
2006 2005 2004 2003(1)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.36 $9.93 $9.65 $9.79
- --------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------
Net Investment Income (Loss) 0.39 0.40 0.43 0.26
- ------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.11) 0.43 0.28 (0.14)
- --------------------------------------------------------------------------------
Total From Investment Operations 0.28 0.83 0.71 0.12
- --------------------------------------------------------------------------------
Distributions
- ------------------------------------
From Net Investment Income (0.39) (0.40) (0.43) (0.26)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $10.25 $10.36 $9.93 $9.65
================================================================================
TOTAL RETURN(2) 2.76% 8.56% 7.49% 1.22%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to
Average Net Assets 1.52% 1.52% 1.48% 1.28%(3)
- ------------------------------------
Ratio of Net Investment
Income (Loss) to Average Net Assets 3.80% 3.99% 4.35% 4.59%(3)
- ------------------------------------
Portfolio Turnover Rate 25% 13% 19% 30%(4)
- ------------------------------------
Net Assets, End of Period
(in thousands) $31,276 $17,499 $7,416 $2,681
- --------------------------------------------------------------------------------
(1) January 31, 2003 (commencement of sale) through August 31, 2003.
(2) Total return assumes reinvestment of net investment income and capital gains
distributions, if any, and does not include any applicable sales charges.
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.
(3) Annualized.
(4) Portfolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended August 31, 2003.
- ------
27
Report of Independent Registered Public Accounting Firm
To the Trustees of the American Century California Tax-Free and Municipal Funds
and Shareholders of the California High-Yield Municipal 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 California High-Yield Municipal
Fund (one of the five funds in the American Century California Tax-Free and
Municipal Funds, hereafter referred to as the "Fund") at August 31, 2006, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our 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 August 31, 2006 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers
LLP Kansas City, Missouri
October 12, 2006
- ------
28
Management
The individuals listed below serve as trustees or officers of the fund. Each
trustee 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 trustees 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 trustees. Those listed as interested trustees are "interested"
primarily by virtue of their engagement as officers of American Century
Companies, Inc. (ACC) or its wholly owned, direct or indirect, subsidiaries,
including the fund's investment advisor, American Century Investment Management,
Inc. (ACIM); the fund's principal underwriter, American Century Investment
Services, Inc. (ACIS); and the fund's transfer agent, American Century Services,
LLC (ACS).
The other trustees (more than three-fourths of the total number) are
independent; that is, they have never been employees or officers of, and have no
financial interest in, ACC or any of its wholly owned, direct or indirect,
subsidiaries, including ACIM, ACIS, and ACS. The trustees serve in this capacity
for eight registered investment companies in the American Century family of
funds.
All persons named as officers of the fund also serve in similar capacities for
the other 14 investment companies advised by ACIM or American Century Global
Investment Management, Inc. (ACGIM), a wholly owned subsidiary of ACIM, unless
otherwise noted. Only officers with policy-making functions are listed. No
officer is compensated for his or her service as an officer of the fund. The
listed officers are interested persons of the fund and are appointed or
re-appointed on an annual basis.
INDEPENDENT TRUSTEES
- --------------------------------------------------------------------------------
JOHN FREIDENRICH, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1937
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Member and Manager, Regis
Management Company, LLC (April 2004 to present); Partner and Founder, Bay
Partners (Venture capital firm, 1976 to present); Partner and Founder, Ware &
Freidenrich (1968 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
RONALD J. GILSON, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1946
POSITION(S) HELD WITH FUND: Trustee, Chairman of the Board
FIRST YEAR OF SERVICE: 1995
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Charles J. Meyers Professor of Law
and Business, Stanford Law School (1979 to present); Marc and Eva Stern
Professor of Law and Business, Columbia University School of Law (1992 to
present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
(continued)
- ------
29
Management
INDEPENDENT TRUSTEES (CONTINUED)
- --------------------------------------------------------------------------------
KATHRYN A. HALL, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1957
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 2001
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Co-Chief Executive Officer and
Chief Investment Officer, Offit Hall Capital Management, LLC (April 2002 to
present); President and Managing Director, Laurel Management Company, LLC (1996
to April 2002)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
MYRON S. SCHOLES, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1941
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1980
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chairman, Oak Hill Platinum
Partners, and a Partner, Oak Hill Capital Management (1999 to present); Frank E.
