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AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 3
2929 ALLEN PARKWAY
HOUSTON TEXAS 77019
SEPTEMBER 21, 1998
PROSPECTUS
The American General Series Portfolio Company 3 (the "Series Company") is a
mutual fund made up of 18 separate Funds (the "Funds"). Each of the Funds has a
different investment objective. Each Fund is explained in more detail on its
Fact Sheet contained in this prospectus. Here is a summary of the goals of the
18 Funds:
ACTIVELY MANAGED EQUITY FUNDS:
AMERICAN GENERAL INTERNATIONAL GROWTH FUND ("INTERNATIONAL GROWTH FUND")
Long-term capital appreciation through investments in non-U.S. companies,
the majority of which are expected to be in developed markets.
AMERICAN GENERAL LARGE CAP GROWTH FUND ("LARGE CAP GROWTH FUND")
Long-term growth through investments in large cap U.S. issuers. Dividend
income is a secondary objective.
AMERICAN GENERAL MID CAP GROWTH FUND ("MID CAP GROWTH FUND")
Capital appreciation through investments in medium capitalization equity
securities. Current income is a secondary objective.
AMERICAN GENERAL SMALL CAP GROWTH FUND ("SMALL CAP GROWTH FUND")
Long-term growth through investments in small growth companies.
AMERICAN GENERAL INTERNATIONAL VALUE FUND ("INTERNATIONAL VALUE FUND")
Growth of capital and future income through investments in non-U.S.
issuers.
AMERICAN GENERAL LARGE CAP VALUE FUND ("LARGE CAP VALUE FUND")
Total returns exceeding the Russell 1000 Value Index through investments
in equity securities.
AMERICAN GENERAL MID CAP VALUE FUND ("MID CAP VALUE FUND")
Growth through investments in medium capitalization companies.
AMERICAN GENERAL SMALL CAP VALUE FUND ("SMALL CAP VALUE FUND")
Maximum long-term return through investments in small capitalization
companies.
SPECIALTY EQUITY FUND:
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND ("SOCIALLY RESPONSIBLE FUND")
Growth through investments in companies meeting social criteria of the
Fund.
BALANCED FUND:
AMERICAN GENERAL BALANCED FUND ("BALANCED FUND")
Conservation of principal and long-term growth of capital and income
through investments in fixed income and equity securities.
INCOME FUNDS:
AMERICAN GENERAL HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND")
Highest possible total return and income consistent with conservation of
capital through investments in high yielding, high risk fixed income
securities. INVESTMENTS OF THIS TYPE ARE REGARDED BY THE RATING AGENCIES
AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO AN ISSUER'S CONTINUING
ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.
AMERICAN GENERAL STRATEGIC BOND FUND ("STRATEGIC BOND FUND")
Highest possible total return and income consistent with conservation of
capital through investments in income producing securities. THE LOWER
RATED FIXED INCOME SECURITIES IN WHICH THE FUND MAY INVEST ARE REGARDED BY
THE RATING AGENCIES AS SPECULATIVE WITH RESPECT TO AN ISSUER'S CONTINUING
ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.
AMERICAN GENERAL DOMESTIC BOND FUND ("DOMESTIC BOND FUND")
High total return consistent with conservation of capital through
investments primarily in investment grade fixed income securities.
AMERICAN GENERAL CORE BOND FUND ("CORE BOND FUND")
Highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed income securities.
MONEY MARKET FUND:
AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND")
Income through investments in short-term money market securities.
LIFESTYLE FUNDS:
AMERICAN GENERAL GROWTH LIFESTYLE FUND ("GROWTH LIFESTYLE FUND")
Growth through investments in Series Company Funds.
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND ("MODERATE GROWTH
LIFESTYLE FUND")
Growth and current income through investments in Series Company Funds.
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND ("CONSERVATIVE GROWTH
LIFESTYLE FUND")
Current income and a low to moderate level of growth through investments
in Series Company Funds.
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SHARES OF THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE IS NO ASSURANCE THAT THIS FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
These Funds are available to you only through a variable annuity contract or
variable life insurance policy you or your employer bought from The Variable
Annuity Life Insurance Company ("VALIC") or one of its affiliates, or employee
thrift plans maintained by VALIC or American General Corporation. VALIC is a
member of the American General Corporation group of companies.
This prospectus sets forth concisely the information you should know before
investing in the Funds.
Because different contracts contain different combinations of Funds, all of the
Funds in this prospectus may not be available to you. And, there may be some
Funds that are available to you that don't appear in this prospectus. See the
separate prospectus that describes your, or your employer's annuity contract for
a complete list of Funds in which you may invest. BE SURE TO READ BOTH
PROSPECTUSES IN FULL BEFORE YOU START PARTICIPATING AND KEEP THEM FOR FUTURE
REFERENCE.
VALIC has filed a Statement of Additional Information, dated September 21, 1998,
with the Securities and Exchange Commission ("SEC"). This Statement contains
additional information about these Funds and is part of this prospectus. For a
free copy, write to the Series Company at the address above or call
1-800-44-VALIC. The Statement of Additional Information has been filed with the
SEC and is available along with other related materials at the SEC's internet
web site (http://www.sec.gov.).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
FUNDS. ALSO, IT HAS NOT PASSED ON WHETHER THIS PROSPECTUS IS ADEQUATE OR
ACCURATE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE.
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TABLE OF CONTENTS
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COVER PAGE
WELCOME....................................... 1
EXPENSE SUMMARY............................... 3
ABOUT THE SERIES COMPANY'S MANAGEMENT......... 4
Investment Adviser....................... 4
Investment Sub-advisers.................. 4
Portfolio Manager........................ 6
How Advisers Are Paid for Their
Services............................... 6
The Sub-advisers......................... 7
About the Board of Trustees.............. 8
ABOUT THE FUNDS............................... 9
Growth, Balanced, Income, Stability and
Lifestyle Categories................... 9
About Level of Risk...................... 9
About Portfolio Turnover................. 9
About Fund Performance................... 10
HOW TO READ A FUND FACT SHEET................. 11
SERIES COMPANY FUND FACT SHEETS
ACTIVELY MANAGED EQUITY FUNDS
International Growth Fund........... 12
Large Cap Growth Fund............... 16
Mid Cap Growth Fund................. 18
Small Cap Growth Fund............... 21
International Value Fund............ 23
Large Cap Value Fund................ 25
Mid Cap Value Fund.................. 28
Small Cap Value Fund................ 30
SPECIALTY EQUITY FUND
Socially Responsible Fund........... 32
BALANCED FUND
Balanced Fund....................... 34
INCOME FUNDS
High Yield Bond Fund................ 37
Strategic Bond Fund................. 38
Domestic Bond Fund.................. 40
Core Bond Fund...................... 42
MONEY MARKET FUND
Money Market Fund................... 45
LIFESTYLE FUNDS
Growth Lifestyle Fund............... 47
Moderate Growth Lifestyle Fund...... 49
Conservative Growth Lifestyle
Fund.............................. 51
</TABLE>
<TABLE>
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TYPES OF INVESTMENTS.......................... 53
Equity Securities........................ 53
Fixed Income Securities.................. 53
U.S. Government Securities.......... 54
Mortgage-Related Securities......... 54
Asset-Backed Securities............. 55
Loan Participations................. 55
Variable Amount Demand Master Notes...... 55
Structured Securities.................... 55
Real Estate Securities................... 55
Illiquid and Restricted Securities....... 56
Foreign Securities....................... 56
Depository Receipts...................... 56
Investment Funds......................... 56
Foreign Currency......................... 56
When-Issued Securities................... 56
Money Market Securities.................. 57
Investment Companies..................... 57
Derivatives.............................. 57
Options............................. 57
Call Option......................... 57
Put Option.......................... 57
Swap Agreements.......................... 58
Warrants and Rights...................... 58
Repurchase Agreements.................... 58
Reverse Repurchase Agreements, Dollar
Rolls and Borrowing.................... 58
A Word About Risk........................ 59
Investment Practices..................... 60
Limitations......................... 60
Lending Portfolio Securities........ 60
ABOUT THE SERIES COMPANY...................... 61
Series Company Shares.................... 61
Net Asset Value of the Series Company
Shares................................. 62
Administrative Service Agreement......... 62
Dividends and Capital Gains.............. 62
Diversification.......................... 62
Taxes.................................... 62
Voting Rights............................ 62
Year 2000 Risks.......................... 63
Euro Conversion.......................... 63
Reports.................................. 64
APPENDIX -- DESCRIPTION OF BOND RATINGS....... 65
APPENDIX -- DESCRIPTION OF COMMERCIAL PAPER
RATINGS........................... 67
</TABLE>
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WELCOME
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Unless otherwise specified in this prospectus, the words we, our, and VALIC mean
The Variable Annuity Life Insurance Company and any Investment Sub-adviser that
we work with. The words you and your mean the participant.
American General Series Portfolio Company 3 (the "Series Company") was organized
as a Delaware business trust on May 6, 1998.
The Series Company is an open-end management investment company and currently
consists of 18 different Funds, each of which is described in detail in this
prospectus. We serve as each Fund's Investment Adviser and, in this role, report
directly to the Series Company's Board of Trustees. As Investment Adviser, we
oversee the Funds' day to day operations, supervise the purchase and sale of
Fund investments and perform the cash management function. Investment
Sub-advisers make the investment decisions for the Funds that they manage, as
described more fully in this prospectus. However, we make investment decisions
for, and are directly responsible for the day to day management of, the Socially
Responsible Fund, the Money Market Fund and the Lifestyle Funds. For more
information, see "About the Funds' Management" in this prospectus.
Individuals can't invest in the shares of these Funds directly. Instead, they
participate through an annuity or variable life contracts or employer plan with
VALIC or one of its affiliates, or employee thrift plans maintained by VALIC or
American General Corporation. Most often employers set up these contracts so
they can offer their employees a way to save for retirement. Retirement plans
through employers may be entitled to tax benefits that individual retirement
plans may not be entitled to. These tax benefits are fully explained in your
contract prospectus.
After you invest in a Fund, you participate in Fund earnings or losses, in
proportion to the amount of money you invest. Depending on your contract, if you
withdraw your money before retirement, you may incur charges and additional tax
liabilities. However, to save for retirement, you generally should let your
investments and their earnings build. At retirement, you may withdraw all or a
portion of your money, leave it in the account until you need it, or start
receiving annuity payments. At a certain age you may be required to begin
withdrawals.
All inquiries regarding this prospectus should be directed, in writing, to VALIC
Customer Service, A3-01, 2929 Allen Parkway, Houston, Texas 77019, or by calling
1-800-633-8960.
All inquiries regarding contracts issued by American General Life Insurance
Company (AGL) should be directed to AGL's Annuity Administration Department,
2727-A Allen Parkway, Houston, Texas 77019-2191 or call 1-800-813-5065. AGL is a
member of the American General Corporation group of companies, as is VALIC.
Open-end means shares
of the Funds can be
bought or sold by the
Series Company at any
time. Also, there is no limit
on the number of investors
who may buy shares.
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EXPENSE SUMMARY
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Annual fund operating expenses are the fees paid out of the assets of a Fund.
Each Fund pays a management fee to VALIC. The expenses paid by a Fund are
factored into the calculation of its share price or dividends and are not
charged directly to investors. The expenses reflected in the tables below are
based on the Funds' anticipated expenses for the first year of operation on an
annualized basis.
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ANNUAL FUND OPERATING EXPENSES:
(after expense reimbursements, as a percentage of net assets)
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<TABLE>
<CAPTION>
INTERNATIONAL LARGE CAP MID CAP SMALL CAP INTERNATIONAL LARGE CAP
GROWTH FUND GROWTH FUND GROWTH FUND GROWTH FUND VALUE FUND VALUE FUND
------------- ----------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fee(a) .47% .30% .18% .56% .37% .25%
Other Expenses(a)(c) .71% .58% .64% .62% .70% .58%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses(a): 1.18% .88% .82% 1.18% 1.07% .83%
===== ===== ===== ===== ===== =====
<CAPTION>
SOCIALLY
MID CAP SMALL CAP RESPONSIBLE
VALUE FUND VALUE FUND FUND
---------- ---------- -----------
<S> <C> <C> <C>
Management Fee(a) .43% .38% --%
Other Expenses(a)(c) .64% .63% .58%
----- ----- -----
Total Fund Operating Expenses(a): 1.07% 1.01% .58%
===== ===== =====
</TABLE>
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ANNUAL FUND OPERATING EXPENSES
(after expense reimbursements, as a percentage of net assets)
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<TABLE>
<CAPTION>
MODERATE
MONEY GROWTH GROWTH
BALANCED HIGH YIELD STRATEGIC DOMESTIC CORE MARKET LIFESTYLE LIFESTYLE
FUND BOND FUND BOND FUND BOND FUND BOND FUND FUND FUND(b) FUND(b)
-------- ---------- --------- --------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fee(a) .05% .20% .03% .24% --% --% .10% .10%
Other Expenses(a)(c) .80% .83% .90% .57% .83% .58% --% --%
---- ----- ---- ---- ---- ---- ---- ----
Total Fund Operating Expenses(a): .85% 1.03% .93% .81% .83% .58% .10% .10%
==== ===== ==== ==== ==== ==== ==== ====
<CAPTION>
CONSERVATIVE
GROWTH
LIFESTYLE
FUND(b)
------------
<S> <C>
Management Fee(a) .10%
Other Expenses(a)(c) --%
----
Total Fund Operating Expenses(a): .10%
====
</TABLE>
(a) After expense reimbursement. VALIC has voluntarily agreed to waive a
portion of its management fee or to reimburse certain expenses of each
Fund, other than the Lifestyle Funds, during the first fiscal year. In the
absence of the expense reimbursement, management fees, other expenses and
total fund operating expenses, respectively, would be: International Growth
Fund, 0.90%, .71% and 1.61%; Large Cap Growth Fund, .55%, .58% and 1.13%;
Mid Cap Growth Fund, .65%, .64% and 1.29%; Small Cap Growth Fund, .85%,
0.62% and 1.47%; International Value Fund, 1.00%, .70% and 1.70%; Large Cap
Value Fund, .50%, .58% and 1.08%; Mid Cap Value Fund, .75%, .64% and 1.39%;
Small Cap Value Fund, .75%, .63% and 1.38%; Socially Responsible Fund,
.25%, .87% and 1.12%; Balanced Fund, .80%, .80% and 1.60%; High Yield Bond
Fund, .70%, .83% and 1.53%; Strategic Bond Fund, .60%, .90% and 1.50%;
Domestic Bond Fund, .60%, .57% and 1.17%; Core Bond Fund, .50%, .86% and
1.36%; Money Market Fund, .25%, .86% and 1.11%. No expense reimbursements
apply to the Growth Lifestyle Fund, the Moderate Growth Lifestyle Fund and
the Conservative Lifestyle Fund.
