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 811-5188
----------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
4500 MAIN STREET, KANSAS CITY, MISSOURI 64111
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(Address of principal executive offices) (Zip code)
DAVID C. TUCKER, ESQ., 4500 MAIN STREET, 9TH FLOOR, KANSAS CITY, MISSOURI 64111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 816-531-5575
-----------------------------
Date of fiscal year end: 12-31
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Date of reporting period: 6-30-2006
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American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of man and woman]
JUNE 30, 2006
VP Balanced
[american century investments logo and text logo]
Table of Contents
Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Market Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
VP BALANCED
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Portfolio Commentary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Stock Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Top Five Stock Industries . . . . . . . . . . . . . . . . . . . . . . . . . 5
Types of Investments in Portfolio . . . . . . . . . . . . . . . . . . . . . 6
Key Fixed-Income Portfolio Statistics . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . 18
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . .20
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
OTHER INFORMATION
Approval of Management Agreement for VP Balanced . . . . . . . . . . . . . . .26
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Index Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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 John Schniedwind]
BY JOHN SCHNIEDWIND, CHIEF INVESTMENT OFFICER, QUANTITATIVE EQUITY
MID-YEAR QUESTIONS ABOUT THE ECONOMY, INFLATION, & FED POLICY
Two key questions that investors and economists asked at the beginning of 2006
remained unanswered as of June 30, hindering U.S. market returns. First, how
strong is the economy after two years of interest rate hikes by the Federal
Reserve (the Fed, the U.S. central bank) and three years of rising oil prices?
Economic growth surged to a three-year high in the first quarter, but slowed in
the next three months, a trend that triggered debate about whether we'll
experience a "soft landing" or a recession in the next 12 months.
Second, how much longer must the Fed raise rates to control inflation? Until
May, it looked like the Fed might be finished by mid-year as the economy showed
signs of cooling and core inflation remained under control. But as the Fed hiked
rates on May 10 for the sixteenth time in this cycle, it roiled the markets by
raising the possibility of more rate increases to fight inflation. Inflation
fears mounted upon the release of government data that indicated at least a
temporary surge in core prices.
MAJOR STOCK INDICES PEAKED IN EARLY MAY, THEN PLUMMETED
The modest stock index gains and losses in the table below don't convey the
volatility of the period, especially in the second quarter. First-half stock
market return graphs resembled a roller coaster--a relatively steady ascent
through May 10, followed by a steep plunge. Until May, the market basked in
double-digit corporate earnings growth, the strongest quarter of economic growth
since 2003, and the notion that the Fed might end its rate hikes by mid-year.
But from May 10 to June 13, the S&P 500 plummeted 7.5%.
WORST FIRST HALF FOR BONDS SINCE 1999
Inflation fears prevented stock market volatility and indications of slower
economic growth from translating into bond market gains. Instead, Treasury
yields rose for six straight months as prices fell. The 10-year Treasury note
yield climbed from 4.40% to 5.14%.
U.S. MARKET RETURNS*
For the six months ended June 30, 2006
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STOCK INDICES
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S&P 500 2.71%
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S&P 500/Citigroup Growth -0.94%
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S&P 500/Citigroup Value 6.52%
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Nasdaq Composite -1.08%
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LEHMAN BROTHERS BOND INDICES
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Aggregate (multi-sector, combined) -0.72%
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Fixed-Rate Mortgage-Backed -0.06%
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Treasury -1.29%
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Corporate Investment-Grade -1.56%
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Agency -0.03%
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*Total returns for periods less than one year are not annualized.
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2
VP Balanced - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
-----------------------------
AVERAGE ANNUAL RETURNS
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SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
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CLASS I 1.32% 4.67% 4.34% 6.42% 7.59% 5/1/91
- --------------------------------------------------------------------------------
BLENDED INDEX(2) 1.35% 4.83% 3.78% 7.82% 9.33% --
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S&P 500 INDEX(3) 2.71% 8.63% 2.49% 8.32% 10.58% --
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LEHMAN BROTHERS
U.S. AGGREGATE
INDEX(3) -0.72% -0.81% 4.97% 6.22% 6.85% --
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(1) Total returns for periods less than one year are not annualized.
(2) See Index Definitions page.
(3) Data provided by Lipper Inc. - A Reuters Company. (c)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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488. As interest rates
rise, bond values will decline.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
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3
VP Balanced - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made June 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended June 30
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Class I 16.18% 21.61% 5.39% 7.00% -5.41% -7.95% 5.71% 11.98% 8.43% 4.67%
- ---------------------------------------------------------------------------------------------------------
Blended index 23.63% 22.21% 15.21% 6.43% -4.78% -7.77% 4.85% 11.36% 6.62% 4.83%
- ---------------------------------------------------------------------------------------------------------
S&P 500 Index 34.70% 30.16% 22.76% 7.25% -14.83% -17.99% 0.25% 19.11% 6.32% 8.63%
- ---------------------------------------------------------------------------------------------------------
Lehman Brothers
U.S. Aggregate
Index 8.15% 10.54% 3.15% 4.57% 11.23% 8.63% 10.40% 0.32% 6.80% -0.81%
- ---------------------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488. As interest rates
rise, bond values will decline.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
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4
VP Balanced - Portfolio Commentary
PORTFOLIO TEAM LEADER: JEFF TYLER
PERFORMANCE SUMMARY
VP Balanced returned 1.32%* for the six months ended June 30, 2006. Its
benchmark (a custom blended index of 60% S&P 500 Index and 40% Lehman Brothers
U.S. Aggregate Index) gained 1.35%. Modest stock gains were partially offset by
a dip in bond returns in the fund's portfolio and in the benchmark.
EQUITY PORTFOLIO STRATEGY
The goal of VP Balanced's equity portfolio is to provide better returns than the
S&P 500 without taking on significant additional risk. We use a two-step
approach for stock selection and portfolio construction, relying on computer
models as key decision-making tools. One model ranks stocks based on their
expected return, using both growth and value measures. Another creates a
portfolio that balances high-ranking stocks with an overall risk level that
compares with that of the S&P 500.
EQUITY DECISIONS THAT MOST AFFECTED PERFORMANCE
Economically sensitive sectors--including energy, industrials, and
materials--were among the best performers in the S&P 500 in the first half of
2006. Strong economic growth in the first quarter and record-high commodities
prices elevated these sectors. Reflecting risk-averse sentiment that took hold
in May and June, value stocks outperformed growth. The growth-oriented
information technology and health care sectors were the only two in the S&P 500
that declined during the six months.
Net of operating expenses, VP Balanced's equity portfolio returned approximately
2.70% for the six months, compared with 2.71% for the S&P 500 (index returns are
not reduced by expenses). Guidance from our models positioned the portfolio more
favorably compared with the index in several stocks. In the industrials and
materials sectors, they
VP BALANCED'S TOP TEN STOCK HOLDINGS
AS OF JUNE 30, 2006
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% OF EQUITY % OF S&P
PORTFOLIO 500 INDEX
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Exxon Mobil Corp. 4.7% 3.2%
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Citigroup Inc. 3.3% 2.1%
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Chevron Corp. 2.8% 1.2%
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International Business
Machines Corp. 2.5% 1.0%
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Hewlett-Packard Co. 2.3% 0.8%
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Goldman Sachs
Group, Inc. (The) 2.1% 0.6%
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Boeing Co. 2.0% 0.6%
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TXU Corp. 2.0% 0.2%
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Cummins Inc. 1.7% 0.1%
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Coca-Cola Company
(The) 1.7% 0.8%
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VP BALANCED'S TOP FIVE STOCK INDUSTRIES
AS OF JUNE 30, 2006
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% OF EQUITY % OF S&P
PORTFOLIO 500 INDEX
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Oil, Gas &
Consumable Fuels 9.9% 8.2%
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Health Care Providers
& Services 7.7% 2.7%
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Diversified Financial
Services 6.2% 5.6%
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Capital Markets 6.1% 3.5%
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IT Services 5.0% 2.1%
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*Total returns for periods less than one year are not annualized.
(continued)
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5
VP Balanced - Portfolio Commentary
included overweights in engine maker Cummins (up 37% for the six months),
aerospace giant Boeing (up 17%), and steel manufacturer NuCor (up 66%), and an
underweight in industrial conglomerate General Electric (down 4.5%).
FIXED-INCOME PORTFOLIO STRATEGY
VP Balanced's fixed-income portfolio is also index-oriented, providing a broad,
roughly market capitalization-based mix of income-producing, investment-grade
debt securities. They may include bonds backed by mortgages or other assets,
high- and medium-grade corporate bonds, and U.S. government securities. We use
an active, multi-step process that seeks to identify the best relative value
among these sectors, then we apply appropriate yield curve/duration positioning,
security selection, and portfolio construction.
FIXED-INCOME DECISIONS THAT MOST AFFECTED PERFORMANCE
Net of operating expenses, VP Balanced's bond portfolio returned approximately
- -0.95% for the six months, compared with -0.72% for the Lehman Brothers U.S.
Aggregate Index (index returns are not reduced by expenses). In anticipation of
higher interest rates, we underweighted Treasury securities and overweighted
agency securities and higher-yielding securitized sectors compared with the
index. We also favored mortgage-backed over corporate securities because of
concerns about rising credit risk as interest rates climb.
HOW THE FUND FITS IN A DIVERSIFIED INVESTMENT STRATEGY
VP Balanced is designed to serve as a core holding for investors seeking
"ready-made" stock/bond diversification. It invests in diversified U.S. stock
and bond portfolios, with an approximately 60/40 stock/bond mix. VP Balanced is
also intended for investors who seek long-term growth with less volatility than
funds that just hold growth stocks. The fund's bond portfolio is designed to
help cushion and offset the stock portfolio's performance swings while providing
income; meanwhile the stock portfolio provides long-term growth potential, which
is important to investors who wish to guard against inflation.
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Common Stocks 60.9% 61.4%
- --------------------------------------------------------------------------------
U.S. Government Agency
Mortgage-Backed
Securities 12.8% 12.3%
- --------------------------------------------------------------------------------
Asset-Backed Securities
and Collateralized
Mortgage Obligations 10.3% 8.9%
- --------------------------------------------------------------------------------
Corporate Bonds 8.2% 9.3%
- --------------------------------------------------------------------------------
U.S. Government
Agency Securities 5.1% 4.2%
- --------------------------------------------------------------------------------
U.S. Treasury Securities 4.6% 4.7%
- --------------------------------------------------------------------------------
Other Securities 0.4% 1.1%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities(1) (2.3)% (1.9)%
- --------------------------------------------------------------------------------
(1) Includes temporary cash investments, collateral received for securities
lending and other assets and liabilities.
KEY FIXED-INCOME PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Weighted Average
Maturity 6.2 yrs 6.2 yrs
- --------------------------------------------------------------------------------
Average Duration
(modified) 5.1 yrs 5.0 yrs
- --------------------------------------------------------------------------------
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6
Shareholder Fee Example (Unaudited)
Fund shareholders may incur two types of costs: (1) transaction costs, including
sales charges (loads) on purchase payments and redemption/exchange fees; and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in your fund and to compare these costs
with the ongoing cost of investing in other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
period and held for the entire period from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
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VP BALANCED CLASS I SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual $1,000 $1,013.20 $4.49 0.90%
- --------------------------------------------------------------------------------
Hypothetical $1,000 $1,020.33 $4.51 0.90%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
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7
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 60.9%
AEROSPACE & DEFENSE -- 1.6%
- --------------------------------------------------------------------------------
29,674 Boeing Co. $ 2,430,662
- --------------------------------------------------------------------------------
9,381 Lockheed Martin Corp. 672,993
- --------------------------------------------------------------------------------
3,103,655
- --------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS -- 0.4%
- --------------------------------------------------------------------------------
1,260 FedEx Corporation 147,244
- --------------------------------------------------------------------------------
6,689 United Parcel Service, Inc.
Cl B 550,705
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697,949
- --------------------------------------------------------------------------------
AIRLINES(1)
- --------------------------------------------------------------------------------
5,539 Southwest Airlines Co. 90,673
- --------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.2%
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19,202 ArvinMeritor Inc.(2) 330,082
- --------------------------------------------------------------------------------
BEVERAGES -- 1.6%
- --------------------------------------------------------------------------------
46,682 Coca-Cola Company (The) 2,008,260
- --------------------------------------------------------------------------------
29,474 Pepsi Bottling Group Inc. 947,589
- --------------------------------------------------------------------------------
3,935 PepsiCo, Inc. 236,257
- --------------------------------------------------------------------------------
3,192,106
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 1.2%
- --------------------------------------------------------------------------------
22,541 Alkermes Inc.(2)(3) 426,476
- --------------------------------------------------------------------------------
27,438 Amgen Inc.(3) 1,789,781
- --------------------------------------------------------------------------------
1,288 Biogen Idec Inc.(3) 59,673
- --------------------------------------------------------------------------------
4,360 ImClone Systems Inc.(2)(3) 168,470
- --------------------------------------------------------------------------------
2,444,400
- --------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.3%
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1,599 Universal Forest Products Inc. 100,305
- --------------------------------------------------------------------------------
7,951 USG Corp.(2)(3) 579,867
- --------------------------------------------------------------------------------
680,172
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 3.7%
- --------------------------------------------------------------------------------
16,735 Goldman Sachs Group, Inc.
(The) 2,517,447
- --------------------------------------------------------------------------------
23,774 Lehman Brothers Holdings Inc. 1,548,876
- --------------------------------------------------------------------------------
26,958 Mellon Financial Corp. 928,164
- --------------------------------------------------------------------------------
19,859 Morgan Stanley 1,255,287
- --------------------------------------------------------------------------------
12,160 Northern Trust Corp. 672,448
- --------------------------------------------------------------------------------
5,801 State Street Corp. 336,980
- --------------------------------------------------------------------------------
7,259,202
- --------------------------------------------------------------------------------
CHEMICALS -- 1.0%
- --------------------------------------------------------------------------------
47,222 Celanese Corp., Series A 964,273
- --------------------------------------------------------------------------------
5,526 Hercules Inc.(3) 84,327
- --------------------------------------------------------------------------------
29,169 Lyondell Chemical Co. 660,970
- --------------------------------------------------------------------------------
8,538 Westlake Chemical Corp.(2) 254,432
- --------------------------------------------------------------------------------
1,964,002
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 1.0%
- --------------------------------------------------------------------------------
765 KeyCorp 27,295
- --------------------------------------------------------------------------------
2,080 PNC Financial Services Group 145,954
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
1,369 U.S. Bancorp $ 42,275
- --------------------------------------------------------------------------------
2,449 Wachovia Corp. 132,442
- --------------------------------------------------------------------------------
23,974 Wells Fargo & Co. 1,608,175
- --------------------------------------------------------------------------------
1,956,141
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 0.3%
- --------------------------------------------------------------------------------
52 Corporate Executive Board Co.
(The) 5,210
- --------------------------------------------------------------------------------
165 Dun & Bradstreet Corp.(3) 11,497
- --------------------------------------------------------------------------------
11,910 John H. Harland Company(2) 518,085
- --------------------------------------------------------------------------------
3,260 Waste Management, Inc. 116,969
- --------------------------------------------------------------------------------
651,761
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 0.7%
- --------------------------------------------------------------------------------
62,261 Cisco Systems Inc.(3) 1,215,958
- --------------------------------------------------------------------------------
7,723 Motorola, Inc. 155,618
- --------------------------------------------------------------------------------
1,371,576
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.5%
- --------------------------------------------------------------------------------
85,589 Hewlett-Packard Co. 2,711,460
- --------------------------------------------------------------------------------
556 Komag, Inc.(2)(3) 25,676
- --------------------------------------------------------------------------------
3,356 Lexmark International, Inc.
Cl A(3) 187,365
- --------------------------------------------------------------------------------
2,924,501
- --------------------------------------------------------------------------------
CONSUMER FINANCE -- 2.0%
- --------------------------------------------------------------------------------
26,229 American Express Co. 1,395,907
- --------------------------------------------------------------------------------
21,536 AmeriCredit Corp.(3) 601,285
- --------------------------------------------------------------------------------
23,224 Capital One Financial Corp. 1,984,491
- --------------------------------------------------------------------------------
3,981,683
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING -- 0.3%
- --------------------------------------------------------------------------------
15,824 Temple-Inland Inc. 678,375
- --------------------------------------------------------------------------------
DISTRIBUTORS -- 0.1%
- --------------------------------------------------------------------------------
5,433 Building Materials Holding
Corp.(2) 151,418
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 3.8%
- --------------------------------------------------------------------------------
38,588 Bank of America Corp. 1,856,083
- --------------------------------------------------------------------------------
80,911 Citigroup Inc. 3,903,146
- --------------------------------------------------------------------------------
3,390 J.P. Morgan Chase & Co. 142,380
- --------------------------------------------------------------------------------
28,424 McGraw-Hill Companies, Inc.
(The) 1,427,738
- --------------------------------------------------------------------------------
7,329,347
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.8%
- --------------------------------------------------------------------------------
19,386 AT&T Inc. 540,676
- --------------------------------------------------------------------------------
11,555 BellSouth Corp. 418,291
- --------------------------------------------------------------------------------
563 CenturyTel Inc. 20,915
- --------------------------------------------------------------------------------
20,524 Verizon Communications Inc. 687,349
- --------------------------------------------------------------------------------
1,667,231
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 1.1%
- --------------------------------------------------------------------------------
23,148 FirstEnergy Corp. 1,254,853
- --------------------------------------------------------------------------------
35,629 Pepco Holdings, Inc. 840,132
- --------------------------------------------------------------------------------
2,094,985
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
8
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT(1)
- --------------------------------------------------------------------------------
323 Acuity Brands Inc. $ 12,568
- --------------------------------------------------------------------------------
673 Emerson Electric Co. 56,404
- --------------------------------------------------------------------------------
68,972
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 0.6%
- --------------------------------------------------------------------------------
30,947 Arrow Electronics, Inc.(3) 996,494
- --------------------------------------------------------------------------------
6,583 Plexus Corp.(2)(3) 225,204
- --------------------------------------------------------------------------------
1,221,698
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES -- 0.3%
- --------------------------------------------------------------------------------
65,348 Grey Wolf Inc.(2)(3) 503,180
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 0.8%
- --------------------------------------------------------------------------------
42,550 Kroger Co. (The) 930,142
- --------------------------------------------------------------------------------
11,040 Longs Drug Stores Corp.(2) 503,645
- --------------------------------------------------------------------------------
1,815 Supervalu Inc. 55,721
- --------------------------------------------------------------------------------
1,489,508
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.6%
- --------------------------------------------------------------------------------
46,373 Campbell Soup Company 1,720,903
- --------------------------------------------------------------------------------
21,528 General Mills, Inc. 1,112,136
- --------------------------------------------------------------------------------
216 Seaboard Corp.(2) 276,480
- --------------------------------------------------------------------------------
3,109,519
- --------------------------------------------------------------------------------
GAS UTILITIES(1)
- --------------------------------------------------------------------------------
818 UGI Corp.(2) 20,139
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.9%
- --------------------------------------------------------------------------------
460 Alcon Inc. 45,333
- --------------------------------------------------------------------------------
21,079 Becton Dickinson & Co. 1,288,560
- --------------------------------------------------------------------------------
4,429 Hospira Inc.(3) 190,181
- --------------------------------------------------------------------------------
6,343 Kinetic Concepts Inc.(2)(3) 280,043
- --------------------------------------------------------------------------------
1,804,117
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 4.7%
- --------------------------------------------------------------------------------
624 Aetna Inc.(2) 24,916
- --------------------------------------------------------------------------------
34,138 AmerisourceBergen Corp. 1,431,065
- --------------------------------------------------------------------------------
17,250 Cardinal Health, Inc. 1,109,693
- --------------------------------------------------------------------------------
26,990 Humana Inc.(3) 1,449,363
- --------------------------------------------------------------------------------
40,482 McKesson Corp. 1,913,989
- --------------------------------------------------------------------------------
32,078 Sierra Health Services, Inc.(3) 1,444,472
- --------------------------------------------------------------------------------
27,867 UnitedHealth Group
Incorporated 1,247,884
- --------------------------------------------------------------------------------
11,338 WellCare Health Plans Inc.(2)(3) 556,129
- --------------------------------------------------------------------------------
9,177,511
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 1.8%
- --------------------------------------------------------------------------------
24,679 Choice Hotels International
Inc.(2) 1,495,547
- --------------------------------------------------------------------------------
32,681 Darden Restaurants, Inc. 1,287,631
- --------------------------------------------------------------------------------
4,075 Domino's Pizza Inc.(2) 100,816
- --------------------------------------------------------------------------------
621 Papa John's International
Inc.(2)(3) 20,617
- --------------------------------------------------------------------------------
10,999 Yum! Brands, Inc. 552,920
- --------------------------------------------------------------------------------
3,457,531
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.0%
- --------------------------------------------------------------------------------
33,211 Colgate-Palmolive Co. $ 1,989,339
- --------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS &
ENERGY TRADERS -- 1.8%
- --------------------------------------------------------------------------------
60,203 AES Corporation (The)(3) 1,110,745
- --------------------------------------------------------------------------------
39,243 TXU Corp. 2,346,339
- --------------------------------------------------------------------------------
3,457,084
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 0.2%
- --------------------------------------------------------------------------------
8,524 McDermott International,
Inc.(2)(3) 387,586
- --------------------------------------------------------------------------------
INSURANCE -- 2.5%
- --------------------------------------------------------------------------------
8,493 Ace, Ltd. 429,661
- --------------------------------------------------------------------------------
17,647 Arch Capital Group Ltd.(3) 1,049,291
- --------------------------------------------------------------------------------
44,622 Berkley (W.R.) Corp. 1,522,949
- --------------------------------------------------------------------------------
16,540 Chubb Corp. 825,346
- --------------------------------------------------------------------------------
14,427 First American Financial Corp.
(The) 609,829
- --------------------------------------------------------------------------------
3,786 LandAmerica Financial Group
Inc.(2) 244,576
- --------------------------------------------------------------------------------
6,978 Zenith National Insurance Corp. 276,817
- --------------------------------------------------------------------------------
4,958,469
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 0.2%
- --------------------------------------------------------------------------------
30,203 RealNetworks Inc.(3) 323,172
- --------------------------------------------------------------------------------
IT SERVICES -- 3.1%
- --------------------------------------------------------------------------------
40,781 Accenture Ltd. Cl A 1,154,918
- --------------------------------------------------------------------------------
37,012 Acxiom Corp.(2) 925,300
- --------------------------------------------------------------------------------
19,014 Global Payments Inc. 923,130
- --------------------------------------------------------------------------------
38,944 International Business
Machines Corp. 2,991,678
- --------------------------------------------------------------------------------
5,995,026
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES -- 0.6%
- --------------------------------------------------------------------------------
33,918 Applera Corporation - Applied
Biosystems Group 1,097,247
- --------------------------------------------------------------------------------
MACHINERY -- 1.1%
- --------------------------------------------------------------------------------
16,861 Cummins Inc. 2,061,257
- --------------------------------------------------------------------------------
MEDIA -- 1.5%
- --------------------------------------------------------------------------------
43,666 DIRECTV Group, Inc. (The)(3) 720,489
- --------------------------------------------------------------------------------
36,027 Disney (Walt) Co. 1,080,810
- --------------------------------------------------------------------------------
4,230 John Wiley & Sons Inc. Cl A 140,436
- --------------------------------------------------------------------------------
56,784 Time Warner Inc. 982,363
- --------------------------------------------------------------------------------
2,924,098
- --------------------------------------------------------------------------------
METALS & MINING -- 1.7%
- --------------------------------------------------------------------------------
14,118 Freeport-McMoRan Copper &
Gold, Inc. Cl B(2) 782,278
- --------------------------------------------------------------------------------
27,144 Nucor Corp. 1,472,562
- --------------------------------------------------------------------------------
16,925 Steel Dynamics Inc.(2) 1,112,650
- --------------------------------------------------------------------------------
3,367,490
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 0.1%
- --------------------------------------------------------------------------------
4,727 Vectren Corp.(2) 128,811
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
9
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 0.7%
- --------------------------------------------------------------------------------
25,790 Big Lots Inc.(2)(3) $ 440,493
- --------------------------------------------------------------------------------
21,986 Dollar Tree Stores Inc.(2)(3) 582,629
- --------------------------------------------------------------------------------
4,111 J.C. Penney Co. Inc. 277,534
- --------------------------------------------------------------------------------
180 Sears Holdings Corp.(3) 27,871
- --------------------------------------------------------------------------------
1,328,527
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 6.0%
- --------------------------------------------------------------------------------
53,540 Chevron Corp. 3,322,692
- --------------------------------------------------------------------------------
90,413 Exxon Mobil Corp. 5,546,838
- --------------------------------------------------------------------------------
10,673 Marathon Oil Corp. 889,061
- --------------------------------------------------------------------------------
3,550 Occidental Petroleum Corp. 364,053
- --------------------------------------------------------------------------------
4,175 Tesoro Corporation 310,453
- --------------------------------------------------------------------------------
19,765 Valero Energy Corp. 1,314,768
- --------------------------------------------------------------------------------
11,747,865
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 0.2%
- --------------------------------------------------------------------------------
19,022 Louisiana-Pacific Corp. 416,582
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 1.0%
- --------------------------------------------------------------------------------
3,768 Alpharma Inc. Cl A(2) 90,583
- --------------------------------------------------------------------------------
8,566 Endo Pharmaceuticals
Holdings Inc.(3) 282,507
- --------------------------------------------------------------------------------
2,849 Johnson & Johnson 170,712
- --------------------------------------------------------------------------------
41,937 King Pharmaceuticals, Inc.(3) 712,928
- --------------------------------------------------------------------------------
18,650 Merck & Co., Inc. 679,420
- --------------------------------------------------------------------------------
1,686 Pfizer Inc. 39,570
- --------------------------------------------------------------------------------
1,975,720
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 0.1%
- --------------------------------------------------------------------------------
320 CBL & Associates Properties,
Inc. 12,458
- --------------------------------------------------------------------------------
3,162 Taubman Centers Inc.(2) 129,325
- --------------------------------------------------------------------------------
141,783
- --------------------------------------------------------------------------------
ROAD & RAIL -- 0.1%
- --------------------------------------------------------------------------------
242 Burlington Northern Santa
Fe Corp. 19,179
- --------------------------------------------------------------------------------
1,097 Norfolk Southern Corp. 58,382
- --------------------------------------------------------------------------------
1,387 Union Pacific Corp. 128,935
- --------------------------------------------------------------------------------
206,496
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 1.2%
- --------------------------------------------------------------------------------
8,870 Freescale Semiconductor Inc.
Cl B(3) 260,778
- --------------------------------------------------------------------------------
11,836 Lam Research Corp.(3) 551,794
- --------------------------------------------------------------------------------
49,168 National Semiconductor Corp. 1,172,657
- --------------------------------------------------------------------------------
12,292 ON Semiconductor Corp.(2)(3) 72,277
- --------------------------------------------------------------------------------
11,051 Texas Instruments Inc. 334,735
- --------------------------------------------------------------------------------
2,392,241
- --------------------------------------------------------------------------------
SOFTWARE -- 0.5%
- --------------------------------------------------------------------------------
12,148 BMC Software Inc.(3) 290,337
- --------------------------------------------------------------------------------
5,070 Cadence Design Systems Inc.(3) 86,951
- --------------------------------------------------------------------------------
5,145 Intuit Inc.(3) 310,707
- --------------------------------------------------------------------------------
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
13,932 Microsoft Corporation $ 324,615
- --------------------------------------------------------------------------------
1,532 Oracle Corp.(3) 22,199
- --------------------------------------------------------------------------------
1,034,809
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 2.3%
- --------------------------------------------------------------------------------
10,368 American Eagle Outfitters, Inc. 352,927
- --------------------------------------------------------------------------------
34,662 Barnes & Noble Inc. 1,265,163
- --------------------------------------------------------------------------------
14,296 Group 1 Automotive, Inc.(2) 805,437
- --------------------------------------------------------------------------------
12,103 Home Depot, Inc. (The) 433,166
- --------------------------------------------------------------------------------
10,849 Lowe's Companies, Inc. 658,209
- --------------------------------------------------------------------------------
13,337 OfficeMax Inc. 543,483
- --------------------------------------------------------------------------------
1,932 Pantry Inc. (The)(3) 111,167
- --------------------------------------------------------------------------------
2,441 Payless ShoeSource, Inc.(3) 66,322
- --------------------------------------------------------------------------------
5,905 Sherwin-Williams Co. 280,369
- --------------------------------------------------------------------------------
4,516,243
- --------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS -- 0.1%
- --------------------------------------------------------------------------------
4,159 Brown Shoe Company, Inc.(2) 141,739
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 1.5%
- --------------------------------------------------------------------------------
20,954 Corus Bankshares Inc.(2) 548,576
- --------------------------------------------------------------------------------
14,110 Downey Financial Corp.(2) 957,363
- --------------------------------------------------------------------------------
219 FirstFed Financial Corp.(3) 12,630
- --------------------------------------------------------------------------------
9,738 Golden West Financial Corp. 722,560
- --------------------------------------------------------------------------------
13,928 Washington Mutual, Inc. 634,838
- --------------------------------------------------------------------------------
2,875,967
- --------------------------------------------------------------------------------
TOBACCO -- 0.5%
- --------------------------------------------------------------------------------
19,119 Loews Corp. - Carolina Group 982,143
- --------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS -- 0.2%
- --------------------------------------------------------------------------------
5,240 WESCO International Inc.(2)(3) 349,822
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.4%
- --------------------------------------------------------------------------------
40,289 Sprint Nextel Corp. 805,377
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $105,055,710) 119,026,327
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES(4) -- 12.8%
$ 105,131 FHLMC, 7.00%, 11/1/13(5) 107,848
- --------------------------------------------------------------------------------
163,542 FHLMC, 6.50%, 6/1/16(5) 165,573
- --------------------------------------------------------------------------------
130,884 FHLMC, 6.50%, 6/1/16(5) 132,509
- --------------------------------------------------------------------------------
1,008,810 FHLMC, 4.50%, 1/1/19(5) 954,492
- --------------------------------------------------------------------------------
36,762 FHLMC, 6.50%, 1/1/28 37,166
- --------------------------------------------------------------------------------
26,029 FHLMC, 6.50%, 6/1/29 26,321
- --------------------------------------------------------------------------------
33,920 FHLMC, 8.00%, 7/1/30 35,791
- --------------------------------------------------------------------------------
925,651 FHLMC, 5.50%, 12/1/33(5) 893,291
- --------------------------------------------------------------------------------
2,013,000 FNMA, 5.00%, settlement
date 7/14/06(6) 1,882,155
- --------------------------------------------------------------------------------
3,428,000 FNMA, 5.50%, settlement
date 7/14/06(6) 3,293,023
- --------------------------------------------------------------------------------
2,876,748 FNMA, 6.00%, settlement
date 7/14/06(6) 2,831,799
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
10
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 968,680 FNMA, 5.00%, settlement
date 7/18/06(6) $ 932,960
- --------------------------------------------------------------------------------
2,224,000 FNMA, 5.50%, settlement
date 7/18/06(6) 2,182,994
- --------------------------------------------------------------------------------
162,079 FNMA, 5.50%, 12/1/08(5) 160,749
- --------------------------------------------------------------------------------
12,062 FNMA, 6.50%, 11/1/11 12,209
- --------------------------------------------------------------------------------
12,293 FNMA, 6.00%, 4/1/13 12,341
- --------------------------------------------------------------------------------
29,313 FNMA, 6.00%, 4/1/13 29,426
- --------------------------------------------------------------------------------
13,732 FNMA, 6.00%, 5/1/13 13,785
- --------------------------------------------------------------------------------
10,598 FNMA, 6.50%, 6/1/13 10,747
- --------------------------------------------------------------------------------
73,822 FNMA, 6.50%, 6/1/13 74,859
- --------------------------------------------------------------------------------
18,162 FNMA, 6.00%, 7/1/13 18,232
- --------------------------------------------------------------------------------
151,102 FNMA, 6.00%, 1/1/14(5) 151,685
- --------------------------------------------------------------------------------
533,054 FNMA, 4.50%, 5/1/19 504,657
- --------------------------------------------------------------------------------
511,415 FNMA, 4.50%, 5/1/19 484,170
- --------------------------------------------------------------------------------
7,364 FNMA, 6.50%, 1/1/28 7,444
- --------------------------------------------------------------------------------
36,406 FNMA, 7.00%, 1/1/28 37,345
- --------------------------------------------------------------------------------
75,648 FNMA, 6.50%, 1/1/29 76,448
- --------------------------------------------------------------------------------
67,789 FNMA, 7.50%, 7/1/29 70,302
- --------------------------------------------------------------------------------
32,987 FNMA, 7.50%, 9/1/30 34,186
- --------------------------------------------------------------------------------
89,332 FNMA, 6.50%, 1/1/32 90,174
- --------------------------------------------------------------------------------
621,487 FNMA, 5.50%, 6/1/33(5) 599,743
- --------------------------------------------------------------------------------
1,069,899 FNMA, 5.50%, 7/1/33 1,032,467
- --------------------------------------------------------------------------------
501,915 FNMA, 5.50%, 8/1/33(5) 484,354
- --------------------------------------------------------------------------------
770,900 FNMA, 5.00%, 11/1/33 724,349
- --------------------------------------------------------------------------------
2,140,775 FNMA, 5.50%, 1/1/34(5) 2,065,875
- --------------------------------------------------------------------------------
3,234,833 FNMA, 4.50%, 9/1/35 2,933,657
- --------------------------------------------------------------------------------
750,552 FNMA, 4.50%, 10/1/35 680,672
- --------------------------------------------------------------------------------
80,717 GNMA, 7.00%, 4/20/26 82,823
- --------------------------------------------------------------------------------
49,520 GNMA, 7.50%, 8/15/26 51,875
- --------------------------------------------------------------------------------
20,661 GNMA, 7.00%, 2/15/28 21,323
- --------------------------------------------------------------------------------
34,752 GNMA, 7.50%, 2/15/28 36,376
- --------------------------------------------------------------------------------
28,429 GNMA, 6.50%, 3/15/28 28,877
- --------------------------------------------------------------------------------
28,393 GNMA, 6.50%, 3/15/28 28,840
- --------------------------------------------------------------------------------
3,569 GNMA, 6.50%, 5/15/28 3,625
- --------------------------------------------------------------------------------
6,319 GNMA, 6.50%, 5/15/28 6,419
- --------------------------------------------------------------------------------
17,403 GNMA, 7.00%, 12/15/28 17,960
- --------------------------------------------------------------------------------
21,371 GNMA, 8.00%, 12/15/29 22,721
- --------------------------------------------------------------------------------
166,528 GNMA, 7.00%, 5/15/31(5) 171,865
- --------------------------------------------------------------------------------
729,131 GNMA, 5.50%, 11/15/32(5) 708,050
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(Cost $25,436,529) 24,966,552
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 8.2%
AEROSPACE & DEFENSE -- 0.3%
- --------------------------------------------------------------------------------
190,000 Honeywell International Inc.,
5.70%, 3/15/36(5) 178,256
- --------------------------------------------------------------------------------
44,000 Lockheed Martin Corp.,
8.50%, 12/1/29 55,539
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 280,000 United Technologies Corp.,
4.375%, 5/1/10(5) $ 268,315
- --------------------------------------------------------------------------------
170,000 United Technologies Corp.,
6.05%, 6/1/36(5) 167,804
- --------------------------------------------------------------------------------
669,914
- --------------------------------------------------------------------------------
BEVERAGES -- 0.3%
- --------------------------------------------------------------------------------
190,000 Fortune Brands Inc., 5.375%,
1/15/16 176,074
- --------------------------------------------------------------------------------
250,000 Miller Brewing Co., 4.25%,
8/15/08 (Acquired 1/6/04,
Cost $254,055)(7) 242,845
- --------------------------------------------------------------------------------
240,000 SABMiller plc, 6.20%, 7/1/11
(Acquired 6/27/06, Cost
$239,830)(7)(8) 241,583
- --------------------------------------------------------------------------------
660,502
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 0.1%
- --------------------------------------------------------------------------------
230,000 Genentech, Inc., 4.75%,
7/15/15 211,011
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 0.4%
- --------------------------------------------------------------------------------
170,000 Merrill Lynch & Co., Inc.,
4.25%, 2/8/10(2) 161,708
- --------------------------------------------------------------------------------
200,000 Merrill Lynch & Co., Inc.,
6.05%, 5/16/16(5) 199,046
- --------------------------------------------------------------------------------
130,000 Morgan Stanley, 4.00%,
1/15/10(5) 122,989
- --------------------------------------------------------------------------------
100,000 Morgan Stanley, 4.25%,
5/15/10 94,496
- --------------------------------------------------------------------------------
130,000 Morgan Stanley, 5.05%,
1/21/11(2) 126,203
- --------------------------------------------------------------------------------
704,442
- --------------------------------------------------------------------------------
CHEMICALS(1)
- --------------------------------------------------------------------------------
44,000 Dow Chemical Co. (The),
7.375%, 11/1/29 49,011
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 0.6%
- --------------------------------------------------------------------------------
44,000 Abbey National plc, 7.95%,
10/26/29 52,534
- --------------------------------------------------------------------------------
210,000 PNC Bank N.A., 4.875%,
9/21/17(5) 190,665
- --------------------------------------------------------------------------------
200,000 SouthTrust Corp., 5.80%,
6/15/14(5) 197,028
- --------------------------------------------------------------------------------
230,000 Wachovia Bank N.A., 4.80%,
11/1/14(5) 212,750
- --------------------------------------------------------------------------------
340,000 Wachovia Bank N.A., 4.875%,
2/1/15(5) 315,184
- --------------------------------------------------------------------------------
250,000 Wells Fargo & Co., 4.625%,
8/9/10(5) 241,390
- --------------------------------------------------------------------------------
1,209,551
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 0.1%
- --------------------------------------------------------------------------------
180,000 Waste Management, Inc.,
7.00%, 7/15/28 187,120
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.2%
- --------------------------------------------------------------------------------
250,000 American General Finance
Corp., Series 2002 H, 4.50%,
11/15/07(5) 246,323
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
11
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 600,000 Bank of America Corp.,
4.375%, 12/1/10(5) $ 570,637
- --------------------------------------------------------------------------------
300,000 Citigroup Inc., 5.00%,
9/15/14(5) 281,252
- --------------------------------------------------------------------------------
170,000 General Electric Capital Corp.,
6.125%, 2/22/11(5) 173,368
- --------------------------------------------------------------------------------
145,000 HSBC Finance Corp., 4.75%,
4/15/10(2) 139,979
- --------------------------------------------------------------------------------
170,000 HSBC Finance Corp., 4.625%,
9/15/10(5) 163,079
- --------------------------------------------------------------------------------
300,000 J.P. Morgan Chase & Co.,
6.75%, 2/1/11(5) 312,122
- --------------------------------------------------------------------------------
260,000 John Deere Capital Corp.,
4.50%, 8/25/08(5) 254,106
- --------------------------------------------------------------------------------
160,000 Residential Capital Corp.,
6.50%, 4/17/13 157,227
- --------------------------------------------------------------------------------
2,298,093
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 0.5%
- --------------------------------------------------------------------------------
214,000 AT&T Corp., 7.30%, 11/15/11 227,420
- --------------------------------------------------------------------------------
140,000 AT&T Inc., 6.80%, 5/15/36(2) 139,204
- --------------------------------------------------------------------------------
44,000 BellSouth Corp., 6.875%,
10/15/31(2) 43,531
- --------------------------------------------------------------------------------
90,000 Embarq Corp., 7.08%, 6/1/16 89,663
- --------------------------------------------------------------------------------
220,000 Sprint Capital Corp., 8.375%,
3/15/12 243,355
- --------------------------------------------------------------------------------
130,000 Telecom Italia Capital SA,
4.00%, 1/15/10 121,749
- --------------------------------------------------------------------------------
70,000 Telefonica Emisones SAu,
5.98%, 6/20/11 69,817
- --------------------------------------------------------------------------------
934,739
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 0.4%
- --------------------------------------------------------------------------------
150,000 Carolina Power & Light Co.,
5.15%, 4/1/15 141,473
- --------------------------------------------------------------------------------
150,000 CenterPoint Energy Resources
Corp., 6.50%, 2/1/08 151,303
- --------------------------------------------------------------------------------
114,000 FirstEnergy Corp., 7.375%,
11/15/31 122,668
- --------------------------------------------------------------------------------
140,000 Florida Power Corp., 4.50%,
6/1/10 134,023
- --------------------------------------------------------------------------------
44,000 Hydro Quebec, 8.40%,
1/15/22 55,531
- --------------------------------------------------------------------------------
150,000 Southern California Edison Co.,
5.625%, 2/1/36 135,674
- --------------------------------------------------------------------------------
740,672
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES -- 0.1%
- --------------------------------------------------------------------------------
120,000 XTO Energy Inc., 6.10%,
4/1/36 108,970
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 0.2%
- --------------------------------------------------------------------------------
230,000 Wal-Mart Stores, Inc., 4.125%,
7/1/10(5) 217,992
- --------------------------------------------------------------------------------
44,000 Wal-Mart Stores, Inc., 7.55%,
2/15/30(2) 51,209
- --------------------------------------------------------------------------------
100,000 Wal-Mart Stores, Inc., 5.25%,
9/1/35 87,556
- --------------------------------------------------------------------------------
356,757
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 0.2%
- --------------------------------------------------------------------------------
$ 210,000 Cadbury Schweppes U.S.
Finance LLC, 3.875%, 10/1/08
(Acquired 6/14/05-8/18/05,
Cost $206,135)(7) $ 201,453
- --------------------------------------------------------------------------------
44,000 Kellogg Co., 7.45%, 4/1/31 50,082
- --------------------------------------------------------------------------------
44,000 Kraft Foods Inc., 6.50%,
11/1/31 44,076
- --------------------------------------------------------------------------------
295,611
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.2%
- --------------------------------------------------------------------------------
220,000 Baxter Finco BV, 4.75%,
10/15/10(5) 211,595
- --------------------------------------------------------------------------------
110,000 Boston Scientific Corp.,
6.40%, 6/15/16 107,351
- --------------------------------------------------------------------------------
318,946
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 0.2%
- --------------------------------------------------------------------------------
170,000 Royal Caribbean Cruises Ltd.,
7.00%, 6/15/13 169,308
- --------------------------------------------------------------------------------
260,000 Yum! Brands Inc., 8.875%,
4/15/11 289,857
- --------------------------------------------------------------------------------
459,165
- --------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 0.1%
- --------------------------------------------------------------------------------
200,000 D.R. Horton, Inc., 7.875%,
8/15/11 210,147
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 0.3%
- --------------------------------------------------------------------------------
550,000 General Electric Co., 5.00%,
2/1/13(5) 527,536
- --------------------------------------------------------------------------------
INSURANCE -- 0.5%
- --------------------------------------------------------------------------------
250,000 Allstate Financial Global
Funding, 4.25%, 9/10/08
(Acquired 9/3/03, Cost
$249,510)(5)(7) 243,040
- --------------------------------------------------------------------------------
44,000 AXA SA, 8.60%, 12/15/30 52,511
- --------------------------------------------------------------------------------
250,000 Genworth Financial Inc.,
5.75%, 6/15/14(5) 246,757
- --------------------------------------------------------------------------------
130,000 Genworth Financial Inc.,
4.95%, 10/1/15(5) 120,391
- --------------------------------------------------------------------------------
250,000 Monumental Global Funding II,
3.85%, 3/3/08 (Acquired
2/5/03, Cost $249,995)(5)(7) 242,696
- --------------------------------------------------------------------------------
140,000 Prudential Financial, Inc.,
5.40%, 6/13/35(2) 121,735
- --------------------------------------------------------------------------------
1,027,130
- --------------------------------------------------------------------------------
MACHINERY -- 0.1%
- --------------------------------------------------------------------------------
130,000 Dover Corp., 5.375%,
10/15/35(5) 115,824
- --------------------------------------------------------------------------------
MEDIA -- 0.6%
- --------------------------------------------------------------------------------
310,000 Comcast Corp., 5.90%,
3/15/16 298,380
- --------------------------------------------------------------------------------
290,000 Cox Communications, Inc.,
7.125%, 10/1/12 300,329
- --------------------------------------------------------------------------------
170,000 Knight-Ridder, Inc., 7.125%,
6/1/11(5) 174,135
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
12
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 250,000 News America Holdings,
7.75%, 1/20/24 $ 268,573
- --------------------------------------------------------------------------------
44,000 Time Warner Inc., 7.625%,
4/15/31 47,513
- --------------------------------------------------------------------------------
110,000 Viacom Inc., 5.75%, 4/30/11
(Acquired 4/5/06, Cost
$109,336)(7) 108,156
- --------------------------------------------------------------------------------
60,000 Viacom Inc., 6.25%, 4/30/16
(Acquired 4/5/06, Cost
$59,737)(7) 58,350
- --------------------------------------------------------------------------------
1,255,436
- --------------------------------------------------------------------------------
METALS & MINING(1)
- --------------------------------------------------------------------------------
70,000 Alcan Inc., 4.50%, 5/15/13 64,190
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 0.4%
- --------------------------------------------------------------------------------
250,000 Dominion Resources Inc.,
4.125%, 2/15/08 243,800
- --------------------------------------------------------------------------------
130,000 Dominion Resources Inc.,
4.75%, 12/15/10 124,204
- --------------------------------------------------------------------------------
220,000 Nisource Finance Corp.,
5.25%, 9/15/17 200,554
- --------------------------------------------------------------------------------
150,000 Pacific Gas & Electric Co.,
6.05%, 3/1/34 142,032
- --------------------------------------------------------------------------------
710,590
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 0.2%
- --------------------------------------------------------------------------------
100,000 May Department Stores Co.
(The), 3.95%, 7/15/07 98,069
- --------------------------------------------------------------------------------
300,000 May Department Stores Co.
(The), 4.80%, 7/15/09 291,956
- --------------------------------------------------------------------------------
44,000 Target Corp., 7.00%, 7/15/31 48,589
- --------------------------------------------------------------------------------
438,614
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 0.5%
- --------------------------------------------------------------------------------
44,000 ConocoPhillips Holding Co.,
6.95%, 4/15/29 48,020
- --------------------------------------------------------------------------------
44,000 Devon Financing Corp ULC,
7.875%, 9/30/31 50,394
- --------------------------------------------------------------------------------
350,000 Enterprise Products Operating
L.P., 4.95%, 6/1/10 335,758
- --------------------------------------------------------------------------------
110,000 Enterprise Products Operating
L.P., 6.65%, 10/15/34(2) 104,688
- --------------------------------------------------------------------------------
260,000 Premcor Refining Group Inc.