Buck Professor of Finance-Emeritus, Stanford Graduate School of Business (1981
to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: 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: Trustee
FIRST YEAR OF SERVICE: 2002
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Professor of Economics, Stanford
University (1977 to present)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Cadence Design Systems (1992 to
present); Director, Watson Wyatt Worldwide (2002 to present); Director,
Palmsource Inc. (2002 to present)
- --------------------------------------------------------------------------------
JEANNE D. WOHLERS, 1665 Charleston Road, Mountain View, CA 94043
YEAR OF BIRTH: 1945
POSITION(S) HELD WITH FUND: Trustee
FIRST YEAR OF SERVICE: 1984
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Retired, Director and Partner,
Windy Hill Productions, LP (educational software)
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: Director, Quintus Corporation (automation
solutions, 1995 to present)
- --------------------------------------------------------------------------------
INTERESTED TRUSTEE
- --------------------------------------------------------------------------------
WILLIAM M. LYONS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1955
POSITION(S) HELD WITH FUND: Trustee, President
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Executive Officer, ACC
(September 2000 to present); President, ACC (June 1997 to present). Also serves
as: Chief Executive Officer, ACIM, ACGIM, ACIS and other ACC subsidiaries;
President, ACIM, ACGIM and other ACC subsidiaries; Executive Vice President,
ACS; Director, ACC, ACIM, ACGIM, ACS, ACIS and other ACC subsidiaries
NUMBER OF PORTFOLIOS IN FUND COMPLEX OVERSEEN BY TRUSTEE: 40
OTHER DIRECTORSHIPS HELD BY TRUSTEE: None
- --------------------------------------------------------------------------------
(continued)
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30
Management
OFFICERS
- --------------------------------------------------------------------------------
JONATHAN THOMAS, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1963
POSITION(S) HELD WITH FUND: Executive Vice President
FIRST YEAR OF SERVICE: 2005
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Executive Vice President, ACC
(November 2005 to present); Chief Administrative Officer, ACC (February 2006 to
present). Also serves as: President, ACS; Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer, ACIM, ACGIM, ACS, ACIS and other
ACC subsidiaries; Managing Director, Morgan Stanley (March 2000 to November
2005)
- --------------------------------------------------------------------------------
MARYANNE ROEPKE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1956
POSITION(S) HELD WITH FUND: Chief Compliance Officer and Senior Vice President
FIRST YEAR OF SERVICE: 2000
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Chief Compliance Officer, ACIM,
ACGIM and ACS (August 2006 to present); Assistant Treasurer, ACC (January 1995
to August 2006); Treasurer and Chief Financial Officer, various American Century
funds (July 2000 to August 2006). Also serves as: Senior Vice President, ACS
- --------------------------------------------------------------------------------
DAVID C. TUCKER, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1958
POSITION(S) HELD WITH FUND: Senior Vice President and General Counsel
FIRST YEAR OF SERVICE: 1998
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACC (February 2001
to present); General Counsel, ACC (June 1998 to present). Also serves as: Senior
Vice President and General Counsel, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
ROBERT LEACH, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1966
POSITION(S) HELD WITH FUND: Vice President, Treasurer and Chief Financial
Officer
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present); Controller, various American Century funds (1997 to September 2006
- --------------------------------------------------------------------------------
C. JEAN WADE, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1964
POSITION(S) HELD WITH FUND: Controller
FIRST YEAR OF SERVICE: 1996
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Vice President, ACS (February 2000
to present)
- --------------------------------------------------------------------------------
JON ZINDEL, 4500 Main Street, Kansas City, MO 64111
YEAR OF BIRTH: 1967
POSITION(S) HELD WITH FUND: Tax Officer
FIRST YEAR OF SERVICE: 1997
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS: Senior Vice President, ACC (August
2006 to present); Vice President, ACC and certain ACC subsidiaries (October 2001
to August 2006); Vice President, Corporate Tax, ACS (April 1998 to August 2006).
Also serves as: Senior Vice President, ACIM, ACGIM, ACS, ACIS and other ACC
subsidiaries
- --------------------------------------------------------------------------------
The SAI has additional information about the fund's trustees and is available
without charge, upon request, by calling 1-800-345-2021.
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31
Approval of Management Agreement for California High-Yield Municipal
Under Section 15(c) of the Investment Company Act, contracts for investment
advisory services are required to be reviewed, evaluated and approved by a
majority of a fund's independent directors or trustees (the "Directors") each
year. At American Century, this process is referred to as the "15(c) Process."