(b) The Growth Lifestyle Fund, the Moderate Growth Lifestyle Fund and the
Conservative Growth Lifestyle Fund seek to accomplish their respective
objectives by investing primarily in a number of other Series Company Funds
("Underlying Series Company Funds"). Each Lifestyle Fund will bear
indirectly its pro rata share of the fees and expenses incurred by the
Underlying Series Company Funds in which the Lifestyle Fund is invested.
(c) Other Expenses, which include custody, accounting, reports to shareholders,
audit, legal, administrative, recordkeeping and other miscellaneous
services provided to the Funds, are based on estimated amounts for the
current fiscal year.
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TOTAL COMBINED OPERATING EXPENSES(a)
(including indirect expenses) (after expense reimbursements, as a percentage of
net assets)
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<TABLE>
<CAPTION>
ESTIMATED TOTAL COMBINED
OPERATING EXPENSES(B)
------------------------
<S> <C>
Growth Lifestyle Fund 1.09%
Moderate Growth Lifestyle Fund 1.03%
Conservative Growth Lifestyle Fund 1.00%
</TABLE>
(a) Estimated Total Combined Operating Expenses of each Lifestyle Fund is based
on the Total Fund Operating Expenses of the Underlying Series Company Funds
and the Lifestyle Funds, assuming each Lifestyle Fund's projected asset
allocation among the Underlying Series Company Funds is maintained.
(b) Reflects estimated total average weighted combined operating expenses.
The purpose of the expense tables above is to assist investors in understanding
the various costs and expenses that a shareholder of a Fund will bear directly
or indirectly. Each Fund's annual operating expenses do not reflect expenses
imposed by separate accounts of VALIC through which an investment in each Fund
is made or their related contracts. A separate account's expenses are fully
explained in your contract prospectus.
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ABOUT THE SERIES COMPANY'S MANAGEMENT
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INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960. VALIC, as of June 30, 1998, had over $8.5 billion in assets
under management. VALIC has been the Investment Adviser for the Funds that
comprise the Series Company since their inception.
VALIC is a member of the American General Corporation group of companies. The
American General Corporation group of companies is a leading provider of
retirement services, life insurance and consumer loans. Members of the American
General Corporation group of companies operate in each of the 50 states and
Canada.
As Investment Adviser, VALIC oversees the Funds' day to day operations. Also,
VALIC supervises the purchase and sale of Fund investments and performs the cash
management function. For the International Growth Fund, the Large Cap Growth
Fund, the Mid Cap Growth Fund, the Small Cap Growth Fund, the International
Value Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the Small Cap
Value Fund, the Balanced Fund, the High Yield Bond Fund, the Strategic Bond
Fund, the Domestic Bond Fund, and the Core Bond Fund, VALIC employs Investment
Sub-advisers who make investment decisions for such Fund(s). However, we make
investment decisions for, and are directly responsible for the day to day
management of, the Socially Responsible Fund, the Money Market Fund and the
Lifestyle Funds. VALIC serves as Investment Adviser through an Investment
Advisory Agreement it enters into with the Series Company. The Investment
Advisory Agreement provides for the Series Company to pay all expenses not
specifically assumed by VALIC. Examples of the expenses paid by the Series
Company include transfer agency fees, custodial fees, the fees of outside legal
and auditing firms, the costs of reports to shareholders and expenses of
servicing shareholder accounts (e.g., daily calculation of the net asset value).
The Series Company allocates these expenses to each Fund in a manner approved by
the Board of Trustees. After the second year, this agreement will be renewed
once each year, by the Series Company Board of Trustees.
One Investment Advisory Agreement dated August 26, 1998 covers all 18 Funds.
For more information about the Advisory Agreement, see the "Investment Adviser"
section in the Statement of Additional Information.
INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with Investment Sub-advisers, financial
service companies that specialize in certain types of investing. However, VALIC
still retains ultimate responsibility for managing the Funds. The Sub-adviser's
role is to make investment decisions for the Funds according to each Fund's
investment objectives and restrictions.
In selecting Sub-advisers, the Series Company's Trustees carefully evaluated:
(i) the nature and quality of the services expected to be rendered to the
Fund(s) by the Sub-adviser, (ii) the distinct investment objective and policies
of the Fund(s); (iii) the history, reputation, qualification and background of
the Sub-advisers' personnel and its financial condition; (iv) its performance
track record; and (v) other factors deemed relevant. The Trustees also reviewed
the fees to be paid to each Sub-adviser.
The Sub-advisers are:
AMERICAN GENERAL INVESTMENT MANAGEMENT, L.P. ("AGIM")
AGIM is the Sub-adviser for the Core Bond Fund, the Strategic Bond Fund and the
High Yield Bond Fund. AGIM is a limited partnership whose sole general partner
and sole limited partner are wholly-owned subsidiaries of American General
Corporation. AGIM provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors. As
of June 30, 1998, AGIM had approximately $70 billion in assets under management.
BANKERS TRUST COMPANY
("BANKER'S TRUST")
Bankers Trust is one of two Sub-advisers for the Small Cap Value Fund. Bankers
Trust first offered investment management services in 1938 and began managing
index funds in 1977. As of June 30, 1998 Bankers Trust was the seventh largest
U.S. financial services
VALIC'S ADDRESS is 2929 Allen
Parkway, Houston, Texas 77019.
AMERICAN GENERAL INVESTMENT
MANAGEMENT'S PRINCIPAL OFFICES
are located at 2929 Allen
Parkway, Houston, Texas 77019.
BANKERS TRUST'S PRINCIPAL OFFICES
are located at 130 Liberty Street,
New York, New York 10006.
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institution and managed over $360 billion in assets. Bankers Trust is entirely
owned by Bankers Trust New York Corporation, a bank holding company.
BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL MANAGEMENT")
Brown Capital Management is the Sub-adviser for the Mid Cap Growth Fund.
Established as a Maryland corporation in 1983, Brown Capital Management served
as investment adviser to approximately $4 billion in assets as of June 30, 1998.
CAPITAL GUARDIAN TRUST COMPANY
("CAPITAL GUARDIAN")
Capital Guardian is the Sub-adviser for the International Value Fund, the
Balanced Fund and the Domestic Bond Fund. Capital Guardian provides investment
management services to a limited number of large institutional clients such as
employee benefit funds, foundations and endowment funds. As of June 30, 1998,
Capital Guardian had more than $79.5 billion in assets under management.
FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
FMA is one of two Sub-advisers for the Small Cap Value Fund. FMA is a
wholly-owned subsidiary of United Asset Management Corporation, and provides
investment management services to corporations, foundations, endowments, pension
and profitsharing plans, trusts, estates and other institutions as well as
individuals. As of June 30, 1998, FMA had over $1.9 billion in assets under
management.
GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
GSAM is the Sub-adviser for the Large Cap Growth Fund. GSAM is a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"). GSAM provides a
wide range of fully discretionary investment advisory services quantitatively
driven and actively managed to U.S. and international equity portfolios, U.S.
and global fixed income portfolios, commodity and currency products and money
market accounts. As of June 30, 1998, GSAM and its affiliates served as
investment adviser or distributor for assets exceeding $162.2 billion.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. MORGAN")
J.P. Morgan is the Sub-adviser for the Small Cap Growth Fund. Known for its
commitment to proprietary research and its disciplined investment strategies,
J.P. Morgan provides asset management services to corporations, financial
institutions, governments and individuals. As of June 30, 1998, J.P. Morgan and
its affiliates employed over 300 analysts and portfolio managers around the
world and had more than $300 billion in assets under management.
JACOBS ASSET MANAGEMENT
Jacobs Asset Management is the Sub-adviser for the International Growth Fund.
Jacobs Asset Management is a Delaware limited partnership. United Asset
Management Corporation is a limited partner of, and owns a controlling interest
in, Jacobs Asset Management. Jacobs Asset Management provides investment
management and advisory services to corporations, unions, pensions and
profit-sharing plans, trusts and estates and other institutions and investors.
As of June 30, 1998, Jacobs Asset Management had more than $431 million in
assets under management.
NEUBERGER&BERMAN MANAGEMENT INC. ("N&B MANAGEMENT")
N&B Management is the Sub-adviser for the Mid Cap Value Fund. N&B Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of June 30, 1998, N&B Management and its affiliates managed
approximately $59 billion in aggregate net assets, including approximately $24
billion in mutual fund assets.
STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
State Street Global Advisors is the Sub-adviser for the Large Cap Value Fund.
State Street Global Advisors is an operating division of State Street Bank, a
wholly-owned subsidiary of State Street Corporation, which had more than $390
billion under management as of June 30, 1998.
BROWN CAPITAL MANAGEMENT'S
PRINCIPAL OFFICES are located at
809 Cathedral Street, Baltimore,
Maryland 21201.
CAPITAL GUARDIAN'S PRINCIPAL
OFFICES are located at 333 South
Hope Street, Los Angeles,
California 90071.
FMA'S PRINCIPAL OFFICES are located
at 55 West Monroe Street,
Suite #2550,
Chicago, Illinois 60603.
GSAM'S PRINCIPAL OFFICES are
located at One New York Plaza,
New York, New York 10004.
J.P. MORGAN'S PRINCIPAL OFFICES
are located at 522 Fifth Avenue,
New York, NY 10036.
JACOBS ASSET MANAGEMENT'S
PRINCIPAL OFFICES are located at 200 East Broward
Boulevard, Suite 1920,
Fort Lauderdale, Florida 33301.
N&B MANAGEMENT'S PRINCIPAL
OFFICES are located 605 Third
Avenue, Second Floor, New York,
New York 10158-0180.
STATE STREET GLOBAL ADVISOR'S
PRINCIPAL OFFICES are located at
2 International Place, Boston,
Massachusetts 02110.
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These financial service companies act as Investment Sub-advisers through an
agreement each entered into with VALIC. For more information on these agreements
and on these Sub-advisers, see the "Investment Sub-Advisers" section in the
Statement of Additional Information.
PORTFOLIO MANAGER
A manager is a person or team of persons VALIC or one of its Sub-advisers, has
assigned to be primarily responsible for the day to day management of a Fund's
investments. A Fund's investments are called its portfolio.
HOW ADVISERS ARE PAID FOR
THEIR SERVICES
VALIC
Each Fund pays VALIC a fee based on its average daily net asset value. A Fund's
net asset value is the total value of the Fund's assets minus any money it owes
for operating expenses, such as the fee paid to its Custodian to safeguard the
Fund's investments.
Here is a list of the percentages each Fund pays VALIC.
<TABLE>
<S> <C>
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
Large Cap Growth Fund 0.55%
Mid Cap Growth Fund 0.65% on the first $25 million
0.55% on the next $25 million
0.45% on assets over $50 million
Small Cap Growth Fund 0.85%
International Value Fund 1.00% on the first $25 million
0.85% on the next $25 million
0.675% on the next $200 million
0.625% on assets over $250 million
Large Cap Value Fund 0.50%
Mid Cap Value Fund 0.75% on the first $100 million
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets over $750 million
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
</TABLE>
<TABLE>
<S> <C>
Socially Responsible
Fund 0.25%
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
High Yield Bond Fund 0.70% on the first $200 million
0.60% on the next $300 million
0.55% on assets over $500 million
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
Domestic Bond Fund 0.60% on the first $50 million
0.45% on the next $50 million
0.43% on the next $200 million
0.40% on the assets over $300 million
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets over $500 million
Money Market Fund 0.25%
Conservative Growth
Lifestyle Fund 0.10%
Moderate Growth
Lifestyle Fund 0.10%
Growth Lifestyle Fund 0.10%
</TABLE>
The Investment Advisory Agreement we entered into with each Fund does not limit
how much the Funds pay in monthly expenses each year.
As shareholders of other Series Company Funds, the Lifestyle Funds incur their
proportionate share of the underlying Series Company Funds' fees and expenses,
including the fees paid to VALIC.
From time to time VALIC, the Sub-advisers and/or the Distributor may voluntarily
undertake to reduce a Fund's expenses by reducing the fees payable to them to
the extent of, or bearing expenses in excess of, such limitations as they may
establish.
6
<PAGE> 9
- --------------------------------------------------------------------------------
THE SUB-ADVISERS
The Funds do not pay the Sub-advisers directly. According to the agreements,
VALIC pays them periodically a fee based upon the Funds' average daily net asset
values. We pay them a percentage of what is paid to us by the Funds. We and the
Sub-advisers may agree to change the amount of money we pay them. Any such
change increasing the charge paid by a Fund to VALIC would have to be approved
by the Series Company Board of Trustees and the shareholders of the Fund.