(The), 6.125%, 5/1/11 261,191
- --------------------------------------------------------------------------------
190,000 XTO Energy Inc., 5.30%,
6/30/15 176,929
- --------------------------------------------------------------------------------
976,980
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 0.1%
- --------------------------------------------------------------------------------
170,000 Abbott Laboratories, 5.875%,
5/15/16(5) 168,855
- --------------------------------------------------------------------------------
100,000 Schering-Plough Corp.,
5.55%, 7/3/06 97,080
- --------------------------------------------------------------------------------
265,935
- --------------------------------------------------------------------------------
ROAD & RAIL -- 0.2%
- --------------------------------------------------------------------------------
300,000 Canadian National Railway
Co., 6.25%, 8/1/34 304,616
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 200,000 Norfolk Southern Corp.,
5.64%, 5/17/29 $ 186,303
- --------------------------------------------------------------------------------
490,919
- --------------------------------------------------------------------------------
SOFTWARE -- 0.1%
- --------------------------------------------------------------------------------
235,000 Oracle Corp., 5.00%, 1/15/11(5) 227,019
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 0.1%
- --------------------------------------------------------------------------------
240,000 Home Depot, Inc. (The),
5.40%, 3/1/16(5) 230,484
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.2%
- --------------------------------------------------------------------------------
400,000 Nextel Communications Inc.,
5.95%, 3/15/14 384,840
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $16,702,195) 16,130,148
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS(4) -- 6.9%
5,101,835 Bank of America Commercial
Mortgage Inc. STRIPS -
COUPON, Series 2004-1,
Class XP, VRN, 0.69%, 7/1/06(5) 111,424
- --------------------------------------------------------------------------------
1,200,000 Bank of America Mortgage
Securities, Series 2004 F,
Class 2A5, VRN, 4.15%,
7/1/06(5) 1,146,472
- --------------------------------------------------------------------------------
6,050,699 Bear Stearns Commercial
Mortgage Securities STRIPS -
COUPON, Series 2004 T16,
Class X2, VRN, 0.77%, 7/1/06(5) 209,106
- --------------------------------------------------------------------------------
475,000 Bear Stearns Commercial
Mortgage Securities, Series
2006 BBA7, Class A1, VRN,
5.24%, 7/17/06, resets
monthly off the 1-month
LIBOR plus 0.11% with no
caps (Acquired 6/5/06, Cost
$475,000)(5)(7) 475,000
- --------------------------------------------------------------------------------
235,288 Commercial Mortgage
Pass-Through Certificates,
Series 2005 F10A, Class A1,
VRN, 5.30%, 7/15/06, resets
monthly off the 1-month
LIBOR plus 0.10% with no
caps (Acquired 3/18/05,
Cost $235,288)(5)(7) 235,467
- --------------------------------------------------------------------------------
473,077 Commercial Mortgage
Pass-Through Certificates,
Series 2005 FL11, Class A1,
VRN, 5.35%, 7/17/06, resets
monthly off the 1-month
LIBOR plus 0.15% with no
caps (Acquired 11/18/05,
Cost $473,077)(5)(7) 473,435
- --------------------------------------------------------------------------------
1,381,962 FHLMC, Series 2527,
Class BN SEQ, 5.00%, 2/15/16 1,367,998
- --------------------------------------------------------------------------------
624,955 FHLMC, Series 2937,
Class KA, 4.50%, 12/15/14 615,427
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
13
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 127,880 GMAC Commercial Mortgage
Securities, Inc., Series
2002 C2, Class A1 SEQ,
4.32%, 10/15/38(5) $ 126,995
- --------------------------------------------------------------------------------
1,100,000 GMAC Commercial Mortgage
Securities, Inc., Series
2005 C1, Class A2 SEQ,
4.47%, 5/10/43(5) 1,055,898
- --------------------------------------------------------------------------------
880,000 Greenwich Capital
Commercial Funding Corp.,
Series 2005 GG5, Class A5,
5.22%, 4/10/37(2) 839,934
- --------------------------------------------------------------------------------
900,000 LB-UBS Commercial
Mortgage Trust, Series
2005 C3, Class A3 SEQ,
4.65%, 7/30/30(5) 855,842
- --------------------------------------------------------------------------------
880,000 LB-UBS Commercial
Mortgage Trust, Series
2005 C3, Class A5 SEQ,
4.74%, 7/15/30(2) 812,249
- --------------------------------------------------------------------------------
755,000 LB-UBS Commercial
Mortgage Trust, Series
2006 C1, Class A4 SEQ,
5.16%, 2/15/31(5) 716,160
- --------------------------------------------------------------------------------
377,504 Lehman Brothers Floating
Rate Commercial Mortgage
Trust, Series 2005 LLFA,
Class A1, VRN, 5.30%,
7/15/06, resets monthly off
the 1-month LIBOR plus
0.10% with no caps (Acquired
7/25/05, Cost $377,504)(5)(7) 377,762
- --------------------------------------------------------------------------------
73,649 MASTR Alternative Loans Trust,
Series 2003-8, Class 4A1,
7.00%, 12/25/33 73,702
- --------------------------------------------------------------------------------
542,897 Wachovia Bank Commercial
Mortgage Trust, Series
2005 WL5A, Class A1, VRN,
5.30%, 7/17/06, resets
monthly off the 1-month
LIBOR plus 0.10% with no
caps (Acquired 3/24/05,
Cost $542,897)(5)(7) 543,260
- --------------------------------------------------------------------------------
1,520,000 Wachovia Bank Commercial
Mortgage Trust, Series
2006 C23, Class A4, 5.42%,
1/15/45(5) 1,467,007
- --------------------------------------------------------------------------------
750,000 Washington Mutual, Inc.,
Series 2004 AR4, Class A6,
3.81%, 6/25/34(5) 710,366
- --------------------------------------------------------------------------------
970,000 Washington Mutual, Inc.,
Series 2004 AR9, Class A7,
VRN, 4.17%, 7/1/06(5) 927,735
- --------------------------------------------------------------------------------
253,895 Washington Mutual, Inc.,
Series 2005 AR11, Class A1C1,
VRN, 5.54%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.20% with a cap
of 10.50% 254,048
- --------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $13,790,003) 13,395,287
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
SECURITIES -- 5.1%
$1,300,000 FHLB, 4.625%, 2/1/08(5) $ 1,283,546
- --------------------------------------------------------------------------------
1,400,000 FHLMC, 7.00%, 3/15/10 1,471,797
- --------------------------------------------------------------------------------
775,000 FHLMC, 5.25%, 7/18/11(5) 767,302
- --------------------------------------------------------------------------------
700,000 FHLMC, 5.50%, 3/28/16(5) 685,692
- --------------------------------------------------------------------------------
1,800,000 FHLMC, 5.30%, 5/12/20(5) 1,656,925
- --------------------------------------------------------------------------------
950,000 FNMA, 5.00%, 9/14/07(5) 944,355
- --------------------------------------------------------------------------------
1,025,000 FNMA, 6.625%, 9/15/09(5) 1,060,454
- --------------------------------------------------------------------------------
2,200,000 FNMA, 5.80%, 2/9/26(5) 2,123,680
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY
SECURITIES
(Cost $10,201,543) 9,993,751
- --------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 4.6%
1,770,000 U.S. Treasury Bonds, 8.125%,
8/15/21(2)(5) 2,282,333
- --------------------------------------------------------------------------------
2,300,000 U.S. Treasury Bonds, 7.125%,
2/15/23(2)(5) 2,752,453
- --------------------------------------------------------------------------------
300,000 U.S. Treasury Bonds, 6.125%,
11/15/27(5) 331,571
- --------------------------------------------------------------------------------
400,000 U.S. Treasury Bonds, 4.50%,
2/15/36(2) 358,782
- --------------------------------------------------------------------------------
1,623,904 U.S. Treasury Inflation Indexed
Notes, 2.00%, 1/15/16(2)(5) 1,551,273
- --------------------------------------------------------------------------------
192,000 U.S. Treasury Notes, 4.875%,
4/30/11(2) 190,103
- --------------------------------------------------------------------------------
1,500,000 U.S. Treasury Notes, 4.875%,
5/31/11(2) 1,485,236
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY SECURITIES
(Cost $9,257,044) 8,951,751
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES(4) -- 3.4%
1,961 ABSC Net Interest Margin,
Series 2004 HE5, Class A1,
5.00%, 8/27/34 (Acquired
6/22/04, Cost $1,956)(7) 1,950
- --------------------------------------------------------------------------------
356,222 Accredited Mortgage Loan
Trust, Series 2006-1, Class A1,
VRN, 5.40%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.06% with
no caps(5) 356,466
- --------------------------------------------------------------------------------
420,000 Accredited Mortgage Loan
Trust, Series 2006-2, Class A1,
VRN, 5.39%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.04% with
no caps 420,000
- --------------------------------------------------------------------------------
281,070 Ameriquest Mortgage
Securities Inc., Series 2006 R1,
Class A2A, VRN, 5.42%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.08% with no caps 281,315
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
14
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 2,346 AQ Finance Net Interest
Margin, Series 2004 RN5,
Class A, 5.19%, 6/29/34
(Acquired 6/24/04, Cost
$2,346)(7) $ 2,341
- --------------------------------------------------------------------------------
800,000 Capital One Prime Auto
Receivables Trust, Series
2004-2, Class A4, VRN, 5.26%,
7/15/06, resets monthly off
the 1-month LIBOR plus
0.06% with no caps(5) 800,879
- --------------------------------------------------------------------------------
281,266 Centex Home Equity, Series
2006 A, Class AV1, VRN,
5.37%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.05% with
no caps(5) 281,411
- --------------------------------------------------------------------------------
612,548 CNH Equipment Trust, Series
2004 A, Class A3A, VRN,
5.27%, 7/17/06, resets
monthly off the 1-month
LIBOR plus 0.07% with
no caps(5) 613,076
- --------------------------------------------------------------------------------
872 Countrywide Asset-Backed
Certificates, Series 2004-11N,
Class N, 5.25%, 4/25/36
(Acquired 10/27/04, Cost
$872)(7) 872
- --------------------------------------------------------------------------------
220,346 Countrywide Asset-Backed
Certificates, Series 2005-7,
Class 3AV1, VRN, 5.46%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.12% with no caps(5) 220,485
- --------------------------------------------------------------------------------
461,087 Countrywide Asset-Backed
Certificates, Series 2006-6,
Class 2A1, VRN, 5.41%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.07% with no caps 461,366
- --------------------------------------------------------------------------------
149,887 Countrywide Asset-Backed
Certificates, Series 2006 BC2,
Class 2A1, VRN, 5.38%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.04% with no caps 149,978
- --------------------------------------------------------------------------------
988,435 Credit-Based Asset Servicing
and Securitization, Series
2006 CB3, Class AV1, VRN,
5.38%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.06% with
no caps(5) 989,033
- --------------------------------------------------------------------------------
4,633 First Franklin Mortgage Loan
Asset Backed Certificates,
Series 2005 FF4, Class 2A1,
VRN, 5.42%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.08% with
no caps 4,636
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
$ 206,951 IndyMac Residential Asset
Backed Trust, Series 2006 B,
Class 2A1, VRN, 5.40%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.06% with no caps $ 207,131
- --------------------------------------------------------------------------------
9,078 Long Beach Asset Holdings
Corp., Series 2005-1, Class N1,
4.12%, 2/25/35 (Acquired
1/19/05, Cost $9,078)(7) 9,072
- --------------------------------------------------------------------------------
177,474 Long Beach Mortgage Loan
Trust, Series 2006-2,
Class 2A1, VRN, 5.41%,
7/25/06, resets monthly off
the 1-month LIBOR plus
0.07% with no caps(5) 177,619
- --------------------------------------------------------------------------------
78,691 NovaStar Home Equity Loan,
Series 2005-1, Class A2A,
VRN, 5.46%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.12% with a cap
of 11.00% 78,748
- --------------------------------------------------------------------------------
428,522 NovaStar Home Equity Loan,
Series 2005-4, Class A2A,
VRN, 5.41%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.09% with a cap
of 11.00% 428,851
- --------------------------------------------------------------------------------
39,248 Residential Asset Mortgage
Products, Inc., Series
2004 RS10, Class AII1, VRN,
5.49%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.17% with a
cap of 14.00% 39,275
- --------------------------------------------------------------------------------
220,732 Residential Asset Mortgage
Products, Inc., Series
2005 RS1, Class AII1, VRN,
5.43%, 7/25/06, resets
monthly off the 1-month
LIBOR plus 0.11% with a
cap of 14.00% 220,895
- --------------------------------------------------------------------------------
100,000 Residential Asset Securities
Corp., Series 2004 KS2,
Class MI1, 4.71%, 3/25/34 95,637
- --------------------------------------------------------------------------------
293,150 SLM Student Loan Trust,
Series 2006-2, Class A1, VRN,
5.71%, 9/25/06, resets
quarterly off the 3-month
LIBOR minus 0.03% with
no caps 293,324
- --------------------------------------------------------------------------------
280,000 SLM Student Loan Trust,
Series 2006-4, Class A1, VRN,
5.04%, 7/25/06, resets
quarterly off the 3-month
LIBOR minus 0.03% with
no caps 280,169
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
15
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Principal Amount Value
- --------------------------------------------------------------------------------
$ 180,000 SLM Student Loan Trust,
Series 2006-5, Class A2, VRN,
5.29%, 7/25/06, resets
quarterly off the 3-month
LIBOR minus 0.01% with
no caps(5) $ 180,056
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $6,594,562) 6,594,585
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENTS &
AGENCIES -- 0.3%
270,000 Province of Quebec, 5.00%,
7/17/09(5) 266,243
- --------------------------------------------------------------------------------
280,000 Republic of Italy, 4.00%,
6/16/08(2) 272,457
- --------------------------------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENTS & AGENCIES
(Cost $554,810) 538,700
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 0.1%
300,000 Illinois GO, (Taxable Pension),
5.10%, 6/1/33(5)
(Cost $302,470) 269,520
- --------------------------------------------------------------------------------
Principal Amount Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.8%
Repurchase Agreement, Morgan Stanley
Group, Inc., (collateralized by various U.S.
Treasury obligations, 6.00%, 2/15/26, valued
at $1,544,484), in a joint trading account at
4.48%, dated 6/30/06, due 7/3/06 (Delivery
value $1,500,560)(5)
(Cost $1,500,000) $ 1,500,000
- --------------------------------------------------------------------------------
COLLATERAL RECEIVED FOR
SECURITIES LENDING(9) -- 10.5%
Repurchase Agreement, UBS AG,
(collateralized by various U.S. Government
Agency obligations in a pooled account at the
lending agent), 5.31%, dated 6/30/06, due
7/3/06 (Delivery value $20,522,631)
(Cost $20,513,554) 20,513,554
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 113.6%
(Cost $209,908,420) 221,880,175
- --------------------------------------------------------------------------------
OTHER ASSETS AND
LIABILITIES -- (13.6)% (26,508,314)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $195,371,861
================================================================================
FUTURES CONTRACTS
Expiration Underlying Face Unrealized
Contracts Purchased Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
100 U.S. Treasury
5-Year Notes September 2006 $10,340,625 $12,275
- --------------------------------------------------------------------------------
4 U.S. Treasury
2-Year Notes September 2006 811,125 (1,697)
- --------------------------------------------------------------------------------
$11,151,750 $10,578
==================================
Expiration Underlying Face Unrealized
Contracts Sold Date Amount at Value Gain (Loss)
- --------------------------------------------------------------------------------
120 U.S. Treasury
10-Year Notes September 2006 $12,583,125 $37,316
==================================
See Notes to Financial Statements. (continued)
- ------
16
VP Balanced - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
SWAP AGREEMENTS
- -----------------------------------------------------------------------------------------------
Unrealized
Notional Amount Description of Agreement Expiration Date Gain (Loss)
- -----------------------------------------------------------------------------------------------
CREDIT DEFAULT
- -----------------------------------------------------------------------------------------------
$2,430,000 Pay quarterly a fixed rate equal to 0.45% December 2010 $(5,366)
multiplied by the notional amount and
receive from Deutsche Bank AG upon each
default event of one of the issues of Dow
Jones CDX N.A. Investment Grade 5, par
value of the proportional notional amount.
- -----------------------------------------------------------------------------------------------
1,950,000 Pay quarterly a fixed rate equal to 0.85% December 2010 1,880
multiplied by the notional amount and
receive from Barclays Capital, Inc. upon each
default event of one of the issues of Dow
Jones CDX N.A. Investment Grade 5, par
value of the proportional notional amount.
- -----------------------------------------------------------------------------------------------
2,200,000 Pay quarterly a fixed rate equal to 0.40% June 2011 (531)
multiplied by the notional amount and
receive from Barclays Capital, Inc. upon each
default event of one of the issues of Dow
Jones CDX N.A. Investment Grade 6, par
value of the proportional notional amount.
- -----------------------------------------------------------------------------------------------
1,200,000 Pay quarterly a fixed rate equal to 0.75% June 2011 3,273
multiplied by the notional amount and
receive from Deutsche Bank AG upon each
default event of one of the issues of Dow
Jones CDX N.A. Investment Grade 6, par
value of the proportional notional amount.
- -----------------------------------------------------------------------------------------------
$ (744)
===========
NOTES TO SCHEDULE OF INVESTMENTS
ABSC = Asset-Backed Securities Corp.
CDX = Credit Derivative Indexes
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GMAC = General Motors Acceptance Corporation
GNMA = Government National Mortgage Association
GO = General Obligation
LB-UBS = Lehman Brothers Inc. -- UBS AG
LIBOR = London Interbank Offered Rate
MASTR = Mortgage Asset Securitization Transactions, Inc.
resets = The frequency with which a security's coupon changes, based on current
market conditions or an underlying index. The more frequently a
security resets, the less risk the investor is taking that the coupon
will vary significantly from current market rates.
SEQ = Sequential Payer
STRIPS = Separate Trading of Registered Interest and Principal of Securities
VRN = Variable Rate Note. Interest reset date is indicated. Rate shown is
effective June 30, 2006.
(1) Industry is less than 0.05% of total net assets.
(2) Security, or a portion thereof, was on loan as of June 30, 2006.
(3) Non-income producing.
(4) Final maturity indicated, unless otherwise noted.
(5) Security, or a portion thereof, has been segregated for a forward
commitment, futures contract, swap agreement, and/or when-issued security.
(6) Forward commitment.
(7) Security was purchased under Rule 144A of the Securities Act of 1933 or is
a private placement and, unless registered under the Act or exempted from
registration, may only be sold to qualified institutional investors. The
aggregate value of restricted securities at June 30, 2006, was $3,457,282,
which represented 1.8% of total net assets.
(8) When-issued security.
(9) Investments represent purchases made by the lending agent with cash
collateral received through securities lending transactions. (See Note 4 in
Notes to Financial Statements.)
See Notes to Financial Statements.
- ------
17
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $189,394,866) --
including $22,850,442 of securities on loan $201,366,621
- -------------------------------------------------------------
Investments made with cash collateral received for
securities on loan, at value (cost of $20,513,554) 20,513,554
- --------------------------------------------------------------------------------
Total investment securities, at value (cost of $209,908,420) 221,880,175
- -------------------------------------------------------------
Cash collateral received from securities on loan 682
- -------------------------------------------------------------
Receivable for investments sold 7,289,013
- -------------------------------------------------------------
Unrealized appreciation on swap agreements 5,153
- -------------------------------------------------------------
Dividends and interest receivable 836,809
- --------------------------------------------------------------------------------
230,011,832
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for collateral received for securities on loan 20,514,236
- -------------------------------------------------------------
Disbursements in excess of demand deposit cash 194,185
- -------------------------------------------------------------
Payable for investments purchased 13,752,040
- -------------------------------------------------------------
Payable for variation margin on futures contracts 30,359
- -------------------------------------------------------------
Unrealized depreciation on swap agreements 5,897
- -------------------------------------------------------------
Accrued management fees 143,254
- --------------------------------------------------------------------------------
34,639,971
- --------------------------------------------------------------------------------
NET ASSETS $195,371,861
================================================================================
CLASS I CAPITAL SHARES, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Authorized 100,000,000
================================================================================
Outstanding 28,090,503
================================================================================
NET ASSET VALUE PER SHARE $6.96
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $175,796,610
- -------------------------------------------------------------
Undistributed net investment income 1,999,421
- -------------------------------------------------------------
Undistributed net realized gain on investment transactions 5,562,481
- -------------------------------------------------------------
Net unrealized appreciation on investments 12,013,349
- --------------------------------------------------------------------------------
$195,371,861
================================================================================
See Notes to Financial Statements.
- ------
18
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- -------------------------------------------------------------
Interest $ 1,971,872
- -------------------------------------------------------------
Dividends (net of foreign taxes withheld of $118) 920,440
- -------------------------------------------------------------
Securities lending 13,483
- --------------------------------------------------------------------------------
2,905,795
- --------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------
Management fees 899,627
- -------------------------------------------------------------
Directors' fees and expenses 1,576
- -------------------------------------------------------------
Other expenses 1,442
- --------------------------------------------------------------------------------
902,645
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 2,003,150
================================================================================
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 6,373,566
- -------------------------------------------------------------
Change in net unrealized appreciation (depreciation)
on investments (5,697,198)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 676,368
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,679,518
================================================================================
See Notes to Financial Statements.
- ------
19
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 2,003,150 $ 3,972,519
- ----------------------------------------------
Net realized gain (loss) 6,373,566 13,614,004
- ----------------------------------------------
Change in net unrealized
appreciation (depreciation) (5,697,198) (7,590,044)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,679,518 9,996,479
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income (3,925,628) (3,907,910)
- ----------------------------------------------
From net realized gains (13,158,123) (83,021)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (17,083,751) (3,990,931)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Proceeds from shares sold 14,995,821 14,448,858
- ----------------------------------------------
Proceeds from reinvestment of distributions 17,083,751 3,990,931
- ----------------------------------------------
Payments for shares redeemed (27,335,225) (39,862,323)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 4,744,347 (21,422,534)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (9,659,886) (15,416,986)
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 205,031,747 220,448,733
- --------------------------------------------------------------------------------
End of period $195,371,861 $205,031,747
================================================================================
Undistributed net investment income $1,999,421 $3,924,382
================================================================================
TRANSACTIONS IN SHARES OF THE FUND
- --------------------------------------------------------------------------------
Sold 2,074,711 1,987,844
- ----------------------------------------------
Issued in reinvestment of distributions 2,472,323 550,473
- ----------------------------------------------
Redeemed (3,808,157) (5,475,314)
- --------------------------------------------------------------------------------
Net increase (decrease) 738,877 (2,936,997)
================================================================================
See Notes to Financial Statements.
- ------
20
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Balanced Fund (the fund) is one fund
in a series issued by the corporation. The fund is diversified under the 1940
Act. The fund's investment objective is long-term capital growth and current
income. The fund pursues its investment objective by investing approximately 60%
of the fund's assets in equity securities and the remaining assets in bonds and
other fixed income securities. The following is a summary of the fund's
significant accounting policies.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes paydown gain (loss) and accretion of discounts and
amortization of premiums.
SECURITIES ON LOAN -- The fund may lend portfolio securities through its lending
agent to certain approved borrowers in order to earn additional income. The fund
continues to recognize any gain or loss in the market price of the securities
loaned and records any interest earned or dividends declared.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
WHEN-ISSUED AND FORWARD COMMITMENTS -- The fund may engage in securities
transactions on a when-issued or forward commitment basis. In these
transactions, the securities' prices and yields are fixed on the date of the
commitment. In a when-issued transaction, the payment and delivery are scheduled
for a future date and during this period, securities are subject to market
fluctuations. In a forward commitment transaction, the fund may sell a security
and at the same time make a commitment to purchase the same security at a future
date at a specified price. Conversely, the fund may purchase a security and at
the same time make a commitment to sell the same security at a future date at a
specified price. These types of transactions are executed simultaneously in what
are known as "roll" transactions. The fund will segregate cash, cash equivalents
or other appropriate liquid securities on its records in amounts sufficient to
meet the purchase price. The fund account for "roll" transactions as purchases
and sales; as such these transactions may increase portfolio turnover.
(continued)
- ------
21
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
investment transactions and unrealized appreciation (depreciation) on
investments, respectively.
SWAP AGREEMENTS -- The fund 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 fund anticipates
purchasing at a later date; or gain exposure to certain markets in the most
economical way possible. A basic swap agreement is a contract in which two
parties agree to exchange the returns earned or realized on predetermined
investments or instruments. Credit default swaps enable an investor to buy/sell
protection against a credit event of a specific issuer. The seller of credit
protection against a security or basket of securities receives an up-front or
periodic payment to compensate against potential default events. The fund will
segregate cash, cash equivalents or other appropriate liquid securities on its
records in amounts sufficient to meet requirements. Unrealized gains are
reported as an asset and unrealized losses are reported as a liability on the
Statement of Assets and Liabilities. Swap agreements are valued daily and
changes in value, including the periodic amounts of interest to be paid or
received on swaps are recorded as unrealized appreciation (depreciation) on
investments. Realized gain or loss is recorded upon receipt or payment of a
periodic settlement or termination of swap agreements. The risks of entering
into swap agreements include the possible lack of liquidity, failure of the
counterparty to meet its obligations, and that there may be unfavorable changes
in the underlying investments and instruments.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of paydown losses, 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.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
(continued)
- ------
22
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee). The
Agreement provides that all expenses of the fund, except brokerage commissions,
taxes, interest, fees and expenses of those directors who are not considered
"interested persons" as defined in the 1940 Act (including counsel fees) and
extraordinary expenses, will be paid by ACIM. The fee is computed and accrued
daily based on the daily net assets of the fund and paid monthly in arrears. For
funds with a stepped fee schedule, the rate of the fee is determined by applying
a fee rate calculation formula. This formula takes into account all of the
investment advisor's assets under management in the fund's investment strategy
(strategy assets) to calculate the appropriate fee rate for the fund. The
strategy assets include the fund's assets and the assets of other clients of the
investment advisor that are not in the American Century family of funds, but
that have the same investment team and investment strategy.
The annual management fee schedule for the fund is as follows:
- -------------------------------------------
STRATEGY ASSETS
- -------------------------------------------
First $250 million 0.90%
- -------------------------------------------
Next $250 million 0.85%
- -------------------------------------------
Over $500 million 0.80%
- -------------------------------------------
The effective annual management fee for the fund for the six months ended June
30, 2006 was 0.90%.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, American Century Investment
Services, Inc., and the corporation's transfer agent, American Century Services,
LLC.
The fund has a bank line of credit agreement and securities lending 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.
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for the
six months ended June 30, 2006, totaled $194,585,467, of which $111,162,487
represented U.S. Treasury and Agency obligations.
Sales of investment securities, excluding short-term investments, for the six
months ended June 30, 2006, totaled $206,190,324, of which $109,235,160
represented U.S. Treasury and Agency obligations.
As of June 30, 2006, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $210,369,321
================================================================================
Gross tax appreciation of investments $15,441,051
- --------------------------------------------------------
Gross tax depreciation of investments (3,930,197)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $11,510,854
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
23
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. SECURITIES LENDING
As of June 30, 2006, securities in the fund valued at $22,850,442, were on loan
through the lending agent, JPMCB, to certain approved borrowers. JPMCB receives
and maintains collateral in the form of cash, and/or acceptable securities as
approved by ACIM. Cash collateral is invested in authorized investments by the
lending agent in a pooled account. The value of cash collateral received at
period end is disclosed in the Statement of Assets and Liabilities and
investments made with the cash by the lending agent are listed in the Schedule
of Investments. Any deficiencies or excess of collateral must be delivered or
transferred by the member firms no later than the close of business on the next
business day. The total value of all collateral received, at this date, was
$23,095,688. The fund's risks in securities lending are that the borrower may
not provide additional collateral when required or return the securities when
due. If the borrower defaults, receipt of the collateral by the fund may be
delayed or limited.
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
24
VP Balanced - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- -----------------------------------------------------------------------------------------------
CLASS I
- -----------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------
PER-SHARE DATA
- -----------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $7.50 $7.28 $6.74 $5.81 $6.59 $7.27
- -----------------------------------------------------------------------------------------------
Income From
Investment Operations
- ---------------------------
Net Investment
Income (Loss) 0.08 0.14 0.13 0.11 0.16 0.17
- ---------------------------
Net Realized and
Unrealized Gain (Loss) 0.02 0.21 0.52 0.98 (0.77) (0.42)
- -----------------------------------------------------------------------------------------------
Total From
Investment Operations 0.10 0.35 0.65 1.09 (0.61) (0.25)
- -----------------------------------------------------------------------------------------------
Distributions
- ---------------------------
From Net
Investment Income (0.15) (0.13) (0.11) (0.16) (0.17) (0.20)
- ---------------------------
From Net
Realized Gains (0.49) --(2) -- -- -- (0.23)
- -----------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.13) (0.11) (0.16) (0.17) (0.43)
- -----------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $6.96 $7.50 $7.28 $6.74 $5.81 $6.59
===============================================================================================
TOTAL RETURN(3) 1.32% 4.93% 9.78% 19.46% (9.56)% (3.54)%
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.90%(4) 0.89% 0.90% 0.90% 0.90% 0.90%
- ---------------------------
Ratio of Net Investment
Income (Loss) to Average
Net Assets 2.02%(4) 1.86% 1.80% 1.85% 2.43% 2.41%
- ---------------------------
Portfolio Turnover Rate 99% 191% 205% 142% 109% 112%
- ---------------------------
Net Assets, End of Period
(in thousands) $195,372 $205,032 $220,449 $214,841 $181,445 $227,516
- -----------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) Per share amount is less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements.
- ------
25
Approval of Management Agreement for VP Balanced
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 VP Balanced (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)
- ------
26
Approval of Management Agreement for VP Balanced
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. If
(continued)
- ------
27
Approval of Management Agreement for VP Balanced
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)
- ------
28
Approval of Management Agreement for VP Balanced
fee breakpoints as the fund increases in size, and through reinvestment in its
business to provide shareholders additional content and services.
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 a 15(c) Provider 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 slightly above 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. 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
(continued)
- ------
29
Approval of Management Agreement for VP Balanced
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 independent 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.
- ------
30
Additional Information
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
31
Index Definitions
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The BLENDED INDEX is considered the benchmark for VP Balanced. It combines two
widely known indices in proportion to the asset mix of the fund. Accordingly,
60% of the index is represented by the S&P 500 Index, which reflects the
approximately 60% of the fund's assets invested in stocks. The remaining 40% of
the index is represented by the Lehman Brothers U.S. Aggregate Index, which
reflects the roughly 40% of the fund's assets invested in fixed-income
securities.
The LEHMAN BROTHERS U.S. AGENCY INDEX is composed of those securities included
in the Lehman Brothers U.S. Aggregate Index that are public obligations of U.S.
government agencies, quasi-federal corporations, and corporate or foreign debt
guaranteed by the U.S. government.
The LEHMAN BROTHERS U.S. AGGREGATE INDEX represents securities that are taxable,
registered with the Securities and Exchange Commission, and U.S.
dollar-denominated. The index covers the U.S. investment-grade fixed-rate bond
market, with index components for government and corporate securities, mortgage
pass-through securities, and asset-backed securities.
The LEHMAN BROTHERS U.S. CORPORATE INDEX is composed of those securities
included in the Lehman Brothers U.S. Aggregate Index that are U.S.
dollar-denominated, investment-grade, fixed-rate, taxable securities sold by
industrial, utility and financial issuers.
The LEHMAN BROTHERS U.S. FIXED-RATE MORTGAGE-BACKED SECURITIES (MBS) INDEX is
the MBS Fixed-Rate component of the Lehman Brothers U.S. Aggregate Index. It
covers the mortgage-backed pass-through securities of the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA),
and the Federal Home Loan Mortgage Corporation (FHLMC).
The LEHMAN BROTHERS U.S. 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.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
The S&P 500/CITIGROUP VALUE AND GROWTH INDICES are market value-weighted indices
consisting of stocks in the S&P 500 Index. S&P 500/CITIGROUP VALUE consists of
those stocks with lower price-to-book ratios that are slower growing or
undervalued, and S&P 500/CITIGROUP GROWTH consists of those stocks with higher
price-to-book ratios that are faster growing.
- ------
32
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50646 All rights reserved.
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP Capital Appreciation Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns . . . . . . . . . . . . . . . . . . . . . . . . 2
VP CAPITAL APPRECIATION
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .11
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .12
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .13
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .14
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
OTHER INFORMATION
Approval of Management Agreement for VP Capital Appreciation. . . . . . . .18
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .23
The opinions expressed in the Market Perspective and the Portfolio Commentary
reflect those of the portfolio management team as of the date of the report, and
do not necessarily represent the opinions of American Century or any other
person in the American Century organization. Any such opinions are subject to
change at any time based upon market or other conditions and American Century
disclaims any responsibility to update such opinions. These opinions may not be
relied upon as investment advice and, because investment decisions made by
American Century funds are based on numerous factors, may not be relied upon as
an indication of trading intent on behalf of any American Century fund. Security
examples are used for representational purposes only and are not intended as
recommendations to purchase or sell securities. Performance information for
comparative indices and securities is provided to American Century by third
party vendors. To the best of American Century's knowledge, such information is
accurate at the time of printing.
Market Perspective
[photo of chief investment officer]
BY HAROLD BRADLEY, CHIEF INVESTMENT OFFICER, SMALL/MID-CAP GROWTH, AMERICAN
CENTURY INVESTMENTS
WHAT HAPPENED IN THE ECONOMY
A short-lived economic slowdown on the heels of last summer's devastating Gulf
Coast hurricanes gave way to a strong rebound after the first of the year. But
persistent inflation and soaring commodity prices led to continued Federal
Reserve rate hikes, even as growth again slowed toward the end of the 6-month
period.
By January 2006, a sluggish U.S. economy still recovering from disruptions
caused by hurricanes Katrina and Rita gave way to resurging growth, with
retailers reporting strong post-holiday sales and overall corporate profits
remaining robust. Gross domestic product growth of 5.6% in the first quarter of
2006 more than tripled the 1.7% rate of the previous quarter.
However, escalating crude oil, gold and other commodity values, plus annual core
inflation rates above 2%, led the Federal Reserve to boost its short-term
interest rate target by one full percentage point. That rate closed the period
at 5.25%, the highest level since January 2001 -- even as a slowdown in the
housing market and other data pointed to the likelihood of a cooling economy in
the second half of 2006.
WHAT HAPPENED IN THE MARKET
The notion that the Fed might soon stop raising rates helped feed investors'
appetites throughout most of the period. But sentiment shifted suddenly in the
period's closing weeks as the Fed made it clear that more rate hikes remained on
the horizon.
Broad market indices posted high single-digit gains in the first four months of
2006. Indices solely comprising small-capitalization stocks fared even better,
rising 10-14% and setting repeated record highs. By early May 2006, even the
mega-cap Dow Jones Industrial Average had inched to within 14 points of its
all-time high established in January 2000.
The market's rally abruptly ended May 10, though, when the Fed again raised its
short-term rate and investors anticipating a signal to an end of the 2-year,
rate-hike campaign didn't get what they desired. As a result, those that had
chased risk in the first four months of the year began avoiding it.
The ensuing month-long selloff wasn't kind to small- and mid-cap stocks, as
investors flocked toward more stable large-cap stocks. Meanwhile, value stocks
continued outperforming growth stocks throughout the 6-month period in all
capitalization ranges, particularly among large-cap issues.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Capital Appreciation - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
--------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CLASS I 9.52% 27.36% 2.75% 4.64% 8.08% 11/20/87
- --------------------------------------------------------------------------------
RUSSELL
MIDCAP
GROWTH
INDEX(2) 2.56% 13.04% 4.76% 8.46% 12.70%(3) --
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. -- A Reuters Company. (c) 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.
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 11/30/87, the date nearest the fund's inception for which data are
available.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
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
VP Capital Appreciation - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made June 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended June 30
- ---------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ---------------------------------------------------------------------------------------------
Class I -8.89% 1.09% 12.58% 66.39% -20.36% -24.61% -6.68% 16.69% 9.54% 27.36%
- ---------------------------------------------------------------------------------------------
Russell
Midcap
Growth
Index 17.59% 24.02% 20.31% 48.59% -31.51% -26.34% 7.35% 27.33% 10.86% 13.04%
- ---------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
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
VP Capital Appreciation - Portfolio Commentary
PORTFOLIO MANAGERS: DAVID ROSE AND KURT STALZER
VP Capital Appreciation performed very well relative to its benchmark and
competition during the six months ended June 30, 2006, returning 9.52%* (see
page 3 for additional performance information). By comparison, the Russell
Midcap Growth Index returned 2.56%, while the Lipper Mid-Cap Growth Funds Index,
a measure of the performance of leading mid-cap growth funds, had a return of
4.40%**.
What's more, VP Capital Appreciation has outperformed the benchmark for the one-
and three-year periods ended in June. The fund returned 27.36% and 17.62% for
the one- and three-year periods, respectively, while the benchmark posted 13.04%
and 16.86% returns for the same periods. In addition, the fund outperformed the
Lipper index for the trailing one-, three-, and five-year periods.
MARKET OVERVIEW
U.S. stocks generally managed positive returns during a volatile six months in
which many indexes rose to near record highs by early May, only to sell-off
sharply on worries over higher-than-expected inflation and interest rates.
Small-cap stocks outperformed large thanks to a strong start to the year, while
value stocks outperformed growth across all market capitalizations (see the
Market Perspective on page 2 for additional information).
The fund's outperformance of its benchmark resulted largely from positioning in
the consumer discretionary, energy, telecommunication services, and information
technology sectors. However, the portfolio's return would have been even better
relative to its benchmark but for our stock selection among health care and
financials stocks, which detracted slightly from relative results.
TOP CONTRIBUTORS
The top-contributing stock in both relative and absolute terms was VP Capital
Appreciation's largest holding, wireless phone company NII Holdings. The firm
markets the Nextel brand from Mexico to South America, and continues to benefit
from tremendous growth in the Latin American market.
Among consumer discretionary shares, we underweighted this economically
sensitive sector as we began to see business fundamentals deteriorating. For
example, we had almost no exposure to stocks of homebuilders and home-related
firms, which performed poorly as rising interest rates took a toll on many
segments of the housing market.
We also added value through stock selection, with one of the portfolio's
TOP TEN HOLDINGS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
NII Holdings, Inc. Cl B 6.9% 6.7%
- --------------------------------------------------------------------------------
Alliance Data
Systems Corp. 4.7% 0.5%
- --------------------------------------------------------------------------------
Precision Castparts Corp. 4.5% 3.5%
- --------------------------------------------------------------------------------
Aker Kvaerner ASA ORD 3.5% 1.6%
- --------------------------------------------------------------------------------
Las Vegas Sands Corp. 3.4% --
- --------------------------------------------------------------------------------
America Movil SA
de CV Series L ADR 3.1% 3.3%
- --------------------------------------------------------------------------------
Diamond Offshore
Drilling, Inc. 2.4% 2.0%
- --------------------------------------------------------------------------------
Boeing Co. 2.2% --
- --------------------------------------------------------------------------------
Monsanto Co. 2.1% 1.5%
- --------------------------------------------------------------------------------
Manpower Inc. 2.1% --
- --------------------------------------------------------------------------------
* Total returns for periods less than one year are not annualized.
**The Lipper Mid-Cap Growth Funds Index returned 15.46%, 15.12%, 2.64% and 6.11%
for the one-, three-, five- and ten-year periods, respectively.
(continued)
- ------
5
VP Capital Appreciation - Portfolio Commentary
largest contributors to relative and absolute performance residing in this
sector--our overweight position in casino operator Las Vegas Sands. The stock
ended the period at an all-time high after winning the rights to build
Singapore's first casino. Add it all up and the consumer discretionary shares in
the portfolio had a positive return (up 7.5%), while those in the benchmark did
not (-4.5%).
Within the energy sector, the portfolio's biggest contributors were in the
equipment and services industries. Strong global demand for energy led to record
capital spending by oil and gas exploration companies. The best performer from
this segment was Aker Kvaerner, a Norwegian oil-services firm.
We also helped performance through stock selection in information technology
shares. Our two biggest contributors in this space were overweights in Alliance
Data Systems and Daktronics. Alliance Data benefited from strength in a number
of different business units, particularly its finance arm, which helped the firm
report record results. Daktronics is an electronic equipment firm best known for
its scoreboards and digital displays that announced expansion plans and a record
year for sales.
KEY DETRACTORS
It helped to be underweight the health care sector as a whole, but some of the
fund's biggest detractors relative to the benchmark were health care providers,
such as Aetna and Humana. Stocks in this space are dealing with changing
Medicare reimbursement rates and, in Aetna's case, news of rising medical
service costs.
VP Capital Appreciation's relative return was also limited by its holdings in
the financials sector. We were underweight this winning sector, and suffered
from poor stock selection among real estate management and consumer finance
firms.
COMMITMENT TO GROWTH PHILOSOPHY
Our investment process targets companies with accelerating earnings growth rates
and share price momentum. In this context, we believe effective stock selection
following a thorough review of fundamentals can position VP Capital Appreciation
for long-term positive performance.
TOP FIVE INDUSTRIES AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Energy Equipment
& Services 12.5% 11.0%
- --------------------------------------------------------------------------------
Wireless
Telecommunication
Services 10.0% 12.8%
- --------------------------------------------------------------------------------
Hotels, Restaurants
& Leisure 8.8% 3.1%
- --------------------------------------------------------------------------------
Aerospace & Defense 8.2% 5.4%
- --------------------------------------------------------------------------------
IT Services 6.2% 1.5%
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
U.S. Common Stocks 79.8% 75.5%
- --------------------------------------------------------------------------------
Foreign Common Stocks* 19.1% 24.3%
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS 98.9% 99.8%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 1.7% 0.5%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities (0.6)% (0.3)%
- --------------------------------------------------------------------------------
*Includes depositary shares, dual listed securities and foreign ordinary shares.
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP CAPITAL APPRECIATION CLASS I SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
Actual $1,000 $1,095.20 $5.19 1.00%
- --------------------------------------------------------------------------------
Hypothetical $1,000 $1,019.84 $5.01 1.00%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
7
VP Capital Appreciation - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 98.9%
AEROSPACE & DEFENSE -- 8.2%
- --------------------------------------------------------------------------------
129,932 BE Aerospace, Inc.(1) $ 2,970,246
- --------------------------------------------------------------------------------
100,400 Boeing Co. 8,223,764
- --------------------------------------------------------------------------------
282,300 Precision Castparts Corp. 16,870,248
- --------------------------------------------------------------------------------
49,427 Rockwell Collins 2,761,486
- --------------------------------------------------------------------------------
30,825,744
- --------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS -- 0.5%
- --------------------------------------------------------------------------------
38,827 EGL Inc.(1) 1,949,115
- --------------------------------------------------------------------------------
AIRLINES -- 1.4%
- --------------------------------------------------------------------------------
105,800 US Airways Group Inc.(1) 5,347,132
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 3.6%
- --------------------------------------------------------------------------------
174,017 CSL Ltd. ORD 6,953,795
- --------------------------------------------------------------------------------
109,900 Gilead Sciences, Inc.(1) 6,501,684
- --------------------------------------------------------------------------------
13,455,479
- --------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.7%
- --------------------------------------------------------------------------------
50,100 NCI Building Systems Inc.(1) 2,663,817
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 3.2%
- --------------------------------------------------------------------------------
40,800 Goldman Sachs
Group, Inc. (The) 6,137,544
- --------------------------------------------------------------------------------
147,226 Lazard Ltd. Cl A 5,947,930
- --------------------------------------------------------------------------------
12,085,474
- --------------------------------------------------------------------------------
CHEMICALS -- 2.8%
- --------------------------------------------------------------------------------
95,141 Monsanto Co. 8,009,920
- --------------------------------------------------------------------------------
85,921 Zoltek Companies, Inc.(1) 2,568,179
- --------------------------------------------------------------------------------
10,578,099
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES
& SUPPLIES -- 2.9%
- --------------------------------------------------------------------------------
123,700 Manpower Inc. 7,991,020
- --------------------------------------------------------------------------------
67,578 Monster Worldwide Inc.(1) 2,882,877
- --------------------------------------------------------------------------------
10,873,897
- --------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING -- 1.7%
- --------------------------------------------------------------------------------
167,000 Chiyoda Corporation ORD 3,414,268
- --------------------------------------------------------------------------------
69,076 Foster Wheeler Ltd.(1) 2,984,083
- --------------------------------------------------------------------------------
6,398,351
- --------------------------------------------------------------------------------
CONSUMER FINANCE -- 0.6%
- --------------------------------------------------------------------------------
25,100 Capital One Financial Corp. 2,144,795
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT
& INSTRUMENTS -- 1.4%
- --------------------------------------------------------------------------------
185,870 Daktronics Inc. 5,366,067
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES -- 12.5%
- --------------------------------------------------------------------------------
140,200 Aker Kvaerner ASA ORD 13,145,510
- --------------------------------------------------------------------------------
109,000 Diamond Offshore Drilling, Inc. 9,148,370
- --------------------------------------------------------------------------------
47,880 Dril-Quip Inc.(1) 3,947,227
- --------------------------------------------------------------------------------
28,200 FMC Technologies Inc.(1) 1,902,372
- --------------------------------------------------------------------------------
87,029 National Oilwell Varco, Inc.(1) 5,510,676
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
72,200 Oceaneering
International, Inc.(1) $ 3,310,370
- --------------------------------------------------------------------------------
80,148 TETRA Technologies, Inc.(1) 2,427,683
- --------------------------------------------------------------------------------
149,188 Weatherford
International Ltd.(1) 7,402,709
- --------------------------------------------------------------------------------
46,794,917
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.8%
- --------------------------------------------------------------------------------
135,941 Archer-Daniels-Midland Co. 5,611,645
- --------------------------------------------------------------------------------
42,136 Hain Celestial
Group, Inc. (The)(1) 1,085,423
- --------------------------------------------------------------------------------
6,697,068
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT
& SUPPLIES -- 2.4%
- --------------------------------------------------------------------------------
38,200 Conceptus Inc.(1) 521,048
- --------------------------------------------------------------------------------
124,519 Hologic, Inc.(1) 6,146,258
- --------------------------------------------------------------------------------
18,700 Intuitive Surgical Inc.(1) 2,206,039
- --------------------------------------------------------------------------------
8,873,345
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS
& SERVICES -- 1.6%
- --------------------------------------------------------------------------------
98,700 Quest Diagnostics Inc. 5,914,104
- --------------------------------------------------------------------------------
HEALTH CARE TECHNOLOGY -- 0.3%
- --------------------------------------------------------------------------------
78,066 Emdeon Corp.(1) 968,799
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 8.8%
- --------------------------------------------------------------------------------
99,966 Burger King Holdings, Inc.(1) 1,574,465
- --------------------------------------------------------------------------------
38,300 Ctrip.com
International, Ltd. ADR 1,955,215
- --------------------------------------------------------------------------------
101,168 Harrah's Entertainment, Inc. 7,201,138
- --------------------------------------------------------------------------------
231,300 InterContinental Hotels
Group plc ORD 4,040,156
- --------------------------------------------------------------------------------
165,200 Las Vegas Sands Corp.(1) 12,862,471
- --------------------------------------------------------------------------------
61,032 Orient-Express Hotels Ltd. Cl A 2,370,483
- --------------------------------------------------------------------------------
18,055 Starwood Hotels & Resorts
Worldwide, Inc.(1) 1,089,439
- --------------------------------------------------------------------------------
25,714 Station Casinos Inc. 1,750,609
- --------------------------------------------------------------------------------
32,843,976
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 0.1%
- --------------------------------------------------------------------------------
6,180 Energizer Holdings Inc.(1) 361,963
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 1.9%
- --------------------------------------------------------------------------------
159,509 McDermott International, Inc.(1) 7,252,874
- --------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL -- 1.2%
- --------------------------------------------------------------------------------
35,000 NutriSystem, Inc.(1) 2,174,550
- --------------------------------------------------------------------------------
77,471 Priceline.com Inc.(1) 2,313,284
- --------------------------------------------------------------------------------
4,487,834
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 1.1%
- --------------------------------------------------------------------------------
98,800 Digital River Inc.(1) 3,990,532
- --------------------------------------------------------------------------------
IT SERVICES -- 6.2%
- --------------------------------------------------------------------------------
296,157 Alliance Data Systems Corp.(1) 17,419,955
- --------------------------------------------------------------------------------
171,200 MoneyGram International Inc. 5,812,240
- --------------------------------------------------------------------------------
23,232,195
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
8
VP Capital Appreciation - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS -- 0.3%
- --------------------------------------------------------------------------------
44,700 Aruze Corp. ORD $ 972,461
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES -- 3.0%
- --------------------------------------------------------------------------------
99,355 Covance Inc.(1) 6,082,514
- --------------------------------------------------------------------------------
149,929 Pharmaceutical Product
Development, Inc. 5,265,506
- --------------------------------------------------------------------------------
11,348,020
- --------------------------------------------------------------------------------
MACHINERY -- 2.3%
- --------------------------------------------------------------------------------
20,769 Bucyrus International, Inc. Cl A 1,048,835
- --------------------------------------------------------------------------------
73,775 Gardner Denver Inc.(1) 2,840,338
- --------------------------------------------------------------------------------
96,780 Manitowoc Co. 4,306,709
- --------------------------------------------------------------------------------
5,123 Terex Corp.(1) 505,640
- --------------------------------------------------------------------------------
8,701,522
- --------------------------------------------------------------------------------
MARINE -- 2.5%
- --------------------------------------------------------------------------------
112,233 American Commercial
Lines Inc.(1) 6,762,038
- --------------------------------------------------------------------------------
70,170 Kirby Corporation(1) 2,771,715
- --------------------------------------------------------------------------------
9,533,753
- --------------------------------------------------------------------------------
MEDIA -- 2.0%
- --------------------------------------------------------------------------------
112,133 Focus Media
Holding Ltd. ADR(1) 7,306,586
- --------------------------------------------------------------------------------
METALS & MINING -- 2.2%
- --------------------------------------------------------------------------------
116,175 Oregon Steel Mills, Inc.(1) 5,885,426
- --------------------------------------------------------------------------------
16,300 Southern Copper Corp. 1,452,819
- --------------------------------------------------------------------------------
24,500 Titanium Metals Corp.(1) 842,310
- --------------------------------------------------------------------------------
8,180,555
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 0.7%
- --------------------------------------------------------------------------------
46,300 Kohl's Corp.(1) 2,737,256
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 0.3%
- --------------------------------------------------------------------------------
47,623 Parallel Petroleum Corp.(1) 1,176,764
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 1.7%
- --------------------------------------------------------------------------------
63,726 Aspreva Pharmaceuticals Corp.(1) 1,729,524
- --------------------------------------------------------------------------------
23,400 Schwarz Pharma AG ORD 2,099,814
- --------------------------------------------------------------------------------
32,200 Shire plc ADR 1,424,206
- --------------------------------------------------------------------------------
64,000 Shire plc ORD 932,863
- --------------------------------------------------------------------------------
6,186,407
- --------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT
& DEVELOPMENT -- 1.3%
- --------------------------------------------------------------------------------
85,496 CB Richard Ellis
Group, Inc. Cl A(1) 2,128,850
- --------------------------------------------------------------------------------
29,404 Jones Lang LaSalle Inc. 2,574,321
- --------------------------------------------------------------------------------
4,703,171
- --------------------------------------------------------------------------------
ROAD & RAIL -- 1.7%
- --------------------------------------------------------------------------------
54,600 CSX Corporation 3,846,024
- --------------------------------------------------------------------------------
78,248 Swift Transportation Co. Inc.(1) 2,485,156
- --------------------------------------------------------------------------------
6,331,180
- --------------------------------------------------------------------------------
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
SEMICONDUCTORS &
SEMICONDUCTOR EQUIPMENT -- 1.5%
- --------------------------------------------------------------------------------
58,700 Cymer, Inc.(1) $ 2,727,202
- --------------------------------------------------------------------------------
75,100 MEMC Electronic
Materials Inc.(1) 2,816,250
- --------------------------------------------------------------------------------
5,543,452
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 1.5%
- --------------------------------------------------------------------------------
77,900 Christopher & Banks
Corporation 2,259,100
- --------------------------------------------------------------------------------
15,975 Gmarket Inc. ADR(1) 245,536
- --------------------------------------------------------------------------------
32,161 J. Crew Group Inc.(1) 882,819
- --------------------------------------------------------------------------------
48,351 Limited Brands, Inc. 1,237,302
- --------------------------------------------------------------------------------
26,300 Too Inc.(1) 1,009,657
- --------------------------------------------------------------------------------
5,634,414
- --------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS -- 2.7%
- --------------------------------------------------------------------------------
45,130 Crocs, Inc.(1) 1,135,020
- --------------------------------------------------------------------------------
62,192 Polo Ralph Lauren Corp. 3,414,341
- --------------------------------------------------------------------------------
10,900 Puma AG Rudolf
Dassler Sport ORD 4,235,959
- --------------------------------------------------------------------------------
33,320 Under Armour, Inc. Cl A(1) 1,420,098
- --------------------------------------------------------------------------------
10,205,418
- --------------------------------------------------------------------------------
TRANSPORTATION INFRASTRUCTURE -- 0.3%
- --------------------------------------------------------------------------------
398,000 China Merchants Holdings
International Co. Ltd. ORD 1,211,969
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 10.0%
- --------------------------------------------------------------------------------
352,200 America Movil SA
de CV Series L ADR 11,714,172
- --------------------------------------------------------------------------------
456,087 NII Holdings, Inc. Cl B(1) 25,714,187
- --------------------------------------------------------------------------------
37,428,359
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $301,364,409) 370,306,864
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 1.7%
$6,500,000 FHLB Discount Notes,
4.90%, 7/3/06(2)
(Cost $6,498,231) 6,500,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 100.6%
(Cost $307,862,640) 376,806,864
- --------------------------------------------------------------------------------
OTHER ASSETS
AND LIABILITIES -- (0.6)% (2,216,125)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $374,590,739
================================================================================
See Notes to Financial Statements. (continued)
- ------
9
VP Capital Appreciation - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
Contracts Settlement Unrealized
to Sell Date Value Gain (Loss)
- --------------------------------------------------------------------------------
4,612,321 AUD for USD 7/31/06 $ 3,427,699 $ (62,666)
- --------------------------------------------------------------------------------
1,387,613 Euro for USD 7/31/06 1,777,702 (31,905)
- --------------------------------------------------------------------------------
993,520 Euro for USD 7/31/06 1,272,821 (22,545)
- --------------------------------------------------------------------------------
1,295,713 GBP for USD 7/31/06 2,395,126 (35,011)
- --------------------------------------------------------------------------------
246,113,750 JPY for USD 7/31/06 2,159,041 (32,741)
- --------------------------------------------------------------------------------
25,218,240 MXN for USD 7/31/06 2,222,129 (13,393)
- --------------------------------------------------------------------------------
40,658,000 NOK for USD 7/31/06 6,540,750 (71,697)
- --------------------------------------------------------------------------------
$19,795,268 $(269,958)
====================================
(Value on Settlement Date $19,525,310)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
AUD = Australian Dollar
GBP = British Pound
FHLB = Federal Home Loan Bank
JPY = Japanese Yen
MXN = Mexican Nuevo Peso
NOK = Norwegian Krona
ORD = Foreign Ordinary Share
USD = United States Dollar
(1) Non-income producing.