As a part of this process, the board reviews fund performance, shareholder
services, audit and compliance information, and a variety of other reports from
the advisor concerning fund operations. In addition to this annual review, the
board of directors oversees and evaluates on a continuous basis at its quarterly
meetings the nature and quality of significant services performed by the
advisor, fund performance, audit and compliance information, and a variety of
other reports relating to fund operations. The board, or committees of the
board, also holds special meetings as needed.
Under a Securities and Exchange Commission rule, each fund is required to
disclose in its annual or semiannual report, as appropriate, the material
factors and conclusions that formed the basis for the board's approval or
renewal of any advisory agreements within the fund's most recently completed
fiscal half-year period.
ANNUAL CONTRACT REVIEW PROCESS
As part of the annual 15(c) Process undertaken during the most recent fiscal
half-year period, the Directors reviewed extensive data and information compiled
by the advisor and certain independent providers of evaluative data (the "15(c)
Providers") concerning California High-Yield Municipal (the "fund") and the
services provided to the fund under the management agreement. The information
considered and the discussions held at the meetings included, but were not
limited to:
* the nature, extent and quality of investment management, shareholder services
and other services provided to the fund under the management agreement;
* reports on the advisor's activities relating to the wide range of programs and
services the advisor provides to the fund and its shareholders on a routine
and non-routine basis;
* data comparing the cost of owning the fund to the cost of owning a similar
fund;
* data comparing the fund's performance to appropriate benchmarks and/or a peer
group of other mutual funds with similar investment objectives and strategies;
* financial data showing the profitability of the fund to the advisor and the
overall profitability of the advisor; and
* data comparing services provided and charges to other investment management
clients of the advisor.
In keeping with its practice, the fund's board of directors held two regularly
scheduled meetings and one special meeting to review and discuss the information
provided by the advisor and to complete its negotiations with the advisor
regarding the renewal of the management agreement, including the setting of the
applicable advisory fee. The board also had the benefit of the advice of its
independent counsel throughout the period.
(continued)
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32
Approval of Management Agreement for California High-Yield Municipal
FACTORS CONSIDERED
The Directors considered all of the information provided by the advisor, the
15(c) Providers, and the board's independent counsel, and evaluated such
information for each fund for which the board has responsibility. The Directors
did not identify any single factor as being all-important or controlling, and
each Director may have attributed different levels of importance to different
factors. In deciding to renew the agreement under the terms ultimately
determined by the board to be appropriate, the Directors' decision was based on
the following factors.
NATURE, EXTENT AND QUALITY OF SERVICES -- GENERALLY. Under the management
agreement, the advisor is responsible for providing or arranging for all
services necessary for the operation of the fund. The board noted that under the
management agreement, the advisor provides or arranges at its own expense a wide
variety of services including:
* fund construction and design
* portfolio security selection
* initial capitalization/funding
* securities trading
* custody of fund assets
* daily valuation of the fund's portfolio
* shareholder servicing and transfer agency, including shareholder
confirmations, recordkeeping and communications
* legal services
* regulatory and portfolio compliance
* financial reporting
* marketing and distribution
The Directors noted that many of these services have expanded over time both in
terms of quantity and complexity in response to shareholder demands, competition
in the industry and the changing regulatory environment. In performing their
evaluation, the Directors considered information received in connection with the
annual review, as well as information provided on an ongoing basis at their
regularly scheduled board and committee meetings.
INVESTMENT MANAGEMENT SERVICES. The nature of the investment management services
provided is quite complex and allows fund shareholders access to professional
money management, instant diversification of their investments within an asset
class, the opportunity to easily diversify among asset classes, and liquidity.
In evaluating investment performance, the board expects the advisor to manage
the fund in accordance with its investment objectives and approved strategies.
In providing these services, the advisor utilizes teams of investment
professionals (portfolio managers, analysts, research assistants, and securities
traders) who require extensive information technology, research, training,
compliance and other systems to conduct their business. At each quarterly
meeting the Directors review investment performance information for the fund,
together with comparative information for appropriate benchmarks and peer groups
of funds managed similarly to the fund. The Directors also review detailed
performance information during the 15(c) Process comparing the fund's
performance with that of similar funds not managed by the advisor.
(continued)
- ------
33
Approval of Management Agreement for California High-Yield Municipal
If performance concerns are identified, the Directors discuss with the advisor
the reasons for such results (e.g., market conditions, security selection) and
any efforts being undertaken to improve performance. The fund's performance for
both the one and three year periods was above the median for its peer group.