The Series Company was issued an exemptive order by the Securities and Exchange
Commission (the "SEC") on September 9, 1998 for an exemption (the "Exemption")
from certain provisions of the Investment Company Act of 1940 ("1940 Act") which
would otherwise require VALIC to obtain formal shareholder approval prior to
engaging and entering into sub-advisory agreements with Sub-advisers. The relief
is based on the conditions set forth in the Exemption that, among other things:
(1) VALIC will select, monitor, evaluate and allocate assets to the Sub-advisers
and oversee the Sub-advisers' compliance with the relevant Fund's investment
objective, policies and restrictions; (2) before a Fund may rely on the
Exemption, the Exemption must be approved by the shareholders of the Funds
operating under the Exemption; (3) the Series Company will provide to
shareholders certain information about a new Sub-adviser; (4) the Series Company
will disclose in this prospectus the existence, substance and effect of the
Exemption; and (5) the Trustees, including a majority of the "independent"
Trustees, must approve each sub-advisory agreement in the manner required under
the 1940 Act. Any changes to the Investment Advisory Agreement between the
Series Company and VALIC would still require shareholder approval. As required
by the Exemption, the initial shareholder of each Fund, by written consent dated
August 26, 1998, voted to permit VALIC to terminate, replace or add Sub-advisers
and to enter into sub-advisory agreements with Sub-advisers upon approval of the
Board of Trustees but without formal shareholder approval.
Under the Investment Sub-advisory Agreement we have with AGIM, we pay AGIM a
monthly fee based on the average daily net asset values of the Core Bond Fund at
an annual rate of 0.25% of the first $200 million, 0.20% of the next $300
million and 0.15% on assets over $500 million and the Strategic Bond Fund at an
annual rate of 0.35% of the first $200 million, 0.25% of the next $300 million
and 0.20% on assets over $500 million. We pay AGIM a monthly fee based on the
average daily net asset values of the High Yield Bond Fund at an annual rate of
0.45% of the first $200 million, 0.35% of the next $300 million and 0.30% on
assets over $500 million.
Under the Investment Sub-Advisory Agreement we have with Bankers Trust, we pay
Bankers Trust monthly fees based on the average daily net asset values of the
portion of the Small Cap Value Fund portfolio it manages at an annual rate of
0.03%.
Under the Investment Sub-Advisory Agreement we have with Brown Capital
Management, we pay Brown Capital Management a monthly fee based on the average
daily net asset values of the Mid Cap Growth Fund at the annual rate of 0.40% of
the first $25 million, 0.30% of the next $25 million and 0.20% on assets over
$50 million.
Under the Investment Sub-Advisory Agreement we have with Capital Guardian, we
pay Capital Guardian a quarterly fee based on the average daily net asset values
of the International Value Fund at an annual rate of 0.75% of the first $25
million, 0.60% of the next $25 million, 0.425% of the next $200 million and
0.375% on assets over $250 million and the Domestic Bond Fund at an annual rate
of 0.35% of the first $50 million, 0.20% on the next $50 million, 0.18% on the
next $200 million and 0.15% of assets over $300 million. We pay Capital Guardian
a quarterly fee based on the average daily net asset values of the Balanced Fund
at an annual rate of 0.55% of the first $25 million, 0.40% of the next $25
million and 0.20% on assets over $50 million. Capital Guardian aggregates fees
with respect to the International Value Fund, the Domestic Bond Fund and the
Balanced Fund and applies a 5% discount to all fees if total fees are between
$1.25 million and $4 million, a 7.5% discount to all fees if total fees are
between $4 million and $8 million, a 10% discount to all fees if total fees are
between $8 million and $12 million, and a 12.5% discount to all fees in excess
of $12 million.
Under the Investment Sub-Advisory Agreement we have with FMA, we pay FMA a
monthly fee based on the average daily net asset values of the portion of the
Small Cap Value Fund portfolio it manages at the annual rate of 0.50% of the
first $50 million and 0.40% on assets over $50 million.
Under the Investment Sub-Advisory Agreement we have with GSAM, we pay GSAM a
monthly fee based on the average daily net asset values of the Large Cap Growth
Fund at the annual rate of 0.30%.
Under the Investment Sub-Advisory Agreement we have with J.P. Morgan, we pay
J.P. Morgan a monthly fee based on the average daily net asset values of the
Small Cap Growth Fund at the annual rate of 0.60%.
For more information on WHAT THE
SUB-ADVISERS ARE PAID, see the
"Investment Sub-Advisers" section
in the Statement of Additional
Information.
7
<PAGE> 10
- --------------------------------------------------------------------------------
Under the Investment Sub-Advisory Agreement we have with Jacobs Asset
Management, we pay Jacobs Asset Management a monthly fee based on the average
daily net asset values of the International Growth Fund at an annual rate of
0.65% of the first $100 million and 0.55% on assets over $100 million.
Under the Investment Sub-Advisory Agreement we have with N&B Management, we pay
N&B Management a monthly fee based on the average daily net asset values of the
Mid Cap Value Fund at the annual rate of 0.50% of the first $100 million, 0.475%
of the next $150 million, 0.45% of the next $250 million, 0.425% of the next
$250 million and 0.40% on assets over $750 million.
Under the Investment Sub-Advisory Agreement we have with State Street Global
Advisors, we pay State Street Global Advisors a monthly fee based on the average
daily net asset values of the Large Cap Value Fund at the annual rate of 0.25%
but no less than $50,000 per year.
According to the agreements we have with the Sub-advisers, we will receive
investment advice for each sub-advised Fund. Under these agreements we give the
Sub-advisers the authority to buy and sell securities for these Funds. We retain
the responsibility for the overall management of these Funds. The Sub-advisers
may buy and sell securities for each Fund with broker-dealers and other
financial intermediaries that they select.
The Sub-advisers may place orders to buy and sell securities of these Funds with
a broker-dealer affiliated with the Sub-adviser as allowed by law. This could
include any affiliated futures commission merchants.
The 1940 Act permits Sub-advisers under certain conditions to place an order to
buy or sell securities with an affiliated broker. One of these conditions is
that the commission received by the affiliated broker can not be greater than
the usual and customary brokers commission if the sale was completed on a
securities exchange. The Series Company has adopted procedures, as required by
the 1940 Act, which provide that any commissions received by a Sub-adviser's
affiliated broker are reasonable and fair if compared to the commission received
by other brokers for the same type of securities transaction.
The Securities Exchange Act of 1934 prohibits members of national securities
exchanges from effecting exchange transactions for accounts that they or their
affiliates manage, except as allowed under rules adopted by the SEC. The Series
Company and the Sub-advisers have entered into written contracts, as required by
the 1940 Act, to allow the Sub-adviser's affiliate to effect these type of
transactions for commissions. The 1940 Act generally prohibits a Sub-adviser or
a Sub-adviser's affiliate, acting as principal, from engaging in securities
transactions with a Fund, without an exemptive order from the SEC.
We and the Sub-advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
ABOUT THE BOARD OF TRUSTEES
The Series Company Board of Trustees currently consists of twelve members: nine
are independent Trustees and three are VALIC employees.
The Board of Trustees may change each Fund's investment objective, investment
policies and non-fundamental investment restrictions without shareholder
approval. The Board may not change any fundamental restrictions placed on the
types of investments each Fund may buy. The fundamental restrictions appear in
the Statement of Additional Information. Changes to these restrictions may be
made with shareholder approval only.
8
<PAGE> 11
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
GROWTH, BALANCED, INCOME, STABILITY AND LIFESTYLE CATEGORIES
The Funds offered in this prospectus fall into five general investment
categories: growth, balanced, income, stability and lifestyle.
GROWTH CATEGORY
The goal of a Fund in the growth category is to increase the value of your
investment over the long term by investing mostly in stocks. Stocks are a type
of investment that can increase in value over a period of years. Companies sell
stock to get the money they need to grow. These companies often keep some of
their profits to reinvest in their business. As they grow, the value of their
stock may increase. This is how the value of your investment may increase.
Series Company Growth Category includes:
International Growth Fund
Large Cap Growth Fund
Mid Cap Growth Fund
Small Cap Growth Fund
International Value Fund
Large Cap Value Fund
Mid Cap Value Fund
Small Cap Value Fund
Socially Responsible Fund
BALANCED CATEGORY
(Combination of Growth and Income Categories)
The goal of a Fund in the balanced category is to increase the value of your
investment over the long term and to provide income. Funds in the balanced
category seek to conserve the value of your initial investment and promote
long-term growth and income by investing in stocks and income producing
securities.
Series Company Balanced Category includes:
Balanced Fund
INCOME CATEGORY
Unlike Funds in the growth category, where the objective is to make the Fund's
investments increase in value, Funds in the income category try to keep the
value of their investments from falling, while providing an increase in the
value of your investment through the income earned on the Fund's investments. To
meet this objective, Funds in the income category buy investments that are
expected to pay interest to the Fund on a regular basis.
Series Company Income Category includes:
High Yield Bond Fund
Strategic Bond Fund
Domestic Bond Fund
Core Bond Fund
STABILITY CATEGORY
Funds in the stability category provide liquidity, protection of capital and
current income through investments in high quality securities.
Series Company Stability Category includes:
Money Market Fund
LIFESTYLE CATEGORY
The proliferation of mutual funds over the last several years has left many
investors in search of a simple means to manage their long-term investments.
With new investment categories emerging each year and with each mutual fund
reacting differently to political, economic and business events, many investors
are forced to make complex investment decisions in the face of limited
experience, time and personal resources. The Lifestyle Funds are designed to
meet the needs of investors who prefer to have their asset allocation decisions
made by professional money managers, are looking for an appropriate core
investment for their retirement portfolio and appreciate the advantages of broad
diversification.
A Lifestyle Fund does not invest directly in portfolio securities but, rather,
invests in a combination of Series Company Funds in order to meet its investment
objective. In this manner, the Lifestyle Funds offer you the opportunity to
diversify your investment portfolio by investing in one Fund, rather than in a
variety of Series Company Funds.
Series Company Lifestyle Category includes:
Growth Lifestyle Fund
Moderate Growth Lifestyle Fund
Conservative Growth Lifestyle Fund
ABOUT LEVEL OF RISK
The risks involved in each Fund are described in each Fund's Fact Sheet. These
risks may include market risk, credit risk, interest rate risk and risk
associated with foreign securities. These risks are described in the "Types of
Investments" section in this prospectus. The money you invest in the Series
Company is not insured. And, we can't guarantee that any of the Funds will meet
their investment objectives. There's a chance you may lose money and end up with
less than you invested.
ABOUT PORTFOLIO TURNOVER
Portfolio turnover occurs when a Fund sells its investments and buys new ones.
In some Funds, high portfolio turnover occurs when these Funds
9
<PAGE> 12
- --------------------------------------------------------------------------------
sell and buy investments as part of their investment strategy.
High portfolio turnover may cause a Fund's expenses to increase. For example, a
Fund may have to pay brokerage fees and other related expenses.
The anticipated annual portfolio turnover rates for each of the Funds except the
Money Market Fund are as follows:
<TABLE>
<CAPTION>
ANTICIPATED
ANNUAL
PORTFOLIO
NAME OF FUND TURNOVER RATE
------------ -------------
<S> <C>
International Growth Fund 50%
Large Cap Growth Fund 50-75%
Mid Cap Growth Fund 30-60%
Small Cap Growth Fund 100%
International Value Fund 150%
Large Cap Value Fund 100%
Mid Cap Value Fund 100%
Small Cap Value Fund 100%
Socially Responsible Fund 120%
Balanced Fund 150%
High Yield Bond Fund 100-200%
Strategic Bond Fund 100-200%
Domestic Bond Fund 150%
Core Bond Fund 100-200%
Growth Lifestyle Fund 10-20%
Moderate Growth Lifestyle 10-20%
Fund
Conservative Growth Lifestyle 10-20%
Fund
</TABLE>
A portfolio turnover rate of 100% or more a year is considered high. A high rate
increases a Fund's transaction costs and expenses.
ABOUT FUND PERFORMANCE
From time to time the Series Company may advertise Fund performance information
such as Fund average total return and index total return. Information as to how
this Fund performance information is calculated appears in the Statement of
Additional Information. Additionally, information on separate account
performance appears in your contract prospectus.
10
<PAGE> 13
HOW TO READ A FUND FACT SHEET
- --------------------------------------------------------------------------------
[CHART]
11
<PAGE> 14
INTERNATIONAL GROWTH
FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal LONG-TERM CAPITAL
APPRECIATION THROUGH
INVESTMENTS IN NON-U.S.
COMPANIES, THE MAJORITY OF
WHICH ARE EXPECTED TO BE IN
DEVELOPED MARKETS
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Jacobs Asset Management
PORTFOLIO MANAGER
This Fund is managed by an investment committee comprised of the following
individuals: Daniel L. Jacobs, Wai W. Chin, Robert J. Jurgens and Cynthia A.