(2) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
10
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $307,862,640) $376,806,864
- --------------------------------------------------------------
Cash 570,874
- --------------------------------------------------------------
Receivable for investments sold 3,119,154
- --------------------------------------------------------------
Dividends and interest receivable 49,014
- --------------------------------------------------------------------------------
380,545,906
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 5,388,504
- --------------------------------------------------------------
Payable for forward foreign currency exchange contracts 269,958
- --------------------------------------------------------------
Accrued management fees 296,705
- --------------------------------------------------------------------------------
5,955,167
- --------------------------------------------------------------------------------
NET ASSETS $374,590,739
================================================================================
CLASS I CAPITAL SHARES, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Authorized 100,000,000
================================================================================
Outstanding 36,583,903
================================================================================
NET ASSET VALUE PER SHARE $10.24
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $360,559,835
- --------------------------------------------------------------
Accumulated net investment loss (52,363)
- --------------------------------------------------------------
Accumulated net realized loss on investment
and foreign currency transactions (54,590,655)
- --------------------------------------------------------------
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 68,673,922
- --------------------------------------------------------------------------------
$374,590,739
================================================================================
See Notes to Financial Statements.
- ------
11
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- --------------------------------------------------------------
Dividends (net of foreign taxes withheld of $26,137) $1,697,986
- --------------------------------------------------------------
Interest 92,881
- --------------------------------------------------------------------------------
1,790,867
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------
Management fees 1,846,543
- --------------------------------------------------------------
Directors' fees and expenses 2,852
- --------------------------------------------------------------
Other expenses 1,262
- --------------------------------------------------------------------------------
1,850,657
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (59,790)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- --------------------------------------------------------------
Investment transactions 29,570,933
- --------------------------------------------------------------
Foreign currency transactions (75,668)
- --------------------------------------------------------------------------------
29,495,265
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
- --------------------------------------------------------------
Investments 1,021,890
- --------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (263,060)
- --------------------------------------------------------------------------------
758,830
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 30,254,095
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $30,194,305
================================================================================
See Notes to Financial Statements.
- ------
12
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ (59,790) $ (1,320,092)
- ----------------------------------------------
Net realized gain (loss) 29,495,265 41,135,385
- ----------------------------------------------
Change in net unrealized
appreciation (depreciation) 758,830 17,814,742
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 30,194,305 57,630,035
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Proceeds from shares sold 50,382,658 57,347,243
- ----------------------------------------------
Payments for shares redeemed (37,348,426) (48,266,678)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 13,034,232 9,080,565
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 43,228,537 66,710,600
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 331,362,202 264,651,602
- --------------------------------------------------------------------------------
End of period $374,590,739 $331,362,202
================================================================================
Accumulated undistributed
net investment income (loss) $(52,363) $7,427
================================================================================
TRANSACTIONS IN SHARES OF THE FUND
- --------------------------------------------------------------------------------
Sold 4,862,869 6,778,117
- ----------------------------------------------
Redeemed (3,717,041) (5,908,148)
- --------------------------------------------------------------------------------
Net increase (decrease) in shares of the fund 1,145,828 869,969
================================================================================
See Notes to Financial Statements.
- ------
13
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Capital Appreciation Fund (the fund)
is one fund in a series issued by the corporation. The fund is diversified under
the 1940 Act. The fund's investment objective is to seek capital growth. The
fund pursues its investment objective by investing primarily in common stocks
that management believes will increase in value over time. The following is a
summary of the fund's significant accounting policies.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
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
investment transactions and unrealized appreciation (depreciation) on
investments, respectively.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective dates of such transactions. For assets and
liabilities, other than investments in securities, net realized and unrealized
gains and losses from foreign currency translations arise from changes in
currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on investment transactions and unrealized appreciation
(depreciation) on investments, respectively. Certain countries may impose taxes
on the contract amount of purchases and sales of foreign currency contracts in
their currency. The fund records the foreign tax expense, if any, as a reduction
to the net realized gain (loss) on foreign currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
(continued)
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
As of December 31, 2005, the fund had accumulated net realized capital loss
carryovers for federal income tax purposes of $83,720,509, which may be used to
offset future taxable gains. Capital loss carryovers of $39,767,176 and
$43,953,333 expire in 2009 and 2010, respectively.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee). The
Agreement provides that all expenses of the fund, except brokerage commissions,
taxes, interest, fees and expenses of those directors who are not considered
"interested persons" as defined in the 1940 Act (including counsel fees) and
extraordinary expenses, will be paid by ACIM. The fee is computed and accrued
daily based on the daily net assets of the fund and paid monthly in arrears. For
funds with a stepped fee schedule, the rate of the fee is determined by applying
a fee rate calculation formula. This formula takes into account all of the
investment advisor's assets under management in the fund's investment strategy
(strategy assets) to calculate the appropriate fee rate for the fund. The
strategy assets include the fund's assets and the assets of other clients of the
investment advisor that are not in the American Century family of funds, but
that have the same investment team and investment strategy.
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The annual management fee schedule for the fund is as follows:
- --------------------------------------------------------------------------------
STRATEGY ASSETS
- --------------------------------------------------------------------------------
First $500 million 1.00%
- --------------------------------------------------------------------------------
Next $500 million 0.95%
- --------------------------------------------------------------------------------
Over $1 billion 0.90%
- --------------------------------------------------------------------------------
The effective annual management fee for the fund for the six months ended June
30, 2006 was 1.00%.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, American Century Investment
Services, Inc., and the corporation's transfer agent, American Century Services,
LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term investments,
for the six months ended June 30, 2006 were $443,741,544 and $434,558,489,
respectively.
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $308,507,072
================================================================================
Gross tax appreciation of investments $71,988,950
- -----------------------------------------------------------
Gross tax depreciation of investments (3,689,158)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation)
of investments $68,299,792
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
4. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
16
VP Capital Appreciation - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ------------------------------------------------------------------------------------------------
CLASS I
- ------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $9.35 $7.66 $7.12 $5.91 $7.50 $15.78
- ------------------------------------------------------------------------------------------------
Income From
Investment Operations
- ----------------------------
Net Investment
Income (Loss) --(2) (0.04) (0.04) (0.04) (0.04) (0.03)
- ----------------------------
Net Realized and
Unrealized Gain (Loss) 0.89 1.73 0.58 1.25 (1.55) (3.64)
- ------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.89 1.69 0.54 1.21 (1.59) (3.67)
- ------------------------------------------------------------------------------------------------
Distributions
- ----------------------------
From Net Realized Gains -- -- -- -- -- (4.61)
- ------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $10.24 $9.35 $7.66 $7.12 $5.91 $7.50
================================================================================================
TOTAL RETURN(3) 9.52% 22.06% 7.58% 20.47% (21.20)% (28.07)%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.00%(4) 1.00% 1.00% 1.00% 1.00% 1.00%
- ----------------------------
Ratio of Net Investment
Income (Loss)
to Average Net Assets (0.03)%(4) (0.46)% (0.57)% (0.58)% (0.55)% (0.35)%
- ----------------------------
Portfolio Turnover Rate 118% 223% 262% 150% 124% 149%
- ----------------------------
Net Assets, End of Period
(in thousands) $374,591 $331,362 $264,652 $285,394 $260,897 $401,812
- ------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) Per-share amount is less than $0.005.
(3) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year are
not annualized.
(4) Annualized.
See Notes to Financial Statements.
- ------
17
Approval of Management Agreement for VP Capital Appreciation
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 VP Capital Appreciation (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)
- ------
18
Approval of Management Agreement for VP Capital Appreciation
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
(continued)
- ------
19
Approval of Management Agreement for VP Capital Appreciation
fund's performance with that of similar funds not managed by the advisor. 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 was
above the median of its peer group for the one year period and below the median
for the three year period during part of the past year. The board discussed the
fund's performance with the advisor and was satisfied with the efforts being
undertaken by the advisor.
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
(continued)
- ------
20
Approval of Management Agreement for VP Capital Appreciation
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, fee breakpoints as the fund increases in size, and through
reinvestment in its business to provide shareholders additional content and
services.
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 a 15(c) Provider 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 at the median 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
(continued)
- ------
21
Approval of Management Agreement for VP Capital Appreciation
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 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 independent 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.
- ------
22
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The LIPPER MID-CAP GROWTH FUNDS INDEX is a non-weighted index of, typically, the
30 largest mutual funds within the Mid Cap Growth fund classification, as
defined by Lipper. The index is adjusted for the reinvestment of capital gains
and income dividends.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL MIDCAP(reg.tm) INDEX measures the performance of the 800 smallest of
the 1,000 largest publicly traded U.S. companies, based on total market
capitalization.
The RUSSELL MIDCAP(reg.tm) GROWTH INDEX measures the performance of those
Russell Midcap Index companies (the 800 smallest of the 1,000 largest publicly
traded U.S. companies, based on total market capitalization) with higher
price-to-book ratios and higher forecasted growth values.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
23
Notes
- ------
24
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century
and American Century Investments are service marks
of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
(c)2006 American Century Proprietary Holdings, Inc. All rights reserved.
0608
SH-SAN-50650
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP Income & Growth Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns . . . . . . . . . . . . . . . . . . . . . . . . . . 2
VP INCOME & GROWTH
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Portfolio Commentary 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Five Largest Overweights . . . . . . . . . . . . . . . . . . . . . . . . . .6
Five Largest Underweights . . . . . . . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . 12
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . .14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 15
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
OTHER INFORMATION
Approval of Management Agreement for VP Income & Growth . . . . . . . . . . . 22
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
The opinions expressed in the Market Perspective and the Portfolio Commentary
reflect those of the portfolio management team as of the date of the report, and
do not necessarily represent the opinions of American Century or any other
person in the American Century organization. Any such opinions are subject to
change at any time based upon market or other conditions and American Century
disclaims any responsibility to update such opinions. These opinions may not be
relied upon as investment advice and, because investment decisions made by
American Century funds are based on numerous factors, may not be relied upon as
an indication of trading intent on behalf of any American Century fund. Security
examples are used for representational purposes only and are not intended as
recommendations to purchase or sell securities. Performance information for
comparative indices and securities is provided to American Century by third
party vendors. To the best of American Century's knowledge, such information is
accurate at the time of printing.
Market Perspective
[photo of John Schniedwind]
BY JOHN SCHNIEDWIND, CHIEF INVESTMENT OFFICER, QUANTITATIVE EQUITY
MUTED GAINS IN THE STOCK MARKET
U.S. stocks advanced in the first six months of 2006, continuing a stock market
rally that began in 2003, but a downturn toward the end of the period limited
the market's overall gains.
Stocks climbed in the first four months of the year as the U.S. economy showed
renewed strength following a period of hurricane-induced weakness at the end of
2005. In addition, profits at public companies continued to grow at a healthy
rate--the S&P 500 Index enjoyed its 16th consecutive quarter of double-digit
earnings growth in the first quarter of 2006.
The major stock indexes reached five-year highs in early May, and then reversed
course in the last six weeks of the period. Stocks declined as evidence of
increasing inflation led the Federal Reserve to signal that further interest
rate increases may be forthcoming. These developments undermined stock prices as
investors grew increasingly cautious, causing the market to give up some of its
earlier gains.
As the table at right shows, the S&P 500 returned just under 3% in the first
half of 2006. Despite a cumulative total return of 54% since the beginning of
2003, the index is still 17% below its all-time high, set in March 2000.
SMALLER COMPANIES AND VALUE STOCKS OUTPERFORMED
Small-cap stocks led the market's advance during the six-month period, although
they were also the most volatile segment of the market. The S&P SmallCap 600
Index posted a gain of nearly 13% in the first quarter, only to fall by 5% in
the last three months of the period. Mid-cap shares came out ahead of
large-company issues.
Reflecting the risk-averse sentiment that took hold late in the period, value
stocks outperformed growth by a substantial margin across all market
capitalizations.
SECTOR PERFORMANCE
Economically sensitive sectors--including energy, industrials, and
materials--were among the best performers in the S&P 500 for the first half of
the year. The strong economy and record-high prices for oil and other
commodities boosted these sectors of the market. Telecommunication services
stocks posted the best returns in the index, boosted by industry consolidation.
The growth-oriented information technology and health care sectors were the only
two segments of the S&P 500 to decline during the period.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006*
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
S&P MidCap 400 Index 4.24%
- --------------------------------------------------------------------------------
S&P SmallCap 600 Index 7.70%
- --------------------------------------------------------------------------------
*Total returns for periods less than one year are not annualized.
- ------
2
VP Income & Growth - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
----------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CLASS I 2.84% 7.12% 3.85% 6.14% 10/30/97
- --------------------------------------------------------------------------------
S&P 500 INDEX(2) 2.71% 8.63% 2.49% 5.63% --
- --------------------------------------------------------------------------------
Class II 2.58% 6.86% -- 6.32% 5/1/02
- --------------------------------------------------------------------------------
Class III 2.84% 7.12% -- 9.54% 6/26/02
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. (c)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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I 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
VP Income & Growth - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made October 30, 1997
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended June 30
- --------------------------------------------------------------------------------------------
1998* 1999 2000 2001 2002 2003 2004 2005 2006
- --------------------------------------------------------------------------------------------
Class I 26.63% 18.54% 3.68% -10.84% -14.54% 0.71% 21.02% 8.29% 7.12%
- --------------------------------------------------------------------------------------------
S&P 500 Index 26.79% 22.76% 7.25% -14.83% -17.99% 0.25% 19.11% 6.32% 8.63%
- --------------------------------------------------------------------------------------------
*From 10/30/97, Class I's inception date, to 6/30/98. Not annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I 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
VP Income & Growth - Portfolio Commentary
PORTFOLIO MANAGER: JOHN SCHNIEDWIND, KURT BORGWARDT, AND ZILI ZHANG
PERFORMANCE SUMMARY
For the six months ended June 30, 2006, VP Income & Growth posted a positive
return that was in line with the performance of its benchmark index, the S&P 500
Index. The portfolio returned 2.84%* for the six-month period, slightly ahead of
the 2.71% return of the S&P 500.
The fund's investment approach emphasizes stock selection over sector
weightings, and as a result, stock selection typically has the most significant
impact on performance relative to the benchmark index. In the first half of
2006, stock selection was mixed but successful enough for the portfolio to eke
out a modest gain over the S&P 500.
HEALTH CARE HOLDINGS HELD UP WELL
Health care stocks generally declined in the first six months of 2006, but the
fund's health care holdings gained ground, contributing to the portfolio's
outperformance of the S&P 500. The top contributors to relative performance in
this sector included pharmaceutical firm Merck and medical instrument maker
Applera-Applied Biosystems. Merck shares rose as the company reduced the price
of Zocor, its top-selling cholesterol medication, below that of generic versions
to maintain market share after the drug's patent expiration. Applera-Applied
Biosystems, which makes instruments and analytic tools for the biotechnology
industry, saw its earnings double as instrumentation sales surged.
Successful stock selection in the health care sector was also dependent on
avoiding the pitfalls. For example, the fund did not own health services
provider UnitedHealth and medical device maker Medtronic, both of which suffered
double-digit declines during the period. UnitedHealth came under investigation
for back-dating executive stock options, while Medtronic was hurt by safety
concerns in implantable cardiac devices.
INDUSTRIALS AND UTILITIES CONTRIBUTED POSITIVELY
Other sectors that had a positive impact on relative results included
industrials and utilities. The best relative performance contributor in the
portfolio was engine maker Cummins, which was also one of the fund's largest
overweights. Despite higher raw materials costs, Cummins was able to improve
profit margins and raise its 2006 earnings
TOP TEN HOLDINGS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Exxon Mobil Corp. 4.8% 3.5%
- --------------------------------------------------------------------------------
Chevron Corp. 4.6% 2.8%
- --------------------------------------------------------------------------------
International Business
Machines Corp. 3.6% 1.6%
- --------------------------------------------------------------------------------
Citigroup Inc. 3.5% 1.0%
- --------------------------------------------------------------------------------
Bank of America Corp. 3.4% 4.9%
- --------------------------------------------------------------------------------
Washington Mutual, Inc. 3.0% 2.8%
- --------------------------------------------------------------------------------
Morgan Stanley 2.8% 0.5%
- --------------------------------------------------------------------------------
FirstEnergy Corp. 2.7% 0.3%
- --------------------------------------------------------------------------------
Cummins Inc. 2.5% 1.7%
- --------------------------------------------------------------------------------
Merck & Co., Inc. 2.4% 2.0%
- --------------------------------------------------------------------------------
*All fund returns referenced in this commentary are for Class I shares.
Total returns for periods less than one year are not annualized.
(continued)
- ------
5
VP Income & Growth - Portfolio Commentary
projections thanks to strong industrial demand for its products.
The fund also benefited from its considerable underweight in industrial
conglomerate General Electric, which declined after reporting disappointing
revenues. Already the fund's largest underweight, GE was eliminated from the
portfolio in the second quarter of the year.
Among utilities stocks, the best performer was FirstEnergy, an electric utility
operating in several mid-Atlantic states. Despite an unseasonably warm winter,
FirstEnergy posted better-than-expected earnings amid strong power generation
demand and higher prices.
TECHNOLOGY, CONSUMER STOCKS LAGGED
Information technology stocks were the worst-performing sector in the S&P 500
during the period, and that held true in the portfolio as well. Stock selection
in this sector also proved disappointing. The fund held an overweight position
in chipmaker Intel, which was by far the biggest individual detractor from
relative performance. Declining sales, lower profit margins, and lost market
share caused a sharp decline in Intel's share price.
Another significant detractor in the technology sector was Internet services
provider EarthLink. The company saw profits weaken and expenses increase as it
continues to transition from dial-up to broadband and wireless services.
Consumer-oriented holdings also detracted from relative results in the first
half of the year. Poultry producer Pilgrim's Pride was the worst performer in
the consumer staples sector as fears of avian flu and falling poultry prices
weighed on the company's earnings. Among consumer discretionary stocks, Barnes &
Noble detracted the most from performance--despite reporting solid earnings, the
bookseller disappointed investors with declining same-store sales growth.
LOOKING AHEAD
Volatility in the stock market has increased recently as investors grapple with
uncertainty surrounding inflation data, the sustainability of the economic
expansion, and Federal Reserve interest rate policy. Regardless of the market
environment, however, we believe that our disciplined, balanced investment
approach--with a slight tilt toward value--will produce favorable long-term
results.
VP INCOME & GROWTH'S FIVE LARGEST
OVERWEIGHTS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
PORTFOLIO'S S&P 500
STOCKS INDEX
- --------------------------------------------------------------------------------
Chevron Corp. 4.56% 1.20%
- --------------------------------------------------------------------------------
Washington Mutual, Inc. 3.04% 0.38%
- --------------------------------------------------------------------------------
International Business
Machines Corp. 3.65% 1.04%
- --------------------------------------------------------------------------------
FirstEnergy Corp. 2.69% 0.16%
- --------------------------------------------------------------------------------
Cummins Inc. 2.52% 0.05%
- --------------------------------------------------------------------------------
VP INCOME & GROWTH'S FIVE LARGEST
UNDERWEIGHTS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
PORTFOLIO'S S&P 500
STOCKS INDEX
- --------------------------------------------------------------------------------
General Electric Co. -- 2.98%
- --------------------------------------------------------------------------------
Procter & Gamble Co. -- 1.59%
- --------------------------------------------------------------------------------
American International
Group Inc. -- 1.33%
- --------------------------------------------------------------------------------
Altria Group Inc. -- 1.33%
- --------------------------------------------------------------------------------
JPMorgan Chase & Co. -- 1.27%
- --------------------------------------------------------------------------------
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
(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 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP INCOME & GROWTH SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,028.40 $3.52 0.70%
- --------------------------------------------------------------------------------
Class II $1,000 $1,025.80 $4.77 0.95%
- --------------------------------------------------------------------------------
Class III $1,000 $1,028.40 $3.52 0.70%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,021.32 $3.51 0.70%
- --------------------------------------------------------------------------------
Class II $1,000 $1,020.08 $4.76 0.95%
- --------------------------------------------------------------------------------
Class III $1,000 $1,021.32 $3.51 0.70%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
8
VP Income & Growth - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 99.8%
AEROSPACE & DEFENSE -- 2.2%
- --------------------------------------------------------------------------------
2,898 Boeing Co. $ 237,375
- --------------------------------------------------------------------------------
13,791 Lockheed Martin Corp. 989,366
- --------------------------------------------------------------------------------
176,622 Northrop Grumman Corp. 11,314,406
- --------------------------------------------------------------------------------
12,982 Raytheon Company 578,608
- --------------------------------------------------------------------------------
13,119,755
- --------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS -- 1.2%
- --------------------------------------------------------------------------------
16,736 FedEx Corporation 1,955,769
- --------------------------------------------------------------------------------
66,813 United Parcel Service, Inc.
Cl B 5,500,714
- --------------------------------------------------------------------------------
7,456,483
- --------------------------------------------------------------------------------
AIRLINES -- 0.1%
- --------------------------------------------------------------------------------
52,396 Southwest Airlines Co. 857,723
- --------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.8%
- --------------------------------------------------------------------------------
261,503 ArvinMeritor Inc. 4,495,237
- --------------------------------------------------------------------------------
AUTOMOBILES -- 0.9%
- --------------------------------------------------------------------------------
783,162 Ford Motor Company 5,427,313
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 0.6%
- --------------------------------------------------------------------------------
52,678 Amgen Inc.(1) 3,436,186
- --------------------------------------------------------------------------------
BUILDING PRODUCTS -- 0.3%
- --------------------------------------------------------------------------------
25,764 USG Corp.(1) 1,878,969
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 6.1%
- --------------------------------------------------------------------------------
94,261 Goldman Sachs Group, Inc.
(The) 14,179,682
- --------------------------------------------------------------------------------
76,430 Lehman Brothers Holdings Inc. 4,979,415
- --------------------------------------------------------------------------------
13,513 Merrill Lynch & Co., Inc. 939,964
- --------------------------------------------------------------------------------
264,994 Morgan Stanley 16,750,270
- --------------------------------------------------------------------------------
36,849,331
- --------------------------------------------------------------------------------
CHEMICALS -- 3.3%
- --------------------------------------------------------------------------------
88,588 Eastman Chemical Company 4,783,752
- --------------------------------------------------------------------------------
385,442 Lyondell Chemical Co. 8,734,115
- --------------------------------------------------------------------------------
174,715 Olin Corp. 3,132,640
- --------------------------------------------------------------------------------
101,406 Westlake Chemical Corp. 3,021,899
- --------------------------------------------------------------------------------
19,672,406
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 5.9%
- --------------------------------------------------------------------------------
423,773 Bank of America Corp. 20,383,481
- --------------------------------------------------------------------------------
22,277 Comerica Inc. 1,158,181
- --------------------------------------------------------------------------------
291,581 National City Corp. 10,552,316
- --------------------------------------------------------------------------------
67,316 Wachovia Corp. 3,640,449
- --------------------------------------------------------------------------------
35,734,427
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 0.4%
- --------------------------------------------------------------------------------
31,624 John H. Harland Company 1,375,644
- --------------------------------------------------------------------------------
30,043 R.R. Donnelley & Sons
Company 959,874
- --------------------------------------------------------------------------------
2,335,518
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 0.3%
- --------------------------------------------------------------------------------
99,062 Motorola, Inc. $ 1,996,099
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 5.9%
- --------------------------------------------------------------------------------
398,996 Hewlett-Packard Co. 12,640,193
- --------------------------------------------------------------------------------
11,717 Imation Corporation 480,983
- --------------------------------------------------------------------------------
283,693 International Business
Machines Corp. 21,793,296
- --------------------------------------------------------------------------------
11,825 Komag, Inc.(1) 546,079
- --------------------------------------------------------------------------------
35,460,551
- --------------------------------------------------------------------------------
CONSUMER FINANCE -- 0.5%
- --------------------------------------------------------------------------------
31,581 Capital One Financial Corp. 2,698,596
- --------------------------------------------------------------------------------
DISTRIBUTORS -- 0.3%
- --------------------------------------------------------------------------------
64,775 Building Materials Holding
Corp. 1,805,279
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 3.5%
- --------------------------------------------------------------------------------
436,078 Citigroup Inc. 21,036,403
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES -- 2.9%
- --------------------------------------------------------------------------------
337,233 AT&T Inc. 9,405,429
- --------------------------------------------------------------------------------
7,755 Embarq Corp.(1) 317,877
- --------------------------------------------------------------------------------
224,365 Verizon Communications Inc. 7,513,984
- --------------------------------------------------------------------------------
17,237,290
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 3.5%
- --------------------------------------------------------------------------------
296,860 FirstEnergy Corp. 16,092,780
- --------------------------------------------------------------------------------
208,398 Pepco Holdings, Inc. 4,914,025
- --------------------------------------------------------------------------------
21,006,805
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS -- 1.4%
- --------------------------------------------------------------------------------
204,628 Arrow Electronics, Inc.(1) 6,589,021
- --------------------------------------------------------------------------------
51,225 Nam Tai Electronics, Inc. 1,145,903
- --------------------------------------------------------------------------------
9,963 Tech Data Corp.(1) 381,683
- --------------------------------------------------------------------------------
8,116,607
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES(2)
- --------------------------------------------------------------------------------
23,828 Grey Wolf Inc.(1) 183,476
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 1.3%
- --------------------------------------------------------------------------------
5,667 Longs Drug Stores Corp. 258,529
- --------------------------------------------------------------------------------
236,059 Supervalu Inc. 7,247,011
- --------------------------------------------------------------------------------
7,505,540
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.4%
- --------------------------------------------------------------------------------
132,787 Chiquita Brands International,
Inc. 1,829,805
- --------------------------------------------------------------------------------
80,290 Del Monte Foods Co. 901,657
- --------------------------------------------------------------------------------
83,258 General Mills, Inc. 4,301,108
- --------------------------------------------------------------------------------
884 Seaboard Corp. 1,131,520
- --------------------------------------------------------------------------------
8,164,090
- --------------------------------------------------------------------------------
GAS UTILITIES -- 0.5%
- --------------------------------------------------------------------------------
9,201 NICOR Inc. 381,842
- --------------------------------------------------------------------------------
112,122 UGI Corp. 2,760,443
- --------------------------------------------------------------------------------
3,142,285
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
9
VP Income & Growth - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.8%
- --------------------------------------------------------------------------------
75,568 Becton Dickinson & Co. $ 4,619,472
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 2.6%
- --------------------------------------------------------------------------------
109,753 AmerisourceBergen Corp. 4,600,846
- --------------------------------------------------------------------------------
60,420 Humana Inc.(1) 3,244,554
- --------------------------------------------------------------------------------
22,488 Kindred Healthcare Inc.(1) 584,688
- --------------------------------------------------------------------------------
147,039 McKesson Corp. 6,952,004
- --------------------------------------------------------------------------------
15,382,092
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 0.9%
- --------------------------------------------------------------------------------
54,798 Darden Restaurants, Inc. 2,159,041
- --------------------------------------------------------------------------------
101,841 McDonald's Corporation 3,421,858
- --------------------------------------------------------------------------------
5,580,899
- --------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 1.1%
- --------------------------------------------------------------------------------
8,189 Furniture Brands
International, Inc. 170,659
- --------------------------------------------------------------------------------
119,256 Newell Rubbermaid Inc. 3,080,382
- --------------------------------------------------------------------------------
1,279 NVR, Inc.(1) 628,309
- --------------------------------------------------------------------------------
129,017 Tupperware Brands Corp. 2,540,345
- --------------------------------------------------------------------------------
6,419,695
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 2.0%
- --------------------------------------------------------------------------------
189,570 Kimberly-Clark Corp. 11,696,469
- --------------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS &
ENERGY TRADERS -- 0.1%
- --------------------------------------------------------------------------------
13,695 TXU Corp. 818,824
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 0.5%
- --------------------------------------------------------------------------------
100,078 Tyco International Ltd. 2,752,145
- --------------------------------------------------------------------------------
INSURANCE -- 4.6%
- --------------------------------------------------------------------------------
191,002 Ace, Ltd. 9,662,792
- --------------------------------------------------------------------------------
50,730 American Financial Group, Inc. 2,176,317
- --------------------------------------------------------------------------------
9,074 Arch Capital Group Ltd.(1) 539,540
- --------------------------------------------------------------------------------
56,080 Chubb Corp. 2,798,392
- --------------------------------------------------------------------------------
13,230 Endurance Specialty Holdings
Ltd. 423,360
- --------------------------------------------------------------------------------
103,865 First American Financial Corp.
(The) 4,390,374
- --------------------------------------------------------------------------------
64,799 LandAmerica Financial Group
Inc. 4,186,015
- --------------------------------------------------------------------------------
83,623 Zenith National Insurance Corp. 3,317,324
- --------------------------------------------------------------------------------
27,494,114
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 1.2%
- --------------------------------------------------------------------------------
492,705 EarthLink Inc.(1) 4,266,825
- --------------------------------------------------------------------------------
67,261 RealNetworks Inc.(1) 719,693
- --------------------------------------------------------------------------------
205,516 United Online, Inc. 2,466,192
- --------------------------------------------------------------------------------
7,452,710
- --------------------------------------------------------------------------------
IT SERVICES -- 0.9%
- --------------------------------------------------------------------------------
18,523 Accenture Ltd. Cl A 524,571
- --------------------------------------------------------------------------------
29,768 Acxiom Corp. 744,200
- --------------------------------------------------------------------------------
80,940 Computer Sciences Corp.(1) 3,920,734
- --------------------------------------------------------------------------------
5,189,505
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS -- 0.1%
- --------------------------------------------------------------------------------
42,734 Hasbro, Inc. $ 773,913
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES -- 1.3%
- --------------------------------------------------------------------------------
232,457 Applera Corporation - Applied
Biosystems Group 7,519,984
- --------------------------------------------------------------------------------
MACHINERY -- 2.5%
- --------------------------------------------------------------------------------
123,127 Cummins Inc. 15,052,276
- --------------------------------------------------------------------------------
MEDIA -- 2.0%
- --------------------------------------------------------------------------------
86,798 CBS Corp. Cl B 2,347,886
- --------------------------------------------------------------------------------
105,140 Disney (Walt) Co. 3,154,200
- --------------------------------------------------------------------------------
17,413 Regal Entertainment Group 353,832
- --------------------------------------------------------------------------------
260,949 Time Warner Inc. 4,514,418
- --------------------------------------------------------------------------------
38,701 Viacom Inc. Cl B 1,387,044
- --------------------------------------------------------------------------------
11,757,380
- --------------------------------------------------------------------------------
METALS & MINING -- 1.6%
- --------------------------------------------------------------------------------
46,754 Freeport-McMoRan Copper &
Gold, Inc. Cl B 2,590,639
- --------------------------------------------------------------------------------
97,257 Nucor Corp. 5,276,192
- --------------------------------------------------------------------------------
38,898 Quanex Corporation 1,675,337
- --------------------------------------------------------------------------------
4,796 Steel Dynamics Inc. 315,289
- --------------------------------------------------------------------------------
9,857,457
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 0.6%
- --------------------------------------------------------------------------------
21,048 OGE Energy Corp. 737,311
- --------------------------------------------------------------------------------
19,571 PG&E Corp. 768,749
- --------------------------------------------------------------------------------
71,373 Vectren Corp. 1,944,915
- --------------------------------------------------------------------------------
3,450,975
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 0.1%
- --------------------------------------------------------------------------------
5,388 J.C. Penney Co. Inc. 363,744
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 12.3%
- --------------------------------------------------------------------------------
439,472 Chevron Corp. 27,273,632
- --------------------------------------------------------------------------------
122,046 ConocoPhillips 7,997,674
- --------------------------------------------------------------------------------
465,306 Exxon Mobil Corp. 28,546,523
- --------------------------------------------------------------------------------
39,094 Marathon Oil Corp. 3,256,530
- --------------------------------------------------------------------------------
43,200 Occidental Petroleum Corp. 4,430,160
- --------------------------------------------------------------------------------
5,750 Tesoro Corporation 427,570
- --------------------------------------------------------------------------------
38,420 Valero Energy Corp. 2,555,698
- --------------------------------------------------------------------------------
74,487,787
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 1.3%
- --------------------------------------------------------------------------------
343,422 Louisiana-Pacific Corp. 7,520,942
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 6.6%
- --------------------------------------------------------------------------------
48,532 Alpharma Inc. Cl A 1,166,709
- --------------------------------------------------------------------------------
158,609 Johnson & Johnson 9,503,851
- --------------------------------------------------------------------------------
148,876 King Pharmaceuticals, Inc.(1) 2,530,892
- --------------------------------------------------------------------------------
392,229 Merck & Co., Inc. 14,288,902
- --------------------------------------------------------------------------------
527,009 Pfizer Inc. 12,368,901
- --------------------------------------------------------------------------------
60,439 ViroPharma Inc.(1) 520,984
- --------------------------------------------------------------------------------
40,380,239
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
10
VP Income & Growth - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 2.7%
- --------------------------------------------------------------------------------
240,805 CBL & Associates Properties,
Inc. $ 9,374,540
- --------------------------------------------------------------------------------
145,083 HRPT Properties Trust 1,677,159
- --------------------------------------------------------------------------------
119,735 iStar Financial Inc. 4,519,996
- --------------------------------------------------------------------------------
10,021 Mack-Cali Realty Corp. 460,164
- --------------------------------------------------------------------------------
16,031,859
- --------------------------------------------------------------------------------
ROAD & RAIL -- 1.1%
- --------------------------------------------------------------------------------
23,557 Burlington Northern Santa Fe
Corp. 1,866,891
- --------------------------------------------------------------------------------
13,131 CSX Corporation 924,948
- --------------------------------------------------------------------------------
30,868 Laidlaw International, Inc. 777,874
- --------------------------------------------------------------------------------
23,213 Norfolk Southern Corp. 1,235,396
- --------------------------------------------------------------------------------
16,032 Union Pacific Corp. 1,490,335
- --------------------------------------------------------------------------------
6,295,444
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 1.3%
- --------------------------------------------------------------------------------
106,484 Freescale Semiconductor Inc.
Cl B(1) 3,130,630
- --------------------------------------------------------------------------------
126,519 Intel Corp. 2,397,535
- --------------------------------------------------------------------------------
83,899 National Semiconductor Corp. 2,000,991
- --------------------------------------------------------------------------------
5,806 Texas Instruments Inc. 175,864
- --------------------------------------------------------------------------------
7,705,020
- --------------------------------------------------------------------------------
SOFTWARE -- 2.0%
- --------------------------------------------------------------------------------
2,853 BMC Software Inc.(1) 68,187
- --------------------------------------------------------------------------------
484,884 Microsoft Corporation 11,297,797
- --------------------------------------------------------------------------------
22,851 Sybase, Inc.(1) 443,309
- --------------------------------------------------------------------------------
11,809,293
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 1.5%
- --------------------------------------------------------------------------------
33,910 AutoNation, Inc.(1) 727,030
- --------------------------------------------------------------------------------
134,193 Barnes & Noble Inc. 4,898,045
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
32,847 Group 1 Automotive, Inc. $ 1,850,600
- --------------------------------------------------------------------------------
53,887 Payless ShoeSource, Inc.(1) 1,464,110
- --------------------------------------------------------------------------------
8,939,785
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 3.9%
- --------------------------------------------------------------------------------
30,208 Countrywide Financial
Corporation 1,150,321
- --------------------------------------------------------------------------------
90,716 IndyMac Bancorp, Inc. 4,159,329
- --------------------------------------------------------------------------------
399,022 Washington Mutual, Inc. 18,187,422
- --------------------------------------------------------------------------------
23,497,072
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES -- 0.9%
- --------------------------------------------------------------------------------
265,021 Sprint Nextel Corp. 5,297,770
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $535,855,955) 597,763,234
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.2%
Repurchase Agreement, Credit Suisse First
Boston, Inc., (collateralized by various U.S.
Treasury obligations, 6.125%-8.875%,
2/15/19-8/15/29, valued at $918,345), in a
joint trading account at 4.50%, dated 6/30/06,
due 7/3/06 (Delivery value $900,338)
(Cost $900,000) 900,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 100.0%
(Cost $536,755,955) 598,663,234
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES(2) 263,582
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $598,926,816
================================================================================
NOTES TO SCHEDULE OF INVESTMENTS
(1) Non-income producing.
(2) Category is less than 0.05% of total net assets.
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $536,755,955) $598,663,234
- ------------------------------------------------------------
Dividends and interest receivable 787,708
- --------------------------------------------------------------------------------
599,450,942
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Disbursements in excess of demand deposit cash 188,501
- ------------------------------------------------------------
Accrued management fees 330,288
- ------------------------------------------------------------
Distribution fees payable 5,337
- --------------------------------------------------------------------------------
524,126
- --------------------------------------------------------------------------------
NET ASSETS $598,926,816
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $529,979,699
- ------------------------------------------------------------
Undistributed net investment income 6,340,452
- ------------------------------------------------------------
Undistributed net realized gain on investment transactions 699,386
- ------------------------------------------------------------
Net unrealized appreciation on investments 61,907,279
- --------------------------------------------------------------------------------
$598,926,816
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $567,815,269
- ------------------------------------------------------------
Shares outstanding 74,943,622
- ------------------------------------------------------------
Net asset value per share $7.58
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $26,080,212
- ------------------------------------------------------------
Shares outstanding 3,444,277
- ------------------------------------------------------------
Net asset value per share $7.57
- --------------------------------------------------------------------------------
CLASS III, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $5,031,335
- ------------------------------------------------------------
Shares outstanding 664,044
- ------------------------------------------------------------
Net asset value per share $7.58
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- ------------------------------------------------------------
Dividends $ 8,935,816
- ------------------------------------------------------------
Interest 16,554
- --------------------------------------------------------------------------------
8,952,370
- --------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------
Management fees 2,557,068
- ------------------------------------------------------------
Distribution fees -- Class II 33,479
- ------------------------------------------------------------
Directors' fees and expenses 6,165
- ------------------------------------------------------------
Other expenses 3,971
- --------------------------------------------------------------------------------
2,600,683
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 6,351,687
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 45,583,142
- ------------------------------------------------------------
Change in net unrealized appreciation (depreciation)
on investments (26,052,867)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 19,530,275
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 25,881,962
================================================================================
See Notes to Financial Statements.
- ------
13
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 6,351,687 $ 14,703,673
- ---------------------------------------------
Net realized gain (loss) 45,583,142 49,734,329
- ---------------------------------------------
Change in net unrealized
appreciation (depreciation) (26,052,867) (27,597,376)
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 25,881,962 36,840,626
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- ---------------------------------------------
Class I (14,163,523) (15,774,720)
- ---------------------------------------------
Class II (426,144) (468,807)
- ---------------------------------------------
Class III (99,168) (73,156)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (14,688,835) (16,316,683)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions (218,055,405) (49,539,619)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (206,862,278) (29,015,676)
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 805,789,094 834,804,770
- --------------------------------------------------------------------------------
End of period $ 598,926,816 $805,789,094
================================================================================
Undistributed net investment income $6,340,452 $14,677,600
================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc. (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Income & Growth Fund (the fund) is
one fund in a series issued by the corporation. The fund is diversified under
the 1940 Act. The fund's investment objective is to seek capital growth by
investing in common stocks. Income is a secondary objective. The following is a
summary of the fund's significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I, Class II, and Class
III. The share classes differ principally in their respective shareholder
servicing and distribution expenses and arrangements. All shares of the fund
represent an equal pro rata interest in the assets of the class to which such
shares belong, and have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes. Income,
non-class specific expenses, and realized and unrealized capital gains and
losses of the fund are allocated to each class of shares based on their relative
net assets.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
Distributions received on securities that represent a return of capital or
capital gain are recorded as a reduction of cost of investments and/or as a
realized gain. The fund estimates the components of distributions received that
may be considered nontaxable distributions or capital gain distributions for
income tax purposes.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
As of December 31, 2005, the fund had accumulated net realized capital loss
carryovers for federal income tax purposes of $30,217,774 expiring in 2010,
which may be used to offset future taxable gains.
REDEMPTION -- The fund may impose a 1% redemption fee on shares held less than
60 days. The fee may not be applicable to all classes. The redemption fee is
recorded as a reduction in the cost of shares redeemed. The redemption fee is
retained by the fund and helps cover transaction costs that long-term investors
may bear when a fund sells securities to meet investor redemptions.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of those directors who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears. For funds with a stepped fee schedule, the
rate of the fee is determined by applying a fee rate calculation formula. This
formula takes into account all of the investment advisor's assets under
management in the fund's investment strategy (strategy assets) to calculate the
appropriate fee rate for the fund. The strategy assets include the fund's assets
and the assets of other clients of the investment advisor that are not in the
American Century family of funds, but that have the same investment team and
investment strategy. The annual management fee schedule for the fund is as
follows:
- ----------------------------------------------
Class I, II & III
- ----------------------------------------------
Strategy Assets
- ----------------------------------------------
First $5 billion 0.700%
- ----------------------------------------------
Over $5 billion 0.650%
- ----------------------------------------------
The effective annual management fee for each class of the fund for the six
months ended June 30, 2006 was 0.70%.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
financial institutions that have entered into sales agreements with respect to
shares of the fund. Fees incurred under the plan during the six months ended
June 30, 2006, are detailed in the Statement of Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term investments,
for the six months ended June 30, 2006, were $263,046,368 and $487,252,387,
respectively.
For the six months ended June 30, 2006, the fund incurred net realized gains of
$24,768,194 from redemptions in kind. A redemption in kind occurs when a fund
delivers securities from its portfolio in lieu of cash as payment to a redeeming
shareholder.
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $546,416,053
================================================================================
Gross tax appreciation of investments $ 78,737,155
- --------------------------------------------------------
Gross tax depreciation of investments (26,489,974)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $ 52,247,181
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales and return of capital dividends.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 300,000,000
================================================================================
Sold 3,485,746 $ 26,402,642
- ------------------------------------------
Issued in reinvestment of distributions 1,898,596 14,163,523
- ------------------------------------------
Redeemed (33,240,379) (255,933,914)
- --------------------------------------------------------------------------------
Net increase (decrease) (27,856,037) $(215,367,749)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 300,000,000
================================================================================
Sold 10,922,551 $ 79,400,168
- ------------------------------------------
Issued in reinvestment of distributions 2,163,885 15,774,720
- ------------------------------------------
Redeemed (20,434,407) (148,333,050)
- --------------------------------------------------------------------------------
Net increase (decrease) (7,347,971) $ (53,158,162)
================================================================================
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 363,917 $ 2,781,339
- ------------------------------------------
Issued in reinvestment of distributions 57,124 426,144
- ------------------------------------------
Redeemed (691,562) (5,268,930)
- --------------------------------------------------------------------------------
Net increase (decrease) (270,521) $(2,061,447)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 946,899 $ 6,870,425
- ------------------------------------------
Issued in reinvestment of distributions 64,308 468,807
- ------------------------------------------
Redeemed (749,560) (5,456,224)
- --------------------------------------------------------------------------------
Net increase (decrease) 261,647 $ 1,883,008
================================================================================
CLASS III
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 61,376 $ 468,319
- ------------------------------------------
Issued in reinvestment of distributions 13,293 99,168
- ------------------------------------------
Redeemed (156,163) (1,193,696)(1)
- --------------------------------------------------------------------------------
Net increase (decrease) (81,494) $ (626,209)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 513,079 $ 3,732,963
- ------------------------------------------
Issued in reinvestment of distributions 10,035 73,156
- ------------------------------------------
Redeemed (280,969) (2,070,584)(2)
- --------------------------------------------------------------------------------
Net increase (decrease) 242,145 $ 1,735,535
================================================================================
(1) Net of redemption fees of $320.
(2) Net of redemption fees of $209.
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
18
VP Income & Growth - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- -------------------------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------
PER-SHARE DATA
- -------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $7.51 $7.32 $6.57 $5.16 $6.46 $7.11
- -------------------------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment
Income (Loss) 0.07(2) 0.13(2) 0.14(2) 0.10(2) 0.08(2) 0.06
- -------------------------
Net Realized and
Unrealized Gain (Loss) 0.14 0.20 0.71 1.38 (1.32) (0.65)
- -------------------------------------------------------------------------------------------------
Total From
Investment Operations 0.21 0.33 0.85 1.48 (1.24) (0.59)
- -------------------------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.14) (0.14) (0.10) (0.07) (0.06) (0.06)
- -------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $7.58 $7.51 $7.32 $6.57 $5.16 $6.46
=================================================================================================
TOTAL RETURN(3) 2.84% 4.63% 12.99% 29.35% (19.37)% (8.35)%
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.70%(4) 0.70% 0.70% 0.70% 0.70% 0.70%
- -------------------------
Ratio of Net Investment
Income (Loss) to Average
Net Assets 1.74%(4) 1.81% 2.08% 1.78% 1.32% 1.05%
- -------------------------
Portfolio Turnover Rate 36% 76% 75% 71% 72% 56%
- -------------------------
Net Assets, End of Period
(in thousands) $567,815 $772,330 $805,904 $826,785 $614,424 $701,274
- -------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
19
VP Income & Growth - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $7.50 $7.30 $6.56 $5.15 $6.22
- --------------------------------------------------------------------------------
Income From
Investment Operations
- -------------------------
Net Investment
Income (Loss)(3) 0.06 0.11 0.13 0.09 0.05
- -------------------------
Net Realized and
Unrealized Gain (Loss) 0.13 0.22 0.69 1.39 (1.12)
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.19 0.33 0.82 1.48 (1.07)
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.12) (0.13) (0.08) (0.07) --
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $7.57 $7.50 $7.30 $6.56 $5.15
================================================================================
TOTAL RETURN(4) 2.58% 4.52% 12.57% 29.19% (17.20)%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.95%(5) 0.95% 0.95% 0.95% 0.95%(5)
- -------------------------
Ratio of Net Investment
Income (Loss) to Average
Net Assets 1.49%(5) 1.56% 1.83% 1.53% 1.42%(5)
- -------------------------
Portfolio Turnover Rate 36% 76% 75% 71% 72%(6)
- -------------------------
Net Assets, End of Period
(in thousands) $26,080 $27,857 $25,218 $14,370 $1,533
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 1, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended December 31, 2002.
See Notes to Financial Statements.
- ------
20
VP Income & Growth - Financial Highlights
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED DECEMBER 31 (EXCEPT AS NOTED)
- --------------------------------------------------------------------------------
CLASS III
- --------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $7.51 $7.32 $6.57 $5.16 $5.63
- --------------------------------------------------------------------------------
Income From
Investment Operations
- ---------------------------
Net Investment
Income (Loss)(3) 0.07 0.13 0.15 0.11 0.04
- ---------------------------
Net Realized and
Unrealized Gain (Loss) 0.14 0.20 0.70 1.37 (0.51)
- --------------------------------------------------------------------------------
Total From
Investment Operations 0.21 0.33 0.85 1.48 (0.47)
- --------------------------------------------------------------------------------
Distributions
- -------------------------
From Net
Investment Income (0.14) (0.14) (0.10) (0.07) --
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $7.58 $7.51 $7.32 $6.57 $5.16
================================================================================
TOTAL RETURN(4) 2.84% 4.63% 12.99% 29.35% (8.35)%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating
Expenses to Average
Net Assets 0.70%(5) 0.70% 0.70% 0.70% 0.70%(5)
- -------------------------
Ratio of Net Investment
Income (Loss) to Average
Net Assets 1.74%(5) 1.81% 2.08% 1.78% 1.63%(5)
- -------------------------
Portfolio Turnover Rate 36% 76% 75% 71% 72%(6)
- -------------------------
Net Assets, End of Period
(in thousands) $5,031 $5,601 $3,683 $1,669 $376
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) June 26, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two
decimal places is made in accordance with SEC guidelines and does not result
in any gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated was
calculated for the year ended December 31, 2002.