SHAREHOLDER AND OTHER SERVICES. The advisor provides the fund with a
comprehensive package of transfer agency, shareholder, and other services. The
Directors review reports and evaluations of such services at their regular
quarterly meetings, including the annual meeting concerning contract review, and
reports to the board. These reports include, but are not limited to, information
regarding the operational efficiency and accuracy of the shareholder and
transfer agency services provided, staffing levels, shareholder satisfaction (as
measured by external as well as internal sources), technology support, new
products and services offered to fund shareholders, securities trading
activities, portfolio valuation services, auditing services, and legal and
operational compliance activities. Certain aspects of shareholder and transfer
agency service level efficiency and the quality of securities trading activities
are measured by independent third party providers and are presented in
comparison to other fund groups not managed by the advisor.
COSTS OF SERVICES PROVIDED AND PROFITABILITY TO THE ADVISOR. The advisor
provides detailed information concerning its cost of providing various services
to the fund, its profitability in managing the fund, its overall profitability,
and its financial condition. The Directors have reviewed with the advisor the
methodology used to prepare this financial information. This financial
information regarding the advisor is considered in order to evaluate the
advisor's financial condition, its ability to continue to provide services under
the management agreement, and the reasonableness of the current management fee.
ETHICS OF THE ADVISOR. The Directors generally consider the advisor's commitment
to providing quality services to shareholders and to conducting its business
ethically. They noted that the advisor's practices generally meet or exceed
industry best practices and that the advisor was not implicated in the industry
scandals of 2003 and 2004.
ECONOMIES OF SCALE. The Directors review reports provided by the advisor on
economies of scale for the complex as a whole and the year-over-year changes in
revenue, costs, and profitability. The Directors concluded that economies of
scale are difficult to measure and predict with precision, especially on a
fund-by-fund basis. This analysis is also complicated by the additional services
and content provided by the advisor and its reinvestment in its ability to
provide and expand those services. Accordingly, the Directors also seek to
evaluate economies of scale by reviewing other information, such as
year-over-year profitability of the advisor generally, the profitability of its
management of the fund specifically, the expenses incurred by the advisor in
providing various functions to the fund, and the breakpoint fees of competitive
funds not managed by the advisor. The Directors believe the advisor is
appropriately sharing economies of scale through its competitive fee structure,
(continued)
- ------
34
Approval of Management Agreement for California High-Yield Municipal
fee breakpoints as the fund complex and the fund increases in size, and through
reinvestment in its business to provide shareholders additional content and
services. In particular, separate breakpoint schedules based on the size of the
entire fund complex and on the size of the fund reflect the complexity of
assessing economies of scale.
COMPARISON TO OTHER FUNDS' FEES. The fund pays the advisor a single,
all-inclusive (or unified) management fee for providing all services necessary
for the management and operation of the fund, other than brokerage expenses,
taxes, interest, extraordinary expenses, and the fees and expenses of the fund's
independent directors (including their independent legal counsel). Under the
unified fee structure, the advisor is responsible for providing all investment
advisory, custody, audit, administrative, compliance, recordkeeping, marketing
and shareholder services, or arranging and supervising third parties to provide
such services. By contrast, most other funds are charged a variety of fees,
including an investment advisory fee, a transfer agency fee, an administrative
fee, distribution charges and other expenses. Other than their investment
advisory fees and Rule 12b-1 distribution fees, all other components of the
total fees charged by these other funds may be increased without shareholder
approval. The board believes the unified fee structure is a benefit to fund
shareholders because it clearly discloses to shareholders the cost of owning
fund shares, and, since the unified fee cannot be increased without a vote of
fund shareholders, it shifts to the advisor the risk of increased costs of
operating the fund and provides a direct incentive to minimize administrative
inefficiencies. Part of the Directors' analysis of fee levels involves reviewing
certain evaluative data compiled by an independent provider and comparing the
fund's unified fee to the total expense ratio of other funds in the fund's peer
group. The unified fee charged to shareholders of the fund was in the lowest
quartile of the total expense ratios of its peer group.
COMPARISON TO FEES AND SERVICES PROVIDED TO OTHER CLIENTS OF THE ADVISOR. The
Directors also requested and received information from the advisor concerning
the nature of the services, fees, and profitability of its advisory services to
advisory clients other than the fund. They observed that these varying types of
client accounts require different services and involve different regulatory and
entrepreneurial risks than the management of the fund. The Directors analyzed
this information and concluded that the fees charged and services provided to
the fund were reasonable by comparison.