New. Mr. Jacobs has been President of the Sub-adviser since July 1, 1995. From
1984 to 1995, Mr. Jacobs was Executive Vice President and Director of Templeton
Investment Counsel. Mr. Jacobs was portfolio manager of Templeton's Smaller
Companies Growth Fund. Ms. Chin has been Managing Director of Asian Research and
Portfolio Management of the Sub-adviser since July 1995. Prior to this, Ms. Chin
was Vice President of the Global Equity Group of Scudder, Stevens & Clark from
1989 to April 1995. Mr. Jurgens has been Managing Director of European Research
and Portfolio Management of the Sub-adviser since August 1995. From 1993 to
1995, Mr. Jurgens was Vice President and head of AIG Global Investors'
International Equity Division. Ms. New has been Director, Latin American
Research, of the Sub-adviser since July 1998. Prior to this, Ms. New was an
equity analyst at Pioneer Management Corporation from December 1997 to June 1998
and was at Templeton International Council from June 1993 to December 1997,
where she had research and portfolio management responsibilities for developed
and emerging market corporate and government debt securities.
INVESTMENT OBJECTIVE
Seeks to provide long-term capital appreciation by investing in equity
securities of non-U.S. companies, the majority of which are expected to be in
developed markets. The Fund may invest across the capitalization spectrum,
although it intends to emphasize smaller capitalization stocks.
INVESTMENT RISK
As described in the Investment Strategy section below, this Fund invests almost
all its assets in foreign securities, which have risks that U.S. investments do
not have, including foreign political and economic developments, fluctuations in
foreign exchange rates and limited publicly available information. For a further
explanation of the risks associated with foreign securities, see "A Word About
Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund will invest in equity securities in the markets of at least three
countries outside the United States. The Fund will diversify its investments
among developed and emerging market countries. The Fund will focus its emerging
market investments on those countries in which the Sub-adviser believes the
economies are developing and the markets are becoming more sophisticated. An
"emerging market country" is any country which, in the opinion of the
Sub-adviser, is generally considered to be an emerging or developing country by
the international financial community, including the International Bank for
Reconstruction and Development (the World Bank) and the International Finance
Corporation. These countries generally include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe. Investing in many emerging countries is not feasible
or may involve unacceptable political risks.
We will use a flexible, value-oriented approach to selecting this Fund's
investments, focusing on companies rather than on countries or markets. Our goal
is to identify stocks selling at the greatest discount to their intrinsic future
value. Value is ascertained through an analysis of price/cash flow, enterprise
value/cash flow, and price/future earnings. This Fund invests in a wide range of
equity securities including those of smaller capitalization companies.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
12
<PAGE> 15
INTERNATIONAL GROWTH FUND
Fact Sheet
- --------------------------------------------------------------------------------
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Foreign equity securities** at least 85%
Equity securities including
common stock, preferred
stock, convertible
preferred stock, rights and
warrants, and American
Depository Receipts
("ADRs"), European
Depository Receipts ("EDRs") and Global
Depository Receipts ("GDRs")
- --------------------------------------------
Equity securities of issuers up to 40%
in emerging countries***
- --------------------------------------------
Equity securities of small generally 50%
capitalization
companies****
- --------------------------------------------
Equity securities of open-end up to 10%
or closed-end investment
companies
- --------------------------------------------
Forward currency exchange up to 100%
contracts
- --------------------------------------------
Illiquid securities***** up to 15%
- --------------------------------------------
Rule 144A securities (liquid) up to 25%
- --------------------------------------------
Short term investments****** up to 10%
- --------------------------------------------
</TABLE>
* At time of purchase.
** We intend to invest at least 85% of this Fund's total
assets in the equity securities of at least three countries outside the
United States.
*** An "emerging country" security is issued by a
company that in our opinion has one or more of the following
characteristics: (i) its principal securities trading market is in an
emerging country; (ii) alone or on a consolidated basis, it derives 50%
or more of its annual revenue from either goods produced, sales made or
services performed in emerging countries, or (iii) it is organized under
the laws of, and has a principal office in, an emerging country.
**** Small capitalization companies are companies with
market capitalizations of less than $1 billion at the time of purchase.
In certain countries, companies at the high end of the $1 billion
capitalization range would be considered to be mid cap or large cap
companies.
***** Percent of Fund's net assets applied at all times.
****** For temporary defensive reasons, we may invest up
to 100% of the Fund's total assets in short-term (less than twelve months
to maturity) securities or cash, including domestic and foreign money
market instruments, certificates of deposit, bankers' acceptances, time
deposits, U.S. Government obligations, U.S. Government agency securities,
short-term corporate debt securities, and commercial paper rated A-1 or
A-2 by S&P or Prime 1 or Prime 2 by Moody's or if unrated, in our opinion
of comparable quality. In no event will the Fund purchase short term
securities rated below Baa by Moody's or BBB by S&P. We may do this when
we think economic, political or market conditions make it too risky for
us to follow our general guidelines.
13
<PAGE> 16
- --------------------------------------------------------------------------------
1. The Templeton Performance Information
The International Growth Fund recently commenced operations and, therefore, has
no investment performance record. The performance information shown herein is
for the Templeton International Fund, a series of the Templeton Variable
Products Series Fund, which was managed by Mr. Jacobs, a principal of the
Sub-adviser. The Templeton International Fund has substantially similar, though
not necessarily identical objectives, policies and strategies as the
International Growth Fund. The chart below shows the historical investment
performance for the year-ended June 30, 1995 and the three-years ended 1995, net
of the Templeton International Fund's fees and expenses. The inception date for
the Templeton International Fund was May 1, 1992. During Mr. Jacobs tenure as
the portfolio manager of the Templeton International Fund, from May 1, 1992 to
June 30, 1995, he was primarily responsible for the day-to-day management and no
other person had a significant role in achieving the Templeton International
Fund's performance.
The International Growth Fund is subject to investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code.
Total fees (after expense reimbursements) for the International Growth Fund are
higher than the total fees incurred by the Templeton International Fund.
Consequently, the performance results for the Templeton International Fund would
have been lower if the Templeton International Fund had the same expenses as the
International Growth Fund. The performance of the Templeton International Fund
has been calculated in accordance with SEC performance standards. See
"Performance and Yield Information" in the Statement of Additional Information
for a description of SEC performance standards. THE PERFORMANCE INFORMATION
HEREIN IS BASED ON THE TEMPLETON INTERNATIONAL FUND WHICH WAS MANAGED IN
SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUAL WHO MANAGED THE
INTERNATIONAL GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE
INTERNATIONAL GROWTH FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF TEMPLETON INTERNATIONAL FUND
<TABLE>
<CAPTION>
<S> <C>
- -----------------------------------------------------
1 YEAR* SINCE INCEPTION*
- -----------------------------------------------------
10.14% 12.33%
- -----------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE MAY 1, 1992
[CHART]
*PERIOD ENDED JUNE 30, 1995
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the International Growth
Fund is likely to differ from the Templeton International Fund in size, cash
flow patterns and certain tax matters. Accordingly, the portfolio holdings and
performance of the International Growth Fund may vary from those of the
Templeton International Fund.
14
<PAGE> 17
- --------------------------------------------------------------------------------
2. The Separate Account Performance Information
Although the International Growth Fund has no performance record, the Fund's
investment objectives, policies and strategies will be substantially similar,
though not necessarily identical, to those employed by the Sub-adviser with
respect to separately managed accounts of the Sub-adviser ("Separately Managed
Accounts"). The chart herein shows the historical investment performance for a
composite of the Sub-adviser's Separately Managed Accounts ("Sub-adviser
Composite") which were managed by the Sub-adviser in substantially the same
manner and by the same individuals who manage the International Growth Fund. The
Sub-adviser Composite represents the total return, net of all fees and expenses,
of all Separately Managed Accounts of the Sub-adviser. The inception date of the
Sub-adviser Composite was October 1, 1995.
The Separately Managed Accounts in the Sub-adviser Composite were not subject to
the investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Separately Managed Accounts included in the
Sub-adviser Composite had been subject to the requirements imposed on registered
mutual funds, their performance might have been lower.
Total fees (after expense reimbursements) for the International Growth Fund are
higher than the total fees incurred by the Separately Managed Accounts
comprising the Sub-adviser Composite. Consequently, the performance results for
the Sub-adviser Composite would have been lower if the Sub-adviser's Separately
Managed Accounts had the same expenses as the International Growth Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S SEPARATELY MANAGED ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE
SAME MANNER AND BY THE SAME INDIVIDUALS WHO MANAGE THE INTERNATIONAL GROWTH FUND
AND DOES NOT REFLECT THE PERFORMANCE OF THE INTERNATIONAL GROWTH FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF SUB-ADVISER COMPOSITE
<TABLE>
<S> <C>
- -----------------------------------------------------
1 YEAR SINCE INCEPTION
- -----------------------------------------------------
19.02% 22.04%
- -----------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 1, 1995
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the International Growth
Fund is likely to differ from the Sub-adviser's Separately Managed Accounts in
size, cash flow patterns and certain tax matters. Accordingly, the portfolio
holdings of the International Growth Fund may vary from those of the
Sub-adviser's Separately Managed Accounts and performance of the International
Growth Fund may vary from those of the Sub-adviser Composite.
15
<PAGE> 18
LARGE CAP GROWTH FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal LONG-TERM GROWTH THROUGH
INVESTMENTS IN LARGE CAP
U.S. ISSUERS. DIVIDEND
INCOME IS A SECONDARY
OBJECTIVE.
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management
PORTFOLIO MANAGER
The Fund is managed by the following individuals: Robert C. Jones; Kent A.
Clark; Victor H. Pinter; and Melissa Brown. Mr. Jones, Managing Director, joined
the Sub-adviser in 1989. From 1987 to 1989, he was the senior quantitative
analyst in the Goldman Sachs Investment Research Department and the author of
the monthly Stock Selection publication. Mr. Clark, Vice President, joined the
Sub-adviser's quantitative equity management team in 1992. Prior to joining the
Sub-adviser, Mr. Clark studied for a Ph.D in finance at the University of
Chicago. Mr. Pinter, Vice President, joined the Sub-adviser in 1990. From 1985
to 1990, he was a project manager in the Sub-adviser's Information Technology
Division. Ms. Brown, Vice President, joined the Sub-adviser in 1998. From 1994
to 1998, Ms. Brown was the director of Quantitative Equity Research and served
on the Investment Policy Committee at Prudential Securities.
INVESTMENT OBJECTIVE
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary objective.
INVESTMENT RISK
This Fund invests almost entirely in equity securities. The value of equity
securities can rise and fall over both short and long periods of time. The
Fund's investments are selected to maintain a risk profile similar to the
Russell 1000 Growth Index, and your investment may experience similar changes in
value and share similar risks such as market risk, credit risk, interest rate
risk and risk associated with foreign securities. For more information about
market risk, credit risk, interest rate risk and risk associated with foreign
securities, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests primarily in the equity securities of large cap U.S. issuers.
Large cap U.S. issuers include the largest 1,000 companies by market
capitalization traded in the United States.
The Fund will be managed utilizing Goldman Sachs' Quantitative Equity Strategy.
The acronym "CORE" (Computer-Optimized and Research Enhanced) reflects the three
step investment process the team uses to select securities. First, we estimate
the returns of 3000 U.S. stocks and foreign securities using a combination of
research from the Goldman Sachs Global Investment Research Department, other
industry sources and objective quantitative analysis. Next, the Fund's
investment portfolio is constructed by balancing expected returns against
portfolio risk, trading fees and investment objectives. The Fund is intended to
be constructed with minimum deviations from the sector, risk statistics and
macroeconomic sensitivity of the benchmark. A proprietary multi-factor model is
used in seeking to ensure risks taken are both intended and are warranted due to
expected return. Lastly, the Fund is traded regularly and rebalanced in seeking
to ensure all positions are in line with current market outlooks and benchmark
weights.
We follow the guidelines listed below for making the primary investments for
this Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Equity securities of large cap at least 65%
U.S. issuers
- --------------------------------------------
Other equity securities of up to 25%
U.S. and foreign issuers**,
including convertible
securities, ADRs and GDRs
- --------------------------------------------
Investment grade fixed income up to 100%
securities***
- --------------------------------------------
Futures and options**** up to 5%
- --------------------------------------------
Illiquid securities***** up to 15%
- --------------------------------------------
Rule 144A securities (liquid) up to 25%
- --------------------------------------------
Warrants and stock purchase up to 5%
rights
- --------------------------------------------
Investment companies up to 5%
- --------------------------------------------
Unseasoned companies up to 5%
- --------------------------------------------
</TABLE>
* At time of purchase.
** This Fund may invest in the equity securities of a
foreign issuer only if the securities are traded in the U.S.
*** For temporary defensive purposes, we may invest up
to 100% of the Fund's total assets in fixed income securities, including
U.S. Government securities, repurchase agreements collateralized by U.S.
Government securities, commercial paper rated at least A-2 by S&P or P-2
by Moody's, certificates of deposit, bankers' acceptances, repurchase
agreements, non-convertible preferred stocks, non-convertible corporate
bonds with a remaining maturity of less than one year. The Sub-adviser
will not necessarily dispose of a fixed income security when its ratings
are down graded to below investment grade.
**** The Fund may purchase or sell futures contracts
only with respect to a representative index. At no time will the aggregate
margin deposit required on all futures or options held, exceed 5% of the
Fund's total assets.
***** Percent of Fund's net assets applied at all times.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
16
<PAGE> 19
- --------------------------------------------------------------------------------
The Large Cap Growth Fund recently commenced operations and, therefore, has no
investment performance record. However, the Large Cap Growth Fund's investment
objective, policies and strategies are substantially similar to those employed
by the Sub-adviser with respect to sixteen accounts ("Combined Accounts"),
including fourteen advisory accounts ("Accounts") and two registered mutual
funds ("Funds"). The chart herein shows the historical investment performance
for a composite of the Combined Accounts ("Combined Accounts Composite"), which
were managed by the Sub-adviser in substantially the same manner and by the same
individuals who manage the Large Cap Growth Fund. The Combined Accounts
Composite includes all Combined Accounts net of average fees and expenses
charged by the Accounts and the Funds. These expenses include investment
advisory fees but do not include custodial fees (other than for the mutual
funds), which, if included, could lessen the performance presented. The
inception dates of the Combined Accounts comprising the Combined Accounts
Composite range from November 11, 1991 to January 30, 1998.