- ------
21
See Notes to Financial Statements.
Approval of Management Agreement for VP Income & Growth
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 VP Income & Growth (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)
- ------
22
Approval of Management Agreement for VP Income & Growth
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. If
(continued)
- ------
23
Approval of Management Agreement for VP Income & Growth
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 was
slightly below its benchmark for the one year period and was above its benchmark
for the three year period.
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,
fee breakpoints as the fund increases in
(continued)
- ------
24
Approval of Management Agreement for VP Income & Growth
size, and through reinvestment in its business to provide shareholders
additional content and services.
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 a 15(c) Provider 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 below the median 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. 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
(continued)
- ------
25
Approval of Management Agreement for VP Income & Growth
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 independent 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.
- ------
26
Share Class Information
Three classes of shares are authorized for sale by the fund: Class I, Class II
and Class III.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
CLASS III shares are sold through insurance company separate accounts. Class III
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares. However, Class III shares have a 1.00%
redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. The total expense ratio of Class III shares is the same as the total
expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
27
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
The S&P MIDCAP 400 INDEX, a capitalization-weighted index consisting of 400
domestic stocks, measures the performance of the mid-size company segment of the
U.S. market.
The S&P SMALLCAP 600 INDEX, a capitalization-weighted index consisting of 600
domestic stocks, measures the small company segment of the U.S. market.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
28
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50647 All rights reserved.
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP International Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
VP INTERNATIONAL
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . . . 6
Investments by Country . . . . . . . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .12
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .13
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .15
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
OTHER INFORMATION
Approval of Management Agreement for VP International . . . . . . . . . . .25
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .30
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .31
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
BY ENRIQUE CHANG, WHO JOINED AMERICAN CENTURY INVESTMENTS IN MARCH AS SENIOR
VICE PRESIDENT AND CHIEF INVESTMENT OFFICER OF THE INTERNATIONAL EQUITY
DISCIPLINE.
From emerging markets to developed countries, international equities delivered
solid returns during the six months ended June 30, 2006.
Indeed, many of the world's equity markets rose to levels not seen in nearly
five years, and I wanted to take a few moments to share my perspective on the
investment environment and economic issues that played a role in their
performance.
Perhaps the most striking aspect of the recent increase is the remarkable
resiliency markets demonstrated in the face of record prices for oil and other
commodities, rising interest rates, and continued geopolitical tension in the
Middle East and elsewhere.
Equities, however, weren't entirely immune to those headwinds. After rising to
multi-year highs early in May, many exchanges retreated as concern intensified
that central banks will increase borrowing costs to control inflation--and slow
consumer spending, corporate profits and the world's economy in the process.
While interest rates and other forces can exert a powerful affect on markets, I
believe there are a variety of hopeful signs on both the economic and investment
horizon.
Europe's economic upturn looks set to continue through 2006, bolstered by strong
global demand for European goods. Increased capital spending by companies
worldwide has resulted in strong order flows for manufacturers on the Continent.
European companies are also benefiting from a changing relationship with labor,
with a number of businesses working with labor unions to control costs and
increase productivity.
In Asia, Japan's emergence from a long period of economic weakness stands out as
one of the most welcome developments of the past year. Japan, the world's
second-largest economy behind the United States, is now in the midst of its
longest economic expansion in years, underpinned by strong domestic demand. The
country's turnaround, now considered by many to be sustainable, could play a
major role in the region's growth this year and perhaps well into the future.
And, of course, China's rise continues to be remarkable. In just a few years
since joining the World Trade Organization, China has emerged as a global engine
for growth. Last year, the country's gross domestic product grew nearly 10%, and
is expected to match that pace in 2006. While countless questions remain about
China's evolution from socialism to capitalism, clearly the country is making
history on several fronts.
In short, I believe the economic, political and demographic changes now under
way around the world are creating opportunity for investors. You can be assured
that our investment team is dedicated to searching for new candidates to help
drive investment performance. Thank you for the opportunity to share my thoughts
with you. As always, it is a privilege to have you as an American Century
investor.
- ------
2
VP International - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
--------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------
CLASS I 7.73% 23.48% 4.28% 7.27% 7.11% 5/1/94
- --------------------------------------------------------------------------------
MSCI EAFE
INDEX 10.16% 26.56% 10.02% 6.39% 6.53%(2) --
- --------------------------------------------------------------------------------
MSCI EAFE
GROWTH
INDEX 9.29% 25.98% 8.12% 3.89% 4.31%(2) --
- --------------------------------------------------------------------------------
Class II 7.70% 23.30% -- -- 5.07% 8/15/01
- --------------------------------------------------------------------------------
Class III 7.73% 23.48% -- -- 8.73% 5/2/02
- --------------------------------------------------------------------------------
Class IV 7.70% 23.30% -- -- 16.17% 5/3/04
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Since 4/30/94, the date nearest Class I's inception for which data are
available.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488. International
investing involves special risks, such as political instability and currency
fluctuations.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
- ------
3
VP International - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made June 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended June 30
- ----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- ----------------------------------------------------------------------------------------------------
Class I 26.67% 25.12% 1.74% 43.62% -29.33% -15.28% -12.51% 21.31% 11.04% 23.48%
- ----------------------------------------------------------------------------------------------------
MSCI EAFE Index 12.84% 6.10% 7.62% 17.16% -23.60% -9.49% -6.46% 32.37% 13.65% 26.56%
- ----------------------------------------------------------------------------------------------------
MSCI EAFE
Growth Index 10.76% 5.87% 5.27% 20.47% -33.30% -9.46% -8.01% 26.42% 11.37% 25.98%
- ----------------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488. International
investing involves special risks, such as political instability and currency
fluctuations.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
- ------
4
VP International - Portfolio Commentary
PORTFOLIO MANAGERS: KEITH CREVELING AND MICHAEL PERELSTEIN
VP International advanced 7.73%* during the six months ended June 30, 2006,
while its benchmark, the Morgan Stanley Capital International EAFE Index,
returned 10.16%.
The gains came during a period in which many of the world's markets demonstrated
their resiliency in the face of rising interest rates in the U.S. and Europe,
and continued high energy prices. Equities, however, weren't entirely immune to
those headwinds. After rising to multi-year highs early in May, many exchanges
retreated as concern intensified that central banks will increase borrowing
costs to control inflation--and slow consumer spending, corporate profits and
the world's economy in the process.
Against that backdrop, all but one sector in which VP International was invested
contributed to the portfolio's total return and nine of our top-10 holdings on
average during the period advanced. The portfolio, which invests primarily in
large growth companies, also achieved strong performance despite an investment
environment that favored the value style of investing over growth. Currency
played a role during the six months, as the movement of the dollar versus other
currencies increased the portfolio's return.
ENERGY BOOSTS PORTFOLIO
Effective security selection led to our energy holdings advancing and
contributing most to relative performance. For example, we had an overweight
stake in the energy equipment and services industry that includes positions in
Norway's Aker Kvaerner, a global provider of deep-water drilling rigs, and
Italian oilfield service contractor Saipem. Aker made the second-largest
contribution to our performance against the index during the period, and Saipem
was among the top-10 contributors to relative performance.
Conversely, we avoided companies that performed poorly in the oil and gas
industry, while taking an overweight position in BG Group, a global natural gas
company based in the United Kingdom. BG reported during the period that
first-quarter 2006 profits more than doubled to $1.06 billion from the same
period a year earlier on increased sales to Europe and Asia and significant
price increases in the wholesale gas market. BG was also among the 10 companies
contributing most to relative performance.
TOP TEN HOLDINGS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Roche Holding AG 2.7% 1.6%
- --------------------------------------------------------------------------------
GlaxoSmithKline plc 2.2% 2.6%
- --------------------------------------------------------------------------------
Total SA 1.8% 2.6%
- --------------------------------------------------------------------------------
BHP Billiton Ltd. 1.7% 1.6%
- --------------------------------------------------------------------------------
Man Group plc 1.7% 1.3%
- --------------------------------------------------------------------------------
Reckitt Benckiser plc 1.7% 1.0%
- --------------------------------------------------------------------------------
Toyota Motor Corp. 1.7% --
- --------------------------------------------------------------------------------
Novartis AG 1.6% 1.6%
- --------------------------------------------------------------------------------
SAP AG 1.5% --
- --------------------------------------------------------------------------------
ORIX Corp. 1.5% 1.6%
- --------------------------------------------------------------------------------
*All fund returns referenced in this commentary are for Class I shares.
Total returns for periods less than one year are not annualized. (continued)
- ------
5
VP International - Portfolio Commentary
STRENGTH AMONG FINANCIALS
VP International also benefited from financials, the portfolio's largest sector
stake. Financials contributed most to total return. The portfolio's holdings
among commercial banks were the biggest source of return, led by Italy's Banco
Popolare di Verona, which advanced on better-than-anticipated fee and interest
income.
Our holdings in most of the financial sector's industries--capital markets,
insurance, diversified financial services, real estate and thrifts--also
contributed to return. VP International's stake in Man Group plc, an asset
manager in the United Kingdom, made the largest contribution to absolute
performance. Man Group reported that earnings for the year ended March 31, 2006,
climbed 15% to about $1 billion as its assets under management increased. Man
Group also made the largest contribution to relative return.
The financial sector, however, underperformed the index, partly due to Turkey's
Garanti Bankasi, which was among the period's biggest detractors. The bank
retreated as investors worried about slowing growth due to unexpected increases
in Turkish interest rates.
MATERIALS LAG INDEX
VP International's position in the materials sector also slowed relative
performance. Holdings in the sector's chemicals industry detracted most, mostly
because of a pullback that was pronounced among chemical companies in Japan,
including Nitto Denko Corp. and JSR Corp. Chemical companies weren't the only
ones impacted by the decline of Japanese markets late in the period. Of the 10
companies that detracted most from our relative performance, four were from
Japan.
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Foreign Common Stocks 98.1% 99.0%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 1.7% 0.9%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities* 0.2% 0.1%
- --------------------------------------------------------------------------------
*Includes collateral received for securities lending and other assets and
liabilities.
INVESTMENTS BY COUNTRY
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Japan 23.2% 23.5%
- --------------------------------------------------------------------------------
France 14.7% 15.4%
- --------------------------------------------------------------------------------
United Kingdom 12.4% 15.2%
- --------------------------------------------------------------------------------
Switzerland 9.7% 10.0%
- --------------------------------------------------------------------------------
Germany 7.3% 5.0%
- --------------------------------------------------------------------------------
Italy 4.2% 2.7%
- --------------------------------------------------------------------------------
Australia 3.6% 3.5%
- --------------------------------------------------------------------------------
Netherlands 3.4% 3.8%
- --------------------------------------------------------------------------------
Greece 3.0% 3.9%
- --------------------------------------------------------------------------------
Norway 2.7% 1.7%
- --------------------------------------------------------------------------------
Ireland 2.5% 2.8%
- --------------------------------------------------------------------------------
Other Countries 11.4% 11.5%
- --------------------------------------------------------------------------------
Cash and equivalents(+) 1.9% 1.0%
- --------------------------------------------------------------------------------
(+)Includes temporary cash investments, collateral received for securities
lending, and other assets and liabilities.
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
(continued)
- ------
7
Shareholder Fee Example (Unaudited)
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP INTERNATIONAL SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,077.30 $6.28 1.22%
- --------------------------------------------------------------------------------
Class II $1,000 $1,077.00 $7.06 1.37%
- --------------------------------------------------------------------------------
Class III $1,000 $1,077.30 $6.28 1.22%
- --------------------------------------------------------------------------------
Class IV $1,000 $1,077.00 $7.06 1.37%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,018.74 $6.11 1.22%
- --------------------------------------------------------------------------------
Class II $1,000 $1,018.00 $6.85 1.37%
- --------------------------------------------------------------------------------
Class III $1,000 $1,018.74 $6.11 1.22%
- --------------------------------------------------------------------------------
Class IV $1,000 $1,018.00 $6.85 1.37%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
8
VP International - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 98.1%
AUSTRALIA -- 3.6%
- --------------------------------------------------------------------------------
658,919 BHP Billiton Ltd.(1) $ 14,206,326
- --------------------------------------------------------------------------------
45,023 CSL Ltd. 1,799,139
- --------------------------------------------------------------------------------
269,550 National Australia Bank Ltd. 7,045,957
- --------------------------------------------------------------------------------
114,690 Rio Tinto Ltd.(1) 6,633,717
- --------------------------------------------------------------------------------
29,685,139
- --------------------------------------------------------------------------------
AUSTRIA -- 0.8%
- --------------------------------------------------------------------------------
114,578 Erste Bank der
Oesterreichischen
Sparkassen AG(1) 6,446,227
- --------------------------------------------------------------------------------
BELGIUM -- 1.3%
- --------------------------------------------------------------------------------
97,680 KBC Groupe(1) 10,478,987
- --------------------------------------------------------------------------------
CANADA -- 0.7%
- --------------------------------------------------------------------------------
76,310 Suncor Energy Inc. 6,169,541
- --------------------------------------------------------------------------------
FRANCE -- 14.7%
- --------------------------------------------------------------------------------
143,290 Accor SA(1) 8,719,333
- --------------------------------------------------------------------------------
114,080 Alstom RGPT(1)(2) 10,422,297
- --------------------------------------------------------------------------------
297,895 Axa SA(1) 9,773,982
- --------------------------------------------------------------------------------
88,550 Essilor International SA
Cie Generale D'Optique 8,910,765
- --------------------------------------------------------------------------------
85,620 Groupe Danone(1) 10,876,640
- --------------------------------------------------------------------------------
38,830 Pernod-Ricard SA(1) 7,695,747
- --------------------------------------------------------------------------------
55,560 PPR SA(1) 7,082,867
- --------------------------------------------------------------------------------
84,750 Schneider Electric SA(1) 8,831,795
- --------------------------------------------------------------------------------
75,780 Societe Generale(1) 11,143,051
- --------------------------------------------------------------------------------
226,740 Total SA(1) 14,916,441
- --------------------------------------------------------------------------------
3,280 Vallourec(1) 3,942,334
- --------------------------------------------------------------------------------
198,600 Veolia Environnement(1) 10,261,711
- --------------------------------------------------------------------------------
87,230 Vinci SA(1) 8,984,276
- --------------------------------------------------------------------------------
121,561,239
- --------------------------------------------------------------------------------
GERMANY -- 7.3%
- --------------------------------------------------------------------------------
123,200 Adidas-Salomon AG 5,888,459
- --------------------------------------------------------------------------------
136,880 Bayerische Motoren Werke AG 6,836,344
- --------------------------------------------------------------------------------
105,080 Continental AG(1) 10,738,095
- --------------------------------------------------------------------------------
43,880 Deutsche Boerse AG(1) 5,975,413
- --------------------------------------------------------------------------------
66,691 Fresenius Medical Care AG 7,664,467
- --------------------------------------------------------------------------------
126,150 Hypo Real Estate Holding AG 7,660,217
- --------------------------------------------------------------------------------
43,000 MAN AG 3,113,078
- --------------------------------------------------------------------------------
60,820 SAP AG 12,831,636
- --------------------------------------------------------------------------------
60,707,709
- --------------------------------------------------------------------------------
GREECE -- 3.0%
- --------------------------------------------------------------------------------
211,480 Greek Organization
of Football Prognostics SA 7,652,572
- --------------------------------------------------------------------------------
343,330 Hellenic Telecommunications
Organization SA(2) 7,559,561
- --------------------------------------------------------------------------------
244,500 National Bank of Greece SA 9,654,012
- --------------------------------------------------------------------------------
24,866,145
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
HONG KONG -- 0.4%
- --------------------------------------------------------------------------------
1,840,400 Li & Fung Ltd. $ 3,720,397
- --------------------------------------------------------------------------------
INDIA -- 0.7%
- --------------------------------------------------------------------------------
118,059 Bharti Airtel Ltd.(2) 952,089
- --------------------------------------------------------------------------------
122,800 Tata Consultancy Services Ltd. 4,645,550
- --------------------------------------------------------------------------------
5,597,639
- --------------------------------------------------------------------------------
IRELAND -- 2.5%
- --------------------------------------------------------------------------------
483,750 Anglo Irish Bank Corp. plc 7,546,273
- --------------------------------------------------------------------------------
424,730 Bank of Ireland 7,575,980
- --------------------------------------------------------------------------------
112,560 Ryanair Holdings plc ADR(1)(2) 5,934,163
- --------------------------------------------------------------------------------
21,056,416
- --------------------------------------------------------------------------------
ITALY -- 4.2%
- --------------------------------------------------------------------------------
347,490 Banco Popolare di Verona
e Novara Scrl 9,308,464
- --------------------------------------------------------------------------------
283,420 ENI SpA 8,345,957
- --------------------------------------------------------------------------------
370,710 Luxottica Group SpA(1) 10,067,937
- --------------------------------------------------------------------------------
316,830 Saipem SpA 7,206,990
- --------------------------------------------------------------------------------
34,929,348
- --------------------------------------------------------------------------------
JAPAN -- 23.2%
- --------------------------------------------------------------------------------
904,000 Bank of Yokohama Ltd. (The) 6,989,996
- --------------------------------------------------------------------------------
1,170 East Japan Railway Company 8,689,003
- --------------------------------------------------------------------------------
97,800 Eisai Co. Ltd.(1) 4,400,594
- --------------------------------------------------------------------------------
250,000 Hoya Corp. 8,889,958
- --------------------------------------------------------------------------------
153,000 JSR Corp. 3,863,265
- --------------------------------------------------------------------------------
268,000 JTEKT Corp. 5,174,785
- --------------------------------------------------------------------------------
27,300 Keyence Corp.(1) 6,969,604
- --------------------------------------------------------------------------------
366,000 Komatsu Ltd. 7,274,912
- --------------------------------------------------------------------------------
189,000 Leopalace21 Corp. 6,522,651
- --------------------------------------------------------------------------------
530,000 Matsushita Electric
Industrial Co., Ltd. 11,182,998
- --------------------------------------------------------------------------------
410,000 Matsushita Electric Works, Ltd. 4,552,968
- --------------------------------------------------------------------------------
436,000 Mitsubishi Electric Corp. 3,493,181
- --------------------------------------------------------------------------------
600 Mitsubishi UFJ Financial
Group, Inc. 8,387,573
- --------------------------------------------------------------------------------
54,600 Murata Manufacturing Co. Ltd. 3,544,432
- --------------------------------------------------------------------------------
183,000 NGK Insulators Ltd.(1) 2,139,304
- --------------------------------------------------------------------------------
172,500 Nikko Cordial Corp. 2,206,457
- --------------------------------------------------------------------------------
68,200 Nitto Denko Corp. 4,856,319
- --------------------------------------------------------------------------------
52,380 ORIX Corp. 12,791,236
- --------------------------------------------------------------------------------
225,700 Sega Sammy Holdings Inc. 8,361,085
- --------------------------------------------------------------------------------
658,000 Sekisui Chemical Co. Ltd. 5,679,997
- --------------------------------------------------------------------------------
153,600 Shin-Etsu Chemical Co., Ltd. 8,347,316
- --------------------------------------------------------------------------------
648,000 Sumitomo Heavy
Industries Ltd. 5,989,987
- --------------------------------------------------------------------------------
680 Sumitomo Mitsui Financial
Group Inc. 7,188,851
- --------------------------------------------------------------------------------
259,000 Sumitomo Realty
& Development Co. Ltd. 6,381,373
- --------------------------------------------------------------------------------
1,501,000 Taisei Corp. 5,481,788
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
9
VP International - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
986,000 Toray Industries Inc. $ 8,554,436
- --------------------------------------------------------------------------------
263,100 Toyota Motor Corp. 13,769,430
- --------------------------------------------------------------------------------
102,600 Yamada Denki Co. Ltd.(1) 10,461,247
- --------------------------------------------------------------------------------
192,144,746
- --------------------------------------------------------------------------------
MEXICO -- 1.6%
- --------------------------------------------------------------------------------
307,100 America Movil SA
de CV Series L ADR 10,214,146
- --------------------------------------------------------------------------------
55,080 Cemex SA de CV ADR 3,137,908
- --------------------------------------------------------------------------------
13,352,054
- --------------------------------------------------------------------------------
NETHERLANDS -- 3.4%
- --------------------------------------------------------------------------------
325,020 ASML Holding N.V.(2) 6,582,895
- --------------------------------------------------------------------------------
268,210 ING Groep N.V. CVA 10,538,753
- --------------------------------------------------------------------------------
240,120 Royal Numico N.V.(1) 10,773,663
- --------------------------------------------------------------------------------
27,895,311
- --------------------------------------------------------------------------------
NORWAY -- 2.7%
- --------------------------------------------------------------------------------
101,859 Aker Kvaerner ASA 9,550,559
- --------------------------------------------------------------------------------
128,190 Statoil ASA 3,632,582
- --------------------------------------------------------------------------------
785,050 Telenor ASA(1) 9,484,629
- --------------------------------------------------------------------------------
22,667,770
- --------------------------------------------------------------------------------
PEOPLE'S REPUBLIC OF CHINA -- 0.5%
- --------------------------------------------------------------------------------
782,000 China Mobile Hong Kong Ltd. 4,470,614
- --------------------------------------------------------------------------------
SINGAPORE -- 0.6%
- --------------------------------------------------------------------------------
491,000 Keppel Corp. Ltd. 4,558,787
- --------------------------------------------------------------------------------
SOUTH KOREA -- 1.1%
- --------------------------------------------------------------------------------
14,470 Samsung Electronics 9,194,320
- --------------------------------------------------------------------------------
SPAIN -- 1.7%
- --------------------------------------------------------------------------------
341,307 Cintra Concesiones
de Infraestructuras
de Transporte SA(1) 4,460,133
- --------------------------------------------------------------------------------
218,400 Inditex SA 9,209,901
- --------------------------------------------------------------------------------
13,670,034
- --------------------------------------------------------------------------------
SWEDEN -- 0.9%
- --------------------------------------------------------------------------------
267,730 Atlas Copco AB A Shares 7,437,151
- --------------------------------------------------------------------------------
SWITZERLAND -- 9.7%
- --------------------------------------------------------------------------------
707,960 ABB Ltd. 9,200,674
- --------------------------------------------------------------------------------
129,890 Adecco SA(1) 7,675,873
- --------------------------------------------------------------------------------
204,700 Compagnie Financiere
Richemont AG Cl A 9,369,570
- --------------------------------------------------------------------------------
92,810 Lonza Group AG 6,360,798
- --------------------------------------------------------------------------------
246,470 Novartis AG(1) 13,336,315
- --------------------------------------------------------------------------------
135,856 Roche Holding AG(1) 22,441,863
- --------------------------------------------------------------------------------
111,476 UBS AG 12,209,558
- --------------------------------------------------------------------------------
80,594,651
- --------------------------------------------------------------------------------
TAIWAN (REPUBLIC OF CHINA) -- 1.0%
- --------------------------------------------------------------------------------
1,327,000 Hon Hai Precision
Industry Co., Ltd. 8,197,177
- --------------------------------------------------------------------------------
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
TURKEY -- 0.1%
- --------------------------------------------------------------------------------
451,865 Turkiye Garanti Bankasi AS $ 1,125,023
- --------------------------------------------------------------------------------
UNITED KINGDOM -- 12.4%
- --------------------------------------------------------------------------------
554,960 Amvescap plc 5,077,467
- --------------------------------------------------------------------------------
925,100 BG Group plc 12,347,739
- --------------------------------------------------------------------------------
1,052,780 BP plc 12,262,631
- --------------------------------------------------------------------------------
256,850 British American Tobacco plc 6,462,754
- --------------------------------------------------------------------------------
846,213 Carphone Warehouse Group plc 4,963,458
- --------------------------------------------------------------------------------
664,220 GlaxoSmithKline plc 18,541,179
- --------------------------------------------------------------------------------
296,580 Man Group plc 13,960,540
- --------------------------------------------------------------------------------
561,530 Marks & Spencer Group plc 6,089,365
- --------------------------------------------------------------------------------
373,822 Reckitt Benckiser plc 13,950,095
- --------------------------------------------------------------------------------
363,300 Standard Chartered plc 8,859,318
- --------------------------------------------------------------------------------
102,514,546
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $625,429,525) 813,040,971
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 1.7%
$13,800,000 FHLB Discount Notes,
4.90%, 7/3/06(3)
(Cost $13,796,243) 13,800,000
- --------------------------------------------------------------------------------
COLLATERAL RECEIVED
FOR SECURITIES LENDING(4) -- 20.6%
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Repurchase Agreement, Morgan Stanley,
(collateralized by various U.S. Government
Agency obligations in a pooled account
at the lending agent), 5.25%,
dated 6/30/06, due 7/3/06
(Delivery value $150,065,625) 150,000,000
- --------------------------------------------------------------------------------
Repurchase Agreement, UBS AG,
(collateralized by various U.S. Government
Agency obligations in a pooled account
at the lending agent), 5.31%,
dated 6/30/06, due 7/3/06
(Delivery value $20,728,406) 20,719,238
- --------------------------------------------------------------------------------
TOTAL COLLATERAL RECEIVED
FOR SECURITIES LENDING
(Cost $170,719,238) 170,719,238
- --------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES -- 120.4%
(Cost $809,945,006) 997,560,209
- --------------------------------------------------------------------------------
OTHER ASSETS
AND LIABILITIES -- (20.4)% (168,805,264)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 828,754,945
================================================================================
See Notes to Financial Statements. (continued)
- ------
10
VP International - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
MARKET SECTOR DIVERSIFICATION
(AS A % OF NET ASSETS)
- --------------------------------------------------------------------------------
Financials 23.5%
- --------------------------------------------------------------------------------
Consumer Discretionary 16.9%
- --------------------------------------------------------------------------------
Industrials 14.2%
- --------------------------------------------------------------------------------
Health Care 9.3%
- --------------------------------------------------------------------------------
Energy 9.0%
- --------------------------------------------------------------------------------
Information Technology 7.3%
- --------------------------------------------------------------------------------
Materials 6.8%
- --------------------------------------------------------------------------------
Consumer Staples 6.0%
- --------------------------------------------------------------------------------
Telecommunication Services 3.9%
- --------------------------------------------------------------------------------
Utilities 1.2%
- --------------------------------------------------------------------------------
Cash and cash equivalents* 1.9%
- --------------------------------------------------------------------------------
*Includes temporary cash investments, collateral received for securities
lending, and other assets and liabilities.
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CVA = Certificaten Van Aandelen
FHLB = Federal Home Loan Bank
(1) Security, or a portion thereof, was on loan as of June 30, 2006.
(2) Non-income producing.
(3) The rate indicated is the yield to maturity at purchase.
(4) Investments represent purchases made by the lending agent with cash
collateral received through securities lending transactions. (See Note 5 in
Notes to Financial Statements.)
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $639,225,768) --
including $161,688,864 of securities on loan $826,840,971
- ---------------------------------------------------------------
Investments made with cash collateral received
for securities on loan, at value (cost of $170,719,238) 170,719,238
- --------------------------------------------------------------------------------
Total investment securities, at value (cost of $809,945,006) 997,560,209
- ---------------------------------------------------------------
Foreign currency holdings, at value (cost of $13,603) 13,603
- ---------------------------------------------------------------
Receivable for investments sold 9,513,875
- ---------------------------------------------------------------
Dividends and interest receivable 850,033
- --------------------------------------------------------------------------------
1,007,937,720
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for collateral received for securities on loan 170,719,238
- ---------------------------------------------------------------
Disbursements in excess of demand deposit cash 123,827
- ---------------------------------------------------------------
Payable for investments purchased 7,505,470
- ---------------------------------------------------------------
Accrued management fees 804,112
- ---------------------------------------------------------------
Distribution fees payable 30,128
- --------------------------------------------------------------------------------
179,182,775
- --------------------------------------------------------------------------------
NET ASSETS $828,754,945
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $763,151,101
- ---------------------------------------------------------------
Accumulated net investment loss (3,357,398)
- ---------------------------------------------------------------
Accumulated net realized loss on investment
and foreign currency transactions (118,632,772)
- ---------------------------------------------------------------
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 187,594,014
- --------------------------------------------------------------------------------
$828,754,945
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $564,078,450
- ---------------------------------------------------------------
Shares outstanding 64,657,835
- ---------------------------------------------------------------
Net asset value per share $8.72
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $140,654,879
- ---------------------------------------------------------------
Shares outstanding 16,138,880
- ---------------------------------------------------------------
Net asset value per share $8.72
- --------------------------------------------------------------------------------
CLASS III, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $112,361,123
- ---------------------------------------------------------------
Shares outstanding 12,878,749
- ---------------------------------------------------------------
Net asset value per share $8.72
- --------------------------------------------------------------------------------
CLASS IV, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $11,660,493
- ---------------------------------------------------------------
Shares outstanding 1,337,198
- ---------------------------------------------------------------
Net asset value per share $8.72
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- ---------------------------------------------------------------
Dividends (net of foreign taxes withheld of $1,003,196) $ 9,664,029
- ---------------------------------------------------------------
Securities lending income 311,040
- ---------------------------------------------------------------
Interest 289,239
- --------------------------------------------------------------------------------
10,264,308
- --------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------
Management fees 5,079,808
- ---------------------------------------------------------------
Distribution fees:
- ---------------------------------------------------------------
Class II 170,784
- ---------------------------------------------------------------
Class IV 14,512
- ---------------------------------------------------------------
Directors' fees and expenses 7,741
- ---------------------------------------------------------------
Other expenses 5,934
- --------------------------------------------------------------------------------
5,278,779
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 4,985,529
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- ---------------------------------------------------------------
Investment transactions 49,772,270
- ---------------------------------------------------------------
Foreign currency transactions (2,891,865)
- --------------------------------------------------------------------------------
46,880,405
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
- ---------------------------------------------------------------
Investments (29,157,921)
- ---------------------------------------------------------------
Translation of assets and liabilities in foreign currencies 38,387,190
- --------------------------------------------------------------------------------
9,229,269
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 56,109,674
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $61,095,203
================================================================================
See Notes to Financial Statements.
- ------
13
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 4,985,529 $ 8,286,007
- -----------------------------------------------
Net realized gain (loss) 46,880,405 67,874,064
- -----------------------------------------------
Change in net unrealized
appreciation (depreciation) 9,229,269 17,869,169
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 61,095,203 94,029,240
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- -----------------------------------------------
Class I (9,536,031) (6,233,902)
- -----------------------------------------------
Class II (1,997,543) (885,427)
- -----------------------------------------------
Class III (1,849,972) (1,114,017)
- -----------------------------------------------
Class IV (169,198) (73,373)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (13,552,744) (8,306,719)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions (17,655,453) (9,260,193)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 29,887,006 76,462,328
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 798,867,939 722,405,611
- --------------------------------------------------------------------------------
End of period $828,754,945 $798,867,939
================================================================================
Accumulated undistributed
net investment income (loss) $(3,357,398) $5,209,817
================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc. (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP International Fund (the fund) is one
fund in a series issued by the corporation. The fund is diversified under the
1940 Act. The fund's investment objective is to seek capital growth. The fund
pursues its investment objective by investing primarily in stocks of growing
foreign companies that management believes will increase in value over time. The
fund will invest primarily in securities of issuers located in developed
markets. The following is a summary of the fund's significant accounting
policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I, Class II, Class III
and Class IV. The share classes differ principally in their respective
shareholder servicing and distribution expenses and arrangements. All shares of
the fund represent an equal pro rata interest in the assets of the class to
which such shares belong, and have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except for class specific
expenses and exclusive rights to vote on matters affecting only individual
classes. Income, non-class specific expenses, and realized and unrealized
capital gains and losses of the fund are allocated to each class of shares based
on their relative net assets.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes. Certain countries impose
taxes on realized gains on the sale of securities registered in their country.
The fund records the foreign tax expense, if any, on an accrual basis. The
realized and unrealized tax provision reduces the net realized gain (loss) on
investment transactions and net unrealized appreciation (depreciation) on
investments, respectively.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
SECURITIES ON LOAN -- The fund may lend portfolio securities through its lending
agent to certain approved borrowers in order to earn additional income. The fund
continues to recognize any gain or loss in the market price of the securities
loaned and records any interest earned or dividends declared.
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
investment transactions and unrealized appreciation (depreciation) on
investments, respectively.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dates of such transactions. Realized and unrealized gains and losses from
foreign currency translations arise from changes in currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on foreign currency transactions and unrealized appreciation
(depreciation) on translation of assets and liabilities in foreign currencies,
respectively. Certain countries may impose taxes on the contract amount of
purchases and sales of foreign currency contracts in their currency. The fund
records the foreign tax expense, if any, as a reduction to the net realized gain
(loss) on foreign currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) has
determined are creditworthy pursuant to criteria adopted by the Board of
Directors. Each repurchase agreement is recorded at cost. The fund requires that
the collateral, represented by securities, received in a repurchase transaction
be transferred to the custodian in a manner sufficient to enable the fund to
obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the securities transferred to ensure
the value, including accrued interest, of the securities under each repurchase
agreement is equal to or greater than amounts owed to the fund under each
repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
As of December 31, 2005, the fund had accumulated net realized capital loss
carryovers for federal income tax purposes of $164,129,068, which may be used to
offset future taxable gains. Capital loss carryovers of $43,390,901,
$120,156,271 and $581,896 expire in 2009, 2010 and 2011, respectively.
The fund has elected to treat $72,761 of net foreign currency losses incurred in
the two-month period ended December 31, 2005, as having been incurred in the
following fiscal year for federal income tax purposes.
REDEMPTION -- The fund may impose a 1.00% redemption fee on shares held less
than 60 days. The fee may not be applicable to all classes. The redemption fee
is recorded as a reduction in the cost of shares redeemed. The redemption fee is
retained by the fund and helps cover transaction costs that long-term investors
may bear when a fund sells securities to meet investor redemptions.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACGIM (the investment advisor), under which ACGIM provides the fund with
investment advisory and management services in exchange for a single, unified
management fee (the fee) per class. The Agreement provides that all expenses of
the fund, except brokerage commissions, taxes, interest, fees and expenses of
those directors who are not considered "interested persons" as defined in the
1940 Act (including counsel fees) and extraordinary expenses, will be paid by
ACGIM. 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. For funds
with a stepped fee schedule, the rate of the fee is determined by applying a fee
rate calculation formula. This formula takes into account all of the investment
advisor's assets under management in the fund's investment strategy (strategy
assets) to calculate the appropriate fee rate for the fund. The strategy assets
include the fund's assets and the assets of other clients of the investment
advisor that are not in the American Century family of funds, but that have the
same investment team and investment strategy.
The annual management fee schedule for each class of the fund is as follows:
- --------------------------------------------------------------------------------
CLASS I & III CLASS II & IV
- --------------------------------------------------------------------------------
STRATEGY ASSETS
- --------------------------------------------------------------------------------
First $250 million 1.50% 1.40%
- --------------------------------------------------------------------------------
Next $250 million 1.20% 1.10%
- --------------------------------------------------------------------------------
Over $500 million 1.10% 1.00%
- --------------------------------------------------------------------------------
The effective annual management fee for each class of the fund for the six
months ended June 30, 2006 was 1.22%, 1.12%, 1.22%, and 1.12% for Class I, Class
II, Class III and Class IV, respectively.
ACGIM has entered into a Subadvisory Agreement with ACIM (the subadvisor) on
behalf of the fund. The subadvisor makes investment decisions for the cash
portion of the fund in accordance with the fund's investments objectives,
policies and restrictions under the supervision of ACGIM and the Board of
Directors. ACGIM pays all costs associated with retaining ACIM as the subadvisor
of the fund.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan for Class II and a separate Master Distribution Plan for Class IV
(collectively, the plans), pursuant to Rule 12b-1 of the 1940 Act. The plans
provide that Class II and Class IV will pay American Century Investment
Services, Inc. (ACIS) an annual distribution fee equal to 0.25%. The fee is
computed and accrued daily based on 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. Fees
incurred under the plan during the six months ended June 30, 2006, are detailed
in the Statement of Operations.
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACGIM, the corporation's subadvisor, ACIM, the distributor of the
corporation, ACIS, and the corporation's transfer agent, American Century
Services, LLC.
The fund has a bank line of credit agreement and securities lending 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.
3. INVESTMENT TRANSACTIONS
Purchases and sales on investment securities, excluding short-term investments,
for the six months ended June 30, 2006, were $320,644,263 and $354,352,567,
respectively.
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $819,572,929
================================================================================
Gross tax appreciation of investments $190,220,944
- ---------------------------------------------------------------
Gross tax depreciation of investments (12,233,664)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $177,987,280
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales and investments in passive foreign investment companies.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 300,000,000
================================================================================
Sold 4,287,982 $ 37,673,809
- --------------------------------------------
Issued in reinvestment of distributions 1,124,532 9,536,031
- --------------------------------------------
Redeemed (8,525,779) (74,228,671)
- --------------------------------------------------------------------------------
Net increase (decrease) (3,113,265) $(27,018,831)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 300,000,000
================================================================================
Sold 10,761,399 $ 79,879,718
- --------------------------------------------
Issued in reinvestment of distributions 832,297 6,233,902
- --------------------------------------------
Redeemed (16,969,722) (125,983,455)
- --------------------------------------------------------------------------------
Net increase (decrease) (5,376,026) $ (39,869,835)
================================================================================
(continued)
- ------
18
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,314,953 $11,532,301
- --------------------------------------------
Issued in reinvestment of distributions 235,837 1,997,543
- --------------------------------------------
Redeemed (417,935) (3,670,452)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,132,855 $ 9,859,392
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 4,247,196 $31,358,782
- --------------------------------------------
Issued in reinvestment of distributions 118,214 885,427
- --------------------------------------------
Redeemed (497,195) (3,697,624)
- --------------------------------------------------------------------------------
Net increase (decrease) 3,868,215 $28,546,585
================================================================================
CLASS III
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 871,114 $ 7,633,181
- --------------------------------------------
Issued in reinvestment of distributions 218,157 1,849,972
- --------------------------------------------
Redeemed (1,217,060) (10,640,789)(1)
- --------------------------------------------------------------------------------
Net increase (decrease) (127,789) $ (1,157,636)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,995,829 $ 14,646,144
- --------------------------------------------
Issued in reinvestment of distributions 148,734 1,114,017
- --------------------------------------------
Redeemed (2,238,828) (16,660,315)(2)
- --------------------------------------------------------------------------------
Net increase (decrease) (94,265) $ (900,154)
================================================================================
CLASS IV
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 204,989 $ 1,806,266
- --------------------------------------------
Issued in reinvestment of distributions 19,953 169,198
- --------------------------------------------
Redeemed (154,798) (1,313,842)(3)
- --------------------------------------------------------------------------------
Net increase (decrease) 70,144 $ 661,622
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 589,887 $ 4,304,574
- --------------------------------------------
Issued in reinvestment of distributions 9,796 73,373
- --------------------------------------------
Redeemed (189,222) (1,414,736)(4)
- --------------------------------------------------------------------------------
Net increase (decrease) 410,461 $ 2,963,211
================================================================================
(1) Net of redemption fees of $6,620.
(2) Net of redemption fees of $12,860.
(3) Net of redemption fees of $4,989.
(4) Net of redemption fees of $400.
(continued)
- ------
19
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
5. SECURITIES LENDING
As of June 30, 2006, securities in the fund valued at $161,688,864, were on loan
through the lending agent, JPMCB, to certain approved borrowers. JPMCB receives
and maintains collateral in the form of cash, and/or acceptable securities as
approved by ACIM or ACGIM. Cash collateral is invested in authorized investments
by the lending agent in a pooled account. The value of cash collateral received
at period end is disclosed in the Statement of Assets and Liabilities and
investments made with the cash by the lending agent are listed in the Schedule
of Investments. Any deficiencies or excess of collateral must be delivered or
transferred by the member firms no later than the close of business on the next
business day. The total value of all collateral received, at this date, was
$170,719,238. The fund's risks in securities lending are that the borrower may
not provide additional collateral when required or return the securities when
due. If the borrower defaults, receipt of the collateral by the fund may be
delayed or limited.
6. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
7. RISK FACTORS
There are certain risks involved in investing in foreign securities. These risks
include those resulting from future adverse political, social, and economic
developments, fluctuations in currency exchange rates, the possible imposition
of exchange controls, and other foreign laws or restrictions.
- ------
20
VP International - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ---------------------------------------------------------------------------------------------------------
CLASS I
- ---------------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.23 $7.35 $6.43 $5.21 $6.59 $10.23
- ---------------------------------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------
Net Investment Income (Loss)(2) 0.05 0.09 0.04 0.04 0.05 0.02
- --------------------------------------
Net Realized and
Unrealized Gain (Loss) 0.58 0.88 0.92 1.22 (1.38) (2.82)
- ---------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.63 0.97 0.96 1.26 (1.33) (2.80)
- ---------------------------------------------------------------------------------------------------------
Distributions
- --------------------------------------
From Net Investment Income (0.14) (0.09) (0.04) (0.04) (0.05) (0.01)
- --------------------------------------
From Net Realized Gains -- -- -- -- -- (0.83)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.14) (0.09) (0.04) (0.04) (0.05) (0.84)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.72 $8.23 $7.35 $6.43 $5.21 $6.59
=========================================================================================================
TOTAL RETURN(3) 7.73% 13.25% 14.92% 24.51% (20.37)% (29.17)%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.22%(4) 1.23% 1.27% 1.34% 1.31% 1.26%
- --------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.20%(4) 1.15% 0.59% 0.67% 0.77% 0.33%
- --------------------------------------
Portfolio Turnover Rate 38% 97% 120% 185% 247% 210%
- --------------------------------------
Net Assets, End of Period
(in thousands) $564,078 $558,013 $537,982 $512,814 $449,026 $688,639
- ---------------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year are
not annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net assets
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two decimal
places is made in accordance with SEC guidelines and does not result in any
gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
21
VP International - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- -------------------------------------------------------------------------------------------------------
CLASS II
- -------------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001(2)
- -------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- -------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.22 $7.34 $6.42 $5.20 $6.59 $7.15
- -------------------------------------------------------------------------------------------------------
Income From Investment Operations
- --------------------------------------
Net Investment Income (Loss)(3) 0.05 0.07 0.02 0.01 0.03 (0.02)
- --------------------------------------
Net Realized and
Unrealized Gain (Loss) 0.58 0.88 0.93 1.24 (1.38) (0.54)
- -------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.63 0.95 0.95 1.25 (1.35) (0.56)
- -------------------------------------------------------------------------------------------------------
Distributions
- --------------------------------------
From Net Investment Income (0.13) (0.07) (0.03) (0.03) (0.04) --
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.72 $8.22 $7.34 $6.42 $5.20 $6.59
=======================================================================================================
TOTAL RETURN(4) 7.70% 13.11% 14.77% 24.36% (20.57)% (7.83)%
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.37%(5) 1.38% 1.42% 1.49% 1.47% 1.44%(5)
- --------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.05%(5) 1.00% 0.44% 0.52% 0.61% (0.82)%(5)
- --------------------------------------
Portfolio Turnover Rate 38% 97% 120% 185% 247% 210%(6)
- --------------------------------------
Net Assets, End of Period
(in thousands) $140,655 $123,337 $81,773 $44,556 $16,711 $3,868
- -------------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) August 15, 2001 (commencement of sale) through December 31, 2001.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year are
not annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two decimal
places is made in accordance with SEC guidelines and does not result in any
gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2001.
See Notes to Financial Statements.
- ------
22
VP International - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ------------------------------------------------------------------------------------------------
CLASS III
- ------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- ------------------------------------------------------------------------------------------------
PER-SHARE DATA
- ------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.23 $7.36 $6.43 $5.21 $6.42
- ------------------------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------
Net Investment Income (Loss)(3) 0.05 0.09 0.04 0.04 0.01
- ------------------------------------------
Net Realized and Unrealized Gain (Loss) 0.58 0.87 0.93 1.22 (1.22)
- ------------------------------------------------------------------------------------------------
Total From Investment Operations 0.63 0.96 0.97 1.26 (1.21)
- ------------------------------------------------------------------------------------------------
Distributions
- -----------------------------------
From Net Investment Income (0.14) (0.09) (0.04) (0.04) --
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.72 $8.23 $7.36 $6.43 $5.21
================================================================================================
TOTAL RETURN(4) 7.73% 13.10% 15.08% 24.51% (18.85)%
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.22%(5) 1.23% 1.27% 1.34% 1.33%(5)
- ------------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.20%(5) 1.15% 0.59% 0.67% 0.22%(5)
- ------------------------------------------
Portfolio Turnover Rate 38% 97% 120% 185% 247%(6)
- ------------------------------------------
Net Assets, End of Period (in thousands) $112,361 $107,098 $96,358 $83,133 $52,498
- ------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 2, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year are
not annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two decimal
places is made in accordance with SEC guidelines and does not result in any
gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2002.
See Notes to Financial Statements.
- ------
23
VP International - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS IV
- --------------------------------------------------------------------------------
2006(1) 2005 2004(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.22 $7.35 $6.47
- --------------------------------------------------------------------------------
Income From Investment Operations
- -------------------------------------------
Net Investment Income (Loss)(3) 0.05 0.08 --(4)
- -------------------------------------------
Net Realized and Unrealized Gain (Loss) 0.58 0.87 0.88
- --------------------------------------------------------------------------------
Total From Investment Operations 0.63 0.95 0.88
- --------------------------------------------------------------------------------
Distributions
- -------------------------------------------
From Net Investment Income (0.13) (0.08) --
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $8.72 $8.22 $7.35
================================================================================
TOTAL RETURN(5) 7.70% 12.97% 13.60%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.37%(6) 1.38% 1.42%(6)
- -------------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.05%(6) 1.00% (0.01)%(6)
- -------------------------------------------
Portfolio Turnover Rate 38% 97% 120%(7)
- -------------------------------------------
Net Assets, End of Period (in thousands) $11,660 $10,420 $6,294
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 3, 2004 (commencement of sale) through December 31, 2004.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year are
not annualized. The total return of the classes may not precisely reflect the
class expense differences because of the impact of calculating the net asset
values to two decimal places. If net asset values were calculated to three
decimal places, the total return differences would more closely reflect the
class expense differences. The calculation of net asset values to two decimal
places is made in accordance with SEC guidelines and does not result in any
gain or loss of value between one class and another.
(6) Annualized.
(7) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2004.
See Notes to Financial Statements.
- ------
24
Approval of Management Agreement for VP International
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 VP International (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)
- ------
25
Approval of Management Agreement for VP International
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
(continued)
- ------
26
Approval of Management Agreement for VP International
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. 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 fell below the median for its peer group for both the one and three
year periods. The board discussed the fund's performance with the advisor and
was satisfied with the efforts being undertaken by the advisor.
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
(continued)
- ------
27
Approval of Management Agreement for VP International
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, fee breakpoints as the fund increases in size, and through
reinvestment in its business to provide shareholders additional content and
services.
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 a 15(c) Provider 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 slightly above the
median 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
(continued)
- ------
28
Approval of Management Agreement for VP International
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 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 independent directors, assisted by the advice
of legal counsel independent of the advisor, taking into account all of the
factors discussed above and the information provided by the advisor, negotiated
changes to the breakpoint schedule used to calculate the management fee. These
changes were proposed by the Directors based on their review of the competitive
changes in the mutual fund marketplace and their review of financial information
provided by the advisor. The new schedule, effective July 29, 2006, contains
lower management fees at certain asset levels than under the existing structure.
Following these negotiations with the advisor, the independent 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.
As a part of the 15(c) Process, the board of directors also unanimously approved
the renewal of the investment subadvisory agreement by which American Century
Investment Management, Inc. (the "subadvisor") is engaged to manage the cash and
cash equivalent investments of the fund. In approving the subadvisory agreement,
the board considered all material factors including the nature, extent, and
quality of investment management services provided by the subadvisor to the fund
under the agreement. As a part of this review the board evaluated the
subadvisor's investment performance and capabilities, as well as its compliance
policies, procedures, and regulatory experience. The Directors noted that the
management fees paid to the subadvisor under the subadvisory agreement were
subject to arm's length negotiation between the advisor and the subadvisor and
are paid by the advisor out of its unified fee.
- ------
29
Share Class Information
Four classes of shares are authorized for sale by the fund: Class I, Class II,
Class III, and Class IV.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
CLASS III shares are sold through insurance company separate accounts. Class III
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares. However, Class III shares have a 1.00%
redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. The total expense ratio of Class III shares is the same as the total
expense ratio of Class I shares.
CLASS IV shares are sold through insurance company separate accounts. Class IV
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class IV shares are purchased. Class IV shares also have a 1.00%
redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. The total expense ratio of Class IV shares is higher than the total
expense ratio of the Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
30
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
Morgan Stanley Capital International (MSCI) has developed several indices that
measure the performance of foreign stock markets.
The MSCI EAFE(reg.tm) (Europe, Australasia, Far East) INDEX is designed to
measure developed market equity performance, excluding the U.S. and Canada.