COLLATERAL BENEFITS DERIVED BY THE ADVISOR. The Directors reviewed information
from the advisor concerning collateral benefits it receives as a result of its
relationship with the fund. They concluded that the advisor's primary business
is managing mutual funds and it generally does not use the fund or shareholder
information to generate profits in other lines of business, and therefore does
not derive any significant collateral benefits from them. The Directors noted
that the advisor receives proprietary research from broker-dealers that execute
fund portfolio transactions and concluded that this research is likely to
benefit fund shareholders.
(continued)
- ------
35
Approval of Management Agreement for California High-Yield Municipal
The Directors also determined that the advisor is able to provide investment
management services to certain clients other than the fund, at least in part,
due to its existing infrastructure built to serve the fund complex. The
Directors concluded, however, that the assets of those other clients are not
material to the analysis and, in any event, are included with the assets of the
fund to determine breakpoints in the fund's fee schedule, provided they are
managed using the same investment team and strategy.
CONCLUSIONS OF THE DIRECTORS
As a result of this process, the Directors, in the absence of particular
circumstances and assisted by the advice of legal counsel that is independent of
the advisor, taking into account all of the factors discussed above and the
information provided by the advisor concluded that the investment management
agreement between the fund and the advisor is fair and reasonable in light of
the services provided and should be renewed.
- ------
36
Share Class Information
Four classes of shares are authorized for sale by the fund: Investor Class, A
Class, B Class, and C Class. The total expense ratios of A Class, B Class, and C
Class shares are higher than that of Investor Class shares. The fund is
available for purchase only through financial intermediaries by investors who
seek advice from them. The fund is closed to other investors, but those with
open accounts may make additional investments and reinvest dividends and capital
gains distributions as long as such accounts remain open.
INVESTOR CLASS shares are available for purchase in two ways: 1) directly from
American Century without any commissions or other fees; or 2) through certain
financial intermediaries (such as banks, broker-dealers, insurance companies and
investment advisors), which may require payment of a transaction fee to the
financial intermediary.
A CLASS shares are sold primarily through institutions such as investment
advisors, banks, broker-dealers, and insurance companies. A Class shares are
sold at their offering price, which is net asset value plus an initial sales
charge that ranges from 4.50% to 0.00% for fixed-income funds, depending on the
amount invested. The initial sales charge is deducted from the purchase amount
before it is invested. A Class shares may be subject to a contingent deferred
sales charge (CDSC). There is no CDSC on shares acquired through reinvestment of
dividends or capital gains. The prospectus contains information regarding
reductions and waivers of sales charges for A Class shares. The unified
management fee for A Class shares is the same as for Investor Class shares. A
Class shares also are subject to a 0.25% annual Rule 12b-1 distribution and
service fee.
B CLASS shares are sold primarily through institutions such as investment
advisors, banks, broker-dealers, and insurance companies. B Class shares
redeemed within six years of purchase are subject to a CDSC that declines from
5.00% during the first year after purchase to 0.00% after the sixth year. There
is no CDSC on shares acquired through reinvestment of dividends or capital
gains. The unified management fee for B Class shares is the same as for Investor
Class shares. B Class shares also are subject to a 1.00% annual Rule 12b-1
distribution and service fee. B Class shares automatically convert to A Class
shares (with lower expenses) eight years after their purchase date.
C CLASS shares are sold primarily through institutions such as investment
advisors, banks, broker-dealers, and insurance companies. C Class shares
redeemed within 12 months of purchase are subject to a CDSC of 1.00%. There is
no CDSC on shares acquired through reinvestment of dividends or capital gains.
The unified management fee for C Class shares is the same as for Investor Class
shares. C Class shares also are subject to a Rule 12b-1 distribution and service
fee of 1.00%.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences.
- ------
37
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 1-800-345-2021. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at americancentury.com and, upon request, by calling
1-800-345-2021.
- ------
38
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 LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX is composed of those securities
included in the Lehman Brothers Municipal Bond Index that are investment-grade
and have maturities between two and four years.
The LEHMAN BROTHERS 5-YEAR GENERAL OBLIGATION (GO) INDEX is composed of
investment-grade U.S. municipal securities, with maturities of four to six
years, that are general obligations of a state or local government.