The Accounts included in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Accounts included in the Combined Accounts
Composite had been subject to the requirements imposed on registered mutual
funds, their performance might have been lower.
Total fees (after expense reimbursements) for the Large Cap Growth Fund are
higher than the total fees historically incurred by the Combined Accounts
comprising the Combined Accounts Composite. Consequently, the performance
results for the Combined Accounts Composite would have been lower if the
Combined Accounts Composite had the same expenses as the Large Cap Growth Fund.
The performance of the Combined Accounts Composite has been calculated in
accordance with SEC performance standards. See "Performance and Yield
Information" in the Statement of Additional Information for a description of SEC
performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A
COMPOSITE OF THE SUB-ADVISER'S COMBINED ACCOUNTS WHICH ARE MANAGED IN
SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUALS AS THE LARGE CAP
GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE LARGE CAP GROWTH FUND
ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF COMBINED ACCOUNTS COMPOSITE
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------
51.22% 26.08% 22.95%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE NOVEMBER 11, 1991
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Large Cap Growth Fund
is likely to differ from the Sub-Adviser's Accounts and Funds in size, cash flow
patterns and certain tax matters. Accordingly, the portfolio holdings of the
Large Cap Growth Fund may vary from those of the Sub-adviser's Combined Accounts
and the performance of the Large Cap Growth Fund may vary from that of the
Combined Accounts Composite.
17
<PAGE> 20
MID CAP GROWTH FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal CAPITAL APPRECIATION THROUGH
INVESTMENTS IN MEDIUM
CAPITALIZATION EQUITY
SECURITIES. CURRENT INCOME
IS A SECONDARY OBJECTIVE.
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
PORTFOLIO MANAGER
The Fund is managed by a team led by Eddie C. Brown. Mr. Brown is Founder,
President and controlling shareholder of the Sub-adviser. Mr. Brown has been
with the Sub-adviser since its inception in 1983. Robert E. Hall, Theodore M.
Alexander III, Noreen A. Frost, and Stephon A. Jackson assist Mr. Brown in the
management of the Fund. Mr. Hall, Senior Vice President and Portfolio
Manager/Analyst, joined the Sub-adviser in September 1993. Mr. Alexander, Vice
President and Portfolio Manager/Analyst, joined the Sub-adviser in October 1995.
Prior to this, Mr. Alexander was a Securities Analyst at Legg Mason Wood Walker
from June 1994 to October 1995. From June 1990 to January 1994, Mr. Alexander
was a Securities Analyst at Alex Brown & Sons, Inc. Ms. Frost, Vice President
and Portfolio Manager/Analyst, joined the Sub-adviser in February 1996. Prior to
this, Ms. Frost was in institutional sales at Duff & Phelps Securities Co. from
December 1994 to October 1996. From 1983 to 1993, Ms. Frost was
Investment/Broker-Dealer Analyst at Alex Brown & Sons, Inc. Mr. Jackson, Vice
President and Portfolio Manager/Analyst, joined the Sub-adviser in July 1997.
Prior to this, Mr. Jackson was Portfolio Manager/Director of Research at NCM
Capital Management from March 1994 to June 1997. From March 1993 to March 1994,
Mr. Jackson was an Analyst at Putnam Investments.
INVESTMENT OBJECTIVE
Seeks capital appreciation principally through investments in medium
capitalization equity securities, such as common and preferred stocks and
securities convertible into common stocks. Current income is a secondary
objective.
INVESTMENT RISK
This Fund invests mostly in equity securities of medium sized companies that we
believe are undervalued in the marketplace. The value of any equity security may
rise or fall over long or short periods of time. Although these equity
securities present an opportunity for capital appreciation, they may not be
broadly traded and involve market risk and risk associated with foreign
securities. For a discussion of market risk and risk associated with foreign
securities, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
This Fund will invest principally in the equity securities of medium
capitalization companies. Medium capitalization companies include companies with
a market capitalization of $1 to $7 billion. We will seek to achieve capital
appreciation through an opportunistic investment strategy with a growth bias.
This Fund will purchase equity securities of those companies that we feel are
undervalued relative to their growth potential in the securities markets,
because the companies are presently out of favor, not well known or possess
value that is not currently recognized by the investment community. We use a
"bottom up" approach to select specific investments, employing analysis that
contains elements of traditional dividend discount and earnings yield models,
establishes predicted relative valuation for equity and fixed income markets,
and determines the attractiveness of individual securities through evaluation of
growth and risk characteristics of the underlying company relative to the
overall equity market. Although the Fund's portfolio securities generally will
be acquired for the long term, they may be sold under some of the following
circumstances when the Sub-adviser believes that: a) the anticipated price
appreciation has been achieved or is no longer probable; b) alternative
investments offer superior total return prospects; or c) fundamentals change
adversely.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
18
<PAGE> 21
MID CAP GROWTH FUND
Fact Sheet
- --------------------------------------------------------------------------------
We follow the guidelines listed below for making the primary investments for
this Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Equity securities of medium at least 65%
capitalization companies
- --------------------------------------------
Other equity securities up to 35%
Common stocks, convertible
preferred stocks, preferred
stocks and convertible bonds
traded on domestic exchanges
or in over-the-counter
markets
- --------------------------------------------
Foreign equity securities, up to 10%
ADRs**
- --------------------------------------------
Money market instruments*** up to 10%
and fixed income
securities****, U.S.
Government securities,
corporate fixed income
securities**** (including
those subject to repurchase
agreements), bankers
acceptances and certificates
of deposit of domestic
branches of U.S. banks,
commercial paper (including
variable amount demand
master notes) rated in one
of the two highest ratings
categories of organizations
or, if not rated, of
equivalent quality and cash
and cash equivalents
- --------------------------------------------
Illiquid securities***** up to 10%
- --------------------------------------------
Rule 144A securities (liquid) up to 25%
- --------------------------------------------
Real estate securities****** up to 10%
- --------------------------------------------
</TABLE>
* At time of purchase.
** Foreign equity securities held by this Fund will be
held in the form of ADRs.
*** For temporary defensive reasons, we may invest up
to 100% of the Fund's assets in money market instruments and cash and
cash equivalents. We may do this when we think economic and market
conditions make it too risky to follow its general guidelines.
**** The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
***** Percent of Fund's net assets applied at all times.
****** This Fund will not invest directly in real estate, but
rather, in interests in or readily marketable securities issued by
companies that invest in real estate, including real estate investment
trusts (REITs).
19
<PAGE> 22
- --------------------------------------------------------------------------------
The Mid Cap Growth Fund recently commenced operations and, therefore, has no
investment performance record. However, the Mid Cap Growth Fund's investment
objective, policies and strategies are substantially similar to those employed
by the Sub-adviser with respect to discretionary investment management accounts
under their management ("Combined Accounts"). The chart herein shows the
investment performance for a composite of these Combined Accounts ("Combined
Accounts Composite") which were managed by the Sub-adviser in substantially the
same manner and by the same individuals who manage the Mid Cap Growth Fund. The
Combined Accounts Composite includes all Combined Accounts, net of account fees
and expenses. The inception dates of the Combined Accounts comprising the
Combined Accounts Composite range from January 1, 1993 to March 31, 1998.
The Combined Accounts in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Combined Accounts included in the Combined
Accounts Composite had been subject to the requirements imposed on mutual funds,
their performance might have been lower.
Total fees (after expense reimbursements) for the Mid Cap Growth Fund are higher
than the total fees historically incurred by the Combined Accounts comprising
the Combined Accounts Composite. Consequently, the performance results for the
Combined Accounts Composite would have been lower if the Combined Accounts
Composite had the same expenses as the Mid Cap Growth Fund. The performance of
the Combined Accounts Composite has been calculated in accordance with SEC
performance standards. See "Performance and Yield Information" in the Statement
of Additional Information for a description of SEC performance standards. THE
PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE SUB-ADVISER'S
COMBINED ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE
SAME INDIVIDUALS AS THE MID CAP GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE
OF THE MIDCAP GROWTH FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF COMBINED ACCOUNTS COMPOSITE
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------
47.95% 23.51% 21.86%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JANUARY 1, 1993
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Mid Cap Growth Fund is
likely to differ from the Sub-adviser's Combined Accounts in size, cash flow
patterns and certain tax matters. Accordingly the portfolio holdings of the Mid
Cap Growth Fund may vary from those of the Sub-adviser's Combined Accounts and
the performance of the Mid Cap Growth Fund may vary from that of the Combined
Accounts Composite.
20
<PAGE> 23
SMALL CAP GROWTH FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal LONG-TERM GROWTH THROUGH
INVESTMENTS IN SMALL GROWTH
COMPANIES
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.
PORTFOLIO MANAGER
Candice Eggerss, Stephen J. Rich and Saira Malik are the members of the
Sub-adviser's team who will be primarily responsible for the day-to-day
management of the Fund. Ms. Eggerss, who has been with the Sub-adviser since
1996, is a Vice President and specializes in portfolio investments in small
capitalization technology companies. Prior to this, Ms. Eggerss was employed at
Weiss, Peck and Greer from April 1993 to April 1996 and at Equitable Capital
Management prior to 1993. Mr. Rich is a Vice President and a portfolio manager
in the Small Cap Equity Group. In addition to his present position, his 7 years
of experience in equity portfolio management include positions in the
Sub-adviser's Structured Equity and Balanced/Equity groups. Ms. Malik joined the
Sub-adviser in 1995 after completing her graduate studies at the University of
Wisconsin.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies.
INVESTMENT RISK
Small capitalization companies may not have the financial strength to do well in
difficult times. Because they are small, the prices of their equity securities
may fluctuate more over the short term but they have more potential to grow.
This means their value may offer greater potential for appreciation. The equity
securities that the Fund invests in involve certain risks such as market risks.
For a discussion of these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
This Fund invests in small capitalization U.S. companies, which are companies
whose market capitalizations are greater than $150 million and less than $1.25
billion. On an industry by industry basis, the Fund's weightings are similar to
those of the Russell 2000 Growth Index. Within each industry, the Fund invests
in equity securities that the Sub-adviser's research and valuation process
indicate are undervalued. The greater a company's estimated worth compared to
the current market price of its equity securities, the more undervalued the
company.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- -----------------------------------------------
<S> <C>
Equity securities of at least 65%
small capitalization
growth companies
including U.S. and
foreign common stocks,
convertible securities,
preferred stocks,
warrants and rights
- -----------------------------------------------
Other equity securities up to 35%
of U.S. and foreign
large and medium
capitalization issuers
including common
stocks, convertible
securities, preferred
stocks, warrants,
rights and investment
company securities
- -----------------------------------------------
Foreign investments up to 5%
- -----------------------------------------------
Futures and options up to 25%
- -----------------------------------------------
Illiquid securities** up to 15%
- -----------------------------------------------
Rule 144A securities up to 30%
(liquid)
- -----------------------------------------------
Investment grade short up to 10%
term fixed income
securities***
- -----------------------------------------------
Swaps up to 5%
- -----------------------------------------------
</TABLE>
* At time of purchase.
** Percent of Fund's net assets applied at all times.
*** During severe market downturns, we may invest up to
100% of the Fund's assets in investment grade short term securities,
including repurchase agreements. The Sub-adviser will not necessarily
dispose of a fixed income security when its rating is down graded to below
investment grade.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
21
<PAGE> 24
- --------------------------------------------------------------------------------
The Small Cap Growth Fund recently commenced operations and, therefore, has no
investment performance record. However, the Small Cap Growth Fund's investment
objective, policies and strategies are substantially similar to those employed
by the Sub-adviser and its affiliates with respect to discretionary investment
management accounts under their management ("Combined Accounts"). The chart
herein shows the historical investment performance for a composite of these
Combined Accounts ("Combined Accounts Composite") which was managed by the
Sub-adviser in substantially the same manner as the Small Cap Growth Fund. The
Combined Accounts Composite includes all Combined Accounts, net of the highest
management fee charged and other account fees and expenses. The inception dates
of the Combined Accounts comprising the Combined Accounts Composite range from
September 1, 1994 to June 1, 1997.
The Combined Accounts in the Combined Accounts Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Combined Accounts included in the Combined
Accounts Composite had been subject to the requirements imposed on registered
mutual funds, their performance might have been lower.
Total fees (after expense reimbursements) for the Small Cap Growth Fund are
higher than the highest management fees and other fees historically incurred by
the Combined Accounts comprising the Combined Accounts Composite. Consequently,
the performance results for the Combined Accounts Composite would have been
lower if the Combined Accounts Composite had the same expenses as the Small Cap
Growth Fund. The performance of the Combined Accounts Composite has been
calculated in accordance with SEC performance standards. See "Performance and
Yield Information" in the Statement of Additional Information for a description
of SEC performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A
COMPOSITE OF THE SUB-ADVISER'S COMBINED ACCOUNTS WHICH ARE MANAGED IN
SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUALS AS THE SMALL CAP
GROWTH FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE SMALL CAP GROWTH FUND
ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF COMBINED ACCOUNTS COMPOSITE
<TABLE>
<S> <C>
- -----------------------------------------------------
1 YEAR SINCE INCEPTION
- -----------------------------------------------------
53.70% 29.20%
- -----------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1994
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Small Cap Growth Fund
is likely to differ from the Sub-adviser's Combined Accounts in size, cash flow
patterns and certain tax matters. Accordingly the portfolio holdings of the
Small Cap Growth Fund may vary from those of the Sub-adviser's Combined Accounts
and the performance of the Small Cap Growth Fund may vary from that of the
Combined Accounts Composite.