The MSCI EAFE(reg.tm) GROWTH INDEX is a capitalization-weighted index that
monitors the performance of growth stocks from Europe, Australasia, and the Far
East.
PROXY VOTING GUIDELINES
American Century Global Investment Management, Inc., the fund's investment
advisor, is responsible for exercising the voting rights associated with the
securities purchased and/or held by the fund. A description of the policies and
procedures the advisor uses in fulfilling this responsibility is available
without charge, upon request, by calling 1-800-378-9878. It is also available on
American Century's Web site at americancentury.com and on the Securities and
Exchange Commission's Web site at sec.gov. Information regarding how the
investment advisor voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
31
Notes
- ------
32
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Global Investment Management, Inc.
New York, New York
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
(c)2006 American Century Proprietary Holdings, Inc. All rights reserved.
0608
SH-SAN-50649
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP Large Company Value Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns. . . . . . . . . . . . . . . . . . . . . . . . . 2
VP LARGE COMPANY VALUE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . 11
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . 13
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 14
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
OTHER INFORMATION
Approval of Management Agreement for VP Large Company Value. . . . . . . . 21
Proxy Voting Results . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Share Class Information. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The opinions expressed in the Market Perspective and 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 Phil Davidson]
BY PHIL DAVIDSON, CHIEF INVESTMENT OFFICER, U.S. VALUE EQUITY
Stocks opened 2006 on a high note, advancing strongly during the first quarter.
Racking up its best opening-quarter performance since 1999, the S&P 500 Index
was up 4.21%, nearly matching its return for all of 2005.
But three factors that had been weighing on the market for the better part of a
year -- high energy prices, investor uneasiness about inflation and rising
interest rates -- finally created a perfect storm during the second quarter. The
pivot point was May 10, just five days after the S&P 500 Index had reached a
five-year high, when the Federal Reserve raised its short-term target interest
rate for the 16th consecutive time since June 2004. Sentiment here and around
the world turned on a dime, touching-off a turbulent, global flight from stocks.
The reaction was swift and steep. The S&P 500 had gained 6.81% through May 9,
outdistancing its nearly 5% return for all of 2005. During the last three weeks
of May, the index dropped 3.85%, registering its worst May performance in more
than 20 years. The tech-heavy Nasdaq Composite fell 6%, while the Dow Jones
Industrial Average, which had been just 80 points shy of a record high on May
10, dropped almost 4%.
Stocks cut a choppy path through June as investors weighed whether the Fed would
increase interest rates again at the end of the month. In one final gyration,
the market rallied strongly June 29 after the Fed raised rates by another
quarter point, while seemingly moderating its interest-rate policy statement.
Twenty-four hours later, only one of the three major U.S. indices, the Dow, was
in the black for the second quarter, up just under one percent.
In the value realm, small- and mid-sized companies had the highest returns for
the six months, as evidenced by the Russell 2000 Value Index's gain of 10.44%.
Larger value companies, tracked by the Russell 1000 Value Index, were up 6.56%.
On the whole, value shares performed better than growth across the
capitalization range, with the greatest edge among larger businesses.
The period was marked by a continuing rally in lower-quality issues, as
investors rewarded stocks rated B or lower (Standard & Poor's defines
high-quality stocks as B+ or higher). A+ shares -- some of the market's
strongest and most stable companies -- actually had the lowest returns for the
six months. Historically, market cycles led by low-quality stocks have tended to
dampen the returns of American Century's value funds, which generally seek
higher-quality value stocks.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Large Company Value - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
--------------
AVERAGE ANNUAL
RETURNS
- --------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR INCEPTION DATE
- --------------------------------------------------------------------------------
CLASS II(2) 4.22% 10.45% 11.23% 10/29/04
- --------------------------------------------------------------------------------
RUSSELL 1000 VALUE INDEX(3) 6.56% 12.10% 13.70% --
- --------------------------------------------------------------------------------
S&P 500 INDEX(3) 2.71% 8.63% 9.27% --
- --------------------------------------------------------------------------------
Class I(2) 4.27% 9.60% 7.33% 12/1/04
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Returns would have been lower if management fees had not been reimbursed
and waived during the period.
(3) Data provided by Lipper Inc. - A Reuters Company. (c) 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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
- ------
3
VP Large Company Value - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made October 29, 2004
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended June 30
- --------------------------------------------------------------------------------
2005* 2006
- --------------------------------------------------------------------------------
Class II 8.13% 10.45%**
- --------------------------------------------------------------------------------
Russell 1000 Value Index 10.49% 12.10%
- --------------------------------------------------------------------------------
S&P 500 Index 6.72% 8.63%
- --------------------------------------------------------------------------------
* From 10/29/04, Class II's inception date, to 6/30/05. Not annualized.
** Returns would have been lower, along with the ending value, if management
fees had not been reimbursed and waived.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
- ------
4
VP Large Company Value - Portfolio Commentary
PORTFOLIO MANAGERS: MARK MALLON, CHUCK RITTER AND BRENDAN HEALY
VP Large Company Value advanced 4.27%* during the six months ended June 30,
2006, trailing the 6.56% return of its benchmark, the Russell 1000 Value Index.
The S&P 500 Index, representative of the broader market, gained 2.71%.
OPPORTUNITIES IN BROADLY DIVERSIFIED, MEGA-CAP STOCKS
VP Large Company Value's investment process looks for stocks that appear
attractively priced given their current fundamentals and business prospects. A
sector or market group that underperforms the market will get increasing
attention in the portfolio. These moves to lagging areas can slow the
portfolio's performance in the short term, but we make them with the belief that
long-term performance will benefit from investments in areas of the market we
perceive as cheap.
One area of the market that certainly has gotten cheaper during the last few
years is that of mega-cap value stocks. During the last five years, the biggest
large-cap value stocks, so called mega-cap value stocks, have trailed other
large cap value indices. In our view, that underperformance has made many giants
of American business more attractively priced than other large-cap stocks.
Typically, these companies feature broadly diversified business models,
generally leading to more stable fundamentals. Reacting to their attractive
prices, the portfolio has increased its exposure to mega-cap stocks over the
past few years and has generally preferred more diversified business models
rather than niche plays.
SOLID RETURNS IN ENERGY
During the six-month period, the portfolio had a modest underweight in energy
stocks, the broad market's best-performing sector over the past three years. Our
exposure generally consisted of multi-national oil companies, such as Exxon
Mobil (our top contributing position) and ConocoPhillips. While such energy
stocks performed well in absolute terms, they trailed more specialized energy
companies involved in refining, exploration or oil field services, whose shares
tend to be more volatile. While narrowly focused energy stocks are benefiting
from the sector's current trends, we believe the benefits of diversification
will come to the fore if the energy environment turns hostile.
ABSOLUTE BOOST FROM FINANCIALS
VP Large Company Value's investments in financials added to our results, with
commercial banks leading the way. Of
TOP TEN HOLDINGS
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Citigroup Inc. 4.6% 4.7%
- --------------------------------------------------------------------------------
Exxon Mobil Corp. 4.5% 4.3%
- --------------------------------------------------------------------------------
Bank of America Corp. 3.4% 3.3%
- --------------------------------------------------------------------------------
Royal Dutch Shell plc ADR 2.8% 2.7%
- --------------------------------------------------------------------------------
Chevron Corp. 2.8% 2.2%
- --------------------------------------------------------------------------------
Freddie Mac 2.7% 3.2%
- --------------------------------------------------------------------------------
J.P. Morgan Chase & Co. 2.4% 2.5%
- --------------------------------------------------------------------------------
Wells Fargo & Co. 2.2% 2.1%
- --------------------------------------------------------------------------------
ConocoPhillips 2.0% 2.2%
- --------------------------------------------------------------------------------
Pfizer Inc. 1.8% 1.6%
- --------------------------------------------------------------------------------
* All fund returns referenced in this commentary are for Class I shares.
Total returns for periods less than one year are not annualized.
Fund returns would have been lower if management fees had not
been waived during the period. (continued)
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5
VP Large Company Value - Portfolio Commentary
note were Wells Fargo and PNC Financial Services Group. These regional banks
managed to advance despite the ongoing Federal Reserve campaign to raise
interest rates. Bank of America Corp., which appears to be successfully
integrating credit card giant MBNA Corp., which it acquired in January, was
another strong contributor.
But while providing strong absolute results, the portfolio's stake in financials
(our largest single position but a relative underweight nonetheless) slowed us
against the benchmark. Much of the shortfall could be traced to two strategic
weightings. The first was the portfolio's larger position in Freddie Mac. During
the first quarter, the mortgage industry stock announced that it would have to
delay issuing final 2005 results until May. The company also faces the potential
of increased regulation of government-sponsored enterprises, or GSEs. We remain
confident in Freddie Mac's long-term prospects, however, and are maintaining our
position. We were also hampered by our avoidance of real estate companies.
Shares of real estate investment trusts, known as REITs, have surged during the
past few years, and continued their march in 2006. As a result of their
sustained upswing, few REITs fell within our valuation criteria.
DISAPPOINTMENTS IN INFORMATION TECHNOLOGY
In the information technology sector, two companies that were exclusive to the
portfolio also dampened our relative progress. In semiconductors, Intel Corp.
performed below expectations, as weaker-than-anticipated demand for personal
computers and aggressive price competition pressured the company's revenues and
margins. Software leader Microsoft Corp. declined on concerns about a delay in
the release of its next-generation Windows software, Vista. We believe the
issues affecting both of these quality companies are transitory and manageable,
and saw their declines as buying opportunities.
INVESTMENT PHILOSOPHY
The VP Large Company Value investment team remains committed to its strategy of
finding large, fundamentally sound businesses trading at price levels it deems
below fair market value. By keeping the portfolio positioned in attractively
priced stocks -- regardless of short-term market movements -- we believe we can
deliver long-term investment rewards.
TOP FIVE INDUSTRIES
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Oil, Gas &
Consumable Fuels 12.7% 11.9%
- --------------------------------------------------------------------------------
Commercial Banks 9.9% 9.7%
- --------------------------------------------------------------------------------
Diversified
Financial Services 7.0% 7.2%
- --------------------------------------------------------------------------------
Pharmaceuticals 6.6% 6.3%
- --------------------------------------------------------------------------------
Insurance 6.2% 6.0%
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Common Stocks 95.1% 96.2%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 3.3% 4.9%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities 1.6% (1.1)%
- --------------------------------------------------------------------------------
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6
Shareholder Fee Example (Unaudited)
Fund shareholders may incur two types of costs: (1) transaction costs, including
sales charges (loads) on purchase payments and redemption/exchange fees; and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in your fund and to compare these costs
with the ongoing cost of investing in other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
period and held for the entire period from January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
(continued)
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7
Shareholder Fee Example (Unaudited)
- -----------------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD(1) ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO(1)
- -----------------------------------------------------------------------------------------
VP LARGE COMPANY VALUE SHAREHOLDER FEE EXAMPLE
- -----------------------------------------------------------------------------------------
ACTUAL
- -----------------------------------------------------------------------------------------
Class I (after waiver)(2) $1,000 $1,042.70 $3.85 0.76%
- -----------------------------------------------------------------------------------------
Class I (before waiver) $1,000 $1,042.70(3) $4.56 0.90%
- -----------------------------------------------------------------------------------------
Class II (after waiver)(2) $1,000 $1,042.20 $4.76 0.94%
- -----------------------------------------------------------------------------------------
Class II (before waiver) $1,000 $1,042.20(3) $5.32 1.05%
- -----------------------------------------------------------------------------------------
HYPOTHETICAL
- -----------------------------------------------------------------------------------------
Class I (after waiver)(2) $1,000 $1,021.03 $3.81 0.76%
- -----------------------------------------------------------------------------------------
Class I (before waiver) $1,000 $1,020.33 $4.51 0.90%
- -----------------------------------------------------------------------------------------
Class II (after waiver)(2) $1,000 $1,020.13 $4.71 0.94%
- -----------------------------------------------------------------------------------------
Class II (before waiver) $1,000 $1,019.59 $5.26 1.05%
- -----------------------------------------------------------------------------------------
(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 181, the number of days in the most recent fiscal half-year,
divided by 365, to reflect the one-half year period.
(2) During a portion of the six months ended June 30, 2006, the investment
advisor voluntarily waived its management fee.
(3) Ending account value assumes the return earned after waiver. The return
would have been lower had fees not been waived and would have resulted in a
lower ending account value.
- ------
8
VP Large Company Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 95.1%
AEROSPACE & DEFENSE -- 0.7%
- --------------------------------------------------------------------------------
310 Northrop Grumman Corp. $ 19,859
- --------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.2%
- --------------------------------------------------------------------------------
250 Lear Corporation 5,553
- --------------------------------------------------------------------------------
BEVERAGES -- 1.8%
- --------------------------------------------------------------------------------
670 Coca-Cola Company (The) 28,823
- --------------------------------------------------------------------------------
790 Pepsi Bottling Group Inc. 25,399
- --------------------------------------------------------------------------------
54,222
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 3.9%
- --------------------------------------------------------------------------------
840 Bank of New York Co., Inc. (The) 27,048
- --------------------------------------------------------------------------------
630 Merrill Lynch & Co., Inc. 43,823
- --------------------------------------------------------------------------------
730 Morgan Stanley 46,143
- --------------------------------------------------------------------------------
117,014
- --------------------------------------------------------------------------------
CHEMICALS -- 2.0%
- --------------------------------------------------------------------------------
620 du Pont (E.I.) de Nemours & Co. 25,792
- --------------------------------------------------------------------------------
540 PPG Industries, Inc. 35,640
- --------------------------------------------------------------------------------
61,432
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 9.9%
- --------------------------------------------------------------------------------
2,160 Bank of America Corp. 103,895
- --------------------------------------------------------------------------------
420 National City Corp. 15,200
- --------------------------------------------------------------------------------
310 PNC Financial Services Group 21,753
- --------------------------------------------------------------------------------
1,330 U.S. Bancorp 41,070
- --------------------------------------------------------------------------------
960 Wachovia Corp. 51,917
- --------------------------------------------------------------------------------
1,000 Wells Fargo & Co. 67,080
- --------------------------------------------------------------------------------
300,915
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 1.3%
- --------------------------------------------------------------------------------
540 R.R. Donnelley & Sons Company 17,253
- --------------------------------------------------------------------------------
580 Waste Management, Inc. 20,810
- --------------------------------------------------------------------------------
38,063
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 0.3%
- --------------------------------------------------------------------------------
690 Avaya Inc.(1) 7,880
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 3.0%
- --------------------------------------------------------------------------------
1,590 Hewlett-Packard Co. 50,371
- --------------------------------------------------------------------------------
530 International Business
Machines Corp. 40,715
- --------------------------------------------------------------------------------
91,086
- --------------------------------------------------------------------------------
DIVERSIFIED -- 1.3%
- --------------------------------------------------------------------------------
310 Standard and Poor's 500
Depositary Receipt 39,404
- --------------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES -- 0.3%
- --------------------------------------------------------------------------------
330 Block (H & R), Inc. 7,874
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 7.0%
- --------------------------------------------------------------------------------
2,900 Citigroup Inc. 139,895
- --------------------------------------------------------------------------------
1,750 J.P. Morgan Chase & Co. 73,500
- --------------------------------------------------------------------------------
213,395
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION
SERVICES -- 4.3%
- --------------------------------------------------------------------------------
1,910 AT&T Inc. $ 53,270
- --------------------------------------------------------------------------------
980 BellSouth Corp. 35,476
- --------------------------------------------------------------------------------
1,230 Verizon Communications Inc. 41,193
- --------------------------------------------------------------------------------
129,939
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 2.9%
- --------------------------------------------------------------------------------
860 Exelon Corporation 48,874
- --------------------------------------------------------------------------------
1,170 PPL Corporation 37,791
- --------------------------------------------------------------------------------
86,665
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 1.9%
- --------------------------------------------------------------------------------
1,450 Kroger Co. (The) 31,697
- --------------------------------------------------------------------------------
520 Wal-Mart Stores, Inc. 25,048
- --------------------------------------------------------------------------------
56,745
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 1.3%
- --------------------------------------------------------------------------------
890 Sara Lee Corp. 14,258
- --------------------------------------------------------------------------------
1,150 Unilever N.V. New York Shares 25,932
- --------------------------------------------------------------------------------
40,190
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 0.5%
- --------------------------------------------------------------------------------
360 HCA Inc. 15,534
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 1.1%
- --------------------------------------------------------------------------------
1,020 McDonald's Corporation 34,272
- --------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 0.7%
- --------------------------------------------------------------------------------
790 Newell Rubbermaid Inc. 20,406
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.3%
- --------------------------------------------------------------------------------
1,070 General Electric Co. 35,267
- --------------------------------------------------------------------------------
1,270 Tyco International Ltd. 34,925
- --------------------------------------------------------------------------------
70,192
- --------------------------------------------------------------------------------
INSURANCE -- 6.2%
- --------------------------------------------------------------------------------
720 Allstate Corp. 39,405
- --------------------------------------------------------------------------------
790 American International Group, Inc. 46,649
- --------------------------------------------------------------------------------
430 Hartford Financial Services
Group Inc. (The) 36,378
- --------------------------------------------------------------------------------
710 Loews Corp. 25,170
- --------------------------------------------------------------------------------
600 Marsh & McLennan Companies, Inc. 16,134
- --------------------------------------------------------------------------------
390 Torchmark Corp. 23,681
- --------------------------------------------------------------------------------
187,417
- --------------------------------------------------------------------------------
IT SERVICES -- 1.2%
- --------------------------------------------------------------------------------
290 Computer Sciences Corp.(1) 14,048
- --------------------------------------------------------------------------------
460 Fiserv, Inc.(1) 20,865
- --------------------------------------------------------------------------------
34,913
- --------------------------------------------------------------------------------
MACHINERY -- 2.8%
- --------------------------------------------------------------------------------
210 Deere & Co. 17,533
- --------------------------------------------------------------------------------
420 Dover Corp. 20,761
- --------------------------------------------------------------------------------
630 Ingersoll-Rand Company Cl A 26,951
- --------------------------------------------------------------------------------
260 Parker-Hannifin Corp. 20,176
- --------------------------------------------------------------------------------
85,421
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
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9
VP Large Company Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
MEDIA -- 3.2%
- --------------------------------------------------------------------------------
590 Gannett Co., Inc. $ 32,999
- --------------------------------------------------------------------------------
2,870 Time Warner Inc. 49,651
- --------------------------------------------------------------------------------
380 Viacom Inc. Cl B 13,619
- --------------------------------------------------------------------------------
96,269
- --------------------------------------------------------------------------------
METALS & MINING -- 0.4%
- --------------------------------------------------------------------------------
230 Nucor Corp. 12,478
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 0.6%
- --------------------------------------------------------------------------------
900 NiSource Inc. 19,656
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 0.5%
- --------------------------------------------------------------------------------
1,080 Dollar General Corp. 15,098
- --------------------------------------------------------------------------------
OFFICE ELECTRONICS -- 0.7%
- --------------------------------------------------------------------------------
1,560 Xerox Corp.(1) 21,700
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 12.7%
- --------------------------------------------------------------------------------
180 Anadarko Petroleum Corp. 8,584
- --------------------------------------------------------------------------------
1,370 Chevron Corp. 85,022
- --------------------------------------------------------------------------------
920 ConocoPhillips 60,288
- --------------------------------------------------------------------------------
140 Devon Energy Corporation 8,457
- --------------------------------------------------------------------------------
2,200 Exxon Mobil Corp. 134,969
- --------------------------------------------------------------------------------
1,270 Royal Dutch Shell plc ADR 85,065
- --------------------------------------------------------------------------------
382,385
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 1.1%
- --------------------------------------------------------------------------------
530 Weyerhaeuser Co. 32,993
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 6.6%
- --------------------------------------------------------------------------------
1,020 Abbott Laboratories 44,482
- --------------------------------------------------------------------------------
700 Johnson & Johnson 41,944
- --------------------------------------------------------------------------------
530 Merck & Co., Inc. 19,308
- --------------------------------------------------------------------------------
2,350 Pfizer Inc. 55,154
- --------------------------------------------------------------------------------
860 Wyeth 38,193
- --------------------------------------------------------------------------------
199,081
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 0.7%
- --------------------------------------------------------------------------------
1,170 Intel Corp. 22,172
- --------------------------------------------------------------------------------
SOFTWARE -- 2.4%
- --------------------------------------------------------------------------------
2,240 Microsoft Corporation 52,192
- --------------------------------------------------------------------------------
1,450 Oracle Corp.(1) 21,011
- --------------------------------------------------------------------------------
73,203
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 1.1%
- --------------------------------------------------------------------------------
930 Gap, Inc. (The) $ 16,182
- --------------------------------------------------------------------------------
470 Home Depot, Inc. (The) 16,821
- --------------------------------------------------------------------------------
33,003
- --------------------------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS -- 1.4%
- --------------------------------------------------------------------------------
550 Liz Claiborne, Inc. 20,383
- --------------------------------------------------------------------------------
340 VF Corp. 23,093
- --------------------------------------------------------------------------------
43,476
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 4.5%
- --------------------------------------------------------------------------------
1,420 Freddie Mac 80,954
- --------------------------------------------------------------------------------
240 MGIC Investment Corp. 15,600
- --------------------------------------------------------------------------------
900 Washington Mutual, Inc. 41,022
- --------------------------------------------------------------------------------
137,576
- --------------------------------------------------------------------------------
TOBACCO -- 1.5%
- --------------------------------------------------------------------------------
620 Altria Group Inc. 45,527
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION
SERVICES -- 0.8%
- --------------------------------------------------------------------------------
1,280 Sprint Nextel Corp. 25,587
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,714,347) 2,878,595
================================================================================
TEMPORARY CASH INVESTMENTS -- 3.3%
- --------------------------------------------------------------------------------
Repurchase Agreement, Credit Suisse First Boston, Inc.,
(collateralized by various U.S. Treasury obligations,
6.125% -- 8.875%, 2/15/19 -- 8/15/29,
valued at $102,038), in a joint trading account
at 4.50%, dated 6/30/06, due 7/3/06
(Delivery value $100,038)
(Cost $100,000) 100,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 98.4%
(Cost $2,814,347) 2,978,595
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- 1.6% 48,459
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $3,027,054
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
(1) Non-income producing.
See Notes to Financial Statements.
- ------
10
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $2,814,347) $2,978,595
- --------------------------------------------------------
Cash 47,258
- --------------------------------------------------------
Dividends and interest receivable 3,237
- --------------------------------------------------------------------------------
3,029,090
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Accrued management fees 1,841
- --------------------------------------------------------
Distribution fees payable 195
- --------------------------------------------------------------------------------
2,036
- --------------------------------------------------------------------------------
NET ASSETS $3,027,054
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $2,842,193
- --------------------------------------------------------
Undistributed net investment income 24,569
- --------------------------------------------------------
Accumulated net realized loss on investment transactions (3,956)
- --------------------------------------------------------
Net unrealized appreciation on investments 164,248
- --------------------------------------------------------------------------------
$3,027,054
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $2,032,899
- --------------------------------------------------------
Shares outstanding 180,153
- --------------------------------------------------------
Net asset value per share $11.28
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $994,155
- --------------------------------------------------------
Shares outstanding 87,253
- --------------------------------------------------------
Net asset value per share $11.39
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
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11
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- --------------------------------------------------------
Dividends (net of foreign taxes withheld of $272) $30,272
- --------------------------------------------------------
Interest 2,592
- --------------------------------------------------------------------------------
32,864
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------
Management fees 10,570
- --------------------------------------------------------
Distribution fees - Class II 902
- --------------------------------------------------------
Directors' fees and expenses 23
- --------------------------------------------------------
Other expenses 4
- --------------------------------------------------------------------------------
11,499
- --------------------------------------------------------------------------------
Amount waived (3,223)
- --------------------------------------------------------------------------------
8,276
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 24,588
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 6,253
- --------------------------------------------------------
Change in net unrealized appreciation
(depreciation) on investments 61,333
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 67,586
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $92,174
================================================================================
See Notes to Financial Statements.
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12
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 24,588 $ 44,526
- ------------------------------------------------
Net realized gain (loss) 6,253 32,489
- ------------------------------------------------
Change in net unrealized
appreciation (depreciation) 61,333 23,380
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 92,174 100,395
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- ------------------------------------------------
Class I (448) (33,929)
- ------------------------------------------------
Class II (158) (10,010)
- ------------------------------------------------
From net realized gains:
- ------------------------------------------------
Class I (5,975) (24,953)
- ------------------------------------------------
Class II (2,251) (11,090)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (8,832) (79,982)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 893,386 544,882
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 976,728 565,295
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 2,050,326 1,485,031
- --------------------------------------------------------------------------------
End of period $3,027,054 $2,050,326
================================================================================
Undistributed net investment income $24,569 $587
================================================================================
See Notes to Financial Statements.
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13
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc. (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Large Company Value Fund (the fund)
is one fund in a series issued by the corporation. The fund is diversified under
the 1940 Act. The fund's investment objective is long-term capital growth. The
production of income is a secondary objective. The fund pursues its objective
through investing in common stocks of companies believed to be undervalued at
the time of purchase. The following is a summary of the fund's significant
accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I and Class II. The
share classes differ principally in their respective 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 -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
EXCHANGE TRADED FUNDS -- The funds may invest in exchange traded funds (ETFs).
ETFs are a type of index fund bought and sold on a securities exchange. An ETF
trades like common stock and represents a fixed portfolio of securities designed
to track the performance and dividend yield of a particular domestic or foreign
market index. A fund may purchase an ETF to temporarily gain exposure to a
portion of the U.S. or a foreign market while awaiting purchase of underlying
securities. The risks of owning an ETF generally reflect the risks of owning the
underlying securities they are designed to track, although the lack of liquidity
on an ETF could result in it being more volatile. Additionally, ETFs have
management fees, which increase their cost.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
(continued)
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of those directors who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears. For funds with a stepped fee schedule, the
rate of the fee is determined by applying a fee rate calculation formula. This
formula takes into account all of the investment advisor's assets under
management in the fund's investment strategy (strategy assets) to calculate the
appropriate fee rate for the fund. The strategy assets include the fund's assets
and the assets of other clients of the investment advisor that are not in the
American Century family of funds, but that have the same investment team and
investment strategy.
The annual management fee schedule for each class of the fund is as follows:
- --------------------------------------------------------------------------------
CLASS I CLASS II
- --------------------------------------------------------------------------------
STRATEGY ASSETS
- --------------------------------------------------------------------------------
First $1 billion 0.90% 0.80%
- --------------------------------------------------------------------------------
Next $4 billion 0.80% 0.70%
- --------------------------------------------------------------------------------
Over $5 billion 0.70% 0.60%
- --------------------------------------------------------------------------------
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
For the six months ended June 30, 2006, the effective annual management fee was
0.90% and 0.80% for Class I and Class II, respectively.
During the six months ended June 30, 2006, the investment advisor voluntarily
agreed to waive $3,223 of its management fee (see Note 6). The effective annual
management fee after waiver was 0.76% and 0.69% for Class I and Class II,
respectively.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and financial institutions that have entered into
sales agreements with respect to shares of the fund. Fees incurred under the
plan during the six months ended June 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the six months
ended June 30, 2006, were as follows:
- --------------------------------------------------------------------------------
Purchases $960,333
- --------------------------------------------
Proceeds from sales $122,570
- --------------------------------------------------------------------------------
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $2,823,460
================================================================================
Gross tax appreciation of investments $225,900
- --------------------------------------------
Gross tax depreciation of investments (70,765)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation)
of investments $155,135
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 200,000,000
================================================================================
Sold 46,040 $514,090
- ---------------------------------------------------------
Issued in reinvestment of distributions 578 6,423
- ---------------------------------------------------------
Redeemed (8,126) (90,582)
- --------------------------------------------------------------------------------
Net increase (decrease) 38,492 $429,931
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 200,000,000
================================================================================
Sold 138,484 $1,508,895
- ---------------------------------------------------------
Issued in reinvestment of distributions 5,342 58,882
- ---------------------------------------------------------
Redeemed (39,196) (427,493)
- --------------------------------------------------------------------------------
Net increase (decrease) 104,630 $1,140,284
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 55,836 $637,760
- ---------------------------------------------------------
Issued in reinvestment of distributions 215 2,409
- ---------------------------------------------------------
Redeemed (15,515) (176,714)
- --------------------------------------------------------------------------------
Net increase (decrease) 40,536 $463,455
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 63,353 $685,917
- ---------------------------------------------------------
Issued in reinvestment of distributions 1,903 21,100
- ---------------------------------------------------------
Redeemed (119,119) (1,302,419)
- --------------------------------------------------------------------------------
Net increase (decrease) (53,863) $(595,402)
================================================================================
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
6. CORPORATE EVENT
The Board of Directors approved its original management agreement between the
investment advisor and the corporation at a meeting held on December 31, 2002.
In order for the management agreement to continue in effect beyond its initial
term, it should have been evaluated and approved for renewal prior to December
31, 2004. However, the agreement inadvertently was not renewed by the Board in
time and, as a result, a new management agreement was required.
The investment advisor continued to provide to the fund investment advisory
services of the same nature as it had historically provided. The investment
advisor reimbursed the fund for all management fees received from January 1,
2005 through December 13, 2005, and agreed to waive receipt of such fees until
the approval of the management agreement.
At a meeting held on December 13, 2005, the Board of Directors considered the
matter and approved a new management agreement for the fund (the "Agreement").
The terms of the Agreement are substantially the same as the terms of the
original management agreement. A special meeting of shareholders of the fund was
held on March 3, 2006 to approve the Agreement. The Agreement was approved by a
majority of the fund's outstanding voting securities and the Agreement became
effective immediately upon such approval.
- ------
18
VP Large Company Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
2006(1) 2005 2004(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.85 $10.79 $10.61
- --------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------------
Net Investment Income (Loss)(3) 0.12 0.27 0.01
- -----------------------------------------
Net Realized and Unrealized Gain (Loss) 0.35 0.25 0.23
- --------------------------------------------------------------------------------
Total From Investment Operations 0.47 0.52 0.24
- --------------------------------------------------------------------------------
Distributions
- -----------------------------------------
From Net Investment Income --(4) (0.25) (0.06)
- -----------------------------------------
From Net Realized Gains (0.04) (0.21) --
- --------------------------------------------------------------------------------
Total Distributions (0.04) (0.46) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $11.28 $10.85 $10.79
================================================================================
TOTAL RETURN(5) 4.27% 4.83% 2.29%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.76%(6)(7) 0.04%(6) 0.90%(7)
- -----------------------------------------
Ratio of Operating Expenses
to Average Net Assets (before waiver) 0.90%(7) 0.94% 0.90%(7)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.95%(6)(7) 2.45%(6) 0.64%(7)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets (before waiver) 1.81%(7) 1.55% 0.64%(7)
- -----------------------------------------
Portfolio Turnover Rate 5% 37% 3%(8)
- -----------------------------------------
Net Assets, End of Period (in thousands) $2,033 $1,538 $400
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) December 1, 2004 (commencement of sale) through December 31, 2004.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) During the year ended December 31, 2005, the investment advisor voluntarily
agreed to reimburse and waive its management fees. During a portion of the
period ended June 30, 2006, the investment advisor voluntarily agreed to
waive its management fees.
(7) Annualized.
(8) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the period October 29, 2004 (fund inception) through
December 31, 2004.
See Notes to Financial Statements.
- ------
19
VP Large Company Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2006(1) 2005 2004(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.97 $10.79 $10.00
- --------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------------
Net Investment Income (Loss)(3) 0.10 0.24 0.04
- -----------------------------------------
Net Realized and Unrealized Gain (Loss) 0.36 0.37 0.81
- --------------------------------------------------------------------------------
Total From Investment Operations 0.46 0.61 0.85
- --------------------------------------------------------------------------------
Distributions
- -----------------------------------------
From Net Investment Income --(4) (0.22) (0.06)
- -----------------------------------------
From Net Realized Gains (0.04) (0.21) --
- --------------------------------------------------------------------------------
Total Distributions (0.04) (0.43) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $11.39 $10.97 $10.79
================================================================================
TOTAL RETURN(5) 4.22% 5.59% 8.52%
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.94%(6)(7) 0.29%(6) 1.05%(7)
- -----------------------------------------
Ratio of Operating Expenses to Average
Net Assets (before waiver) 1.05%(7) 1.09% 1.05%(7)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.77%(6)(7) 2.20%(6) 2.44%(7)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets (before waiver) 1.66%(7) 1.40% 2.44%(7)
- -----------------------------------------
Portfolio Turnover Rate 5% 37% 3%
- -----------------------------------------
Net Assets, End of Period (in thousands) $994 $513 $1,085
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) October 29, 2004 (fund inception) through December 31, 2004.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) During the year ended December 31, 2005, the investment advisor voluntarily
agreed to reimburse and waive its management fee. During a portion of the
period ended June 30, 2006, the investment advisor voluntarily agreed to
waive its management fee.
(7) Annualized.
See Notes to Financial Statements.
- ------
20
Approval of Management Agreement for VP Large Company Value
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 VP Large Company Value (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)
- ------
21
Approval of Management Agreement for VP Large Company Value
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
(continued)
- ------
22
Approval of Management Agreement for VP Large Company Value
fund's performance with that of similar funds not managed by the advisor. 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 below the median for its peer group. The
board discussed the fund's performance with the advisor and was satisfied with
the efforts being undertaken by the advisor.
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
(continued)
- ------
23
Approval of Management Agreement for VP Large Company Value
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, fee breakpoints as the fund increases in size, and through
reinvestment in its business to provide shareholders additional content and
services.
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 a 15(c) Provider 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 just above the median 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
(continued)
- ------
24
Approval of Management Agreement for VP Large Company Value
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 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 independent 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.
- ------
25
Proxy Voting Results
A special meeting of shareholders was held on March 3, 2006, to vote on the
following proposal. The proposal received the required majority of votes and was
adopted.
A summary of voting results is listed below the proposal.
PROPOSAL
To vote on approval of the management agreement.
VP Large Company Value Fund
For: 173,254
Against: 44
Abstain: 18,983
- ------
26
Share Class Information
Two classes of shares are authorized for sale by the fund: Class I and Class II
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
27
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or
style performance or to serve as fund performance comparisons. They are not
investment products available for purchase.
The DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL 1000(reg.tm) VALUE INDEX measures the performance of those Russell
1000 Index companies (the 1,000 largest of the 3,000 largest publicly traded
U.S. companies, based on total market capitalization) with lower price-to-book
ratios and lower forecasted growth rates.
The RUSSELL 2000(reg.tm) VALUE INDEX measures the performance of those Russell
2000 Index companies (the 2,000 smallest of the 3,000 largest publicly traded
U.S. companies, based on total market capitalization) with lower price-to-book
ratios and lower forecasted growth rates.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
28
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century
and American Century Investments are service marks
of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50654 All rights reserved.
American Century
Variable Portfolios
SEMIANNUAL REPORT
[insert photo of boy with plane]
JUNE 30, 2006
VP Mid Cap Value Fund
[american century investments logo and text logo]
[blank inside cover]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns . . . . . . . . . . . . . . . . . . . . . . . . 2
VP MID CAP VALUE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .12
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .13
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .15
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
OTHER INFORMATION
Approval of Management Agreement for VP Mid Cap Value . . . . . . . . . . .21
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .26
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .27
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.
- ------
1
Market Perspective
[photo of Chief Investment Officer]
BY PHIL DAVIDSON, CHIEF INVESTMENT OFFICER, U.S. VALUE EQUITY
Stocks opened 2006 on a high note, advancing strongly during the first quarter.
Racking up its best opening-quarter performance since 1999, the S&P 500 Index
was up 4.21%, nearly matching its return for all of 2005.
But three factors that had been weighing on the market for the better part of a
year -- high energy prices, investor uneasiness about inflation and rising
interest rates -- finally created a perfect storm during the second quarter. The
pivot point was May 10, just five days after the S&P 500 Index had reached a
five-year high, when the Federal Reserve raised its short-term target interest
rate for the 16th consecutive time since June 2004. Sentiment here and around
the world turned on a dime, touching-off a turbulent, global flight from stocks.
The reaction was swift and steep. The S&P 500 had gained 6.81% through May 9,
outdistancing its nearly 5% return for all of 2005. During the last three weeks
of May, the index dropped 3.85%, registering its worst May performance in more
than 20 years. The tech-heavy Nasdaq Composite fell 6%, while the Dow Jones
Industrial Average, which had been just 80 points shy of a record high on May
10, dropped almost 4%.
Stocks cut a choppy path through June as investors weighed whether the Fed would
increase interest rates again at the end of the month. In one final gyration,
the market rallied strongly June 29 after the Fed raised rates by another
quarter point, while seemingly moderating its interest-rate policy statement.
Twenty-four hours later, only one of the three major U.S. indices, the Dow, was
in the black for the second quarter, up just under one percent.
In the value realm, small- and mid-sized companies had the highest returns for
the six months, as evidenced by the Russell 2000 Value Index's gain of 10.44%.
Larger value companies, tracked by the Russell 1000 Value Index, were up 6.56%.
On the whole, value shares performed better than growth across the
capitalization range, with the greatest edge among larger businesses.
The period was marked by a continuing rally in lower-quality issues, as
investors rewarded stocks rated B or lower (Standard & Poor's defines
high-quality stocks as B+ or higher). A+ shares -- some of the market's
strongest and most stable companies -- actually had the lowest returns for the
six months. Historically, market cycles led by low-quality stocks have tended to
dampen the returns of American Century's value funds, which generally seek
higher-quality value stocks.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Mid Cap Value - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
--------------
AVERAGE ANNUAL
RETURNS
- -------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR INCEPTION DATE
- -------------------------------------------------------------------------------
CLASS II 5.10% 11.32% 16.55% 10/29/04
- -------------------------------------------------------------------------------
RUSSELL MIDCAP
VALUE INDEX(2) 7.02% 14.26% 19.03% --
- -------------------------------------------------------------------------------
Class I 5.18% 11.56% 12.21% 12/1/04
- -------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. (c) 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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the index are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not.
(continued)
- ------
3
VP Mid Cap Value - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made October 29, 2004
- --------------------------------------------------------------------------------
ONE-YEAR RETURNS OVER LIFE OF CLASS
- --------------------------------------------------------------------------------
Periods ended June 30
- --------------------------------------------------------------------------------
2005* 2006
- --------------------------------------------------------------------------------
Class II 15.99% 11.32%
- --------------------------------------------------------------------------------
Russel Midcap Value Index 17.01% 14.26%
- --------------------------------------------------------------------------------
* From 10/29/04, Class II's inception date. Not annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class II shares; performance
for other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the index are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the index do not.
- ------
4
VP Mid Cap Value - Portfolio Commentary
PORTFOLIO MANAGERS: MICHAEL LISS, PHIL DAVIDSON AND SCOTT MOORE
Despite an equities market in which investors generally preferred lower-quality,
momentum-driven stocks, VP Mid Cap Value -- which concentrates on higher-quality
businesses with strong market positions and sound balance sheets -- posted a
gain of 5.18%* during the six-month period ended June 30, 2006. That return
trailed its benchmark, the Russell Midcap Value Index, which was up 7.02%.
Now roughly 19 months old, VP Mid Cap Value has performed solidly since its
inception on December 1, 2004. The portfolio's average annualized return of
12.21% as of June 30 places it ahead of the 10.33%** median return for
Morningstar's Mid Cap Value category.
CONSUMER STAPLES LEAD PORTFOLIO
The uncertainty that marked the final two months of the period led many
investors to seek "safer" stocks and VP Mid Cap Value was rewarded for taking
positions in providers of everyday household products and food and beverages,
items that consumers tend to purchase regardless of the investment or market
climate. Our top-contributing securities included H.J. Heinz Co. and Kraft Foods
Inc. Best known for its ketchup franchise (which has a market share of 60% in
the U.S.), Heinz is one of the world's leading marketers of branded foods,
including condiments, sauces, meals, frozen food and infant foods. Investors in
Heinz have been reacting to a proposal from an activist shareholder that calls
for cost-cutting, significant investments in brand advertising, a higher
dividend and share repurchases. Kraft, the largest branded food company in the
United States, has been increasing its investments in brand-building and new
product innovations.
ConAgra Foods, Inc., whose brands include Chef Boyardee, Healthy Choice, Hunt's
and Reddi-wip, provides a good example of a how we look for catalysts that will
lead to improvements in a company's share price. The company entered 2006 beset
by high costs and sagging retail sales. But ConAgra's shares have performed well
during the last six months, as new management has made operational improvements
and divested non-core brands.
INDUSTRIALS ADD VALUE
Industrial stocks were also among VP Mid Cap Value's largest contributors to
absolute performance. In machinery, we held American Railcar Industries Inc., a
maker of covered hopper and tank railcars. American Railcar has a backlog of
nearly two years (almost twice the industry
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
International Flavors
& Fragrances Inc. 3.9% 3.8%
- --------------------------------------------------------------------------------
Equitable Resources Inc. 3.9% 2.2%
- --------------------------------------------------------------------------------
Kimberly-Clark Corp. 3.8% 1.9%
- --------------------------------------------------------------------------------
Beckman Coulter, Inc. 2.4% 1.1%
- --------------------------------------------------------------------------------
Dollar General Corp. 2.3% 0.7%
- --------------------------------------------------------------------------------
Symmetry Medical Inc. 2.2% 0.7%
- --------------------------------------------------------------------------------
Fifth Third Bancorp 2.1% 1.8%
- --------------------------------------------------------------------------------
Freddie Mac 2.0% 1.0%
- --------------------------------------------------------------------------------
SunTrust Banks, Inc. 1.9% 2.8%
- --------------------------------------------------------------------------------
HCA Inc. 1.8% --
- --------------------------------------------------------------------------------
* All fund returns and inception dates referenced in this commentary are for
Class I shares. Total returns for periods less than one year are not annualized.
**The Morningstar's Mid Cap Value category returned 5.17% and 11.06% for the
six-month and one-year periods ended June 30, 2006, respectively.
(c) 2006 Morningstar, Inc. All Rights Reserved. The information contained
herein: (1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate, complete
or timely. Neither Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information. Morningstar Rankings
are based on risk adjusted returns.
(continued)
- ------
5
VP Mid Cap Value - Portfolio Commentary
average), driven by cyclical demand for rail cars that carry coal and gasoline.
Providers of commercial services also carried the portfolio, led by Waste
Management Inc., the largest solid waste management company in the country.
Fueled by expanding margins and cost control, Waste Management continued to
improve its operating performance. Republic Services, another leading waste
management firm, also reported strong results. In addition to raising its
dividend 17% during the period, Republic Services announced plans to repurchase
more than 9% of its stock during 2006.
EFFECTIVE SELECTIONS IN FINANCIALS
In financials, the portfolio depended on investments in real estate investment
trusts (REITs) and commercial banks. On the real estate side, Education Realty
Trust, Inc. was a strong performer. The company owns and manages student housing
communities located near university campuses. Education Realty Trust has been
involved in the student housing industry since 1964 and is currently one of only
three publicly traded REITs focused on this niche industry.
Profits for commercial banks were squeezed during the period by rising
short-term interest rates (a rising cost for capital). Nevertheless SunTrust
Banks, Inc. was one of our top contributors. SunTrust, the seventh-largest U.S.
bank, operates throughout 11 Southeastern states, which represent one of the
highest population growth footprints in banking.
SOME DISAPPOINTMENTS
Consumer discretionary businesses, a broad waterfront of companies involved in
pursuits such as retailing, media, hotels, restaurants and leisure products,
slowed our progress the most. In retailing, discounter Dollar General Corp.
found its profits squeezed by steep markdowns, higher shrink, and gasoline
prices that both raised transportation costs and slowed spending by the chain's
low-income customers. We believe the company's issues are manageable and
increased our position during the period.
Another of our largest detractors was media company Westwood One, Inc., the
nation's largest radio network and the leading distributor of national radio
programs. In addition to facing a weak advertising environment, Westwood One is
contending with rising operating expenses as it invests in new programming.
LOOKING AHEAD
VP Mid Cap Value seeks to help investors achieve long-term capital growth by
investing in medium-sized companies. We will adhere to our discipline of
identifying well-managed companies that appear to be undervalued for reasons
unrelated to their fundamental or financial health.