The LEHMAN BROTHERS LONG-TERM MUNICIPAL BOND INDEX is composed of those
securities included in the Lehman Brothers Municipal Bond Index that have
maturities greater than 22 years.
The LEHMAN BROTHERS MUNICIPAL BOND INDEX is a market value-weighted index
designed for the long-term tax-exempt bond market.
The LEHMAN BROTHERS NON-INVESTMENT-GRADE MUNICIPAL BOND INDEX is composed of
non-investment-grade U.S. municipal securities with a remaining maturity of one
year or more.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. TREASURY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of the
U.S. Treasury with a remaining maturity of one year or more.
- ------
39
Notes
- ------
40
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTOR SERVICES REPRESENTATIVE:
1-800-345-2021 or 816-531-5575
INVESTORS USING ADVISORS:
1-800-378-9878
BUSINESS, NOT-FOR-PROFIT,
EMPLOYER-SPONSORED RETIREMENT PLANS:
1-800-345-3533
BANKS AND TRUST COMPANIES, BROKER-DEALERS,
FINANCIAL PROFESSIONALS, INSURANCE COMPANIES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 or 816-444-3485
AMERICAN CENTURY CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
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.
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0610
SH-ANN-51538N
©2006 American Century Proprietary Holdings, Inc. All rights reserved.
ITEM 2. CODE OF ETHICS.
a. The registrant has adopted a Code of Ethics for Senior Financial Officers
that applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer, and persons performing
similar functions.
b. No response required.
c. None.
d. None.
e. Not applicable.
f. The registrant's Code of Ethics for Senior Financial Officers was filed as
Exhibit 12 (a)(1) to American Century Asset Allocation Portfolios, Inc.'s
Annual Certified Shareholder Report on Form N-CSR, File No. 811-21591, on
September 29, 2005, and is incorporated herein by reference.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The registrant's board has determined that the registrant has at least
one audit committee financial expert serving on its audit committee.
(a)(2) Jeanne D. Wohlers and Ronald J. Gilson are the registrant's designated
audit committee financial experts. They are "independent" as defined in
Item 3 of Form N-CSR.
(a)(3) Not applicable.
(b) No response required.
(c) No response required.
(d) No response required.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees.
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years were as follows:
FY 2005: $75,604
FY 2006: $88,961
(b) Audit-Related Fees.
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were as follows:
For services rendered to the registrant:
FY 2005: $0
FY 2006: $0
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit
services with the registrant's investment adviser and its affiliates):
FY 2005: $0
FY 2006: $0
(c) Tax Fees.
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning were as follows:
For services rendered to the registrant:
FY 2005: $12,286
FY 2006: $13,268
These services included review of federal and state income tax forms
and federal excise tax forms.
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit
services with the registrant's investment adviser and its affiliates):
FY 2005: $0
FY 2006: $0
(d) All Other Fees.
The aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant, other than the services reported
in paragraphs (a) through (c) of this Item were as follows:
For services rendered to the registrant:
FY 2005: $0
FY 2006: $0
Fees required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X (relating to certain engagements for non-audit
services with the registrant's investment adviser and its affiliates):
FY 2005: $0
FY 2006: $0
(e)(1) In accordance with paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation
S-X, before the accountant is engaged by the registrant to render audit
or non-audit services, the engagement is approved by the registrant's
audit committee. Pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X, the registrant's audit committee also pre-approves its
accountant's engagements for non-audit services with the registrant's
investment adviser, its parent company, and any entity controlled by,
or under common control with the investment adviser that provides
ongoing services to the registrant, if the engagement relates directly
to the operations and financial reporting of the registrant.
(e)(2) All services described in each of paragraphs (b) through (d) of this
Item were pre-approved before the engagement by the registrant's audit
committee pursuant to paragraph (c)(7)(i)(A) of Rule 2-01 of Regulation
S-X. Consequently, none of such services were required to be approved
by the audit committee pursuant to paragraph (c)(7)(i)(C).
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant were as follows:
FY 2005: $197,286
FY 2006: $254,351
(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 CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
By: /s/ William M. Lyons
------------------------------------------
Name: William M. Lyons
Title: President
Date: October 30, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ William M. Lyons
------------------------------------------
Name: William M. Lyons
Title: President
(principal executive officer)
Date: October 30, 2006
By: /s/ Robert J. Leach
------------------------------------------
Name: Robert J. Leach
Title: Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: October 30, 2006