22
<PAGE> 25
INTERNATIONAL VALUE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH OF CAPITAL AND FUTURE
INCOME THROUGH INVESTMENTS
IN NON-U.S. ISSUERS
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
PORTFOLIO MANAGER
The Fund's portfolio managers include: (i) Robert Ronus, President of the
Sub-adviser, who has been an investment professional for 29 years and has been
with the Sub-adviser or an affiliate for 25 years; (ii) David Fisher, Vice
Chairman of the Sub-adviser, who has been an investment professional for 32
years and has been with the Sub-adviser or an affiliate for 28 years; (iii)
Harmut Giesecke, Senior Vice President and Director of Capital International,
Inc., an affiliate of the Sub-adviser, who has been an investment professional
for 26 years and has been with the Sub-adviser or an affiliate for 25 years;
(iv) Nancy Kyle, Senior Vice President of the Sub-adviser, who has been an
investment professional for 24 years and has been with the Sub-adviser or an
affiliate for 7 years; (v) John McIlwraith, Senior Vice President of the
Sub-adviser, who has been an investment professional for 28 years and has been
with the Sub-adviser or an affiliate for 14 years; (vi) Nilly Sikorsky, Director
of The Capital Group of Companies, Inc., an affiliate of the Sub-adviser, who
has been an investment professional for 35 years and has been with the
Sub-adviser or an affiliate for 35 years; (vii) Lionel Sauvage, Vice President
of the Sub-adviser, who has been an investment professional for 11 years and has
been with the Sub-adviser or an affiliate for 11 years; (viii) Richard Havas,
Sr., Vice President of the Sub-adviser, who has been an investment professional
for 16 years and has been with the Sub-adviser or an affiliate for 12 years; and
(ix) Rudolf Staehelin, Sr., Vice President of Capital Research International, an
affiliate the Sub-adviser, who has been an investment professional for 20 years
and has been with the Sub-adviser or an affiliate for 16 years.
INVESTMENT OBJECTIVE
Seeks to provide growth of capital and future income through investments
primarily in securities of non-U.S. issuers and securities whose principal
markets are outside of the United States.
INVESTMENT RISK
As described in the Investment Strategy section below, this Fund invests almost
all of its assets in foreign securities, which have risks that U.S. investments
do not have, including future foreign political and economic developments,
fluctuations in foreign exchange rates and limited publicly available
information. For a further explanation of the risks associated with foreign
securities and market risk, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a portfolio consisting primarily of equity and fixed income
securities of non-U.S. issuers.
While the assets of the Fund can be invested with geographical flexibility, the
emphasis will be on securities of companies located in Europe, Canada,
Australia, and the Far East, giving due consideration to economic, social, and
political developments, currency risks and the liquidity of various national
markets.
<TABLE>
<CAPTION>
Percent of
Fund Investments Fund's Total Assets*
- -----------------------------------------------
<S> <C>
Foreign securities** at least 80%
Equity securities,
investment grade fixed
income securities
- -----------------------------------------------
Futures and options Put up to 90% of the
and call options on amount in foreign
foreign currencies and securities
forward currency
contracts
- -----------------------------------------------
Cash, cash equivalents, up to 100%
government securities,
nonconvertible
preferred stocks, or
investment grade fixed
income securities***
- -----------------------------------------------
Rule 144A securities up to 15%
(liquid)
- -----------------------------------------------
Illiquid securities**** up to 15%
- -----------------------------------------------
</TABLE>
* At the time of purchase.
** We may invest up to 10% of the Fund's assets in the
securities of foreign small capitalization companies. The Fund also may
invest in securities of issuers located in emerging market countries.
*** We may invest up to 100% of the Fund's assets in
these instruments in varying proportions as a temporary defensive position,
when we think economic, political and market conditions in foreign
countries make it too risky to follow our general guidelines.
**** Percent of Fund's net assets applied at all times.
For additional
information about THE
FUND'S INVESTMENTS see
"Types of Investments."
23
<PAGE> 26
- --------------------------------------------------------------------------------
The International Value Fund recently commenced operations and, therefore, has
no investment performance record. However, the International Value Fund's
investment objectives, policies and strategies are substantially similar, but
not necessarily identical, to those employed by the Sub-adviser with respect to
discretionary investment accounts ("Discretionary Accounts") managed by the
Sub-adviser. The chart herein shows the historical investment performance for a
composite of the Sub-adviser's Discretionary Accounts ("Sub-adviser Composite")
which were managed by the Sub-adviser in substantially the same manner as the
International Value Fund. The Sub-adviser Composite represents the total return
of all Discretionary Accounts net of the highest management fee charged and
other account fees and expenses. The inception dates of the Discretionary
Accounts comprising the Sub-Adviser Composite range from December 31, 1978 to
March 31, 1998.
The Discretionary Accounts in the Sub-adviser Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Discretionary Accounts included in the Sub-Adviser
Composite had been subject to the requirements imposed on registered mutual
funds, their performance might have been lower.
Total fees (after expense reimbursements) for the International Value Fund are
higher than the highest management fees and other fees historically incurred by
the Discretionary Accounts comprising the Sub-adviser Composite. Consequently,
the performance results for the Sub-adviser Composite would have been lower if
the Sub-adviser Composite had the same expenses as the International Value Fund.
The performance of the Sub-adviser Composite has been calculated in accordance
with SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE INTERNATIONAL VALUE FUND AND DOES NOT REFLECT THE PERFORMANCE OF
THE INTERNATIONAL VALUE FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE
<TABLE>
<CAPTION>
<S> <C> <C>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
24.02% 14.85% 11.35%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the International Value
Fund is likely to differ from the Sub-adviser's Discretionary Accounts in size,
cash flow patterns and certain tax matters. Accordingly the portfolio holdings
of the International Value Fund may vary from those of the Sub-adviser's
Discretionary Accounts and the performance of the International Value Fund may
vary from that of the Sub-adviser Composite.
24
<PAGE> 27
LARGE CAP VALUE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal TOTAL RETURNS EXCEEDING THE
RUSSELL 1000 VALUE INDEX
THROUGH INVESTMENTS IN
EQUITY SECURITIES
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/
State Street Global Advisors
PORTFOLIO MANAGER
The Fund's portfolio managers include Jeffrey P. Adams, Jennifer W. Bardsley,
David A. Hanna, Douglas T. Holmes, CFA, Ben J. Salm, Peter Stonberg, CFA,
Richard B. Weed and Peter B. Wiley, CFA. Mr. Adams, Principal, US Active Equity
who joined the Sub-adviser in June 1989, where he has been the team leader of
the Small Cap Strategy since its inception and is responsible for the research
initiatives for this product. Mr. Adams' responsibilities include the management
of global active portfolios and research and development of new U.S. active
processes. Ms. Bardsley, Principal, US Active Equity, joined the Sub-Adviser in
1993 as a member of the Investment Systems group and moved to the U.S. Active
Equity group in January 1996, where her responsibilities include product
development, portfolio management and maintenance of the modeling and portfolio
construction processes. Mr. Hanna, Principal, US Active Equity, joined the
Sub-adviser in May 1997 and is a Portfolio Manager for the Hedged Matrix
(Long/Short Market Neutral) Product and participates in group research projects
involving the development of modeling and portfolio development techniques.
Prior to joining the Sub-adviser, Mr. Hanna was director of equity and
quantitative research at Standish, Ayer & Wood, from January 1992 to April 1997,
where he both managed a group of quantitative analysts and worked on equity
research projects. Mr. Holmes, Managing Director, Global Enhanced Equity, joined
the Sub-adviser in 1984 and specializes in the portfolio construction, risk
control and trading of accounts managed by the Sub-adviser in this area. Mr.
Salm, Principal, US Active Equity, joined the Sub-adviser in 1992 and is
responsible for research, product development and portfolio management within
the US Active strategy. Mr. Stonberg, Principal and Head of US Active Equity,
joined the Sub-adviser in 1981 and is responsible for all of the Sub-adviser's
US Active Equity investment strategies. Mr. Weed, Principal, US Active Equity,
joined the Sub-adviser in April 1994, where his responsibilities include
portfolio management, product development and research. Previously, Mr. Weed was
with Valuequest, an investment adviser, from December 1993 to March 1994 and
with Brattle Group, an economic consulting firm, from May 1992 to November 1993.
Mr. Wiley, Principal, US Active Equity, joined the Sub-adviser in April 1997.
Previously, Mr. Wiley was with Colonial Management Associates, an investment
management firm, from August 1992 to April 1997.
INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000 Value
Index (Index) through investment in equity securities.
INVESTMENT RISK
This Fund invests primarily in the equity securities of large, well-established
companies that generally possess the strength to withstand difficult financial
periods. Nevertheless, the value of any equity security can rise or fall over
short and long periods of time. As described below, in order to avoid unintended
exposures to economic factors, including the direction of the economy, interest
rates, energy prices and inflation, we maintain the proportion of equity
securities from different economic sectors in this Fund's portfolio at a level
similar to that of the Index. There is no assurance that the Fund will be
unaffected by such economic factors.
Because the Fund maintains sector weights at a similar level to that of the
Index, your investment may experience similar changes in value and share similar
risks such as market risk and risk associated with foreign securities. For more
information about market risk and risk associated with foreign securities, see
"A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund will invest primarily in equity securities of large capitalization
companies. Large capitalization companies include the largest 1,200 companies by
market capitalization domiciled in the United States. Equity securities will be
selected and ranked according to two separate and uncorrelated measures: value
and the momentum of Wall Street sentiment. The value measure compares a
company's assets, projected earnings growth and cash flow growth with the price
of its equity securities within the context of its historical valuation. The
measure of Wall Street sentiment examines changes in Wall Street analysts'
earnings estimates and ranks stocks by the strength and consistency of those
changes. These two measures will be combined to create a single composite score
of an equity security's attractiveness. These scores are used to determine their
relative attractiveness. Sector weights are maintained at a similar level
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
25
<PAGE> 28
LARGE CAP VALUE FUND
Fact Sheet
- --------------------------------------------------------------------------------
to that of the Index to avoid unintended exposure to factors such as the
direction of the economy, interest rates, energy prices and inflation.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Equity securities of large at least 65%
capitalization companies
- --------------------------------------------
ADRs up to 5%
- --------------------------------------------
Debentures up to 5%
- --------------------------------------------
Notes up to 5%
- --------------------------------------------
Warrants** up to 5%
- --------------------------------------------
Illiquid and restricted up to 15%
securities**
- --------------------------------------------
Rule 144A securities (liquid) up to 15%
- --------------------------------------------
Securities lending up to 331/3%
- --------------------------------------------
When-issued securities** up to 25%
- --------------------------------------------
Put and call options up to 5%
Covered put and call options
on securities
Put and call options on
securities indices
- --------------------------------------------
Futures and options up to 5%
Initial margin deposits on
futures and premiums for
options and futures
- --------------------------------------------
High quality short-term fixed up to 100%
income securities***
- --------------------------------------------
</TABLE>
* At time of purchase.
** Percent of Fund's net assets applied at all times.
*** For temporary defensive purposes, to invest
uncommitted cash balances or to meet shareholder redemptions, we may
invest up to 100% of the Fund's assets in high quality short-term fixed
income securities such as U.S. Government securities, repurchase
agreements collateralized by these obligations, variable amount master
demand notes, commercial paper, bank certificates of deposit, bankers'
acceptances and time deposits. The Sub-adviser will not necessarily
dispose of a fixed income security when its rating is down graded to below
investment grade.
26
<PAGE> 29
- --------------------------------------------------------------------------------
The Large Cap Value Fund recently commenced operations and, therefore, has no
investment performance record. However, the Large Cap Value Fund will be managed
by the Sub-adviser in substantially the same manner and by the same individuals
as those who manage discretionary accounts (the "Discretionary Accounts") with
substantially similar investment objectives, policies and strategies.
The chart herein shows the investment performance for all Discretionary
Accounts, net of account fees and expenses. The inception dates for the
Discretionary Accounts range from August 1, 1992 through August 1, 1997. The
Discretionary Accounts are not subject to the investment limitations,
diversification requirements and the other restrictions imposed on registered
mutual funds by the 1940 Act and Subchapter M of the Internal Revenue Code. If
the Discretionary Accounts had been subject to the requirements imposed on
registered mutual funds, their performance might have been lower.
Total fees (after expense reimbursements) for the Large Cap Value Fund are
higher than the total fees incurred by the Discretionary Accounts. Consequently,
the performance results for the Discretionary Accounts would have been lower if
the Discretionary Accounts had the same expenses as the Large Cap Value Fund.
The performance of the Discretionary Accounts has been calculated in accordance
with SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC
performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON THE SUB-
ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AND BY THE SAME INDIVIDUALS AS THE LARGE CAP VALUE FUND AND DOES NOT
REFLECT THE PERFORMANCE OF THE LARGE CAP VALUE FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF DISCRETIONARY ACCOUNTS
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------
58.95% 24.14% 24.04%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE AUGUST 1, 1992
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Large Cap Value Fund is
likely to differ from the Discretionary Accounts in size, cash flow patterns and
certain tax matters. Accordingly the portfolio holdings and performance of the
Large Cap Value Fund may vary from those of the Discretionary Accounts.
27
<PAGE> 30
MID CAP VALUE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH THROUGH INVESTMENTS
IN MEDIUM CAPITALIZATION
COMPANIES
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Neuberger&Berman Management Inc.