- --------------------------------------------------------------------------------
TOP FIVE INDUSTRIES AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Chemicals 8.0% 6.8%
- --------------------------------------------------------------------------------
Health Care Equipment
& Supplies 5.4% 3.0%
- --------------------------------------------------------------------------------
Commercial Banks 5.1% 5.9%
- --------------------------------------------------------------------------------
Food Products 5.1% 7.9%
- --------------------------------------------------------------------------------
Oil, Gas &
Consumable Fuels 4.9% 4.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Common Stocks 93.2% 98.5%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 2.1% 3.4%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities 4.7% (1.9)%
- --------------------------------------------------------------------------------
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
continued)
- ------
7
Shareholder Fee Example (Unaudited)
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 -- EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP MID CAP VALUE SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,051.80 $5.09 1.00%
- --------------------------------------------------------------------------------
Class II $1,000 $1,051.00 $5.85 1.15%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,019.84 $5.01 1.00%
- --------------------------------------------------------------------------------
Class II $1,000 $1,019.09 $5.76 1.15%
- --------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
8
VP Mid Cap Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 93.2%
AEROSPACE & DEFENSE - 0.8%
- --------------------------------------------------------------------------------
1,893 Honeywell International Inc. $ 76,288
- --------------------------------------------------------------------------------
645 Northrop Grumman Corp. 41,319
- --------------------------------------------------------------------------------
117,607
- --------------------------------------------------------------------------------
AUTO COMPONENTS - 0.8%
- --------------------------------------------------------------------------------
9,761 Cooper Tire & Rubber Co. 108,738
- --------------------------------------------------------------------------------
AUTOMOBILES - 0.2%
- --------------------------------------------------------------------------------
844 Winnebago Industries 26,198
- --------------------------------------------------------------------------------
BEVERAGES - 2.3%
- --------------------------------------------------------------------------------
3,126 Anheuser-Busch Companies, Inc. 142,514
- --------------------------------------------------------------------------------
9,555 Coca-Cola Enterprises Inc. 194,636
- --------------------------------------------------------------------------------
337,150
- --------------------------------------------------------------------------------
BUILDING PRODUCTS - 1.0%
- --------------------------------------------------------------------------------
5,078 Masco Corp. 150,512
- --------------------------------------------------------------------------------
CAPITAL MARKETS - 0.2%
- --------------------------------------------------------------------------------
624 Nuveen Investments Inc. Cl A 26,863
- --------------------------------------------------------------------------------
CHEMICALS - 8.0%
- --------------------------------------------------------------------------------
1,209 Air Products & Chemicals, Inc. 77,279
- --------------------------------------------------------------------------------
1,789 du Pont (E.I.) de Nemours & Co. 74,422
- --------------------------------------------------------------------------------
6,089 Ferro Corp. 97,180
- --------------------------------------------------------------------------------
16,363 International Flavors
& Fragrances Inc. 576,633
- --------------------------------------------------------------------------------
4,872 Minerals Technologies Inc. 253,344
- --------------------------------------------------------------------------------
5,458 Nalco Holding Co.(1) 96,225
- --------------------------------------------------------------------------------
1,175,083
- --------------------------------------------------------------------------------
COMMERCIAL BANKS - 5.1%
- --------------------------------------------------------------------------------
1,853 BB&T Corporation 77,066
- --------------------------------------------------------------------------------
3,154 Chemical Financial Corp. 96,512
- --------------------------------------------------------------------------------
8,198 Fifth Third Bancorp 302,917
- --------------------------------------------------------------------------------
3,639 SunTrust Banks, Inc. 277,510
- --------------------------------------------------------------------------------
754,005
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 1.4%
- --------------------------------------------------------------------------------
1,823 Pitney Bowes, Inc. 75,290
- --------------------------------------------------------------------------------
3,084 Republic Services, Inc. Cl A 124,408
- --------------------------------------------------------------------------------
199,698
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.5%
- --------------------------------------------------------------------------------
1,904 Diebold, Inc. 77,340
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 2.4%
- --------------------------------------------------------------------------------
3,416 AptarGroup, Inc. 169,468
- --------------------------------------------------------------------------------
5,910 Bemis Co., Inc. 180,964
- --------------------------------------------------------------------------------
350,432
- --------------------------------------------------------------------------------
DISTRIBUTORS - 0.3%
- --------------------------------------------------------------------------------
976 Genuine Parts Company 40,660
- --------------------------------------------------------------------------------
DIVERSIFIED - 1.0%
- --------------------------------------------------------------------------------
1,916 iShares S&P MidCap 400
Index Fund 146,172
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.8%
- --------------------------------------------------------------------------------
7,941 Commonwealth Telephone
Enterprises, Inc. $ 263,324
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 2.0%
- --------------------------------------------------------------------------------
3,719 Empire District Electric Co. 76,425
- --------------------------------------------------------------------------------
6,957 Northeast Utilities 143,802
- --------------------------------------------------------------------------------
3,445 Westar Energy Inc. 75,790
- --------------------------------------------------------------------------------
296,017
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 2.2%
- --------------------------------------------------------------------------------
4,230 American Power Conversion Corp. 82,443
- --------------------------------------------------------------------------------
2,915 Hubbell Inc. Cl A 127,064
- --------------------------------------------------------------------------------
2,367 Hubbell Inc. Cl B 112,788
- --------------------------------------------------------------------------------
322,295
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT
& INSTRUMENTS - 0.9%
- --------------------------------------------------------------------------------
5,602 CPI International Inc.(1) 81,229
- --------------------------------------------------------------------------------
1,594 Littelfuse, Inc.(1) 54,802
- --------------------------------------------------------------------------------
136,031
- --------------------------------------------------------------------------------
FOOD PRODUCTS - 5.1%
- --------------------------------------------------------------------------------
4,235 ConAgra Foods, Inc. 93,636
- --------------------------------------------------------------------------------
11,481 Diamond Foods Inc. 184,499
- --------------------------------------------------------------------------------
1,348 General Mills, Inc. 69,638
- --------------------------------------------------------------------------------
4,077 H.J. Heinz Co. 168,053
- --------------------------------------------------------------------------------
2,425 Kraft Foods Inc. Cl A 74,933
- --------------------------------------------------------------------------------
6,705 Unilever N.V. New York Shares 151,198
- --------------------------------------------------------------------------------
741,957
- --------------------------------------------------------------------------------
GAS UTILITIES - 1.3%
- --------------------------------------------------------------------------------
6,784 WGL Holdings Inc. 196,397
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES - 5.4%
- --------------------------------------------------------------------------------
6,413 Beckman Coulter, Inc. 356,241
- --------------------------------------------------------------------------------
2,725 National Dentex Corp.(1) 63,220
- --------------------------------------------------------------------------------
1,852 Steris Corp. 42,337
- --------------------------------------------------------------------------------
21,094 Symmetry Medical Inc.(1) 324,848
- --------------------------------------------------------------------------------
786,646
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES - 3.3%
- --------------------------------------------------------------------------------
4,244 Apria Healthcare Group Inc.(1) 80,212
- --------------------------------------------------------------------------------
6,119 HCA Inc. 264,034
- --------------------------------------------------------------------------------
827 LifePoint Hospitals Inc.(1) 26,572
- --------------------------------------------------------------------------------
2,206 Universal Health Services, Inc. Cl B 110,874
- --------------------------------------------------------------------------------
481,692
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 4.8%
- --------------------------------------------------------------------------------
3,007 CEC Entertainment Inc.(1) 96,585
- --------------------------------------------------------------------------------
5,128 International Speedway Corp. 237,786
- --------------------------------------------------------------------------------
6,389 OSI Restaurant Partners, Inc. 221,059
- --------------------------------------------------------------------------------
4,035 Speedway Motorsports Inc. 152,281
- --------------------------------------------------------------------------------
707,711
- --------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.4%
- --------------------------------------------------------------------------------
858 Hunter Douglas N.V. ORD 57,761
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
9
VP Mid Cap Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 3.8%
- --------------------------------------------------------------------------------
8,908 Kimberly-Clark Corp. $ 549,624
- --------------------------------------------------------------------------------
INSURANCE - 4.8%
- --------------------------------------------------------------------------------
2,013 Ambac Financial Group, Inc. 163,254
- --------------------------------------------------------------------------------
1,623 Aspen Insurance Holdings Ltd. 37,800
- --------------------------------------------------------------------------------
1,171 Genworth Financial Inc. Cl A 40,798
- --------------------------------------------------------------------------------
650 Hartford Financial
Services Group Inc. (The) 54,990
- --------------------------------------------------------------------------------
5,881 Horace Mann Educators Corp. 99,683
- --------------------------------------------------------------------------------
8,075 Marsh & McLennan Companies, Inc. 217,136
- --------------------------------------------------------------------------------
7,607 RAM Holdings Ltd.(1) 95,620
- --------------------------------------------------------------------------------
709,281
- --------------------------------------------------------------------------------
IT SERVICES - 1.2%
- --------------------------------------------------------------------------------
2,637 Accenture Ltd. Cl A 74,679
- --------------------------------------------------------------------------------
729 DST Systems, Inc.(1) 43,376
- --------------------------------------------------------------------------------
4,958 NCI Inc. Cl A(1) 64,950
- --------------------------------------------------------------------------------
183,005
- --------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 2.2%
- --------------------------------------------------------------------------------
5,019 Arctic Cat Inc. 97,921
- --------------------------------------------------------------------------------
12,097 Hasbro, Inc. 219,076
- --------------------------------------------------------------------------------
316,997
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES - 1.7%
- --------------------------------------------------------------------------------
11,322 PRA International(1) 252,141
- --------------------------------------------------------------------------------
MACHINERY - 0.3%
- --------------------------------------------------------------------------------
1,060 Kaydon Corporation 39,549
- --------------------------------------------------------------------------------
MEDIA - 2.8%
- --------------------------------------------------------------------------------
4,514 ADVO, Inc. 111,090
- --------------------------------------------------------------------------------
2,201 Dow Jones & Co., Inc. 77,057
- --------------------------------------------------------------------------------
7,681 Valassis Communications, Inc.(1) 181,194
- --------------------------------------------------------------------------------
4,633 Westwood One, Inc. 34,748
- --------------------------------------------------------------------------------
404,089
- --------------------------------------------------------------------------------
METALS & MINING - 0.8%
- --------------------------------------------------------------------------------
4,756 Compass Minerals International Inc. 118,662
- --------------------------------------------------------------------------------
MULTI-UTILITIES - 4.4%
- --------------------------------------------------------------------------------
1,264 Dominion Resources Inc. 94,535
- --------------------------------------------------------------------------------
4,483 Puget Energy Inc. 96,295
- --------------------------------------------------------------------------------
4,926 Wisconsin Energy Corp. 198,518
- --------------------------------------------------------------------------------
13,473 XCEL Energy Inc. 258,411
- --------------------------------------------------------------------------------
647,759
- --------------------------------------------------------------------------------
MULTILINE RETAIL - 2.6%
- --------------------------------------------------------------------------------
23,849 Dollar General Corp. 333,409
- --------------------------------------------------------------------------------
2,161 Family Dollar Stores, Inc. 52,793
- --------------------------------------------------------------------------------
386,202
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 4.9%
- --------------------------------------------------------------------------------
17,044 Equitable Resources Inc. 570,974
- --------------------------------------------------------------------------------
2,611 Murphy Oil Corp. 145,850
- --------------------------------------------------------------------------------
716,824
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 2.6%
- --------------------------------------------------------------------------------
7,744 MeadWestvaco Corp. $ 216,290
- --------------------------------------------------------------------------------
2,640 Weyerhaeuser Co. 164,340
- --------------------------------------------------------------------------------
380,630
- --------------------------------------------------------------------------------
PHARMACEUTICALS - 1.7%
- --------------------------------------------------------------------------------
1,391 Schering-Plough Corp. 26,471
- --------------------------------------------------------------------------------
9,300 Watson Pharmaceuticals, Inc.(1) 216,504
- --------------------------------------------------------------------------------
242,975
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS - 1.0%
- --------------------------------------------------------------------------------
3,322 Annaly Mortgage Management Inc. 42,555
- --------------------------------------------------------------------------------
3,345 Education Realty Trust, Inc. 55,694
- --------------------------------------------------------------------------------
1,122 Rayonier, Inc. 42,535
- --------------------------------------------------------------------------------
140,784
- --------------------------------------------------------------------------------
SEMICONDUCTORS &
SEMICONDUCTOR EQUIPMENT - 1.3%
- --------------------------------------------------------------------------------
4,852 Applied Materials, Inc. 78,990
- --------------------------------------------------------------------------------
1,836 KLA-Tencor Corp. 76,323
- --------------------------------------------------------------------------------
2,992 Teradyne, Inc.(1) 41,679
- --------------------------------------------------------------------------------
196,992
- --------------------------------------------------------------------------------
SOFTWARE - 0.5%
- --------------------------------------------------------------------------------
867 Reynolds & Reynolds Co. Cl A 26,591
- --------------------------------------------------------------------------------
2,863 Synopsys, Inc.(1) 53,738
- --------------------------------------------------------------------------------
80,329
- --------------------------------------------------------------------------------
SPECIALTY RETAIL - 1.0%
- --------------------------------------------------------------------------------
2,194 Foot Locker, Inc. 53,731
- --------------------------------------------------------------------------------
4,975 Gap, Inc. (The) 86,565
- --------------------------------------------------------------------------------
140,296
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 4.1%
- --------------------------------------------------------------------------------
3,046 Fannie Mae 146,513
- --------------------------------------------------------------------------------
5,054 Freddie Mac 288,128
- --------------------------------------------------------------------------------
2,213 MGIC Investment Corp. 143,845
- --------------------------------------------------------------------------------
1,147 Washington Federal, Inc. 26,599
- --------------------------------------------------------------------------------
605,085
- --------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS - 0.3%
- --------------------------------------------------------------------------------
565 Grainger (W.W.), Inc. 42,505
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $13,630,799) 13,654,018
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
10
VP Mid Cap Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS - 2.1%
Repurchase Agreement, Credit Suisse First Boston, Inc.,
(collateralized by various U.S. Treasury obligations,
6.125% - 8.875%, 2/15/19 - 8/15/29, valued at $306,115),
in a joint trading account at 4.50%, dated 6/30/06,
due 7/3/06 (Delivery value $300,113)
(Cost $300,000) $ 300,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 95.3%
(Cost $13,930,799) 13,954,018
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - 4.7% 689,936
- --------------------------------------------------------------------------------
TOTAL NET ASSETS - 100.0% $14,643,954
================================================================================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts to Sell Settlement Date Value Unrealized Gain (Loss)
- --------------------------------------------------------------------------------
53,434 Euro for USD 7/31/06 $ 68,457 $ (1,115)
- --------------------------------------------------------------------------------
67,561 Euro for USD 7/31/06 86,554 (1,553)
- --------------------------------------------------------------------------------
$155,011 $ (2,668)
====================================
(Value on Settlement Date $152,343)
NOTES TO SCHEDULE OF INVESTMENTS
ORD = Foreign Ordinary Share
USD = United States Dollar
(1) Non-income producing.
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $13,930,799) $13,954,018
- ----------------------------------------------------------------
Cash 670,782
- ----------------------------------------------------------------
Receivable for investments sold 396,281
- ----------------------------------------------------------------
Dividends and interest receivable 22,012
- --------------------------------------------------------------------------------
15,043,093
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 385,232
- ----------------------------------------------------------------
Payable for forward foreign currency exchange contracts 2,668
- ----------------------------------------------------------------
Accrued management fees 9,467
- ----------------------------------------------------------------
Distribution fees payable 1,772
- --------------------------------------------------------------------------------
399,139
- --------------------------------------------------------------------------------
NET ASSETS $14,643,954
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $14,140,126
- ----------------------------------------------------------------
Undistributed net investment income 62,136
- ----------------------------------------------------------------
Undistributed net realized gain on investment and foreign
currency transactions 421,102
- ----------------------------------------------------------------
Net unrealized appreciation on investments and translation
of assets and liabilites in foreign currencies 20,590
- --------------------------------------------------------------------------------
$14,643,954
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $5,674,767
- ----------------------------------------------------------------
Shares outstanding 466,028
- ----------------------------------------------------------------
Net asset value per share $12.18
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $8,969,187
- ----------------------------------------------------------------
Shares outstanding 737,329
- ----------------------------------------------------------------
Net asset value per share $12.16
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- ----------------------------------------------------------------
Dividends (net of foreign taxes withheld of $510) $110,599
- ----------------------------------------------------------------
Interest 8,487
- --------------------------------------------------------------------------------
119,086
- --------------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------
Management fees 47,296
- ----------------------------------------------------------------
Distribution fees - Class II 9,506
- ----------------------------------------------------------------
Directors' fees and expenses 131
- ----------------------------------------------------------------
Other expenses 17
- --------------------------------------------------------------------------------
56,950
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 62,136
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- ----------------------------------------------------------------
Investment transactions 537,933
- ----------------------------------------------------------------
Foreign currency transactions (1,235)
- --------------------------------------------------------------------------------
536,698
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION):
- ----------------------------------------------------------------
Investments (147,268)
- ----------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (3,260)
- --------------------------------------------------------------------------------
(150,528)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 386,170
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $448,306
================================================================================
See Notes to Financial Statements
- ------
13
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 62,136 $ 54,938
- --------------------------------------------------
Net realized gain (loss) 536,698 178,596
- --------------------------------------------------
Change in net unrealized
appreciation (depreciation) (150,528) 126,548
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 448,306 360,082
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net investment income:
- --------------------------------------------------
Class I -- (20,147)
- --------------------------------------------------
Class II -- (40,350)
- --------------------------------------------------
From net realized gains:
- --------------------------------------------------
Class I (22,315) (66,230)
- --------------------------------------------------
Class II (73,461) (146,274)
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (95,776) (273,001)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 5,550,416 7,799,563
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 5,902,946 7,886,644
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 8,741,008 854,364
- --------------------------------------------------------------------------------
End of period $14,643,954 $8,741,008
================================================================================
Undistributed net investment income $62,136 --
================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc. (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Mid Cap Value Fund (the fund) is one
fund in a series issued by the corporation. The fund is diversified under the
1940 Act. The fund's investment objective is to seek long-term capital growth.
The production of income is a secondary objective. The fund pursues its
objective by investing in stocks of mid-sized market capitalization companies
that the investment advisor believes to be undervalued at the time of purchase.
The following is a summary of the fund's significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I and Class II. The
share classes differ principally in their respective 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 -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
Distributions received on securities that represent a return of capital or
capital gain are recorded as a reduction of cost of investments and/or as a
realized gain. The fund estimates the components of distributions received that
may be considered nontaxable distributions or capital gain distributions for
income tax purposes.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective dates of such transactions. For assets and
liabilities, other than investments in securities, net realized and unrealized
gains and losses from foreign currency translations arise from changes in
currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on investment transactions and unrealized appreciation
(depreciation) on investments, respectively. Certain countries may impose taxes
on the contract amount of purchases and sales of foreign currency contracts in
their currency. The fund records the foreign tax expense, if any, as a reduction
to the net realized gain (loss) on foreign currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign cur-
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
rency exchange rate underlying the forward contract. Additionally, losses may
arise if the counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of those directors who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears.
The effective annual management fee for each class of the fund for the six
months ended June 30, 2006 was 1.00% and 0.90% for Class I and Class II,
respectively.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and financial institutions that have entered into
sales agreements with respect to shares of the fund. Fees incurred under the
plan during the six months ended June 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investments securities, excluding short-term investments,
for the six months ended June 30, 2006, were $17,626,258 and $12,969,114,
respectively.
As of June 30, 2006, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $14,131,348
================================================================================
Gross tax appreciation of investments $ 323,678
- -------------------------------------------------------------
Gross tax depreciation of investments (501,008)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $ (177,330)
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 453,500 $5,529,314
- ----------------------------------------------------
Issued in reinvestment of distributions 1,869 22,315
- ----------------------------------------------------
Redeemed (202,445) (2,470,113)
- --------------------------------------------------------------------------------
Net increase (decrease) 252,924 $3,081,516
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 229,327 $2,654,643
- ----------------------------------------------------
Issued in reinvestment of distributions 7,398 86,377
- ----------------------------------------------------
Redeemed (49,010) (563,469)
- --------------------------------------------------------------------------------
Net increase (decrease) 187,715 $2,177,551
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 247,166 $3,003,265
- ----------------------------------------------------
Issued in reinvestment of distributions 6,158 73,461
- ----------------------------------------------------
Redeemed (50,330) (607,826)
- --------------------------------------------------------------------------------
Net increase (decrease) 202,994 $2,468,900
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 473,345 $5,502,915
- ----------------------------------------------------
Issued in reinvestment of distributions 15,942 186,624
- ----------------------------------------------------
Redeemed (5,808) (67,527)
- --------------------------------------------------------------------------------
Net increase (decrease) 483,479 $5,622,012
================================================================================
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
18
VP Mid Cap Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
2006(1) 2005 2004(2)
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.70 $11.21 $10.80
- --------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------------
Net Investment Income (Loss)(3) 0.09 0.20 --(4)
- -----------------------------------------
Net Realized and Unrealized Gain (Loss) 0.51 0.86 0.44
- --------------------------------------------------------------------------------
Total From Investment Operations 0.60 1.06 0.44
- --------------------------------------------------------------------------------
Distributions
- -----------------------------------------
From Net Investment Income -- (0.10) (0.03)
- -----------------------------------------
From Net Realized Gains (0.12) (0.47) --
- --------------------------------------------------------------------------------
Total Distributions (0.12) (0.57) (0.03)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $12.18 $11.70 $11.21
================================================================================
TOTAL RETURN(5) 5.18% 9.56% 4.08%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.00%(6) 1.02% 1.00%(6)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.44%(6) 1.64% 0.47%(6)
- -----------------------------------------
Portfolio Turnover Rate 129% 225% 46%(7)
- -----------------------------------------
Net Assets, End of Period (in thousands) $5,675 $2,493 $285
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) December 1, 2004 (commencement of sale) through December 31, 2004.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) Annualized.
(7) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the period October 29, 2004 (fund inception) through
December 31, 2004.
See Notes to Financial Statements.
- ------
19
VP Mid Cap Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2006(1) 2005 2004(2)
PER-SHARE DATA
Net Asset Value, Beginning of Period $11.69 $11.21 $10.00
- --------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------------
Net Investment Income (Loss)(3) 0.08 0.16 0.02
- -----------------------------------------
Net Realized and Unrealized Gain (Loss) 0.51 0.87 1.22
- --------------------------------------------------------------------------------
Total From Investment Operations 0.59 1.03 1.24
- --------------------------------------------------------------------------------
Distributions
- -----------------------------------------
From Net Investment Income -- (0.08) (0.03)
- -----------------------------------------
From Net Realized Gains (0.12) (0.47) --
- --------------------------------------------------------------------------------
Total Distributions (0.12) (0.55) (0.03)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $12.16 $11.69 $11.21
================================================================================
TOTAL RETURN(4) 5.10% 9.31% 12.39%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.15%(5) 1.17% 1.15%(5)
- -----------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.29%(5) 1.49% 0.95%(5)
- -----------------------------------------
Portfolio Turnover Rate 129% 225% 46%
- -----------------------------------------
Net Assets, End of Period (in thousands) $8,969 $6,249 $570
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) October 29, 2004 (fund inception) through December 31, 2004.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) Annualized.
See Notes to Financial Statements.
- -------
20
Approval of Management Agreement for VP Mid Cap Value
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 VP Mid Cap Value (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, share-holder
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)
- ------
21
Approval of Management Agreement for VP Mid Cap Value
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
manage-ment 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
(continued)
- ------
22
Approval of Management Agreement for VP Mid Cap Value
fund's performance with that of similar funds not managed by the advisor. 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 appropri-
(continued)
- ------
23
Approval of Management Agreement for VP Mid Cap Value
ately sharing economies of scale through its competitive fee structure, fee
breakpoints as the fund increases in size, and through reinvestment in its
business to provide shareholders additional content and services.
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 a 15(c) Provider 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 above the median 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. The Directors also determined that the advisor is
able to provide investment management services to certain clients other than the
(continued)
- ------
24
Approval of Management Agreement for VP Mid Cap Value
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 independent 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.
- ------
25
Share Class Information
Two classes of shares are authorized for sale by the fund: Class I and Class II.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
26
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL MIDCAP(reg.tm) INDEX measures the performance of the 800 smallest of
the 1,000 largest publicly traded U.S. companies, based on total market
capitalization.
The RUSSELL MIDCAP(reg.tm) VALUE INDEX measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values.
The RUSSELL 1000(reg.tm) VALUE INDEX measures the performance of those Russell
1000 Index companies (the 1,000 largest of the 3,000 largest publicly traded
U.S. companies, based on total market capitalization) with lower price-to-book
ratios and lower forecasted growth rates.
The RUSSELL 2000(reg.tm) VALUE INDEX measures the performance of those Russell
2000 Index companies (the 2,000 smallest of the 3,000 largest publicly traded
U.S. companies, based on total market capitalization) with lower price-to-book
ratios and lower forecasted growth rates.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
27
Notes
- -------
28
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
(c)2006 American Century Proprietary Holdings, Inc. All rights reserved.
0608
SH-SAN-50655
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP Ultra(reg.tm) Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns. . . . . . . . . . . . . . . . . . . . . . . . . 2
VP ULTRA
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . 12
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . 14
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 15
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
OTHER INFORMATION
Approval of Management Agreement for VP Ultra. . . . . . . . . . . . . . . 23
Share Class Information. . . . . . . . . . . . . . . . . . . . . . . . . . 28
Index Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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 Mark Mallon]
BY MARK MALLON, CHIEF INVESTMENT OFFICER, AMERICAN CENTURY INVESTMENTS
WHAT HAPPENED IN THE ECONOMY
Resurging growth on the heels of a 4th-quarter 2005 slowdown provided fuel for a
dose of investor enthusiasm in early 2006. But that enthusiasm dimmed late in
the 6-month period as persistent inflation led the Federal Reserve to maintain
its ongoing string of interest rate hikes -- even as economic growth appeared to
slow as the period closed.
As measured in gross domestic product (GDP), U.S. economic growth rose to 5.6%
in the first quarter of 2006, more than tripling the 1.7% rate of the previous
quarter, with retailers reporting strong post-holiday sales and overall
corporate profits remaining robust.
However, a surge in many commodity values -- including crude oil, copper and
gold, which reached its highest level in a quarter century -- gave the Federal
Reserve one reason to keep its 2-year string of interest rate hikes intact.
Moreover, core inflation rates of 2-3% remained at the high end of the Fed's
comfort zone.
As a result, during the period the central bank boosted its short-term rate
target by one full percentage point to 5.25%, the highest level since January
2001. Two separate quarter-point increases came in the last half of the period,
even as most economists estimated GDP growth had scaled back to 2-3% after the
roaring start to the year.
WHAT HAPPENED IN THE MARKET
Through early May 2006, investors chased risk. As summer approached, they ran
from it.
Before the Fed raised its short-term target May 10, investors had suspected that
day's rate hike might be the last. But in announcing the increase, the central
bank made it clear more tightening could lay ahead to keep inflation in check.
Market sentiment turned on a dime. The ensuing selloff sent the S&P 500 Index,
which in early May reached its highest point in five years, down 8% from its
peak. Small-cap indices that had established repeated record highs fell by more
than 10%, meeting the classic definition of a market "correction."
The Fed boosted its benchmark rate another quarter-point June 29. This time, it
gave investors what they wanted to hear: some indication that its rate-hike
campaign might soon end.
U.S. equity markets responded with their best 1-day performance in three years,
pushing broad market indices to low-single digit gains for the 6-month period.
Meanwhile, as they have since 2000, value stocks once again outperformed growth
issues for the period as a whole, particularly when investors lowered their risk
tolerance in May and June.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Ultra - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
----------------------
AVERAGE ANNUAL RETURNS
- ---------------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS INCEPTION DATE
- ---------------------------------------------------------------------------------------
CLASS I -6.07% 0.00% -0.70% -0.45% 5/1/01
- ---------------------------------------------------------------------------------------
RUSSELL 1000 GROWTH INDEX(2) -0.93% 6.12% -0.76% -1.47%(3) --
- ---------------------------------------------------------------------------------------
S&P 500 INDEX(2) 2.71% 8.63% 2.49% 2.06%(3) --
- ---------------------------------------------------------------------------------------
Class II -6.10% -0.21% -- 1.40% 5/1/02
- ---------------------------------------------------------------------------------------
Class III -6.08% -0.10% -- 1.76% 5/13/02
- ---------------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. (c) 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.
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 4/30/01, the date nearest Class I's inception for which data are
available.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
- ------
3
VP Ultra - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made May 1, 2001
LIFE OF CLASS
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended June 30
- -------------------------------------------------------------------------------
2001* 2002 2003 2004 2005 2006
- -------------------------------------------------------------------------------
Class I 1.20% -17.36% -1.74% 17.56% 1.14% 0.00%
- -------------------------------------------------------------------------------
Russell 1000 Growth Index -3.75% -26.49% 2.94% 17.88% 1.68% 6.12%
- -------------------------------------------------------------------------------
S&P 500 Index -1.78% -17.99% 0.25% 19.11% 6.32% 8.63%
- -------------------------------------------------------------------------------
* From 5/1/01, Class I's inception date. Index data from 4/30/01, the date
nearest Class I's inception for which data are available. Not annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
- ------
4
VP Ultra - Portfolio Commentary
PORTFOLIO MANAGERS: WADE SLOME, JERRY SULLIVAN, AND TOM TELFORD
American Century VP Ultra fell 6.07%* during the six months ended June 30, 2006,
trailing the 0.93% decline of its benchmark, the Russell 1000 Growth Index, and
the S&P 500 Index's 2.71% gain.
Longer-term, VP Ultra has slightly outperformed its benchmark, declining 0.70%
in the five years ended June 30, 2006, compared with the 0.76% loss of the
Russell 1000 Growth in the same time frame.
CYCLICALS LEAD, TECH TRAILS
In the latest 6-month period, Ultra's orientation toward companies with
consistent, above-average growth did not match the market's preference for firms
with traditionally cyclical profits. The portfolio scaled back positions in many
cyclical companies throughout 2005 because management believed further share
price increases would accrue at a heightened level of risk.
In particular, VP Ultra's substantial underweight in industrial companies
hindered the portfolio's relative performance. Conversely, the portfolio
benefited from an overweight in financials, which led all sectors in
contributing to both relative and absolute returns.
Ultimately, though, VP Ultra couldn't overcome either a variety of lagging stock
picks throughout the health care sector or its detrimental overweight in
information technology, which composed 30% of the portfolio in the period and
whose returns trailed all other sectors.
TOP PICKS FIT INVESTMENT PROCESS
Though the market as a whole in the period tended to prefer traditionally
cyclical companies, VP Ultra's top two individual performers both fit the
portfolio's focus on investing in businesses with competitive advantages that
provide a foundation for growth.
Its name notwithstanding, International Game Technology actually sits in the
consumer discretionary sector. One of VP Ultra's top 10 average holdings in the
period and also a top 10 overweight position, the world's largest slot machine
maker continued producing solid gains in revenue and earnings. As a result, its
shares shot up 24%, ranking as the portfolio's top relative and absolute
contributor.
Second on the contribution list: CarMax. The used-car marketer has experienced
favorable pricing trends that helped boost its quarterly sales
TOP TEN HOLDINGS
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Wal-Mart Stores, Inc. 4.3% 3.2%
- --------------------------------------------------------------------------------
First Data Corp. 3.4% 2.8%
- --------------------------------------------------------------------------------
Yahoo! Inc. 3.2% 1.8%
- --------------------------------------------------------------------------------
eBay Inc. 2.9% 3.0%
- --------------------------------------------------------------------------------
International Game
Technology 2.8% 2.5%
- --------------------------------------------------------------------------------
UnitedHealth Group
Incorporated 2.7% 2.6%
- --------------------------------------------------------------------------------
Amazon.com, Inc. 2.6% 2.5%
- --------------------------------------------------------------------------------
Apollo Group Inc. Cl A 2.6% 2.2%
- --------------------------------------------------------------------------------
SLM Corporation 2.6% 2.1%
- --------------------------------------------------------------------------------
Electronic Arts Inc. 2.5% 2.0%
- --------------------------------------------------------------------------------
* All fund returns referenced in this commentary
are for Class I shares. Total returns for periods less
than one year are not annualized. (continued)
- ------
5
VP Ultra - Portfolio Commentary
and earnings. The company's stock rallied 28% in the period.
Meanwhile, though the overall technology sector hurt VP Ultra, the portfolio
benefited on a relative basis from its underweight in two massive industry
stalwarts, Microsoft and Intel. Shares in those companies and most other large
technology firms struggled as most investors looked outside the industry for
investment returns in the period.
AILING HEALTH CARE
Three of VP Ultra's 10 worst performers came from health care, including two of
its 10 largest average holdings, Teva Pharmaceutical Industries and UnitedHealth
Group.
Stock in the former, a maker of generic drugs, got battered when rival Merck
announced it would lower prices on its branded Zocor cholesterol drug to compete
with generic competitors. The latter found itself caught up in a brewing scandal
involving stock-option grants to certain executives.
Shares of eBay led all individual detractors in the portfolio, and Amazon.com
also ranked as a leading detractor. Both stocks have encountered mounting
revenue and competition concerns.
MANAGEMENT CHANGE
American Century announced June 30, 2006, that Bruce Wimberly, VP Ultra's senior
portfolio manager and a 12-year veteran of the company, would resign to focus on
personal interests and spend more time with his family.
Tom Telford, who has worked with American Century for 10 years and most recently
guided the company's New Opportunities, New Opportunities II and Technology
funds as portfolio manager for each, now serves as co-portfolio manager on the
VP Ultra team.
Mr. Telford joins Wade Slome and Jerry Sullivan as managers of VP Ultra. Mr.
Slome has co-managed the fund since July 2002, while Mr. Sullivan has co-managed
the portfolio since July 2001.
INVESTMENT PHILOSOPHY
VP Ultra's management team invests in companies with improving business
fundamentals and, over time, the ability to sustain that improvement and
resulting growth.
TOP FIVE INDUSTRIES AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Internet Software
& Services 9.2% 3.3%
- --------------------------------------------------------------------------------
IT Services 7.9% 7.1%
- --------------------------------------------------------------------------------
Hotels, Restaurants
& Leisure 7.2% 6.2%
- --------------------------------------------------------------------------------
Food & Staples Retailing 6.9% 5.9%
- --------------------------------------------------------------------------------
Specialty Retail 6.6% 5.4%
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Domestic
Common Stocks 90.4% 90.0%
- --------------------------------------------------------------------------------
Foreign
Common Stocks(1) 7.6% 6.6%
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS 98.0% 96.6%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 2.7% 2.4%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities (0.7)% 1.0%
- --------------------------------------------------------------------------------
(1) Includes depositary shares, dual listed securities and foreign
ordinary shares.
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
(continued)
- ------
7
Shareholder Fee Example (Unaudited)
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP ULTRA SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Class I $1,000 $939.30 $4.81 1.00%
- --------------------------------------------------------------------------------
Class II $1,000 $939.00 $5.53 1.15%
- --------------------------------------------------------------------------------
Class III $1,000 $939.20 $4.81 1.00%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,019.84 $5.01 1.00%
- --------------------------------------------------------------------------------
Class II $1,000 $1,019.09 $5.76 1.15%
- --------------------------------------------------------------------------------
Class III $1,000 $1,019.84 $5.01 1.00%
- --------------------------------------------------------------------------------
* Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year,divided by 365, to
reflect the one-half year period.
- ------
8
VP Ultra - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 98.0%
AIR FREIGHT & LOGISTICS -- 3.4%
- --------------------------------------------------------------------------------
24,226 C.H. Robinson Worldwide Inc. $ 1,291,246
- --------------------------------------------------------------------------------
30,206 Expeditors International
of Washington, Inc. 1,691,838
- --------------------------------------------------------------------------------
45,167 FedEx Corporation 5,278,216
- --------------------------------------------------------------------------------
97,712 United Parcel
Service, Inc. Cl B 8,044,628
- --------------------------------------------------------------------------------
16,305,928
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 2.3%
- --------------------------------------------------------------------------------
75,987 Amgen Inc.(1) 4,956,632
- --------------------------------------------------------------------------------
70,426 Genentech, Inc.(1) 5,760,847
- --------------------------------------------------------------------------------
10,717,479
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 2.9%
- --------------------------------------------------------------------------------
41,262 Goldman Sachs
Group, Inc. (The) 6,207,044
- --------------------------------------------------------------------------------
32,799 Legg Mason, Inc. 3,264,156
- --------------------------------------------------------------------------------
116,624 T. Rowe Price Group Inc. 4,409,553
- --------------------------------------------------------------------------------
13,880,753
- --------------------------------------------------------------------------------
CHEMICALS -- 1.9%
- --------------------------------------------------------------------------------
107,450 Monsanto Co. 9,046,216
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 1.2%
- --------------------------------------------------------------------------------
84,022 Wells Fargo & Co. 5,636,196
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 3.1%
- --------------------------------------------------------------------------------
228,574 Cisco Systems Inc.(1) 4,464,050
- --------------------------------------------------------------------------------
258,366 QUALCOMM Inc. 10,352,726
- --------------------------------------------------------------------------------
14,816,776
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 2.3%
- --------------------------------------------------------------------------------
79,670 Apple Computer, Inc.(1) 4,550,750
- --------------------------------------------------------------------------------
252,383 Dell Inc.(1) 6,160,669
- --------------------------------------------------------------------------------
10,711,419
- --------------------------------------------------------------------------------
CONSUMER FINANCE -- 2.6%
- --------------------------------------------------------------------------------
229,040 SLM Corporation 12,120,797
- --------------------------------------------------------------------------------
DIVERSIFIED -- 0.9%
- --------------------------------------------------------------------------------
9,580 iShares FTSE/Xinhua China 25
Index Fund(1) 735,169
- --------------------------------------------------------------------------------
26,390 Standard and Poor's 500
Depositary Receipt 3,354,433
- --------------------------------------------------------------------------------
4,089,602
- --------------------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES -- 2.6%
- --------------------------------------------------------------------------------
238,238 Apollo Group Inc. Cl A(1) 12,309,757
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 2.1%
- --------------------------------------------------------------------------------
11,480 Chicago Mercantile
Exchange Holdings Inc. $ 5,638,401
- --------------------------------------------------------------------------------
43,912 McGraw-Hill
Companies, Inc. (The) 2,205,700
- --------------------------------------------------------------------------------
39,686 Moody's Corp. 2,161,300
- --------------------------------------------------------------------------------
10,005,401
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES -- 1.1%
- --------------------------------------------------------------------------------
77,970 Schlumberger Ltd. 5,076,627
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 6.9%
- --------------------------------------------------------------------------------
53,590 Costco Wholesale Corporation 3,061,597
- --------------------------------------------------------------------------------
421,419 Wal-Mart Stores, Inc. 20,299,753
- --------------------------------------------------------------------------------
152,202 Walgreen Co. 6,824,738
- --------------------------------------------------------------------------------
42,210 Whole Foods Market, Inc. 2,728,454
- --------------------------------------------------------------------------------
32,914,542
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 0.4%
- --------------------------------------------------------------------------------
43,220 Wm. Wrigley Jr. Co. 1,960,459
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 4.2%
- --------------------------------------------------------------------------------
41,223 Boston Scientific Corp.(1) 694,195
- --------------------------------------------------------------------------------
124,705 Medtronic, Inc. 5,851,159
- --------------------------------------------------------------------------------
60,512 St. Jude Medical, Inc.(1) 1,961,799
- --------------------------------------------------------------------------------
109,150 Stryker Corp. 4,596,307
- --------------------------------------------------------------------------------
51,342 Varian Medical Systems, Inc.(1) 2,431,044
- --------------------------------------------------------------------------------
72,945 Zimmer Holdings Inc.(1) 4,137,440
- --------------------------------------------------------------------------------
19,671,944
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 3.9%
- --------------------------------------------------------------------------------
20,530 Express Scripts, Inc.(1) 1,472,822
- --------------------------------------------------------------------------------
70,200 Quest Diagnostics Inc. 4,206,384
- --------------------------------------------------------------------------------
280,614 UnitedHealth Group
Incorporated 12,565,895
- --------------------------------------------------------------------------------
18,245,101
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 7.2%
- --------------------------------------------------------------------------------
213,609 Carnival Corporation 8,916,039
- --------------------------------------------------------------------------------
58,810 Cheesecake Factory Inc.(1) 1,584,930
- --------------------------------------------------------------------------------
11,104 Chipotle Mexican
Grill Inc. Cl A(1) 676,789
- --------------------------------------------------------------------------------
355,831 International Game
Technology 13,500,227
- --------------------------------------------------------------------------------
1,019,260 PartyGaming plc ORD 2,174,843
- --------------------------------------------------------------------------------
50,379 PF Chang's China
Bistro, Inc.(1) 1,915,410
- --------------------------------------------------------------------------------
146,864 Starbucks Corporation(1) 5,545,585
- --------------------------------------------------------------------------------
34,313,823
- --------------------------------------------------------------------------------
See Notes to Financial Statements. (continued)
- ------
9
VP Ultra - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
HOUSEHOLD DURABLES -- 0.2%
- --------------------------------------------------------------------------------
47,290 D.R. Horton, Inc. $ 1,126,448
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 0.6%
- --------------------------------------------------------------------------------
48,490 Procter & Gamble Co. (The) 2,696,044
- --------------------------------------------------------------------------------
INSURANCE -- 4.8%
- --------------------------------------------------------------------------------
108,569 Aflac Inc. 5,032,173
- --------------------------------------------------------------------------------
52,116 Ambac Financial Group, Inc. 4,226,608
- --------------------------------------------------------------------------------
3,740 Berkshire Hathaway Inc. Cl B(1) 11,380,819
- --------------------------------------------------------------------------------
87,260 Progressive Corp. (The) 2,243,455
- --------------------------------------------------------------------------------
22,883,055
- --------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL -- 2.6%
- --------------------------------------------------------------------------------
322,999 Amazon.com, Inc.(1) 12,493,601
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 9.2%
- --------------------------------------------------------------------------------
56,870 Digital River Inc.(1) 2,296,979
- --------------------------------------------------------------------------------
461,838 eBay Inc.(1) 13,527,235
- --------------------------------------------------------------------------------
22,410 Google Inc. Cl A(1) 9,397,185
- --------------------------------------------------------------------------------
157,140 VeriSign, Inc.(1) 3,640,934
- --------------------------------------------------------------------------------
453,680 Yahoo! Inc.(1) 14,971,440
- --------------------------------------------------------------------------------
43,833,773
- --------------------------------------------------------------------------------
IT SERVICES -- 7.9%
- --------------------------------------------------------------------------------
153,821 Accenture Ltd. Cl A 4,356,211
- --------------------------------------------------------------------------------
144,312 Checkfree Corp.(1) 7,152,103
- --------------------------------------------------------------------------------
355,590 First Data Corp. 16,015,773
- --------------------------------------------------------------------------------
256,952 Paychex, Inc. 10,015,989
- --------------------------------------------------------------------------------
37,540,076
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES -- 1.0%
- --------------------------------------------------------------------------------
66,510 Fisher Scientific International(1) 4,858,556
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 1.2%
- --------------------------------------------------------------------------------
113,814 Target Corp. 5,562,090
- --------------------------------------------------------------------------------
OFFICE ELECTRONICS -- 0.2%
- --------------------------------------------------------------------------------
31,250 Zebra Technologies
Corp. Cl A(1) 1,067,500
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 3.7%
- --------------------------------------------------------------------------------
75,136 Apache Corp. 5,128,032
- --------------------------------------------------------------------------------
106,030 EnCana Corp. 5,581,419
- --------------------------------------------------------------------------------
15,430 Exxon Mobil Corp. 946,631
- --------------------------------------------------------------------------------
73,140 Suncor Energy Inc. 5,925,071
- --------------------------------------------------------------------------------
17,581,153
- --------------------------------------------------------------------------------
PERSONAL PRODUCTS -- 0.5%
- --------------------------------------------------------------------------------
72,498 Avon Products, Inc. 2,247,438
- --------------------------------------------------------------------------------
Shares/Principal Amount Value
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 2.2%
- --------------------------------------------------------------------------------
40,985 Abraxis BioScience Inc.(1) 977,082
- --------------------------------------------------------------------------------
296,534 Teva Pharmaceutical
Industries Ltd. ADR 9,367,509
- --------------------------------------------------------------------------------
10,344,591
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 3.1%
- --------------------------------------------------------------------------------
1,240,160 ARM Holdings plc ORD 2,594,639
- --------------------------------------------------------------------------------
23,080 Broadcom Corp. Cl A(1) 693,554
- --------------------------------------------------------------------------------
50,054 KLA-Tencor Corp. 2,080,745
- --------------------------------------------------------------------------------
127,549 Maxim Integrated Products, Inc. 4,095,598
- --------------------------------------------------------------------------------
156,571 Microchip Technology Inc. 5,252,957
- --------------------------------------------------------------------------------
14,717,493
- --------------------------------------------------------------------------------
SOFTWARE -- 4.6%
- --------------------------------------------------------------------------------
72,590 Adobe Systems Inc.(1) 2,203,832
- --------------------------------------------------------------------------------
271,418 Electronic Arts Inc.(1) 11,681,832
- --------------------------------------------------------------------------------
54,615 NAVTEQ Corp.(1) 2,440,198
- --------------------------------------------------------------------------------
104,890 Red Hat Inc.(1) 2,454,426
- --------------------------------------------------------------------------------
43,300 Salesforce.com Inc.(1) 1,154,378
- --------------------------------------------------------------------------------
114,906 Symantec Corp.(1) 1,785,639
- --------------------------------------------------------------------------------
21,720,305
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 6.6%
- --------------------------------------------------------------------------------
241,728 Bed Bath & Beyond Inc.(1) 8,018,118
- --------------------------------------------------------------------------------
247,900 CarMax, Inc.(1) 8,790,534
- --------------------------------------------------------------------------------
142,852 Lowe's Companies, Inc. 8,666,831
- --------------------------------------------------------------------------------
233,715 PETsMART, Inc. 5,983,104
- --------------------------------------------------------------------------------
31,458,587
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 0.6%
- --------------------------------------------------------------------------------
68,770 Countrywide
Financial Corporation 2,618,762
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $451,007,854) 464,572,292
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 2.7%
- --------------------------------------------------------------------------------
$12,600,000 FHLB Discount Notes,
4.90%, 7/3/06(2)
(Cost $12,596,570) 12,600,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 100.7%
(Cost $463,604,424) 477,172,292
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES -- (0.7)% (3,417,373)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $473,754,919
================================================================================
See Notes to Financial Statements. (continued)
- ------
10
VP Ultra - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
Contracts to Sell Settlement Date Value Unrealized Gain (Loss)
- --------------------------------------------------------------------------------
1,294,964 GBP for USD 7/31/06 $2,393,736 $(34,991)
======================================
(Value on Settlement Date $2,358,745)
NOTES TO SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
ADR = American Depositary Receipt
FHLB = Federal Home Loan Bank
GBP = British Pound
ORD = Foreign Ordinary Share
USD = United States Dollar
(1) Non-income producing.
(2) The rate indicated is the yield to maturity at purchase.
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $463,604,424) $477,172,292
- --------------------------------------------------------
Cash 2,895,469
- --------------------------------------------------------
Receivable for investments sold 489,094
- --------------------------------------------------------
Dividends and interest receivable 127,668
- --------------------------------------------------------------------------------
480,684,523
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 6,481,181
- --------------------------------------------------------
Payable for forward foreign currency exchange contracts 34,991
- --------------------------------------------------------
Accrued management fees 343,315
- --------------------------------------------------------
Distribution fees payable 70,117
- --------------------------------------------------------------------------------
6,929,604
- --------------------------------------------------------------------------------
NET ASSETS $473,754,919
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $475,591,571
- --------------------------------------------------------
Accumulated net investment loss (477,738)
- --------------------------------------------------------
Accumulated net realized loss on investment and
foreign currency transactions (14,891,791)
- --------------------------------------------------------
Net unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 13,532,877
- --------------------------------------------------------------------------------
$473,754,919
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $109,157,186
- --------------------------------------------------------
Shares outstanding 11,200,008
- --------------------------------------------------------
Net asset value per share $9.75
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $362,875,595
- --------------------------------------------------------
Shares outstanding 37,427,934
- --------------------------------------------------------
Net asset value per share $9.70
- --------------------------------------------------------------------------------
CLASS III, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $1,722,138
- --------------------------------------------------------
Shares outstanding 176,843
- --------------------------------------------------------
Net asset value per share $9.74
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- --------------------------------------------------------
Dividends (net of foreign taxes withheld of $9,015) $ 1,430,731
- --------------------------------------------------------
Interest 236,870
- --------------------------------------------------------------------------------
1,667,601
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------
Management fees 1,784,661
- --------------------------------------------------------
Distribution fees -- Class II 352,742
- --------------------------------------------------------
Directors' fees and expenses 4,899
- --------------------------------------------------------
Other expenses 3,037
- --------------------------------------------------------------------------------
2,145,339
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (477,738)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- --------------------------------------------------------
Investment transactions (3,943,637)
- --------------------------------------------------------
Foreign currency transactions (112,789)
- --------------------------------------------------------------------------------
(4,056,426)
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
- --------------------------------------------------------
Investments (22,664,026)
- --------------------------------------------------------
Translation of assets and liabilities
in foreign currencies (47,694)
- --------------------------------------------------------------------------------
(22,711,720)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (26,768,146)
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(27,245,884)
================================================================================
See Notes to Financial Statements.
- ------
13
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $(477,738) $ (390,303)
- ------------------------------------------
Net realized gain (loss) (4,056,426) 4,285,461
- ------------------------------------------
Change in net unrealized
appreciation (depreciation) (22,711,720) 4,436,227
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (27,245,884) 8,331,385
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions 178,748,877 141,480,774
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 151,502,993 149,812,159
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 322,251,926 172,439,767
- --------------------------------------------------------------------------------
End of period $473,754,919 $322,251,926
================================================================================
Accumulated net investment loss $(477,738) --
================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Ultra Fund (the fund) is one fund in
a series issued by the corporation. The fund is diversified under the 1940 Act.
The fund's investment objective is to seek long-term capital growth. The fund
pursues its objective by investing primarily in equity securities of large
companies that management believes will increase in value over time. The
following is a summary of the fund's significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I, Class II and Class
III. The share classes differ principally in their respective shareholder
servicing and distribution expenses and arrangements. All shares of the fund
represent an equal pro rata interest in the assets of the class to which such
shares belong, and have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes. Income,
non-class specific expenses, and realized and unrealized capital gains and
losses of the fund are allocated to each class of shares based on their relative
net assets.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
Distributions received on securities that represent a return of capital or
capital gain are recorded as a reduction of cost of investments and/or as a
realized gain. The fund estimates the components of distributions received that
may be considered nontaxable distributions or capital gain distributions for
income tax purposes.
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
investment transactions and unrealized appreciation (depreciation) on
investments, respectively.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective dates of such transactions. For assets and
liabilities, other than investments in securities, net realized and unrealized
gains and losses from foreign currency translations arise from changes in
currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on investment transactions and unrealized appreciation
(depreciation) on investments, respectively. Certain
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
countries may impose taxes on the contract amount of purchases and sales of
foreign currency contracts in their currency. The fund records the foreign tax
expense, if any, as a reduction to the net realized gain (loss) on foreign
currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
As of December 31, 2005, the fund had accumulated net realized capital loss
carryovers for federal income tax purposes of $7,123,403, which may be used to
offset future taxable gains. Capital loss carryovers of $2,033,731, $2,696,809
and $2,392,863 expire in 2010, 2011 and 2012, respectively.
The fund has elected to treat $107,357 of net capital losses incurred in the
two-month period ended December 31, 2005, as having been incurred in the
following fiscal year for federal income tax purposes.
REDEMPTION -- The fund may impose a 1.00% redemption fee on shares held less
than 60 days. The fee may not be applicable to all classes. The redemption fee
is recorded as a reduction in the cost of shares redeemed. The redemption fee is
retained by the fund and helps cover transaction costs that long-term investors
may bear when a fund sells securities to meet investor redemptions.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of those directors who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears. For funds with a stepped fee schedule, the
rate of the fee is determined by applying a fee rate calculation formula. This
formula takes into account all of the investment advisor's assets under
management in the fund's investment strategy (strategy assets) to calculate the
appropriate fee rate for the fund. The strategy assets include the fund's assets
and the assets of other clients of the investment advisor that are not in the
American Century family of funds, but that have the same investment team and
investment strategy. The annual management fee schedule for each class of the
fund is as follows:
- --------------------------------------------------------------------------------
CLASSES I & III CLASS II
- --------------------------------------------------------------------------------
STRATEGY ASSETS
- --------------------------------------------------------------------------------
First $5 billion 1.000% 0.900%
- --------------------------------------------------------------------------------
Next $5 billion 0.990% 0.890%
- --------------------------------------------------------------------------------
Next $5 billon 0.980% 0.880%
- --------------------------------------------------------------------------------
Next $5 billion 0.970% 0.870%
- --------------------------------------------------------------------------------
Next $5 billion 0.950% 0.850%
- --------------------------------------------------------------------------------
Next $5 billion 0.900% 0.800%
- --------------------------------------------------------------------------------
Over $30 billion 0.800% 0.700%
- --------------------------------------------------------------------------------
The effective annual management fee for each class of the fund for the six
months ended June 30, 2006 was 1.00%, 0.90%, and 1.00% for Class I, Class II and
Class III, respectively.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and financial institutions that have entered into
sales agreements with respect to shares of the fund. Fees incurred under the
plan during the six months ended June 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the six months
ended June 30, 2006, were as follows:
- --------------------------------------------------------------------------------
Purchases $290,307,177
- -------------------------------------------------------
Proceeds from sales $110,487,919
- --------------------------------------------------------------------------------
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $469,376,485
================================================================================
Gross tax appreciation of investments $30,579,633
- -------------------------------------------------------
Gross tax depreciation of investments (22,783,826)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation)of investments $7,795,807
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales and return of capital dividends.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 3,769,463 $ 38,485,910
- -----------------------------------------
Redeemed (2,742,510) (28,282,858)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,026,953 $ 10,203,052
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 100,000,000
================================================================================
Sold 6,126,580 $ 60,963,982
- -----------------------------------------
Redeemed (3,780,405) (37,629,922)
- --------------------------------------------------------------------------------
Net increase (decrease) 2,346,175 $ 23,334,060
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 18,197,533 $184,540,852
- -----------------------------------------
Redeemed (1,443,678) (14,787,594)
- --------------------------------------------------------------------------------
Net increase (decrease) 16,753,855 $169,753,258
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 12,794,864 $128,119,595
- -----------------------------------------
Redeemed (1,205,410) (11,875,904)
- --------------------------------------------------------------------------------
Net increase (decrease) 11,589,454 $116,243,691
================================================================================
(continued)
- ------
18
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS (CONTINUED)
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS III
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 106,448 $1,105,880
- -----------------------------------------
Redeemed (228,366) (2,313,313)(1)
- --------------------------------------------------------------------------------
Net increase (decrease) (121,918) $(1,207,433)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,643,778 $15,479,845
- -----------------------------------------
Redeemed (1,440,232) (13,576,822)(2)
- --------------------------------------------------------------------------------
Net increase (decrease) 203,546 $1,903,023
================================================================================
(1) Net of redemption fees of $370.
(2) Net of redemption fees of $134,910.
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
19
VP Ultra - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- -------------------------------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001(2)
- -------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- -------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.38 $10.16 $9.18 $7.35 $9.53 $10.00
- -------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------------
Net Investment Income (Loss)(3) (0.01) (0.01) --(4) (0.01) 0.02 --(4)
- ------------------------------------------
Net Realized and
Unrealized Gain (Loss) (0.62) 0.22 0.98 1.84 (2.18) (0.47)
- -------------------------------------------------------------------------------------------------------
Total From Investment Operations (0.63) 0.21 0.98 1.83 (2.16) (0.47)
- -------------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------
From Net Investment Income -- -- -- -- (0.02) --
- -------------------------------------------------------------------------------------------------------
Redemption Fees(3) --(4) 0.01 --(4) --(4) --(4) --
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.75 $10.38 $10.16 $9.18 $7.35 $9.53
=======================================================================================================
TOTAL RETURN(5) (6.07)% 2.17% 10.68% 24.90% (22.71)% (4.70)%
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.00%(6) 1.01% 1.00% 1.01% 1.00% 1.00%(6)
- ------------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.13)%(6) (0.08)% 0.05% (0.15%) 0.19% 0.16%(6)
- ------------------------------------------
Portfolio Turnover Rate 29% 58% 45% 111% 168% 48%
- ------------------------------------------
Net Assets, End of Period (in thousands) $109,157 $105,560 $79,489 $63,364 $31,621 $30,801
- -------------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 1, 2001 (inception) through December 31, 2001.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) Annualized.
See Notes to Financial Statements.
- ------
20
VP Ultra - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ---------------------------------------------------------------------------------------------
CLASS II
- ---------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- ---------------------------------------------------------------------------------------------
PER-SHARE DATA
- ---------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.33 $10.13 $9.16 $7.34 $9.16
- ---------------------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------------
Net Investment Income (Loss)(3) (0.01) (0.02) --(4) (0.03) --(4)
- ------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.62) 0.21 0.97 1.85 (1.81)
- ---------------------------------------------------------------------------------------------
Total From Investment Operations (0.63) 0.19 0.97 1.82 (1.81)
- ---------------------------------------------------------------------------------------------
Distributions
- ------------------------------------------
From Net Investment Income -- -- -- -- (0.01)
- ---------------------------------------------------------------------------------------------
Redemption Fees(3) --(4) 0.01 --(4) --(4) --(4)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.70 $10.33 $10.13 $9.16 $7.34
=============================================================================================
TOTAL RETURN(5) (6.10)% 1.97% 10.59% 24.80% (19.80)%
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.15%(6) 1.16% 1.15% 1.16% 1.15%(6)
- ------------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.28)%(6) (0.23)% (0.10)% (0.30)% 0.07%(6)
- ------------------------------------------
Portfolio Turnover Rate 29% 58% 45% 111% 168%(7)
- ------------------------------------------
Net Assets, End of Period (in thousands) $362,876 $213,594 $91,984 $26,831 $2,635
- ---------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 1, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) Annualized.
(7) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2002.
See Notes to Financial Statements.
- ------
21
VP Ultra - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ----------------------------------------------------------------------------------------------
CLASS III
- ----------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- ----------------------------------------------------------------------------------------------
PER-SHARE DATA
- ----------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.37 $10.15 $9.17 $7.34 $9.08
- ----------------------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------------
Net Investment Income (Loss)(3) (0.01) --(4) 0.01 (0.02) 0.01
- ------------------------------------------
Net Realized and Unrealized Gain (Loss) (0.62) 0.21 0.97 1.85 (1.74)
- ----------------------------------------------------------------------------------------------
Total From Investment Operations (0.63) 0.21 0.98 1.83 (1.73)
- ----------------------------------------------------------------------------------------------
Distributions
- -----------------------------------
From Net Investment Income -- -- -- -- (0.01)
- ----------------------------------------------------------------------------------------------
Redemption Fees(3) --(4) 0.01 --(4) --(4) --(4)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.74 $10.37 $10.15 $9.17 $7.34
==============================================================================================
TOTAL RETURN(5) (6.08)% 2.17% 10.69% 24.93% (19.02)%
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.00%(6) 1.01% 1.00% 1.01% 1.00%(6)
- ------------------------------------------
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.13)%(6) (0.08)% 0.05% (0.15)% 0.14%(6)
- ------------------------------------------
Portfolio Turnover Rate 29% 58% 45% 111% 168%(7)
- ------------------------------------------
Net Assets, End of Period (in thousands) $1,722 $3,098 $966 $339 $257
- ----------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 13, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Per-share amount was less than $0.005.
(5) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(6) Annualized.
(7) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2002.
See Notes to Financial Statements.
- ------
22
Approval of Management Agreement for VP Ultra
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 VP Ultra (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)
- ------
23
Approval of Management Agreement for VP Ultra
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. If
performance concerns are identified, the Directors discuss with the advisor the
reasons for such results (e.g., market
(continued)
- ------
24
Approval of Management Agreement for VP Ultra
conditions, security selection) and any efforts being undertaken to improve
performance. The fund's performance for both the one and three year periods was
below the median for its peer group. The board discussed the fund's performance
with the advisor and was satisfied with the efforts being undertaken by the
advisor.
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
(continued)
- ------
25
Approval of Management Agreement for VP Ultra
through its competitive fee structure, fee breakpoints as the fund increases in
size, and through reinvestment in its business to provide shareholders
additional content and services.
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 a 15(c) Provider 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 above the median 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. 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
(continued)
- ------
26
Approval of Management Agreement for VP Ultra
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 independent directors, assisted by the advice
of legal counsel independent of the advisor, taking into account all of the
factors discussed above and the information provided by the advisor, negotiated
changes to the breakpoint schedule used to calculate the management fee. These
changes were proposed by the Directors based on their review of the competitive
changes in the mutual fund marketplace and their review of financial information
provided by the advisor. The new schedule, effective July 29, 2006, contains
lower management fees at certain asset levels than under the existing structure.
Following these negotiations with the advisor, the independent 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.
- ------
27
Share Class Information
Three classes of shares are authorized for sale by the fund: Class I, Class II
and Class III.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
CLASS III shares are sold through insurance company separate accounts. Class III
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares. However, Class III shares have a 1.00%
redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. The total expense ratio of Class III shares is the same as the total
expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
28
Index Definitions
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL 1000(reg.tm) INDEX is a market-capitalization weighted, large-cap
index created by Frank Russell Company to measure the performance of the 1,000
largest companies in the Russell 3000 Index (the 3,000 largest publicly traded
U.S. companies, based on total market capitalization).
The RUSSELL 1000(reg.tm) GROWTH INDEX measures the performance of those Russell
1000 Index companies (the 1,000 largest of the 3,000 largest publicly traded
U.S. companies, based on total market capitalization) with higher price-to-book
ratios and higher forecasted growth rates.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
- ------
29
Additional Information
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
30
Notes
- ------
31
Notes
- ------
32
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
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Investments are service marks of American
Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50651 All rights reserved.
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy]
JUNE 30, 2006
VP Value Fund
[american century investments logo and text logo]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns. . . . . . . . . . . . . . . . . . . . . . . . . 2
VP VALUE
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio. . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . . . 12
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . 13
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . 14
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 15
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
OTHER INFORMATION
Approval of Management Agreement for VP Value. . . . . . . . . . . . . . . 23
Share Class Information. . . . . . . . . . . . . . . . . . . . . . . . . . 28
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Index Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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 Phil Davidson]
BY PHIL DAVIDSON, CHIEF INVESTMENT OFFICER, U.S. VALUE EQUITY
Stocks opened 2006 on a high note, advancing strongly during the first quarter.
Racking up its best opening-quarter performance since 1999, the S&P 500 Index
was up 4.21%, nearly matching its return for all of 2005.
But three factors that had been weighing on the market for the better part of a
year -- high energy prices, investor uneasiness about inflation and rising
interest rates -- finally created a perfect storm during the second quarter. The
pivot point was May 10, just five days after the S&P 500 Index had reached a
five-year high, when the Federal Reserve raised its short-term target interest
rate for the 16th consecutive time since June 2004. Sentiment here and around
the world turned on a dime, touching-off a turbulent, global flight from stocks.
The reaction was swift and steep. The S&P 500 had gained 6.81% through May 9,
outdistancing its nearly 5% return for all of 2005. During the last three weeks
of May, the index dropped 3.85%, registering its worst May performance in more
than 20 years. The tech-heavy Nasdaq Composite fell 6%, while the Dow Jones
Industrial Average, which had been just 80 points shy of a record high on May
10, dropped almost 4%.
Stocks cut a choppy path through June as investors weighed whether the Fed would
increase interest rates again at the end of the month. In one final gyration,
the market rallied strongly June 29 after the Fed raised rates by another
quarter point, while seemingly moderating its interest-rate policy statement.
Twenty-four hours later, only one of the three major U.S. indices, the Dow, was
in the black for the second quarter, up just under one percent.
In the value realm, small- and mid-sized companies had the highest returns for
the six months, as evidenced by the Russell 2000 Value Index's gain of 10.44%.
Larger value companies, tracked by the Russell 1000 Value Index, were up 6.56%.
On the whole, value shares performed better than growth across the
capitalization range, with the greatest edge among larger businesses.
The period was marked by a continuing rally in lower-quality issues, as
investors rewarded stocks rated B or lower (Standard & Poor's defines
high-quality stocks as B+ or higher). A+ shares -- some of the market's
strongest and most stable companies -- actually had the lowest returns for the
six months. Historically, market cycles led by low-quality stocks have tended to
dampen the returns of American Century's value funds, which generally seek
higher-quality value stocks.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Value - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
---------------------------------
AVERAGE ANNUAL RETURNS
- --------------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR 5 YEARS 10 YEARS INCEPTION DATE
- --------------------------------------------------------------------------------------
CLASS I 3.04% 7.77% 7.97% 10.28% 10.40% 5/1/96
- --------------------------------------------------------------------------------------
RUSSELL 3000
VALUE INDEX(2) 6.90% 12.32% 7.36% 10.97% 10.92% --
- --------------------------------------------------------------------------------------
S&P 500 INDEX(2) 2.71% 8.63% 2.49% 8.32% 8.48% --
- --------------------------------------------------------------------------------------
LIPPER MULTI-CAP
VALUE INDEX(2) 4.27% 9.79% 6.26% 9.48% 9.40% --
- --------------------------------------------------------------------------------------
Class II 2.99% 7.59% -- -- 7.65% 8/14/01
- --------------------------------------------------------------------------------------
Class III 3.04% 7.77% -- -- 8.65% 5/6/02
- --------------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. (c) 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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
(continued)
- ------
3
VP Value - Performance
GROWTH OF $10,000 OVER 10 YEARS
$10,000 investment made June 30, 1996
ONE-YEAR RETURNS OVER 10 YEARS
Periods ended June 30
- -----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
- -----------------------------------------------------------------------------------------------------
Class I 23.86% 17.80% 11.98% -15.88% 31.94% 1.12% -0.49% 25.20% 8.08% 7.77%
- -----------------------------------------------------------------------------------------------------
Russell 3000
Value Index 32.66% 27.95% 14.39% -8.38% 11.64% -7.75% -1.23% 22.14% 14.09% 12.32%
- -----------------------------------------------------------------------------------------------------
S&P 500 Index 34.70% 30.16% 22.76% 7.25% -14.83% -17.99% 0.25% 19.11% 6.32% 8.63%
- -----------------------------------------------------------------------------------------------------
Lipper Multi-Cap
Value Index 28.73% 20.39% 9.61% -6.66% 15.14% -10.89% 2.13% 22.22% 10.95% 9.79%
- -----------------------------------------------------------------------------------------------------
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I shares; performance for
other share classes will vary due to differences in fee structure. For
information about other share classes available, please consult the prospectus.
Data assumes reinvestment of dividends and capital gains, and none of the charts
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Returns for the indices are
provided for comparison. The fund's total returns include operating expenses
(such as transaction costs and management fees) that reduce returns, while the
total returns of the indices do not.
- ------
4
VP Value - Portfolio Commentary
PORTFOLIO MANAGERS: PHIL DAVIDSON, MICHAEL LISS AND SCOTT MOORE
Despite an equities market in which investors generally preferred lower quality,
momentum-driven stocks, VP Value -- which concentrates on higher quality
businesses with strong market positions and sound balance sheets -- gained 3.04%
* during the six months ended June 30, 2006. The portfolio's return trailed the
Lipper Multi-Cap Value Index, which was up 4.27%. The Russell 3000 Value Index,
indicative of the value side of the market, was up 6.90%. The S&P 500 Index,
representative of the broad market, gained 2.71%.
Looking longer-term, from the fund's inception on May 1, 1996, VP Value has
produced an average annualized return of 10.40%, ahead of the 9.40% figure
posted by the Lipper Multi-Cap Value Index. The Russell 3000 Value Index and the
S&P 500 Index have average annualized returns of 10.92% and 8.48%, respectively,
for the same period.
CONSUMER STAPLES LEAD PORTFOLIO
Uncertainty during the final two months of the period sent many investors
searching for "safer" stocks, and VP Value was rewarded for taking overweight
positions in providers of everyday household products and food and beverages,
items that consumers tend to purchase regardless of the investment or market
climate. Our top-contributing securities included Kraft Foods Inc. and
Kimberly-Clark Corp. Kraft, the largest branded food and beverage company in the
United States, has been increasing its investments in brand-building and new
product innovations. Kimberly-Clark is one of the world's largest makers of
personal-care paper products. In the beverage realm, Anheuser-Busch added to our
results. The world's largest brewing company is benefiting from a more favorable
pricing environment and a growing international beer presence.
INDUSTRIALS ADD TO RESULTS
In industrials, the portfolio benefited from positions in several commercial
services companies. Waste Management Inc., the largest solid waste management
company in the country, was a standout. Fueled by expanding margins and
continued cost control, Waste Management continued to improve its operating
performance. Republic Services, another leading waste management firm, continued
to report strong results. In addition to raising its dividend 17% during the
period, Republic Services announced plans to repurchase more than 9% of its
TOP TEN HOLDINGS
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Kimberly-Clark Corp. 4.5% 3.0%
- --------------------------------------------------------------------------------
International Flavors
& Fragrances Inc. 4.2% 3.2%
- --------------------------------------------------------------------------------
Bank of America Corp. 3.6% 4.3%
- --------------------------------------------------------------------------------
American International
Group, Inc. 3.6% 1.8%
- --------------------------------------------------------------------------------
Freddie Mac 3.4% 1.5%
- --------------------------------------------------------------------------------
Equitable Resources Inc. 2.9% --
- --------------------------------------------------------------------------------
Kraft Foods Inc. Cl A 2.4% 4.6%
- --------------------------------------------------------------------------------
Beckman Coulter, Inc. 2.4% 1.5%
- --------------------------------------------------------------------------------
Chevron Corp. 2.3% --
- --------------------------------------------------------------------------------
Intel Corp. 2.2% 0.6%
- --------------------------------------------------------------------------------
* All fund returns referenced in this commentary are
for Class I shares.Total returns for periods less
than one year are not annualized. (continued)
- ------
5
VP Value - Portfolio Commentary
stock during 2006. These two businesses are indicative of the types of companies
VP Value seeks to own: high-quality businesses with strong cash flows and sound
balance sheets.
ARAMARK Corp., also boosted our results. The company provides a broad range of
managed services (particularly food services) to businesses, educational
institutions, health care providers and sports venues. During the second
quarter, the stock benefited from a management-led buyout proposal that offered
a material premium for the shares.
MATERIALS ANOTHER PLUS
International Flavors & Fragrances Inc. (IFF) topped our investments in the
materials sector. The company is a leading manufacturer and creator of chemical
compounds used to impart or improve the flavor or fragrance in a diverse variety
of consumer products ranging from perfumes and cosmetics to food and beverages.
Not only does IFF have recession-resistant end markets, its sales in developing
markets like China, India and Latin America are growing strongly.
SOME DISAPPOINTMENTS
Consumer discretionary businesses, a broad waterfront of companies involved in
pursuits such as retailing, media, hotels, restaurants and leisure products,
slowed our progress the most. In retailing, discounter Dollar General Corp.
found its profits squeezed by steep markdowns, higher shrink, and gasoline
prices that both raised transportation costs and slowed spending by the chain's
low-income customers. We believe the company's issues are manageable and
increased our position during the period.
Our largest detractors also included media company Westwood One, Inc., the
nation's largest radio network and the leading distributor of national radio
programs. In addition to facing a weak advertising environment, Westwood One is
contending with rising operating expenses as it invests in new programming.
LOOKING AHEAD
We will continue to adhere to our discipline of seeking seasoned, well-managed
companies whose shares appear to be undervalued for reasons unrelated to the
firms' fundamental or financial health. This strategy has delivered attractive,
risk-adjusted returns over time.
TOP FIVE INDUSTRIES
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Chemicals 7.8% 7.4%
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 7.6% 6.1%
- --------------------------------------------------------------------------------
Insurance 6.5% 5.0%
- --------------------------------------------------------------------------------
Pharmaceuticals 6.1% 6.7%
- --------------------------------------------------------------------------------
Thrifts &
Mortgage Finance 5.9% 3.4%
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Common Stocks 98.6% 96.9%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 0.3% 4.2%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities 1.1% (1.1)%
- --------------------------------------------------------------------------------
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
(continued)
- ------
7
Shareholder Fee Example (Unaudited)
- --------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 - EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- --------------------------------------------------------------------------------
VP VALUE SHAREHOLDER FEE EXAMPLE
- --------------------------------------------------------------------------------
ACTUAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,030.40 $4.68 0.93%
- --------------------------------------------------------------------------------
Class II $1,000 $1,029.90 $5.44 1.08%
- --------------------------------------------------------------------------------
Class III $1,000 $1,030.40 $4.68 0.93%
- --------------------------------------------------------------------------------
HYPOTHETICAL
- --------------------------------------------------------------------------------
Class I $1,000 $1,020.18 $4.66 0.93%
- --------------------------------------------------------------------------------
Class II $1,000 $1,019.44 $5.41 1.08%
- --------------------------------------------------------------------------------
Class III $1,000 $1,020.18 $4.66 0.93%
- --------------------------------------------------------------------------------
* Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365,
to reflect the one-half year period.
- ------
8
VP Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS -- 98.6%
AEROSPACE & DEFENSE -- 0.7%
- --------------------------------------------------------------------------------
432,719 Honeywell
International Inc. $ 17,438,576
- --------------------------------------------------------------------------------
AUTO COMPONENTS -- 0.7%
- --------------------------------------------------------------------------------
1,520,143 Cooper Tire & Rubber Co. 16,934,393
- --------------------------------------------------------------------------------
BEVERAGES -- 2.9%
- --------------------------------------------------------------------------------
929,997 Anheuser-Busch
Companies, Inc. 42,398,563
- --------------------------------------------------------------------------------
1,627,421 Coca-Cola Enterprises Inc. 33,150,566
- --------------------------------------------------------------------------------
75,549,129
- --------------------------------------------------------------------------------
BUILDING PRODUCTS -- 1.1%
- --------------------------------------------------------------------------------
950,015 Masco Corp. 28,158,445
- --------------------------------------------------------------------------------
CAPITAL MARKETS -- 0.7%
- --------------------------------------------------------------------------------
148,164 Merrill Lynch & Co., Inc. 10,306,288
- --------------------------------------------------------------------------------
113,700 Morgan Stanley 7,186,977
- --------------------------------------------------------------------------------
17,493,265
- --------------------------------------------------------------------------------
CHEMICALS -- 7.8%
- --------------------------------------------------------------------------------
113,121 Air Products &
Chemicals, Inc. 7,230,694
- --------------------------------------------------------------------------------
688,240 du Pont (E.I.)
de Nemours & Co. 28,630,784
- --------------------------------------------------------------------------------
3,022,335 International Flavors
& Fragrances Inc. 106,507,086
- --------------------------------------------------------------------------------
803,922 Minerals Technologies Inc. 41,803,944
- --------------------------------------------------------------------------------
853,300 Nalco Holding Co.(1) 15,043,679
- --------------------------------------------------------------------------------
199,216,187
- --------------------------------------------------------------------------------
COMMERCIAL BANKS -- 4.6%
- --------------------------------------------------------------------------------
110,400 BB&T Corporation 4,591,536
- --------------------------------------------------------------------------------
1,308,178 Fifth Third Bancorp 48,337,177
- --------------------------------------------------------------------------------
727,484 SunTrust Banks, Inc. 55,477,930
- --------------------------------------------------------------------------------
311,291 U.S. Bancorp 9,612,666
- --------------------------------------------------------------------------------
118,019,309
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 0.8%
- --------------------------------------------------------------------------------
495,724 Republic Services, Inc. Cl A 19,997,506
- --------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 0.8%
- --------------------------------------------------------------------------------
815,412 Dell Inc.(1) 19,904,207
- --------------------------------------------------------------------------------
CONTAINERS & PACKAGING -- 1.1%
- --------------------------------------------------------------------------------
915,683 Bemis Co., Inc. 28,038,213
- --------------------------------------------------------------------------------
DIVERSIFIED -- 0.5%
- --------------------------------------------------------------------------------
113,134 Standard and Poor's 500
Depositary Receipt 14,380,463
- --------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 4.7%
- --------------------------------------------------------------------------------
1,944,921 Bank of America Corp. 93,550,700
- --------------------------------------------------------------------------------
542,645 Citigroup Inc. 26,177,195
- --------------------------------------------------------------------------------
119,727,895
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION
SERVICES -- 2.4%
- --------------------------------------------------------------------------------
483,510 BellSouth Corp. $ 17,503,062
- --------------------------------------------------------------------------------
488,007 Commonwealth Telephone
Enterprises, Inc. 16,182,312
- --------------------------------------------------------------------------------
811,521 Verizon Communications Inc. 27,177,838
- --------------------------------------------------------------------------------
60,863,212
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 1.2%
- --------------------------------------------------------------------------------
111,200 FPL Group, Inc. 4,601,456
- --------------------------------------------------------------------------------
1,294,084 Northeast Utilities 26,748,716
- --------------------------------------------------------------------------------
31,350,172
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.5%
- --------------------------------------------------------------------------------
313,961 Hubbell Inc. Cl B 14,960,242
- --------------------------------------------------------------------------------
FOOD & STAPLES RETAILING -- 1.5%
- --------------------------------------------------------------------------------
819,636 Wal-Mart Stores, Inc. 39,481,866
- --------------------------------------------------------------------------------
FOOD PRODUCTS -- 5.3%
- --------------------------------------------------------------------------------
793,829 ConAgra Foods, Inc. 17,551,559
- --------------------------------------------------------------------------------
247,278 General Mills, Inc. 12,774,381
- --------------------------------------------------------------------------------
559,675 H.J. Heinz Company 23,069,804
- --------------------------------------------------------------------------------
1,973,338 Kraft Foods Inc. Cl A 60,976,145
- --------------------------------------------------------------------------------
957,068 Unilever N.V.
New York Shares 21,581,883
- --------------------------------------------------------------------------------
135,953,772
- --------------------------------------------------------------------------------
GAS UTILITIES -- 0.7%
- --------------------------------------------------------------------------------
634,124 WGL Holdings Inc. 18,357,890
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT
& SUPPLIES -- 3.0%
- --------------------------------------------------------------------------------
1,087,887 Beckman Coulter, Inc. 60,432,123
- --------------------------------------------------------------------------------
1,046,100 Symmetry Medical Inc.(1) 16,109,940
- --------------------------------------------------------------------------------
76,542,063
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS
& SERVICES -- 2.3%
- --------------------------------------------------------------------------------
949,317 HCA Inc. 40,963,028
- --------------------------------------------------------------------------------
355,206 Universal Health
Services, Inc. Cl B 17,852,654
- --------------------------------------------------------------------------------
58,815,682
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 3.5%
- --------------------------------------------------------------------------------
436,747 International
Speedway Corp. 20,251,958
- --------------------------------------------------------------------------------
1,149,575 OSI Restaurant
Partners, Inc. 39,775,295
- --------------------------------------------------------------------------------
782,962 Speedway Motorsports Inc. 29,548,986
- --------------------------------------------------------------------------------
89,576,239
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 4.5%
- --------------------------------------------------------------------------------
1,872,944 Kimberly-Clark Corp. 115,560,645
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 1.4%
- --------------------------------------------------------------------------------
1,065,429 General Electric Co. 35,116,540
- --------------------------------------------------------------------------------
- ------
9
See Notes to Financial Statements. (continued)
VP Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
Shares Value
- --------------------------------------------------------------------------------
INSURANCE -- 6.5%
- --------------------------------------------------------------------------------
276,416 Ambac Financial
Group, Inc. $ 22,417,338
- --------------------------------------------------------------------------------
1,544,606 American International
Group, Inc. 91,208,984
- --------------------------------------------------------------------------------
187 Berkshire Hathaway Inc. Cl A(1) 17,140,233
- --------------------------------------------------------------------------------
1,335,094 Marsh & McLennan
Companies, Inc. 35,900,678
- --------------------------------------------------------------------------------
166,667,233
- --------------------------------------------------------------------------------
IT SERVICES -- 1.4%
- --------------------------------------------------------------------------------
479,598 International Business
Machines Corp. 36,842,718
- --------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS -- 1.3%
- --------------------------------------------------------------------------------
1,816,678 Hasbro, Inc. 32,900,039
- --------------------------------------------------------------------------------
MEDIA -- 1.4%
- --------------------------------------------------------------------------------
293,201 New York Times Co.
(The) Cl A 7,195,153
- --------------------------------------------------------------------------------
149,465 Time Warner Inc. 2,585,745
- --------------------------------------------------------------------------------
744,328 Valassis Communications, Inc.(1) 17,558,697
- --------------------------------------------------------------------------------
1,188,555 Westwood One, Inc. 8,914,162
- --------------------------------------------------------------------------------
36,253,757
- --------------------------------------------------------------------------------
MULTI-UTILITIES -- 4.8%
- --------------------------------------------------------------------------------
125,883 Ameren Corp. 6,357,092
- --------------------------------------------------------------------------------
144,100 Consolidated Edison, Inc. 6,403,804
- --------------------------------------------------------------------------------
258,552 Dominion Resources Inc. 19,337,104
- --------------------------------------------------------------------------------
953,172 Wisconsin Energy Corp. 38,412,832
- --------------------------------------------------------------------------------
2,703,448 XCEL Energy Inc. 51,852,132
- --------------------------------------------------------------------------------
122,362,964
- --------------------------------------------------------------------------------
MULTILINE RETAIL -- 2.3%
- --------------------------------------------------------------------------------
3,440,599 Dollar General Corp. 48,099,574
- --------------------------------------------------------------------------------
430,721 Family Dollar Stores, Inc. 10,522,514
- --------------------------------------------------------------------------------
58,622,088
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 7.6%
- --------------------------------------------------------------------------------
965,112 Chevron Corp. 59,894,851
- --------------------------------------------------------------------------------
2,222,906 Equitable Resources Inc. 74,467,350
- --------------------------------------------------------------------------------
776,419 Exxon Mobil Corp. 47,633,306
- --------------------------------------------------------------------------------
230,521 Murphy Oil Corp. 12,876,903
- --------------------------------------------------------------------------------
194,872,410
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 2.1%
- --------------------------------------------------------------------------------
962,487 MeadWestvaco Corp. 26,882,262
- --------------------------------------------------------------------------------
431,301 Weyerhaeuser Co. 26,848,487
- --------------------------------------------------------------------------------
53,730,749
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
PHARMACEUTICALS -- 6.1%
- --------------------------------------------------------------------------------
974,042 Abbott Laboratories 42,477,971
- --------------------------------------------------------------------------------
527,871 Bristol-Myers Squibb Co. 13,650,744
- --------------------------------------------------------------------------------
116,860 Eli Lilly and Company 6,458,852
- --------------------------------------------------------------------------------
375,100 Johnson & Johnson 22,475,992
- --------------------------------------------------------------------------------
314,155 Merck & Co., Inc. 11,444,667
- --------------------------------------------------------------------------------
1,277,191 Pfizer Inc. 29,975,673
- --------------------------------------------------------------------------------
1,319,000 Watson Pharmaceuticals, Inc.(1) 30,706,320
- --------------------------------------------------------------------------------
157,190,219
- --------------------------------------------------------------------------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT -- 2.2%
- --------------------------------------------------------------------------------
2,937,321 Intel Corp. 55,662,233
- --------------------------------------------------------------------------------
SOFTWARE -- 1.7%
- --------------------------------------------------------------------------------
1,915,617 Microsoft Corporation 44,633,876
- --------------------------------------------------------------------------------
SPECIALTY RETAIL -- 2.6%
- --------------------------------------------------------------------------------
400,479 Foot Locker, Inc. 9,807,731
- --------------------------------------------------------------------------------
926,194 Gap, Inc. (The) 16,115,776
- --------------------------------------------------------------------------------
1,119,376 Home Depot, Inc. (The) 40,062,466
- --------------------------------------------------------------------------------
65,985,973
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 5.9%
- --------------------------------------------------------------------------------
1,030,504 Fannie Mae 49,567,242
- --------------------------------------------------------------------------------
1,531,710 Freddie Mac 87,322,788
- --------------------------------------------------------------------------------
219,694 MGIC Investment Corp. 14,280,110
- --------------------------------------------------------------------------------
151,170,140
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,447,383,354) 2,528,330,310
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS -- 0.3%
- --------------------------------------------------------------------------------
Repurchase Agreement, Credit Suisse
First Boston, Inc., (collateralized by
various U.S. Treasury obligations,
6.125% -- 8.875%, 2/15/19 -- 8/15/29,
valued at $7,754,910), in a joint trading
account at 4.50%, dated 6/30/06, due 7/3/06
(Delivery value $7,602,850)
(Cost $7,600,000) 7,600,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES -- 98.9%
(Cost $2,454,983,354) 2,535,930,310
- --------------------------------------------------------------------------------
OTHER ASSETS
AND LIABILITIES -- 1.1% 28,323,915
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $2,564,254,225
================================================================================
See Notes to Financial Statements. (continued)
- ------
10
VP Value - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Contracts to Sell Settlement Date Value Unrealized Gain (Loss)
- -----------------------------------------------------------------------------------------
5,519,722 Euro for USD 7/31/06 $ 7,071,441 $(116,139)
- -----------------------------------------------------------------------------------------
7,048,390 Euro for USD 7/31/06 9,029,852 (162,060)
- -----------------------------------------------------------------------------------------
$16,101,293 $(278,199)
=========================================
(Value on Settlement Date $15,823,094)
NOTES TO SCHEDULE OF INVESTMENTS
USD = United States Dollar
(1) Non-income producing.
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value
(cost of $2,454,983,354) $2,535,930,310
- ---------------------------------------------------
Receivable for investments sold 47,189,807
- ---------------------------------------------------
Dividends and interest receivable 4,218,894
- --------------------------------------------------------------------------------
2,587,339,011
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Disbursements in excess of demand deposit cash 2,680,851
- ---------------------------------------------------
Payable for investments purchased 18,088,932
- ---------------------------------------------------
Payable for forward foreign
currency exchange contracts 278,199
- ---------------------------------------------------
Accrued management fees 1,896,011
- ---------------------------------------------------
Distribution fees payable 140,793
- --------------------------------------------------------------------------------
23,084,786
- --------------------------------------------------------------------------------
NET ASSETS $2,564,254,225
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $2,367,999,611
- ---------------------------------------------------
Undistributed net investment income 22,184,042
- ---------------------------------------------------
Undistributed net realized gain on investment
and foreign currency transactions 93,401,815
- ---------------------------------------------------
Net unrealized appreciation on investments
and translation of assets and
liabilities in foreign currencies 80,668,757
- --------------------------------------------------------------------------------
$2,564,254,225
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $1,866,436,357
- ---------------------------------------------------
Shares outstanding 246,024,380
- ---------------------------------------------------
Net asset value per share $7.59
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $688,387,081
- ---------------------------------------------------
Shares outstanding 90,729,585
- ---------------------------------------------------
Net asset value per share $7.59
- --------------------------------------------------------------------------------
CLASS III, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $9,430,787
- ---------------------------------------------------
Shares outstanding 1,243,108
- ---------------------------------------------------
Net asset value per share $7.59
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- ---------------------------------------------------
Dividends (including $89,727 from affiliates
and net of foreign taxes withheld of $105,464) $34,008,005
- ---------------------------------------------------
Interest 1,879,926
- --------------------------------------------------------------------------------
35,887,931
- --------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------
Management fees 12,799,192
- ---------------------------------------------------
Distribution fees -- Class II 846,380
- ---------------------------------------------------
Directors' fees and expenses 27,759
- ---------------------------------------------------
Other expenses 6,201
- --------------------------------------------------------------------------------
13,679,532
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 22,208,399
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- ---------------------------------------------------
Investment transactions (including
$(541,550) from affiliates) 154,498,238
- ---------------------------------------------------
Foreign currency transactions (1,165,922)
- --------------------------------------------------------------------------------
153,332,316
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION
(DEPRECIATION) ON:
- ---------------------------------------------------
Investments (80,993,749)
- ---------------------------------------------------
Translation of assets and liabilities
in foreign currencies (810,681)
- --------------------------------------------------------------------------------
(81,804,430)
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 71,527,886
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $93,736,285
================================================================================
See Notes to Financial Statements.
- ------
13
Statement of Changes in Net Assets
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- -------------------------------------------------------------------------------------
OPERATIONS
- -------------------------------------------------------------------------------------
Net investment income (loss) $22,208,399 $ 46,087,836
- ----------------------------------------------
Net realized gain (loss) 153,332,316 272,704,415
- ----------------------------------------------
Change in net unrealized
appreciation (depreciation) (81,804,430) (177,043,745)
- -------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 93,736,285 141,748,506
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- -------------------------------------------------------------------------------------
From net investment income:
- ----------------------------------------------
Class I (31,704,045) (19,718,978)
- ----------------------------------------------
Class II (8,355,314) (3,397,166)
- ----------------------------------------------
Class III (123,198) (54,888)
- ----------------------------------------------
From net realized gains:
- ----------------------------------------------
Class I (199,994,009) (228,154,534)
- ----------------------------------------------
Class II (59,269,499) (47,630,651)
- ----------------------------------------------
Class III (777,151) (635,071)
- -------------------------------------------------------------------------------------
Decrease in net assets from distributions (300,223,216) (299,591,288)
- -------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- -------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from capital share transactions (183,498,088) 423,328,830
- -------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS (389,985,019) 265,486,048
NET ASSETS
- -------------------------------------------------------------------------------------
Beginning of period 2,954,239,244 2,688,753,196
- -------------------------------------------------------------------------------------
End of period $2,564,254,225 $2,954,239,244
=====================================================================================
Undistributed net investment income $22,184,042 $40,158,200
=====================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Value Fund (the fund) is one fund in
a series issued by the corporation. The fund is diversified under the 1940 Act.
The fund's investment objective is long-term capital growth. Income is a
secondary objective. The fund seeks to achieve its investment objective by
investing primarily in equity securities of companies management believes to be
undervalued at the time of purchase. The following is a summary of the fund's
significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I, Class II and Class
III. The share classes differ principally in their respective shareholder
servicing and distribution expenses and arrangements. All shares of the fund
represent an equal pro rata interest in the assets of the class to which such
shares belong, and have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes. Income,
non-class specific expenses, and realized and unrealized capital gains and
losses of the fund are allocated to each class of shares based on their relative
net assets.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes accretion of discounts and amortization of premiums.
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
investment transactions and unrealized appreciation (depreciation) on
investments, respectively.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective dates of such transactions. For assets and
liabilities, other than investments in securities, net realized and unrealized
gains and losses from foreign currency translations arise from changes in
currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on investment transactions and unrealized appreciation
(depreciation) on investments, respectively. Certain countries may impose taxes
on the contract amount of purchases and sales of foreign currency contracts in
their currency. The fund
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
records the foreign tax expense, if any, as a reduction to the net realized gain
(loss) on foreign currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
REDEMPTION -- The fund may impose a 1.00% redemption fee on shares held less
than 60 days. The fee may not be applicable to all classes. The redemption fee
is recorded as a reduction in the cost of shares redeemed. The redemption fee is
retained by the fund and helps cover transaction costs that long-term investors
may bear when a fund sells securities to meet investor redemptions.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
those directors who are not considered "interested persons" as defined in the
1940 Act (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed and accrued daily based on the daily net assets of the
specific class of shares of the fund and paid monthly in arrears. For funds with
a stepped fee schedule, the rate of the fee is determined by applying a fee rate
calculation formula. This formula takes into account all of the investment
advisor's assets under management in the fund's investment strategy (strategy
assets) to calculate the appropriate fee rate for the fund. The strategy assets
include the fund's assets and the assets of other clients of the investment
advisor that are not in the American Century family of funds, but that have the
same investment team and investment strategy.
The annual management fee schedule for each class of the fund is as follows:
- --------------------------------------------------------------------------------
CLASS I & III CLASS II
- --------------------------------------------------------------------------------
STRATEGY ASSETS
- --------------------------------------------------------------------------------
First $500 million 1.00% 0.90%
- --------------------------------------------------------------------------------
Next $500 million 0.95% 0.85%
- --------------------------------------------------------------------------------
Over $1 billion 0.90% 0.80%
- --------------------------------------------------------------------------------
The effective annual management fee for each class of the fund for the six
months ended June 30, 2006 was 0.93%, 0.83%, and 0.93% for Class I, Class II,
and Class III, respectively.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and financial institutions that have entered into
sales agreements with respect to shares of the fund. Fees incurred under the
plan during the six months ended June 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term investments,
for the six months ended June 30, 2006 were $1,745,959,504 and $2,153,531,407,
respectively.
For the six months ended June 30, 2006, the fund incurred net realized gains of
$19,024,709 from redemptions in kind. A redemption in kind occurs when a fund
delivers securities from its portfolio in lieu of cash as payment to a redeeming
shareholder.
As of June 30, 2006, the composition of unrealized appreciation and depreciation
of investment securities based on the aggregate cost of investments for federal
income tax purposes was as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $2,508,687,697
================================================================================
Gross tax appreciation of investments $132,709,445
- -------------------------------------------------------
Gross tax depreciation of investments (105,466,832)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation)
of investments $27,242,613
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 650,000,000
================================================================================
Sold 7,306,025 $ 57,732,965
- ------------------------------------------
Issued in reinvestment of distributions 30,810,911 231,698,054
- ------------------------------------------
Redeemed (72,247,829) (563,340,660)
- --------------------------------------------------------------------------------
Net increase (decrease) (34,130,893) $(273,909,641)
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 650,000,000
================================================================================
Sold 24,556,695 $ 198,084,573
- ------------------------------------------
Issued in reinvestment of distributions 31,297,161 247,873,512
- ------------------------------------------
Redeemed (32,666,622) (261,534,181)
- --------------------------------------------------------------------------------
Net increase (decrease) 23,187,234 $ 184,423,904
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 150,000,000
================================================================================
Sold 6,786,111 $ 53,595,356
- ------------------------------------------
Issued in reinvestment of distributions 8,980,719 67,624,813
- ------------------------------------------
Redeemed (4,130,061) (32,129,700)
- --------------------------------------------------------------------------------
Net increase (decrease) 11,636,769 $ 89,090,469
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 150,000,000
================================================================================
Sold 26,913,190 $215,758,091
- ------------------------------------------
Issued in reinvestment of distributions 6,434,782 51,027,817
- ------------------------------------------
Redeemed (3,833,357) (30,546,690)
- --------------------------------------------------------------------------------
Net increase (decrease) 29,514,615 $236,239,218
================================================================================
CLASS III
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 311,637 $ 2,436,432
- ------------------------------------------
Issued in reinvestment of distributions 119,727 900,349
- ------------------------------------------
Redeemed (255,219) (2,015,697)(1)
- --------------------------------------------------------------------------------
Net increase (decrease) 176,145 $ 1,321,084
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 674,944 $ 5,407,470
- ------------------------------------------
Issued in reinvestment of distributions 87,116 689,959
- ------------------------------------------
Redeemed (424,875) (3,431,721)(2)
- --------------------------------------------------------------------------------
Net increase (decrease) 337,185 $ 2,665,708
================================================================================
(1) Net of redemption fees of $1,336.
(2) Net of redemption fees of $3,321.
(continued)
- ------
18
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
5. AFFILIATED COMPANY TRANSACTIONS
If a fund's holding represents ownership of 5% or more of the voting securities
of a company, the company is affiliated as defined in the 1940 Act. A summary of
transactions for each company which is or was an affiliate at or during the six
months ended June 30, 2006 follows:
- ---------------------------------------------------------------------------------------------------------------
SHARE BALANCE PURCHASE SALES REALIZED DIVIDEND JUNE 30, 2006
12/31/05 COST COST GAIN (LOSS) INCOME SHARE BALANCE MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------
Minerals
Technologies Inc.(1) 894,595 $9,767,241 $16,180,939 $(541,550) $89,727 803,922 $41,803,944
- ---------------------------------------------------------------------------------------------------------------
(1) Company was not an affiliate at June 30, 2006.
6. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
19
VP Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- -----------------------------------------------------------------------------------------------------------
CLASS I
- -----------------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
PER-SHARE DATA
- -----------------------------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $8.20 $8.75 $7.79 $6.12 $7.44 $6.67
- -----------------------------------------------------------------------------------------------------------
Income From Investment Operations
- ----------------------------------
Net Investment Income (Loss)(2) 0.06 0.13 0.09 0.09 0.08 0.08
- ----------------------------------
Net Realized and Unrealized
Gain (Loss) 0.18 0.28 1.01 1.65 (0.95) 0.77
- -----------------------------------------------------------------------------------------------------------
Total From Investment Operations 0.24 0.41 1.10 1.74 (0.87) 0.85
- -----------------------------------------------------------------------------------------------------------
Distributions
- ----------------------------------
From Net Investment Income (0.12) (0.08) (0.08) (0.07) (0.06) (0.08)
- ----------------------------------
From Net Realized Gains (0.73) (0.88) (0.06) -- (0.39) --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.85) (0.96) (0.14) (0.07) (0.45) (0.08)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.59 $8.20 $8.75 $7.79 $6.12 $7.44
===========================================================================================================
TOTAL RETURN(3) 3.04% 5.03% 14.33% 28.96% (12.62)% 12.82%
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.93%(4) 0.93% 0.93% 0.95% 0.95% 0.97%
- ----------------------------------
Ratio of Net Investment Income
(Loss)to Average Net Assets 1.60%(4) 1.66% 1.16% 1.37% 1.17% 1.28%
- ----------------------------------
Portfolio Turnover Rate 63% 133% 139% 109% 106% 174%
- ----------------------------------
Net Assets, End of Period
(in thousands) $1,866,436 $2,297,418 $2,248,902 $1,919,580 $1,465,287 $1,424,235
- -----------------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(4) Annualized.
See Notes to Financial Statements.
- ------
20
VP Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- -----------------------------------------------------------------------------------------------------
CLASS II
- -----------------------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001(2)
- -----------------------------------------------------------------------------------------------------
PER-SHARE DATA
Net Asset Value,
Beginning of Period $8.19 $8.74 $7.78 $6.11 $7.44 $7.19
- -----------------------------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------
Net Investment Income (Loss)(3) 0.06 0.12 0.08 0.08 0.07 0.02
- ------------------------------------
Net Realized and Unrealized
Gain (Loss) 0.17 0.27 1.01 1.65 (0.95) 0.23
- ----------------------------------------------------------------------------------------------------
Total From Investment Operations 0.23 0.39 1.09 1.73 (0.88) 0.25
- ----------------------------------------------------------------------------------------------------
Distributions
- ------------------------------------
From Net Investment Income (0.10) (0.06) (0.07) (0.06) (0.06) --
- ------------------------------------
From Net Realized Gains (0.73) (0.88) (0.06) -- (0.39) --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.83) (0.94) (0.13) (0.06) (0.45) --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.59 $8.19 $8.74 $7.78 $6.11 $7.44
=====================================================================================================
TOTAL RETURN(4) 2.99% 4.85% 14.17% 28.81% (12.81)% 3.48%
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 1.08%(5) 1.08% 1.08% 1.10% 1.10% 1.11%(5)
- ------------------------------------
Ratio of Net Investment Income
(Loss) to Average Net Assets 1.45%(5) 1.51% 1.01% 1.22% 1.02% 0.81%(5)
- ------------------------------------
Portfolio Turnover Rate 63% 133% 139% 109% 106% 174%(6)
- ------------------------------------
Net Assets, End of Period
(in thousands) $688,387 $648,071 $433,465 $218,141 $82,976 $17,145
- -----------------------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) August 14, 2001 (commencement of sale) through December 31, 2001.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2001.
See Notes to Financial Statements.
- ------
21
VP Value - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- -----------------------------------------------------------------------------------------
CLASS III
- -----------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002(2)
- -----------------------------------------------------------------------------------------
PER-SHARE DATA
- -----------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.20 $8.75 $7.79 $6.12 $6.92
- -----------------------------------------------------------------------------------------
Income From Investment Operations
- ------------------------------------------
Net Investment Income (Loss)(3) 0.06 0.13 0.09 0.09 0.06
- ------------------------------------------
Net Realized and Unrealized Gain (Loss) 0.18 0.28 1.01 1.65 (0.86)
- -----------------------------------------------------------------------------------------
Total From Investment Operations 0.24 0.41 1.10 1.74 (0.80)
- -----------------------------------------------------------------------------------------
Distributions
- ------------------------------------
From Net Investment Income (0.12) (0.08) (0.08) (0.07) --
- ------------------------------------
From Net Realized Gains (0.73) (0.88) (0.06) -- --
- -----------------------------------------------------------------------------------------
Total Distributions (0.85) (0.96) (0.14) (0.07) --
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.59 $8.20 $8.75 $7.79 $6.12
=========================================================================================
TOTAL RETURN(4) 3.04% 5.03% 14.33% 28.96% (11.56)%
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------
Ratio of Operating Expenses
to Average Net Assets 0.93%(5) 0.93% 0.93% 0.95% 0.95%(5)
- ------------------------------------
Ratio of Net Investment Income
(Loss) to Average Net Assets 1.60%(5) 1.66% 1.16% 1.37% 1.50%(5)
- ------------------------------------
Portfolio Turnover Rate 63% 133% 139% 109% 106%(6)
- ------------------------------------
Net Assets, End of Period
(in thousands) $9,431 $8,750 $6,387 $1,819 $356
- -----------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) May 6, 2002 (commencement of sale) through December 31, 2002.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2002.
See Notes to Financial Statements.
- ------
22
Approval of Management Agreement for VP Value
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 VP Value (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)
- ------
23
Approval of Management Agreement for VP Value
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
(continued)
- ------
24
Approval of Management Agreement for VP Value
information during the 15(c) Process comparing the fund's performance with that
of similar funds not managed by the advisor. 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 below 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
(continued)
- ------
25
Approval of Management Agreement for VP Value
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, fee breakpoints as the fund increases in size, and through
reinvestment in its business to provide shareholders additional content and
services.
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 a 15(c) Provider 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 just above the median 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
(continued)
- ------
26
Approval of Management Agreement for VP Value
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 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 independent 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.
- ------
27
Share Class Information
Three classes of shares are authorized for sale by the fund: Class I, Class II
and Class III.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
CLASS III shares are sold through insurance company separate accounts. Class III
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares. However, Class III shares have a 1.00%
redemption fee for shares that are redeemed or exchanged within 60 days of
purchase. The total expense ratio of Class III shares is the same as the total
expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
28
Additional Information
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
- ------
29
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 DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The LIPPER MULTI-CAP VALUE INDEX is an equally-weighted index of, typically, the
30 largest mutual funds that use a value investment strategy to purchase
securities of companies of all market capitalizations.
The NASDAQ COMPOSITE INDEX is a market-value weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL 1000(reg.tm) INDEX is a market-capitalization weighted, large-cap
index created by Frank Russell Company to measure the performance of the 1,000
largest companies in the Russell 3000 Index (the 3,000 largest publicly traded
U.S. companies, based on total market capitalization). THE RUSSELL 1000(reg.tm)
VALUE INDEX measures the performance of those Russell 1000 Index companies (the
1,000 largest of the 3,000 largest publicly traded U.S. companies, based on
total market capitalization) with lower price-to-book ratios and lower
forecasted growth rates.
The RUSSELL 2000(reg.tm) INDEX is a market-capitalization weighted index created
by Frank Russell Company to measure the performance of the 2,000 smallest of the
3,000 largest publicly traded U.S. companies, based on total market
capitalization. The RUSSELL 2000(reg.tm) VALUE INDEX measures the performance of
those Russell 2000 Index companies (the 2,000 smallest of the 3,000 largest
publicly traded U.S. companies, based on total market capitalization) with lower
price-to-book ratios and lower forecasted growth rates.
The RUSSELL 3000(reg.tm) INDEX measures the performance of the 3,000 largest
U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. As of the latest
reconstitution, the average market capitalization was approximately $4 billion;
the median market capitalization was approximately $700 million. The index had a
total market capitalization range of approximately $309 billion to $128 million.
The RUSSELL 3000(reg.tm) VALUE INDEX measures the performance of those Russell
3000 Index companies (the 3,000 largest U.S. companies based on total market
capitalization) with lower price-to-book ratios and lower forecasted growth
values.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
- ------
30
Notes
- ------
31
Notes
- ------
32
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century
and American Century Investments are service marks
of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50648 All rights reserved.