PORTFOLIO MANAGER
Michael M. Kassen and Robert I. Gendelman serve as co-managers of the Fund. Mr.
Kassen and Mr. Gendelman are Vice Presidents of the Sub-adviser and principals
of Neuberger&Berman, LLC. Messrs. Kassen and Gendelman have been associated with
the Sub-adviser since 1990 and 1994, respectively. Prior to 1994, Mr. Gendelman
was portfolio manager for another mutual fund manager.
INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach.
INVESTMENT RISK
The value of any equity security may rise or fall over long or short periods of
time. Although equity securities present an opportunity for capital
appreciation, they may not be broadly traded and involve market risk and risk
associated with foreign securities. For a discussion of these risks, see "A Word
About Risk" in this prospectus.
INVESTMENT STRATEGY
This Fund invests principally in equity securities of medium capitalization
established companies, using a value-oriented investment approach intended to
increase capital with reasonable risk. Medium capitalization companies include
companies with the characteristics of companies included in the Russell
Midcap(TM) Index. As of June 30, 1998, the largest company included in the
Russell Midcap(TM) Index had an approximate market capitalization of $10.3
billion. We choose securities we believe are undervalued based on strong
fundamentals, including a low price-to-earnings ratio, consistent cash flow, and
the company's track record through all parts of the market cycle. When selecting
securities for this Fund, we also consider other factors, including ownership by
a company's management of the company's stock and the dominance a company in its
particular field.
We follow the guidelines listed below for making the investments for this Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Equity securities of medium at least 65%
capitalization companies
- --------------------------------------------
Other equity securities up to 35%
Common stock, preferred
stock, convertible
securities
- --------------------------------------------
Covered call options up to 35%
- --------------------------------------------
Foreign currency transactions up to 5%
- --------------------------------------------
Options on foreign currencies up to 5%
- --------------------------------------------
Foreign securities up to 10%
- --------------------------------------------
Illiquid and restricted up to 15%
securities**
- --------------------------------------------
Rule 144A securities (liquid) up to 25%
- --------------------------------------------
Corporate fixed income up to 15%
securities rated C or higher
by Moody's or CC or higher
by S&P and comparable
unrated securities***
- --------------------------------------------
Investment grade fixed income less than 5%
securities**** corporate
bonds and debentures, U.S.
Government securities, money
market instruments, zero
coupon securities
- --------------------------------------------
Cash and cash equivalents***** up to 100%
- --------------------------------------------
</TABLE>
* At time of purchase.
** We may invest up to 15% of the Fund's net assets in
illiquid securities. This limitation applies at all times. Restricted
securities are explained under "Types of Investments."
*** This Fund may invest up to 15% of its net assets in
below investment grade fixed income securities only when we believe that
the anticipated return to the Fund warrants exposure to the additional
risk involved in these instruments.
**** The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
***** For temporary defensive reasons, we may invest up
to 100% of the Fund's assets in cash and cash equivalents, U.S. Government
securities, commercial paper and certain other money market instruments,
including repurchase agreements collateralized by the foregoing. We may do
this when we think economic and market conditions make it too risky to
follow its general investment guidelines.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
28
<PAGE> 31
- --------------------------------------------------------------------------------
The Mid Cap Value Fund recently commenced operations and, therefore, has no
investment performance record. However, the Mid Cap Value Fund's investment
objectives, policies and strategies are substantially similar, though not
necessarily identical, to those of Neuberger&Berman Partners Fund and it is
managed by the Sub-adviser in substantially the same manner and by the same
individuals as Neuberger&Berman Partners Fund. Neuberger&Berman Partners Fund
seeks to achieve its objective by investing principally in common stocks of
medium-to large-capitalization companies. As a result, Neuberger&Berman Partners
Fund may in the future have, or in the past have had, greater exposure to larger
capitalization companies than the MidCap Value Fund will have. The chart
herein shows the investment performance for Neuberger&Berman Partners Fund for
the period April 1, 1988 through March 31, 1998, net of Neuberger&Berman
Partners Fund's fees and expenses. The date the Sub-Adviser assumed management
of Neuberger&Berman Partners Fund was January 20, 1975.
The Mid Cap Value Fund is subject to investment limitations, diversification
requirements and other restrictions imposed on registered mutual funds by the
1940 Act and Subchapter M of the Internal Revenue Code.
Total fees after (expense reimbursements) for the Mid Cap
Value Fund are higher than the total fees incurred by
Neuberger&Berman Partners Fund. Consequently, the performance results for
Neuberger&Berman Partners Fund would have been lower if Neuberger&Berman
Partners Fund had the same expenses as the Mid Cap Value Fund. The performance
of Neuberger&Berman Partners Fund has been calculated in accordance with SEC
performance standards. See "Performance and Yield Information" in the Statement
of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON NEUBERGER&BERMAN
PARTNERS FUND WHICH IS MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE SAME
INDIVIDUALS AS THE MID CAP VALUE FUND AND DOES NOT REFLECT THE PERFORMANCE OF
THE MID CAP VALUE FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF
NEUBERGER&BERMAN PARTNERS FUND
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------
41.54% 21.80% 17.95%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Mid Cap Value Fund is
likely to differ from Neuberger&Berman Partners Fund in size, cash flow patterns
and certain tax matters. Neuberger&Berman Partners Fund may have greater
exposure to large capitalization companies than the Mid Cap Value Fund.
Accordingly, the portfolio holdings and performance of the Mid Cap Value Fund
may vary from those of Neuberger&Berman Partners Fund.
29
<PAGE> 32
SMALL CAP VALUE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal MAXIMUM LONG-TERM RETURN
THROUGH INVESTMENTS IN SMALL
CAPITALIZATION COMPANIES
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISERS
Fiduciary Management Associates, Inc.
Bankers Trust Company
PORTFOLIO MANAGER
The actively-managed portion of the Fund's portfolio is managed by Kathryn Maag
Vorisek, Lloyd J. Spicer, CFA, and Terry B. French. Ms. Vorisek, Senior Vice
President and Portfolio Manager/Analyst for the Sub-adviser's small cap
discipline, is the team leader. Ms. Vorisek joined the Sub-adviser in April
1996. Previously, Ms. Vorisek was with Duff & Phelps Investment Management from
June 1989 to April 1996, Citicorp from October 1988 to June 1989, and Lehman
Brothers from July 1984 to October 1988. Mr. Spicer, Senior Vice President and
Portfolio Manager/Small Cap Advisor, joined the Sub-adviser in March 1994. Mr.
French, Senior Vice President and Portfolio Manager, joined the Sub-adviser in
November 1997. Mr. French managed private investment portfolios from January
1991 to November 1997.
Frank Salerno, Managing Director-Chief Investment Officer of Quantitative and
Equity Index of Bankers Trust, has been the portfolio manager for the
passively-managed portion of this Fund's portfolio since the Fund's inception.
Mr. Salerno has been with Bankers Trust since 1981.
INVESTMENT OBJECTIVE
Seeks maximum long-term return, consistent with reasonable risk to principal, by
investing primarily in equity securities of small capitalization companies in
terms of revenues and/or market capitalization.
INVESTMENT RISK
A portion of this Fund's portfolio is invested in a statistically-selected
sampling of the 2000 stocks in the Russell 2000 Index (Index). This part of the
Fund's investment portfolio avoids the risks of individual stock selection and
seeks to achieve and exceed the return of the smaller-sized company sector of
the market. On the average, that return has been positive, but has been negative
at certain times. There is no assurance that a positive return will occur in the
future.
Because this Fund invests in smaller capitalization equity securities, your
investment may exhibit greater market value volatility than investments in
common stocks of larger companies. Your investment also will experience similar
changes in value and share similar risks as stocks included in the Index, such
as market risk and risk associated with investment in foreign securities. For
more information about these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGIES
This Fund invests primarily in equity securities of small capitalization
companies, which are companies whose stock market capitalizations range from $50
million to $1 billion and companies included in the Index. One portion of the
Fund's investment portfolio will be actively managed and the other portion will
be passively managed. In analyzing and selecting investments for the
actively-managed portion of the Fund's investment portfolio, we look for market
themes and changes that signal opportunity. We seek companies with lower
price-to-earnings ratios, strong cash flow, good credit lines and clean or
improving balance sheets. At any given time, this portion of the Fund's
investment portfolio will be invested in a diversified group of small
capitalization equity securities in several industries. The Fund will invest
primarily in U.S. companies with seasoned management or a track record as part
of a larger company.
The passively-managed portion of the Fund's investment portfolio is comprised of
a sampling of stocks in the Index that, as a group, should reflect its
performance. The stocks of the Index to be included in the Fund will be selected
utilizing a statistical sampling technique known as "optimization." This process
selects stocks for the Fund so that various industry weightings, market
capitalizations and fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios and dividend yields) closely approximate
those of the Index. The stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of the Index as a whole.
Since it may not be possible for this Fund to buy every stock included
in the Index or in the same proportions, we rely on the aforementioned
statistical technique to figure out, of the stocks tracked by the index, how
many and which ones to buy.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
30
<PAGE> 33
SMALL CAP VALUE FUND
Fact Sheet
- --------------------------------------------------------------------------------
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ---------------------------------------------
<S> <C>
Equity securities of small at least 65%
capitalization companies**
- ---------------------------------------------
Short-term investments Foreign up to 35%
and domestic money market
instruments, certificates of
deposit bankers'
acceptances, time deposits,
U.S. Government obligations,
U.S. Government agency
securities, short-term
corporate fixed income
securities***, commercial
paper rated A-1 or A-2 by
S&P or Prime-1 or Prime-2 by
Moody's or, if unrated, of
comparable quality,
repurchase agreements
- ---------------------------------------------
Illiquid securities**** up to 15%
- ---------------------------------------------
Futures and Options up to 20%
- ---------------------------------------------
Swap Agreements up to 10%
- ---------------------------------------------
Warrants***** up to 5%
- ---------------------------------------------
Time deposits****** up to 10%
- ---------------------------------------------
Foreign securities up to 10%
- ---------------------------------------------
Investment companies up to 10%
- ---------------------------------------------
Rule 144A securities (liquid) up to 10%
- ---------------------------------------------
</TABLE>
* At time of purchase.
** This Fund will invest at least 65% of its total assets
in equity securities of companies whose stock market capitalizations
range from $50 million to $1 billion, including stocks in the Russell
2000 Index.
*** The Fund will not purchase short-term fixed
income securities rated below Baa by Moodys or BBB by S&P. However, the
Sub-adviser will not necessarily dispose of a fixed income security when
its rating is down graded to below investment grade.
**** Percent of Fund's net assets applied at all times.
***** The Fund's investment in warrants will not exceed
2% of its assets with respect to warrants not listed on the New York or
American Stock Exchanges.
****** This Fund will invest only in time deposits
maturing in two to seven calendar days. The Fund will not purchase time
deposits maturing in more than seven days.
31
<PAGE> 34
SOCIALLY RESPONSIBLE
FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH THROUGH INVESTMENTS
IN COMPANIES MEETING SOCIAL
CRITERIA OF THE FUND
- -------------------------------------------------
Investment Category GROWTH
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER
This Fund is managed by William Trimbur, Jr. Since June 1987, Mr. Trimbur has
served as Vice President and Investment Officer of American General Series
Portfolio Company, a registered open-end investment company managed by VALIC.
Mr. Trimbur has served as Portfolio Manager of the American General Series
Portfolio Company International Equities Fund since 1989, the American General
Series Portfolio Company International Government Bond Fund since 1991 and the
American General Series Portfolio Company Social Awareness Fund ("AGSPC" Social
Awareness Fund") since September 1998.
INVESTMENT OBJECTIVE
Seeks to obtain growth of capital through investment, primarily in equity
securities, in companies which meet the social criteria established for the
Fund. The Fund does not invest in companies that:
- produce nuclear energy;
- make military weapons or delivery systems; or
- engage continuously in practices or produce products that significantly
pollute the environment (such products include tobacco products).
INVESTMENT RISK
This Fund may experience market risk, and risks associated with foreign
securities. For a discussion of these risks see "A Word About Risk" in this
prospectus.
If a company stops meeting the Fund's social criteria after the Fund invested in
it, the Fund will sell these investments even if this means the Fund loses
money. Also, if the Fund changes its social criteria and the companies the Fund
has already invested in no longer qualify, the Fund will sell these investments
even if this means the Fund loses money. Social criteria screening will limit
the availability of investment opportunities for the Fund more than for funds
having no such criteria.
To find out which companies meet the Fund's social criteria, we rely on industry
classifications, research services such as the Investor Responsibility Research
Center (IRRC), and special magazines and papers that publish this type of
information.
Since our definition of social criteria is not "fundamental," the Series
Company's Board of Trustees may change it without shareholder approval. When
deciding to make changes to the criteria, the Board will consider, among other
things, new or revised state laws that govern or affect the investments of
public funds. At least once a year, we survey state laws on this issue to look
for any new developments. If our survey shows that at least 20 states have
adopted laws that restrict public funds from being invested in a clearly
definable category of investments, this category is automatically added to our
social criteria list.
INVESTMENT STRATEGY
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund's Investments Assets*
- -----------------------------------------------
<S> <C>
Equity securities of at least 80%
companies meeting the
Fund's social criteria
- -----------------------------------------------
Other types of equity up to 20%
securities of companies
meeting social criteria
including:
Foreign securities
Preferred stock
Convertible
securities
- -----------------------------------------------
High quality money market up to 20%
securities and warrants
- -----------------------------------------------
Futures and options up to 33%
- -----------------------------------------------
Illiquid and restricted up to 10%
securities**
- -----------------------------------------------
Rule 144A securities up to 20%
(liquid)
- -----------------------------------------------
</TABLE>
* At time of purchase.