[front cover]
American Century
Variable Portfolios
SEMIANNUAL REPORT
[photo of boy with plane]
JUNE 30, 2006
VP Vista(reg.sm) Fund
[american century investments logo and text logo]
[inside front cover - blank]
Table of Contents
Market Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Six-Month Total Returns . . . . . . . . . . . . . . . . . . . . . . . . 2
VP VISTA
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Portfolio Commentary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Ten Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Top Five Industries . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Investments in Portfolio . . . . . . . . . . . . . . . . . . . 6
Shareholder Fee Example . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FINANCIAL STATEMENTS
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . .12
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . .13
Statement of Changes in Net Assets. . . . . . . . . . . . . . . . . . . . .14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . .15
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
OTHER INFORMATION
Approval of Management Agreement for VP Vista . . . . . . . . . . . . . . .21
Share Class Information . . . . . . . . . . . . . . . . . . . . . . . . . .26
Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . .27
The opinions expressed in the Market Perspective and the Portfolio Commentary
reflect those of the portfolio management team as of the date of the report, and
do not necessarily represent the opinions of American Century or any other
person in the American Century organization. Any such opinions are subject to
change at any time based upon market or other conditions and American Century
disclaims any responsibility to update such opinions. These opinions may not be
relied upon as investment advice and, because investment decisions made by
American Century funds are based on numerous factors, may not be relied upon as
an indication of trading intent on behalf of any American Century fund. Security
examples are used for representational purposes only and are not intended as
recommendations to purchase or sell securities. Performance information for
comparative indices and securities is provided to American Century by third
party vendors. To the best of American Century's knowledge, such information is
accurate at the time of printing.
Market Perspective
[photo of Chief Investment Officer]
BY HAROLD BRADLEY, CHIEF INVESTMENT OFFICER, SMALL/MID-CAP GROWTH, AMERICAN
CENTURY INVESTMENTS
WHAT HAPPENED IN THE ECONOMY
A short-lived economic slowdown on the heels of last summer's devastating Gulf
Coast hurricanes gave way to a strong rebound after the first of the year. But
persistent inflation and soaring commodity prices led to continued Federal
Reserve rate hikes, even as growth again slowed toward the end of the 6-month
period.
By January 2006, a sluggish U.S. economy still recovering from disruptions
caused by hurricanes Katrina and Rita gave way to resurging growth, with
retailers reporting strong post-holiday sales and overall corporate profits
remaining robust. Gross domestic product growth of 5.6% in the first quarter of
2006 more than tripled the 1.7% rate of the previous quarter.
However, escalating crude oil, gold and other commodity values, plus annual core
inflation rates above 2%, led the Federal Reserve to boost its short-term
interest rate target by one full percentage point. That rate closed the period
at 5.25%, the highest level since January 2001 -- even as a slowdown in the
housing market and other data pointed to the likelihood of a cooling economy in
the second half of 2006.
WHAT HAPPENED IN THE MARKET
The notion that the Fed might soon stop raising rates helped feed investors'
appetites throughout most of the period. But sentiment shifted suddenly in the
period's closing weeks as the Fed made it clear that more rate hikes remained on
the horizon.
Broad market indices posted high single-digit gains in the first four months of
2006. Indices solely comprising small-capitalization stocks fared even better,
rising 10-14% and setting repeated record highs. By early May 2006, even the
mega-cap Dow Jones Industrial Average had inched to within 14 points of its
all-time high established in January 2000.
The market's rally abruptly ended May 10, though, when the Fed again raised its
short-term rate and investors anticipating a signal to an end of the 2-year,
rate-hike campaign didn't get what they desired. As a result, those that had
chased risk in the first four months of the year began avoiding it.
The ensuing month-long selloff wasn't kind to small- and mid-cap stocks, as
investors flocked toward more stable large-cap stocks. Meanwhile, value stocks
continued outperforming growth stocks throughout the 6-month period in all
capitalization ranges, particularly among large-cap issues.
SIX-MONTH TOTAL RETURNS
AS OF JUNE 30, 2006(1)
- --------------------------------------------------------------------------------
S&P 500 Index 2.71%
- --------------------------------------------------------------------------------
Dow Jones Industrial Average 5.22%
- --------------------------------------------------------------------------------
Nasdaq Composite Index -1.08%
- --------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
- ------
2
VP Vista - Performance
TOTAL RETURNS AS OF JUNE 30, 2006
--------------
AVERAGE ANNUAL
RETURNS
- -------------------------------------------------------------------------------
SINCE INCEPTION
6 MONTHS(1) 1 YEAR INCEPTION DATE
- -------------------------------------------------------------------------------
CLASS I 6.65% 16.72% 9.62% 10/5/01
- -------------------------------------------------------------------------------
RUSSELL MIDCAP
GROWTH INDEX(2) 2.56% 13.04% 11.25% --
- -------------------------------------------------------------------------------
Class II 6.59% 16.57% 19.26% 4/29/05
- -------------------------------------------------------------------------------
(1) Total returns for periods less than one year are not annualized.
(2) Data provided by Lipper Inc. - A Reuters Company. (c) 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.
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.
The performance information presented does not include charges and deductions
imposed by the insurance company separate account under the variable annuity or
variable life insurance contracts. The inclusion of such charges could
significantly lower performance. Please refer to the insurance company separate
account prospectus for a discussion of the charges related to insurance
contracts.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I 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
VP Vista - Performance
GROWTH OF $10,000 OVER LIFE OF CLASS
$10,000 investment made October 5, 2001
ONE-YEAR RETURNS OVER LIFE OF CLASS
Periods ended June 30
- --------------------------------------------------------------------------------
2002* 2003 2004 2005 2006
- --------------------------------------------------------------------------------
Class I -3.20% -0.52% 31.98% 4.17% 16.72%
- --------------------------------------------------------------------------------
Russell Midcap Growth Index -3.25% 7.35% 27.33% 10.86% 13.04%
- --------------------------------------------------------------------------------
* From 10/5/01, Class I's inception date. Not annualized.
Data presented reflect past performance. Past performance is no guarantee of
future results. Current performance may be higher or lower than the performance
shown. Investment return and principal value will fluctuate, and redemption
value may be more or less than original cost. To obtain performance data current
to the most recent month end, please call 1-800-345-6488.
Unless otherwise indicated, performance reflects Class I 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
VP Vista - Portfolio Commentary
PORTFOLIO MANAGERS: GLENN FOGLE AND DAVID M. HOLLOND
American Century VP Vista surged 6.65%* during the six months ended June 30,
2006, exceeding the 2.56% return of its benchmark, the Russell Midcap Growth
Index. The portfolio's 1- and 3-year returns of 16.72% and 17.06%, respectively,
through that date exceeded the benchmark's gains of 13.04% and 16.86% for the
same time periods.
VALUE MAINTAINS ITS LEAD
Heading into the period, value stocks in the mid-cap space had outpaced growth
stocks substantially during the previous 5-year stretch. The Russell Midcap
Value Index gained an average of 13.01% annually in that time, versus a 4.76%
average annual gain for the Russell Midcap Growth Index.
That trend didn't change in the recent 6-month period. The Russell Midcap Value
gained 7.02%, compared with 2.56% for the Russell Midcap Growth. Much of the
difference came in the last three months of the period, when investors' risk
tolerance decreased. (See the Market Perspective on page 2).
FISHING EVERYWHERE
A hallmark of VP Vista's investment process includes the flexibility to find and
invest in growth stories in every area of the market, including sectors
traditionally considered "value" sectors. That attribute helped VP Vista surpass
its benchmark in the latest 6-month period.
VP Vista benefited considerably from overweight positions in materials,
industrials and telecommunications services during the period. Combined, those
sectors only composed 18% of the benchmark's weight during the period, compared
with 43% for VP Vista.
Those overweight positions explained about 70% of the portfolio's excess return
Those stakes also helped offset losses from several individual stock picks in
health care and information technology, two sectors that historically have
carried a "growth" label. An underweight position in IT helped mute losses in
that sector, though.
RIDING THE COMMODITY RALLY
VP Vista's top individual performer in the period, Titanium Metals, fit the
portfolio's broader 2006 investment theme of finding stocks that will benefit
from the
TOP TEN HOLDINGS
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
NII Holdings, Inc. Cl B 4.1% 4.3%
- --------------------------------------------------------------------------------
McDermott
International, Inc. 4.0% 1.7%
- --------------------------------------------------------------------------------
TETRA Technologies, Inc. 3.1% --
- --------------------------------------------------------------------------------
Alliance Data
Systems Corp. 3.0% --
- --------------------------------------------------------------------------------
SBA Communications
Corp. Cl A 2.7% 0.5%
- --------------------------------------------------------------------------------
Terex Corp. 2.4% --
- --------------------------------------------------------------------------------
Las Vegas Sands Corp. 2.3% --
- --------------------------------------------------------------------------------
American Tower Corp. Cl A 2.1% 2.5%
- --------------------------------------------------------------------------------
Thermo Electron Corp. 2.1% --
- --------------------------------------------------------------------------------
Pharmaceutical Product
Development, Inc. 2.0% 2.0%
- --------------------------------------------------------------------------------
* All fund returns referenced in this commentary are for Class I shares.
Total returns for periods less than one year are not annualized.
(continued)
- ------
5
VP Vista - Portfolio Commentary
ongoing rally in commodity markets, including metals and alloys. The company
makes titanium for use in the commercial aerospace industry, which increasingly
seeks lightweight material to improve efficiency and combat rising fuel costs.
Titanium's shares, constituting one of the portfolio's top 10 average holdings
and one of its largest individual overweight positions, more than doubled in
value during the period.
VP Vista's second-leading performer reflected the same general commodity trend.
The global search for more crude oil has boosted demand for offshore drilling
platforms made by McDermott International. The portfolio's 3rd-biggest average
holding and also its 3rd-biggest overweight stake in the period, shares of
McDermott gained 53%.
BAD TIMING
During the period, VP Vista maintained a steady overweight in natural gas
producer Southwestern Energy, one of its 10 biggest average holdings -- and its
worst individual performer. But the portfolio maintained that weight during a
relatively mild winter in which natural gas prices plunged. As a result,
Southwestern's share price suffered, falling 13% in the 6-month period, with the
bulk of the stock's losses coming in the first three months of the year.
Otherwise, three of the portfolio's 10 leading relative detractors came from the
same industry: health care providers and services. As a whole, the industry
faces increasing margin pressure from reimbursement issues and rising costs.
Within the benchmark, health care providers trailed all other industries in the
health care sector during the period, and providers composed the majority of VP
Vista's holdings in the sector.
INVESTMENT PHILOSOPHY
VP Vista adheres to an investment process that identifies mid-sized and smaller
companies with accelerating earnings and revenue. Ultimately, the portfolio's
management team believes this selection strategy will produce solid, long-term
gains for investors.
TOP FIVE INDUSTRIES
AS OF JUNE 30, 2006
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Wireless Telecommunication
Services 10.9% 11.4%
- --------------------------------------------------------------------------------
Energy Equipment
& Services 10.2% 7.7%
- --------------------------------------------------------------------------------
Hotels, Restaurants
& Leisure 6.8% 0.5%
- --------------------------------------------------------------------------------
Machinery 6.4% 2.1%
- --------------------------------------------------------------------------------
Life Sciences Tools
& Services 4.6% --
- --------------------------------------------------------------------------------
TYPES OF INVESTMENTS IN PORTFOLIO
- --------------------------------------------------------------------------------
% OF % OF
NET ASSETS NET ASSETS
AS OF AS OF
6/30/06 12/31/05
- --------------------------------------------------------------------------------
Domestic
Common Stocks 91.0% 80.3%
- --------------------------------------------------------------------------------
Foreign Common Stocks* 6.2% 16.5%
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS 97.2% 96.8%
- --------------------------------------------------------------------------------
Temporary
Cash Investments 3.4% 3.3%
- --------------------------------------------------------------------------------
Other Assets
and Liabilities (0.6)% (0.1)%
- --------------------------------------------------------------------------------
*Includes depositary shares, dual listed securities, and foreign ordinary
shares.
- ------
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 January 1, 2006 to June 30, 2006.
ACTUAL EXPENSES
The table provides information about actual account values and actual expenses
for each class. You may use the information, together with the amount you
invested, to estimate the expenses that you paid over the period. First,
identify the share class you own. Then simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number under the heading "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The table also provides information about hypothetical account values and
hypothetical expenses based on the actual expense ratio of each class of your
fund and an assumed rate of return of 5% per year before expenses, which is not
the actual return of a fund's share class. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in your fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption/exchange fees. Therefore, the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds. In addition, if these transactional costs were
included, your costs would have been higher.
(continued)
- ------
7
Shareholder Fee Example (Unaudited)
EXPENSES PAID
BEGINNING ENDING DURING PERIOD* ANNUALIZED
ACCOUNT VALUE ACCOUNT VALUE 1/1/06 -- EXPENSE
1/1/06 6/30/06 6/30/06 RATIO*
- ------------------------------------------------------------------------------
VP VISTA SHAREHOLDER FEE EXAMPLE
- ------------------------------------------------------------------------------
ACTUAL
- ------------------------------------------------------------------------------
Class I $1,000 $1,066.50 $5.12 1.00%
- ------------------------------------------------------------------------------
Class II $1,000 $1,065.90 $5.89 1.15%
- ------------------------------------------------------------------------------
HYPOTHETICAL
- ------------------------------------------------------------------------------
Class I $1,000 $1,019.84 $5.01 1.00%
- ------------------------------------------------------------------------------
Class II $1,000 $1,019.09 $5.76 1.15%
- ------------------------------------------------------------------------------
*Expenses are equal to the class's annualized expense ratio listed in the table
above, multiplied by the average account value over the period, multiplied by
181, the number of days in the most recent fiscal half-year, divided by 365, to
reflect the one-half year period.
- ------
8
VP Vista - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
COMMON STOCKS - 97.2%
AEROSPACE & DEFENSE - 3.6%
- --------------------------------------------------------------------------------
29,583 BE Aerospace, Inc.(1) $ 676,267
- --------------------------------------------------------------------------------
14,755 Precision Castparts Corp. 881,759
- --------------------------------------------------------------------------------
1,558,026
- --------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS - 0.5%
- --------------------------------------------------------------------------------
4,420 EGL Inc.(1) 221,884
- --------------------------------------------------------------------------------
AIRLINES - 0.5%
- --------------------------------------------------------------------------------
4,048 US Airways Group Inc.(1) 204,586
- --------------------------------------------------------------------------------
BIOTECHNOLOGY - 1.1%
- --------------------------------------------------------------------------------
10,691 Celgene Corp.(1) 507,074
- --------------------------------------------------------------------------------
CAPITAL MARKETS - 2.8%
- --------------------------------------------------------------------------------
13,944 Investment Technology
Group Inc.(1) 709,192
- --------------------------------------------------------------------------------
7,335 Jefferies Group, Inc. 217,336
- --------------------------------------------------------------------------------
4,827 Piper Jaffray Companies(1) 295,461
- --------------------------------------------------------------------------------
1,221,989
- --------------------------------------------------------------------------------
CHEMICALS - 1.2%
- --------------------------------------------------------------------------------
6,142 Monsanto Co. 517,095
- --------------------------------------------------------------------------------
COMMERCIAL BANKS - 1.6%
- --------------------------------------------------------------------------------
7,664 Colonial BancGroup Inc. (The) 196,812
- --------------------------------------------------------------------------------
8,996 Compass Bancshares Inc. 500,177
- --------------------------------------------------------------------------------
696,989
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 2.5%
- --------------------------------------------------------------------------------
7,750 Manpower Inc. 500,649
- --------------------------------------------------------------------------------
4,602 Monster Worldwide Inc.(1) 196,321
- --------------------------------------------------------------------------------
5,225 Republic Services, Inc. Cl A 210,777
- --------------------------------------------------------------------------------
5,778 Waste Management, Inc. 207,315
- --------------------------------------------------------------------------------
1,115,062
- --------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.9%
- --------------------------------------------------------------------------------
20,630 Redback Networks Inc.(1) 378,354
- --------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING - 2.3%
- --------------------------------------------------------------------------------
12,837 Foster Wheeler Ltd.(1) 554,558
- --------------------------------------------------------------------------------
26,711 Quanta Services, Inc.(1) 462,902
- --------------------------------------------------------------------------------
1,017,460
- --------------------------------------------------------------------------------
CONSUMER FINANCE - 0.5%
- --------------------------------------------------------------------------------
3,707 First Marblehead Corp. (The) 211,077
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.9%
- --------------------------------------------------------------------------------
11,159 Allegheny Energy, Inc.(1) 413,664
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.9%
- --------------------------------------------------------------------------------
16,663 ABB Ltd. ORD 216,553
- --------------------------------------------------------------------------------
4,773 Alstom RGPT ORD(1) 436,059
- --------------------------------------------------------------------------------
4,704 General Cable Corp.(1) 164,640
- --------------------------------------------------------------------------------
817,252
- --------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.5%
- --------------------------------------------------------------------------------
6,184 Molex Inc. 207,597
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 10.2%
- --------------------------------------------------------------------------------
10,467 Diamond Offshore Drilling, Inc. $ 878,495
- --------------------------------------------------------------------------------
2,733 Dril-Quip Inc.(1) 225,309
- --------------------------------------------------------------------------------
13,217 Oceaneering International, Inc.(1) 605,999
- --------------------------------------------------------------------------------
16,314 Superior Energy Services(1) 553,045
- --------------------------------------------------------------------------------
44,098 TETRA Technologies, Inc.(1) 1,335,728
- --------------------------------------------------------------------------------
17,401 Weatherford International Ltd.(1) 863,438
- --------------------------------------------------------------------------------
4,462,014
- --------------------------------------------------------------------------------
FOOD PRODUCTS - 3.7%
- --------------------------------------------------------------------------------
19,463 Archer-Daniels-Midland Co. 803,433
- --------------------------------------------------------------------------------
8,425 Campbell Soup Co. 312,652
- --------------------------------------------------------------------------------
7,214 H.J. Heinz Co. 297,361
- --------------------------------------------------------------------------------
4,221 Kellogg Co. 204,423
- --------------------------------------------------------------------------------
1,617,869
- --------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT
& SUPPLIES - 1.7%
- --------------------------------------------------------------------------------
6,199 Advanced Medical Optics Inc.(1) 314,289
- --------------------------------------------------------------------------------
4,438 Hologic, Inc.(1) 219,060
- --------------------------------------------------------------------------------
1,890 Intuitive Surgical Inc.(1) 222,963
- --------------------------------------------------------------------------------
756,312
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS
& SERVICES - 1.4%
- --------------------------------------------------------------------------------
3,218 Laboratory Corporation
of America Holdings(1) 200,256
- --------------------------------------------------------------------------------
6,920 Quest Diagnostics Inc. 414,647
- --------------------------------------------------------------------------------
614,903
- --------------------------------------------------------------------------------
HEALTH CARE TECHNOLOGY - 0.5%
- --------------------------------------------------------------------------------
17,473 Emdeon Corp.(1) 216,840
- --------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 6.8%
- --------------------------------------------------------------------------------
8,813 Harrah's Entertainment, Inc. 627,309
- --------------------------------------------------------------------------------
13,356 International Game Technology 506,727
- --------------------------------------------------------------------------------
13,183 Las Vegas Sands Corp.(1) 1,026,428
- --------------------------------------------------------------------------------
5,450 Penn National Gaming, Inc.(1) 211,351
- --------------------------------------------------------------------------------
6,972 Pinnacle Entertainment Inc.(1) 213,692
- --------------------------------------------------------------------------------
5,605 Scientific Games Corp. Cl A(1) 199,650
- --------------------------------------------------------------------------------
3,027 Station Casinos Inc. 206,078
- --------------------------------------------------------------------------------
2,991,235
- --------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 4.0%
- --------------------------------------------------------------------------------
38,752 McDermott International, Inc.(1) 1,762,053
- --------------------------------------------------------------------------------
INSURANCE - 0.5%
- --------------------------------------------------------------------------------
3,356 Torchmark Corp. 203,776
- --------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.5%
- --------------------------------------------------------------------------------
3,384 NutriSystem, Inc.(1) 210,248
- --------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES - 0.5%
- --------------------------------------------------------------------------------
6,682 Akamai Technologies, Inc.(1) 241,822
- --------------------------------------------------------------------------------
IT SERVICES - 3.0%
- --------------------------------------------------------------------------------
22,180 Alliance Data Systems Corp.(1) 1,304,628
- ---------------------------------------------------------------------------------
See Notes to Financial Statements.
(continued)
- ------
9
VP Vista - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
LIFE SCIENCES TOOLS & SERVICES - 4.6%
- --------------------------------------------------------------------------------
3,391 Covance Inc.(1) $ 207,597
- --------------------------------------------------------------------------------
25,241 Pharmaceutical Product
Development, Inc. 886,464
- --------------------------------------------------------------------------------
24,791 Thermo Electron Corp.(1) 898,426
- --------------------------------------------------------------------------------
1,992,487
- --------------------------------------------------------------------------------
MACHINERY - 6.4%
- --------------------------------------------------------------------------------
8,692 AGCO Corp.(1) 228,773
- --------------------------------------------------------------------------------
7,455 Atlas Copco AB Cl A ORD 207,089
- --------------------------------------------------------------------------------
10,159 Manitowoc Co. 452,076
- --------------------------------------------------------------------------------
17,521 Sandvik AB ORD 203,809
- --------------------------------------------------------------------------------
10,648 Terex Corp.(1) 1,050,958
- --------------------------------------------------------------------------------
16,436 Trinity Industries, Inc. 664,014
- --------------------------------------------------------------------------------
2,806,719
- --------------------------------------------------------------------------------
MARINE - 1.4%
- --------------------------------------------------------------------------------
9,894 American Commercial Lines Inc.(1) 596,114
- --------------------------------------------------------------------------------
MEDIA - 1.0%
- --------------------------------------------------------------------------------
6,488 Focus Media Holding Ltd. ADR(1) 422,758
- --------------------------------------------------------------------------------
METALS & MINING - 4.5%
- --------------------------------------------------------------------------------
10,034 Allegheny Technologies Inc. 694,753
- --------------------------------------------------------------------------------
12,775 Oregon Steel Mills, Inc.(1) 647,182
- --------------------------------------------------------------------------------
18,823 Titanium Metals Corp.(1) 647,135
- --------------------------------------------------------------------------------
1,989,070
- --------------------------------------------------------------------------------
MULTILINE RETAIL - 1.1%
- --------------------------------------------------------------------------------
3,097 Sears Holdings Corp.(1) 479,539
- --------------------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS - 0.5%
- --------------------------------------------------------------------------------
4,964 ATP Oil & Gas Corp.(1) 208,141
- --------------------------------------------------------------------------------
PHARMACEUTICALS - 0.4%
- --------------------------------------------------------------------------------
11,799 Elan Corp. plc ADR(1) 197,043
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS - 1.9%
- --------------------------------------------------------------------------------
7,941 Archstone-Smith Trust 403,960
- --------------------------------------------------------------------------------
6,072 Camden Property Trust 446,596
- --------------------------------------------------------------------------------
850,556
- --------------------------------------------------------------------------------
REAL ESTATE MANAGEMENT
& DEVELOPMENT - 1.0%
- --------------------------------------------------------------------------------
4,982 Jones Lang LaSalle Inc. 436,174
- --------------------------------------------------------------------------------
ROAD & RAIL - 0.5%
- --------------------------------------------------------------------------------
3,097 CSX Corporation 218,153
- --------------------------------------------------------------------------------
SEMICONDUCTORS &
SEMICONDUCTOR EQUIPMENT - 2.0%
- --------------------------------------------------------------------------------
4,346 Cymer, Inc.(1) 201,915
- --------------------------------------------------------------------------------
654 FormFactor, Inc.(1) 29,188
- --------------------------------------------------------------------------------
17,384 MEMC Electronic Materials Inc.(1) 651,900
- --------------------------------------------------------------------------------
883,003
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
SOFTWARE - 1.0%
- --------------------------------------------------------------------------------
15,760 BEA Systems Inc.(1) $ 206,298
- --------------------------------------------------------------------------------
5,346 Citrix Systems, Inc.(1) 214,589
- --------------------------------------------------------------------------------
420,887
- --------------------------------------------------------------------------------
SPECIALTY RETAIL - 3.2%
- --------------------------------------------------------------------------------
22,578 Circuit City Stores Inc. 614,573
- --------------------------------------------------------------------------------
20,621 Office Depot, Inc.(1) 783,598
- --------------------------------------------------------------------------------
1,398,171
- --------------------------------------------------------------------------------
TEXTILES, APPAREL &
LUXURY GOODS - 0.8%
- --------------------------------------------------------------------------------
882 Puma AG Rudolf
Dassler Sport ORD 342,763
- --------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 1.4%
- --------------------------------------------------------------------------------
15,847 Hudson City Bancorp, Inc. 211,241
- --------------------------------------------------------------------------------
4,481 PMI Group, Inc. (The) 199,763
- --------------------------------------------------------------------------------
3,304 Radian Group Inc. 204,121
- --------------------------------------------------------------------------------
615,125
- --------------------------------------------------------------------------------
TRADING COMPANIES &
DISTRIBUTORS - 1.0%
- --------------------------------------------------------------------------------
6,678 WESCO International Inc.(1) 445,823
- --------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION
SERVICES - 10.9%
- --------------------------------------------------------------------------------
20,310 America Movil SA
de CV Series L ADR 675,511
- --------------------------------------------------------------------------------
28,996 American Tower Corp. Cl A(1) 902,356
- --------------------------------------------------------------------------------
7,146 Crown Castle International Corp.(1) 246,823
- --------------------------------------------------------------------------------
31,677 NII Holdings, Inc. Cl B(1) 1,785,948
- --------------------------------------------------------------------------------
44,461 SBA Communications Corp. Cl A(1) 1,162,210
- --------------------------------------------------------------------------------
4,772,848
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $38,237,665) 42,545,183
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS - 3.4%
- --------------------------------------------------------------------------------
Repurchase Agreement, Credit Suisse First Boston, Inc.,
(collateralized by various U.S. Treasury obligations,
6.125% - 8.875%, 2/15/19 - 8/15/29, valued at $1,530,574),
in a joint trading account at 4.50%, dated 6/30/06, due 7/3/06
(Delivery value $1,500,563)
(Cost $1,500,000) 1,500,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 100.6%
(Cost $39,737,665) 44,045,183
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - (0.6)% (287,200)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS - 100.0% $43,757,983
================================================================================
See Notes to Financial Statements.
(continued)
- ------
10
VP Vista - Schedule of Investments
JUNE 30, 2006 (UNAUDITED)
- -----------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- -----------------------------------------------------------------------------
Contracts to Sell Settlement Date Value Unrealized Gain (Loss)
- -----------------------------------------------------------------------------
127,472 CHF for USD 7/31/06 $104,514 $ (1,855)
- -----------------------------------------------------------------------------
125,069 Euro for USD 7/31/06 160,229 (2,838)
- -----------------------------------------------------------------------------
174,679 Euro for USD 7/31/06 223,786 (4,016)
- -----------------------------------------------------------------------------
1,458,364 SEK for USD 7/31/06 203,041 (4,163)
- -----------------------------------------------------------------------------
$691,570 $(12,872)
=================================
(Value on Settlement Date $678,698)
- -----------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
- -----------------------------------------------------------------------------
ADR = American Depositary Receipt
CHF = Swiss Franc
ORD = Foreign Ordinary Share
SEK = Swedish Krona
USD = United States Dollar
(1) Non-income producing.
See Notes to Financial Statements.
- ------
11
Statement of Assets and Liabilities
JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Investment securities, at value (cost of $39,737,665) $44,045,183
- ------------------------------------------------------------
Cash 161,713
- ------------------------------------------------------------
Receivable for investments sold 426,629
- ------------------------------------------------------------
Dividends and interest receivable 10,956
- --------------------------------------------------------------------------------
44,644,481
- --------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------
Payable for investments purchased 851,776
- ------------------------------------------------------------
Payable for forward foreign currency exchange contracts 12,872
- ------------------------------------------------------------
Accrued management fees 21,283
- ------------------------------------------------------------
Distribution fees payable 567
- --------------------------------------------------------------------------------
886,498
- --------------------------------------------------------------------------------
NET ASSETS $43,757,983
================================================================================
NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Capital (par value and paid-in surplus) $39,136,652
- ------------------------------------------------------------
Undistributed net investment income 11,023
- ------------------------------------------------------------
Undistributed net realized gain on investment
and foreign currency transactions 315,687
- ------------------------------------------------------------
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies 4,294,621
- --------------------------------------------------------------------------------
$43,757,983
================================================================================
CLASS I, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $40,885,482
- ------------------------------------------------------------
Shares outstanding 2,654,479
- ------------------------------------------------------------
Net asset value per share $15.40
- --------------------------------------------------------------------------------
CLASS II, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
Net assets $2,872,501
- ------------------------------------------------------------
Shares outstanding 186,782
- ------------------------------------------------------------
Net asset value per share $15.38
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- ------
12
Statement of Operations
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
- --------------------------------------------------------------------------------
INVESTMENT INCOME (LOSS)
- --------------------------------------------------------------------------------
INCOME:
- --------------------------------------------------------------
Dividends (net of foreign taxes withheld of $717) $ 103,977
- --------------------------------------------------------------
Interest 22,873
- --------------------------------------------------------------------------------
126,850
- --------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------
Management fees 112,844
- --------------------------------------------------------------
Distribution fees - Class II 2,763
- --------------------------------------------------------------
Directors' fees and expenses 184
- --------------------------------------------------------------
Other expenses 36
- --------------------------------------------------------------------------------
115,827
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 11,023
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
- --------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) ON:
- --------------------------------------------------------------
Investment transactions 371,106
- --------------------------------------------------------------
Foreign currency transactions (15,487)
- --------------------------------------------------------------------------------
355,619
- --------------------------------------------------------------------------------
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
- --------------------------------------------------------------
Investments 1,706,397
- --------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (16,493)
- --------------------------------------------------------------------------------
1,689,904
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) 2,045,523
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: $2,056,546
================================================================================
See Notes to Financial Statements.
- ------
13
Statement of Changes in Net Assets
SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS 2006 2005
- --------------------------------------------------------------------------------
OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (loss) $ 11,023 $ (52,800)
- ---------------------------------------------
Net realized gain (loss) 355,619 185,630
- ---------------------------------------------
Change in net unrealized
appreciation (depreciation) 1,689,904 1,104,264
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,056,546 1,237,094
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
From net realized gains:
- ---------------------------------------------
Class I (66,566) --
- ---------------------------------------------
Class II (6,417) --
- --------------------------------------------------------------------------------
Decrease in net assets from distributions (72,983) --
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
Net increase (decrease) in net assets from
capital share transactions 23,661,449 7,263,556
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS 25,645,012 8,500,650
- --------------------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 18,112,971 9,612,321
- --------------------------------------------------------------------------------
End of period $43,757,983 $18,112,971
================================================================================
Undistributed net investment income $11,023 --
================================================================================
See Notes to Financial Statements.
- ------
14
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Variable Portfolios, Inc., (the corporation) is
registered under the Investment Company Act of 1940 (the 1940 Act) as an
open-end management investment company. VP Vista Fund (the fund) is one fund in
a series issued by the corporation. The fund is diversified under the 1940 Act.
The fund's investment objective is to seek long-term capital growth. The fund
pursues its objective by investing in medium-sized and smaller companies that
the investment advisor believes will increase in value over time. The following
is a summary of the fund's significant accounting policies.
MULTIPLE CLASS -- The fund is authorized to issue Class I and Class II. The
share classes differ principally in their respective shareholder servicing and
distribution expenses and arrangements. All shares of the fund represent an
equal pro rata interest in the assets of the class to which such shares belong,
and have identical voting, dividend, liquidation and other rights and the same
terms and conditions, except for class specific expenses and exclusive rights to
vote on matters affecting only individual classes. Income, non-class specific
expenses, and realized and unrealized capital gains and losses of the fund are
allocated to each class of shares based on their relative net assets. Sale of
Class II shares commenced on April 29, 2005.
SECURITY VALUATIONS -- Securities traded primarily on a principal securities
exchange are valued at the last reported sales price, or at the mean of the
latest bid and asked prices where no last sales price is available. Depending on
local convention or regulation, securities traded over-the-counter are valued at
the mean of the latest bid and asked prices, the last sales price, or the
official close price. Debt securities not traded on a principal securities
exchange are valued through a commercial pricing service or at the mean of the
most recent bid and asked prices. Discount notes may be valued through a
commercial pricing service or at amortized cost, which approximates fair value.
If the fund determines that the market price of a portfolio security is not
readily available, or that the valuation methods mentioned above do not reflect
the security's fair value, such security is valued at its fair value as
determined by, or in accordance with procedures adopted by, the Board of
Directors or its designee if such fair value determination would materially
impact a fund's net asset value. Circumstances that may cause the fund to fair
value a security include: an event occurred after the close of the exchange on
which a portfolio security principally trades (but before the close of the New
York Stock Exchange) that was likely to have changed the value of the security;
a security has been declared in default; or trading in a security has been
halted during the trading day.
SECURITY TRANSACTIONS -- Security transactions are accounted for as of the trade
date. Net realized gains and losses are determined on the identified cost basis,
which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld, if any, is
recorded as of the ex-dividend date. Distributions received on securities that
represent a return of capital or capital gain are recorded as a reduction of
cost of investments and/or as a realized gain. The fund estimates the components
of distributions received that may be considered nontaxable distributions or
capital gain distributions for income tax purposes. Interest income is recorded
on the accrual basis and includes accretion of discounts and amortization of
premiums.
FOREIGN CURRENCY TRANSACTIONS -- All assets and liabilities initially expressed
in foreign currencies are translated into U.S. dollars at prevailing exchange
rates at period end. Purchases and sales of investment securities, dividend and
interest income, and certain expenses are translated at the rates of exchange
prevailing on the respective dates of such transactions. For assets and
liabilities, other than investments in securities, net realized and unrealized
gains and losses from foreign currency translations arise from changes in
currency exchange rates.
Net realized and unrealized foreign currency exchange gains or losses occurring
during the holding period of investment securities are a component of realized
gain (loss) on investment transactions and unrealized appreciation
(depreciation) on investments, respectively. Certain countries may impose taxes
on the contract amount of purchases and sales of foreign currency contracts in
their currency. The fund records the foreign tax expense, if any, as a reduction
to the net realized gain (loss) on foreign currency transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The fund may enter into forward
foreign currency exchange contracts to facilitate transactions of securities
denominated in a foreign currency or to hedge the fund's exposure to foreign
currency exchange rate fluctuations. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. The fund bears the risk of an unfavorable change in
the foreign currency exchange rate underlying the forward contract.
(continued)
- ------
15
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Additionally, losses may arise if the counterparties do not perform under the
contract terms.
REPURCHASE AGREEMENTS -- The fund may enter into repurchase agreements with
institutions that American Century Investment Management, Inc. (ACIM) (the
investment advisor) has determined are creditworthy pursuant to criteria adopted
by the Board of Directors. Each repurchase agreement is recorded at cost. The
fund requires that the collateral, represented by securities, received in a
repurchase transaction be transferred to the custodian in a manner sufficient to
enable the fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the Securities
and Exchange Commission, the fund, along with other registered investment
companies having management agreements with ACIM or American Century Global
Investment Management, Inc. (ACGIM), may transfer uninvested cash balances into
a joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
INCOME TAX STATUS -- It is the fund's policy to distribute substantially all net
investment income and net realized gains to shareholders and to otherwise
qualify as a regulated investment company under provisions of the Internal
Revenue Code. Accordingly, no provision has been made for federal or state
income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains, if any, are generally declared and paid annually.
The book-basis character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences reflect the
differing character of certain income items and net realized gains and losses
for financial statement and tax purposes, and may result in reclassification
among certain capital accounts on the financial statements.
INDEMNIFICATIONS -- Under the corporation's organizational documents, its
officers and directors are indemnified against certain liabilities arising out
of the performance of their duties to the fund. In addition, in the normal
course of business, the fund enters into contracts that provide general
indemnifications. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the fund.
The risk of material loss from such claims is considered by management to be
remote.
USE OF ESTIMATES -- The financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
may require management to make certain estimates and assumptions at the date of
the financial statements. Actual results could differ from these estimates.
(continued)
- ------
16
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
2. FEES AND TRANSACTIONS WITH RELATED PARTIES
MANAGEMENT FEES -- The corporation has entered into a Management Agreement with
ACIM, under which ACIM provides the fund with investment advisory and management
services in exchange for a single, unified management fee (the fee) per class.
The Agreement provides that all expenses of the fund, except brokerage
commissions, taxes, interest, fees and expenses of those directors who are not
considered "interested persons" as defined in the 1940 Act (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed and
accrued daily based on the daily net assets of the specific class of shares of
the fund and paid monthly in arrears. The effective annual management fee for
each class of the fund for the six months ended June 30, 2006 was 1.00% and
0.90% for Class I and Class II, respectively.
DISTRIBUTION FEES -- The Board of Directors has adopted the Master Distribution
Plan (the plan) for Class II, pursuant to Rule 12b-1 of the 1940 Act. The plan
provides that Class II will pay American Century Investment Services, Inc.
(ACIS) an annual distribution fee equal to 0.25%. The fee is computed and
accrued daily based on the Class II daily net assets and paid monthly in
arrears. The distribution fee provides compensation for expenses incurred in
connection with distributing shares of Class II including, but not limited to,
payments to brokers, dealers, and financial institutions that have entered into
sales agreements with respect to shares of the fund. Fees incurred under the
plan during the six months ended June 30, 2006, are detailed in the Statement of
Operations.
RELATED PARTIES -- Certain officers and directors of the corporation are also
officers and/or directors, and, as a group, controlling stockholders of American
Century Companies, Inc. (ACC), the parent of the corporation's investment
advisor, ACIM, the distributor of the corporation, ACIS, and the corporation's
transfer agent, American Century Services, LLC.
The fund has a bank line of credit agreement with JPMorgan Chase Bank (JPMCB).
JPMCB is a custodian of the fund and a wholly owned subsidiary of J.P. Morgan
Chase & Co. (JPM). JPM is an equity investor in ACC.
3. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, excluding short-term investments,
for the six months ended June 30, 2006, were $49,627,035 and $26,687,511,
respectively.
As of June 30, 2006, the components of investments for federal income tax
purposes were as follows:
- --------------------------------------------------------------------------------
Federal tax cost of investments $40,029,082
================================================================================
Gross tax appreciation of investments $ 4,392,741
- ---------------------------------------------------------
Gross tax depreciation of investments (376,640)
- --------------------------------------------------------------------------------
Net tax appreciation (depreciation) of investments $ 4,016,101
================================================================================
The difference between book-basis and tax-basis cost and unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
(continued)
- ------
17
Notes to Financial Statements
JUNE 30, 2006 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the fund were as follows:
- --------------------------------------------------------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 1,597,752 $23,718,187
- ------------------------------------------------
Issued in reinvestment of distributions 4,471 66,566
- ------------------------------------------------
Redeemed (111,291) (1,735,884)
- --------------------------------------------------------------------------------
Net increase (decrease) 1,490,932 $22,048,869
================================================================================
YEAR ENDED DECEMBER 31, 2005
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 646,473 $8,800,416
- ------------------------------------------------
Redeemed (200,246) (2,732,247)
- --------------------------------------------------------------------------------
Net increase (decrease) 446,227 $6,068,169
================================================================================
CLASS II
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 129,510 $2,032,693
- ------------------------------------------------
Issued in reinvestment of distributions 431 6,417
- ------------------------------------------------
Redeemed (29,445) (426,530)
- --------------------------------------------------------------------------------
Net increase (decrease) 100,496 $1,612,580
================================================================================
PERIOD ENDED DECEMBER 31, 2005(1)
SHARES AUTHORIZED 50,000,000
================================================================================
Sold 120,349 $1,670,376
- ------------------------------------------------
Redeemed (34,063) (474,989)
- --------------------------------------------------------------------------------
Net increase (decrease) 86,286 $1,195,387
================================================================================
(1) April 29, 2005 (commencement of sale) through December 31, 2005.
5. BANK LINE OF CREDIT
The fund, along with certain other funds managed by ACIM or ACGIM, has a
$500,000,000 unsecured bank line of credit agreement with JPMCB. The fund may
borrow money for temporary or emergency purposes to fund shareholder
redemptions. Borrowings under the agreement bear interest at the Federal Funds
rate plus 0.50%. The fund did not borrow from the line during the six months
ended June 30, 2006.
- ------
18
VP Vista - Financial Highlights
For a Share Outstanding Throughout the Years Ended December 31 (except as noted)
- ------------------------------------------------------------------------------------
CLASS I
- ------------------------------------------------------------------------------------
2006(1) 2005 2004 2003 2002 2001(2)
- ------------------------------------------------------------------------------------
PER-SHARE DATA
- ------------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $14.49 $13.40 $11.59 $8.15 $10.15 $10.00
- ------------------------------------------------------------------------------------
Income From
Investment
Operations
- --------------------
Net Investment
Income (Loss) 0.01(3) (0.05)(3) (0.01)(3) (0.05) (0.02) (0.01)
- --------------------
Net Realized and
Unrealized
Gain (Loss) 0.95 1.14 1.82 3.49 (1.98) 0.16
- ------------------------------------------------------------------------------------
Total From
Investment
Operations 0.96 1.09 1.81 3.44 (2.00) 0.15
- ------------------------------------------------------------------------------------
Distributions
- --------------------
From Net
Realized Gains (0.05) -- -- -- -- --
- ------------------------------------------------------------------------------------
Net Asset Value,
End of Period $15.40 $14.49 $13.40 $11.59 $8.15 $10.15
====================================================================================
TOTAL RETURN(4) 6.65% 8.13% 15.62% 42.21% (19.70)% 1.50%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------
Ratio of
Operating Expenses
to Average
Net Assets 1.00%(5) 1.01% 1.00% 1.00% 1.00% 1.00%(5)
- --------------------
Ratio of Net
Investment Income
(Loss) to
Average Net Assets 0.11%(5) (0.40)% (0.05)% (0.58)% (0.29)% (0.32)%(5)
- --------------------
Portfolio
Turnover Rate 118% 276% 252% 262% 294% 50%
- --------------------
Net Assets,
End of Period
(in thousands) $40,885 $16,863 $9,612 $2,206 $1,164 $1,072
- ------------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) October 5, 2001 (fund inception) through December 31, 2001.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) Annualized.
See Notes to Financial Statements.
- ------
19
VP Vista - Financial Highlights
For a Share Outstanding Throughout the Periods Indicated
- --------------------------------------------------------------------------------
CLASS II
- --------------------------------------------------------------------------------
2006(1) 2005(2)
- --------------------------------------------------------------------------------
PER-SHARE DATA
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $14.48 $12.56
- --------------------------------------------------------------------------------
Income From Investment Operations
- -----------------------------------------------------
Net Investment Income (Loss)(3) (0.01) (0.05)
- -----------------------------------------------------
Net Realized and Unrealized Gain (Loss) 0.96 1.97
- --------------------------------------------------------------------------------
Total From Investment Operations 0.95 1.92
- --------------------------------------------------------------------------------
Distributions
- -----------------------------------------------------
From Net Realized Gains (0.05) --
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $15.38 $14.48
================================================================================
TOTAL RETURN(4) 6.59% 15.29%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Ratio of Operating Expenses to Average Net Assets 1.15%(5) 1.16%(5)
- -----------------------------------------------------
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.04)%(5) (0.55)%
(5)
- -----------------------------------------------------
Portfolio Turnover Rate 118% 276%(6)
- -----------------------------------------------------
Net Assets, End of Period (in thousands) $2,873 $1,250
- --------------------------------------------------------------------------------
(1) Six months ended June 30, 2006 (unaudited).
(2) April 29, 2005 (commencement of sale) through December 31, 2005.
(3) Computed using average shares outstanding throughout the period.
(4) Total return assumes reinvestment of net investment income and capital
gains distributions, if any. Total returns for periods less than one year
are not annualized. The total return of the classes may not precisely
reflect the class expense differences because of the impact of calculating
the net asset values to two decimal places. If net asset values were
calculated to three decimal places, the total return differences would more
closely reflect the class expense differences. The calculation of net asset
values to two decimal places is made in accordance with SEC guidelines and
does not result in any gain or loss of value between one class and another.
(5) Annualized.
(6) Portfolio turnover is calculated at the fund level. Percentage indicated
was calculated for the year ended December 31, 2005.
See Notes to Financial Statements.
- ------
20
Approval of Management Agreement for VP Vista
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 VP Vista (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, share-holder
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)
- ------
21
Approval of Management Agreement for VP Vista
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
(continued)
- ------
22
Approval of Management Agreement for VP Vista
fund's performance with that of similar funds not managed by the advisor. 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 was
below the median of its peer group for the one period and above the median for
the three year period.
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,
(continued)
- ------
23
Approval of Management Agreement for VP Vista
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 increases in
size, and through reinvestment in its business to provide shareholders
additional content and services.
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 a 15(c) Provider 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 just above the median 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. The Directors also determined that the advisor is
(continued)
- ------
24
Approval of Management Agreement for VP Vista
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 independent 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.
- ------
25
Share Class Information
Two classes of shares are authorized for sale by the fund: Class I and Class II.
CLASS I shares are sold through insurance company separate accounts. Class I
shareholders do not pay any commissions or other fees to American Century for
the purchase of portfolio shares.
CLASS II shares are sold through insurance company separate accounts. Class II
shares are subject to a 0.25% Rule 12b-1 distribution fee, which is available to
pay for distribution services provided by the financial intermediary through
which the Class II shares are purchased. The total expense ratio of Class II
shares is higher than the total expense ratio of Class I shares.
All classes of shares represent a pro rata interest in the fund and generally
have the same rights and preferences. Because all shares of the fund are sold
through insurance company separate accounts, additional fees may apply.
- ------
26
Additional Information
INDEX DEFINITIONS
The following indices are used to illustrate investment market, sector, or style
performance or to serve as fund performance comparisons. They are not investment
products available for purchase.
The DOW JONES INDUSTRIAL AVERAGE (DJIA) is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials but including
service-oriented firms. Prepared and published by Dow Jones & Co., it is the
oldest and most widely quoted of all the market indicators.
The NASDAQ COMPOSITE INDEX is a market value-weighted index of all domestic and
international common stocks listed on the Nasdaq stock market.
The RUSSELL MIDCAP(reg.tm) INDEX measures the performance of the 800 smallest of
the 1,000 largest publicly traded U.S. companies, based on total market
capitalization.
The RUSSELL MIDCAP(reg.tm) GROWTH INDEX measures the performance of those
Russell Midcap Index companies (the 800 smallest of the 1,000 largest publicly
traded U.S. companies, based on total market capitalization) with higher
price-to-book ratios and higher forecasted growth values.
The RUSSELL MIDCAP(reg.tm) VALUE INDEX measures the performance of those Russell
Midcap companies with lower price-to-book ratios and lower forecasted growth
values.
The S&P 500 INDEX is a market value-weighted index of the stocks of 500 publicly
traded U.S. companies chosen for market size, liquidity, and industry group
representation that are considered to be leading firms in dominant industries.
Each stock's weight in the index is proportionate to its market value. Created
by Standard & Poor's, it is considered to be a broad measure of U.S. stock
market performance.
PROXY VOTING GUIDELINES
American Century Investment Management, Inc., the fund's investment advisor, is
responsible for exercising the voting rights associated with the securities
purchased and/or held by the fund. A description of the policies and procedures
the advisor uses in fulfilling this responsibility is available without charge,
upon request, by calling 1-800-378-9878. It is also available on American
Century's Web site at americancentury.com and on the Securities and Exchange
Commission's Web site at sec.gov. Information regarding how the investment
advisor voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available on the "About Us" page at
americancentury.com. It is also available at sec.gov.
(continued)
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27
Additional Information
QUARTERLY PORTFOLIO DISCLOSURE
The fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (SEC) for the first and third quarters of each fiscal
year on Form N-Q. The fund's Form N-Q is available on the SEC's Web site at
sec.gov, and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The fund also makes its complete schedule of
portfolio holdings for the most recent quarter of its fiscal year available on
its Web site at ipro.americancentury.com (for Investment Professionals) and,
upon request, by calling 1-800-378-9878.
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28
[inside back cover - blank]
[back cover]
CONTACT US
AMERICANCENTURY.COM
AUTOMATED INFORMATION LINE:
1-800-345-8765
INVESTMENT PROFESSIONAL SERVICE REPRESENTATIVES:
1-800-345-6488
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
INVESTMENT ADVISOR:
American Century Investment Management, Inc.
Kansas City, Missouri
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
The American Century Investments logo, American Century and American Century
Investments are service marks of American Century Proprietary Holdings, Inc.
American Century Investment Services, Inc., Distributor
0608 (c)2006 American Century Proprietary Holdings, Inc.
SH-SAN-50652 All rights reserved.
ITEM 2. CODE OF ETHICS.
Not applicable for semiannual report filings.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semiannual report filings.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semiannual report filings.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The schedule of investments is included as part of the report to stockholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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) Not applicable for semiannual report filings.
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment
Company Act of 1940, are filed and attached hereto as Exhibit
99.302CERT.
(a)(3) Not applicable.
(b) A certification by the registrant's chief executive officer and chief
financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, is furnished and attached hereto as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
By: /s/ William M. Lyons
-----------------------------------------
Name: William M. Lyons
Title: President
Date: August 15, 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: August 15, 2006
By: /s/ Maryanne L. Roepke
-----------------------------------------
Name: Maryanne L. Roepke
Title: Sr. Vice President, Treasurer, and
Chief Financial Officer
(principal financial officer)
Date: August 15, 2006