** Percent of Fund's net assets applied at all times.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
32
<PAGE> 35
- --------------------------------------------------------------------------------
The Socially Responsible Fund recently commenced operations and, therefore, has
no investment performance record. However, the Socially Responsible Fund's
investment objectives, policies and strategies are substantially similar to
those of the AGSPC Social Awareness Fund and it is managed by VALIC in
substantially the same manner as the AGSPC Social Awareness Fund. The chart
herein shows the historical investment performance for the AGSPC Social
Awareness Fund for the period of October 2, 1989 through March 31, 1998, net of
AGSPC Social Awareness Fund's fees and expenses. The inception date for the
AGSPC Social Awareness Fund was October 2, 1989.
The AGSPC Social Awareness Fund is subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code.
Total fees (after expense reimbursements) for the Socially Responsible Fund are
higher than the total fees incurred by the AGSPC Social Awareness Fund.
Consequently, the performance results for the AGSPC Social Awareness Fund would
have been lower if the AGSPC Social Awareness Fund had the same expenses as the
Socially Responsible Fund. The performance of the AGSPC Social Awareness Fund
has been calculated in accordance with SEC performance standards. See
"Performance and Yield Information" in the Statement of Additional Information
for a description of SEC performance standards. THE PERFORMANCE INFORMATION
HEREIN IS BASED ON THE AGSPC SOCIAL AWARENESS FUND WHICH IS MANAGED IN
SUBSTANTIALLY THE SAME MANNER AS THE SOCIALLY RESPONSIBLE FUND AND DOES NOT
REFLECT THE PERFORMANCE OF THE SOCIALLY RESPONSIBLE FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF AGSPC SOCIAL AWARENESS FUND
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION
--------------------------------------------------
47.45% 25.67% 16.57%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 2, 1989
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Socially Responsible
Fund is likely to differ from the AGSPC Social Awareness Fund in size, cash flow
patterns and certain tax matters. Accordingly the portfolio holdings and
performance of the Socially Responsible Fund may vary from those of the Social
Awareness Fund.
33
<PAGE> 36
BALANCED FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal CONSERVATION OF PRINCIPAL
AND LONG-TERM GROWTH OF
CAPITAL AND INCOME THROUGH
INVESTMENTS IN FIXED INCOME
AND EQUITY SECURITIES
- -------------------------------------------------
Investment Category BALANCED
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
PORTFOLIO MANAGER
This Fund is managed using a system of multiple portfolio managers. Under this
system, the Fund is divided into segments, which are assigned to individual
managers.
The portfolio managers for the fixed income portion of the Fund include: (i) Jim
Mulally, Senior Vice President of the Sub-adviser, who has been an investment
professional for 21 years and has been with the Sub-adviser or an affiliate for
18 years; and (ii) Jim Baker, Vice President of the Sub-adviser, who has been an
investment professional for 17 years and has been with the Sub-adviser or an
affiliate for 11 years.
The portfolio managers for the U.S. large cap equity portion of the Fund
include: (i) David Fisher, Vice Chairman of the Sub-adviser, who has been an
investment professional for 32 years and has been with the Sub-adviser or an
affiliate for 28 years; (ii) Gene Stein, Executive Vice President of the
Sub-adviser, who has been an investment professional for 26 years and has been
with the Sub-adviser or an affiliate for 25 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-adviser, who has been an investment
professional for 17 years and has been with the Sub-adviser or an affiliate for
11 years; (iv) Ted Samuels, Senior Vice President of the Sub-adviser, who has
been an investment professional for 19 years and has been with the Sub-adviser
or an affiliate for 17 years; (v) Donnalisa Barnum, Vice President of the
Sub-adviser, who has been an investment professional for 16 years and has been
with the Sub-adviser or an affiliate for 12 years; and (vi) R. Bryan Jacoboski,
Vice President of the Sub-adviser, who has been an investment professional for
17 years and has been with the Sub-adviser or an affiliate for 4 years.
Previously Mr. Jacoboski was Managing Director, Equity Research at Paine Webber
from 1983 to 1994.
The portfolio managers for the U.S. small cap equity portion of the Fund
include: (i) Bob Kirby, Chairman Emeritus of the Sub-adviser, who has been an
investment professional for 45 years and has been with the Sub-adviser or an
affiliate for 32 years; (ii) Michael Ericksen, Senior Vice President of the
Sub-adviser, who has been an investment professional for 17 years and has been
with the Sub-adviser or an affiliate for 11 years; (iii) James Kang, Vice
President of Capital Guardian Research Company, an affiliate of the Sub-adviser,
who has been an investment professional for 11 years and has been with the
Sub-adviser or an affiliate for 10 years; and (iv) R. Bryan Jacoboski, Vice
President of the Sub-adviser, who been an investment professional for 17 years
and has been with the Sub-adviser or an affiliate for 4 years. Previously Mr.
Jacoboski was Managing Director, Equity Research at Paine Webber from 1983 to
1994.
INVESTMENT OBJECTIVE
Seeks balanced accomplishment of
(i) conservation of principal and (ii) long-term growth of capital and income
through investment in fixed income and equity securities.
INVESTMENT RISK
This Fund invests principally in fixed income and equity securities. The value
of an equity security can rise and fall over long and short periods of time and
involve market risks. Like equity securities, fixed income securities involve
certain risks, including interest rate risk, credit risk, market risk and risk
associated with foreign securities. This may cause the fixed income securities
that the Fund owns to be worth less than the Fund paid. For a discussion of
these risk, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in a combination of fixed income and equity securities in order
to maintain the value of your principal investment and provide you with capital
growth and income over the long-term. At all times at least 25% of the Fund's
total assets are invested in fixed income senior securities. We select
securities for the Fund's portfolio by identifying fixed income and equity
securities that represent fundamental values at reasonable prices. We implement
this philosophy using a system of portfolio managers, under which a different
group of portfolio managers makes investment decisions for the fixed income and
equity portions of the Fund.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
34
<PAGE> 37
BALANCED FUND
Fact Sheet
- --------------------------------------------------------------------------------
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- -------------------------------------------
<S> <C>
Fixed income securities up to 75%
Securities rated "A"
or better by Moody's
or S&P or of
comparable investment
quality**, U.S.
Government securities
and its
instrumentalities,
securities issued by
the Canadian
Government, its
provinces or their
instrumentalities,
mortgage-related
securities of
governmental issuers,
GNMA certificates of
private issuers,
collateralized
mortgage obligations,
mortgage-backed bonds,
cash or cash
equivalents, including
commercial bank
obligations and
commercial paper***
- -------------------------------------------
Fixed income senior at least 25%
securities
- -------------------------------------------
Equity securities**** up to 75%
- -------------------------------------------
High yield high risk up to 20%
fixed income
securities*****
- -------------------------------------------
Rule 144A securities up to 15%
(liquid)
- -------------------------------------------
Illiquid up to 15%
securities******
- -------------------------------------------
</TABLE>
* At time of purchase.
** The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
*** These investments will constitute at least 75% of
the fixed income securities held by the Fund.
**** Equity securities held by the Fund will be listed on
national securities exchanges or in the national over-the-counter market
(NASDAQ) and may include American Depository Receipts. We may invest up
to 10% of the Fund's assets in the securities of U.S.
small-capitalization companies.
***** No minimum rating requirement applied.
Commonly referred to as high yield, high risk, junk or below investment
grade fixed income securities.
****** Percent of Fund's net assets applied at all times.
35
<PAGE> 38
- --------------------------------------------------------------------------------
The Balanced Fund recently commenced operations and, therefore, has no
investment performance record. However, the Balanced Fund's investment
objectives, policies and strategies will be substantially similar, but not
necessarily identical, to those employed by the Sub-adviser with respect to
discretionary investment accounts ("Discretionary Accounts") managed by the
Sub-adviser. Although managed in substantially the same manner as the Balanced
Fund, the Discretionary Accounts may not invest as great a percentage of their
assets in fixed income senior securities as the Balanced Fund. As a result, the
Balanced Fund may have, or may in the past have had, greater exposure to fixed
income senior securities than the Discretionary Accounts. The chart herein shows
the historical investment performance for a composite of all of the
Sub-adviser's Discretionary Accounts ("Sub-adviser Composite") which were
managed by the Sub-adviser in substantially the same manner as the Balanced
Fund. The Sub-adviser Composite represents the total return of all Discretionary
Accounts net of the highest management fee charged and other account fees and
expenses. The inception dates of the Discretionary Accounts comprising
Sub-adviser Composite range from December 31, 1974 to September 30, 1997.
The Discretionary Accounts in the Sub-adviser Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Discretionary Accounts included in the Sub-adviser
Composite had been subject to the requirements imposed on mutual funds, their
performance might have been lower.
Total fees (after expense reimbursements) for the Balanced Fund are higher than
the highest management fees and other fees historically incurred by the
Discretionary Accounts comprising the Sub-adviser Composite. Consequently, the
performance results for the Sub-adviser Composite would have been lower if the
Sub-adviser Composite had the same expenses as the Balanced Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE BALANCED FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE BALANCED
FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------
31.17% 15.84% 14.44%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Balanced Fund is likely
to differ from the Sub-adviser's Discretionary Accounts in size, cash flow
patterns and certain tax matters. Accordingly the portfolio holdings of the
Balanced Fund may vary from those of the Sub-adviser's Discretionary Accounts
and the performance of the Balanced Fund may vary from that of the Sub-adviser
Composite.
36
<PAGE> 39
HIGH YIELD BOND FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN AND INCOME CONSISTENT
WITH CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN HIGH
YIELDING, HIGH RISK FIXED
INCOME SECURITIES
- -------------------------------------------------
Investment Category INCOME
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. The Sub-adviser was formed in April
1998 as successor to the Investment Management Division of American General
Corporation.
PORTFOLIO MANAGERS
The Fund is managed by Gordon Massie, who is assisted by Jeffrey Gary and Mark
Pauly, CFA. Mr. Massie, Senior Vice President, joined the Sub-adviser in April
1998. Previously, Mr. Massie was Director of High Yield Research at American
General Corporation from August 1985 to April 1998. Mr. Gary, Vice President,
joined the Sub-adviser in June 1998. From 1996 to April 1998, Mr. Gary was
Managing Director at Koch Capital Services, Inc. and from 1993 to 1996, Mr. Gary
served as Senior Analyst/Trader at Cargill Financial Services. Mr. Pauly, Senior
Investment Manager, High Yield, joined the Sub-adviser in April 1998. From
August 1994 to August 1996, Mr. Pauly served as the Manager of Portfolio
Forecasting and Analysis for American General Corporation and, from June 1992 to
August 1994, Mr. Pauly was Director of Marketing Services for American General
of New York.
INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of high yielding, high
risk fixed income securities.
INVESTMENT RISK
High yielding, high risk fixed income securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Because investment in lower rated fixed income securities
(commonly referred to as junk bonds) involves significantly greater credit risk,
market risk and interest rate risk than higher rated fixed income securities
achievement of the Fund's investment objective is dependent upon the
Sub-adviser's investment analysis. Accordingly, the Fund's investments may be
worth less than what the Fund paid for them. The Fund is also subject to risks
associated with foreign securities. For a discussion of these risks see "A Word
About Risk" in the prospectus.
INVESTMENT STRATEGY
The Fund invests in high yielding, high risk fixed income securities to provide
you with the highest possible total return from current income and capital gains
while preserving your investment.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Fixed income securities rated at least 65%
below Baa3 by Moody's and
below BBB- by S&P**
- --------------------------------------------
Foreign fixed income up to 35%
securities rated below Baa3
by Moody's and below BBB- by
S&P**
- --------------------------------------------
Fixed income securities rated up to 35%
Baa3 or higher by Moody's or
Rated BBB- or higher by
S&P***
- --------------------------------------------
Zero coupon securities (i.e., up to 15%
securities not paying
current cash interest)
- --------------------------------------------
Fixed income securities rated up to 15%
below Caa3 by Moody's or
CCC- by S&P***
- --------------------------------------------
Equity securities up to 20%
preferred stocks,
convertible securities,
common stocks and warrants
- --------------------------------------------
Illiquid securities**** up to 15%
- --------------------------------------------
Rule 144A securities (liquid) up to 30%
- --------------------------------------------
</TABLE>
* At time of purchase.
** Commonly referred to as high yield, high risk, junk
or below investment grade fixed income securities.
*** The Sub-adviser will not necessarily dispose of a fixed
income security when its rating is down graded to below investment grade.
**** Percent of Fund's net assets applied at all times.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
37
<PAGE> 40
STRATEGIC BOND FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN AND INCOME CONSISTENT
WITH CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN
INCOME PRODUCING SECURITIES
- -------------------------------------------------
Investment Category INCOME
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. The Sub-adviser was formed in April
1998 as successor to the Investment Management Division of American General
Corporation.
PORTFOLIO MANAGERS
The Fund is managed by Steven Guterman, who is assisted by Gordon Massie, Robert
Hiebert, CFA, Craig Mitchell, CFA, James J. Roth, George Steelman, Edwin
Ferrell, CFA and William Trimbur, Jr., CFA. Mr. Guterman, Executive Vice
President, joined the Sub-adviser in June 1998. Previously, Mr. Guterman was
with Salomon Brothers, Inc. from 1983 to May 1998, where he served as Managing
Director from 1996 to May 1998 and with Salomon Brothers Asset Management, Inc.
("SBAM"), where he was a Senior Portfolio Manager and head of the U.S. Fixed
Income Portfolio Group from 1990 to May 1998. In such capacity, Mr. Guterman
served as a portfolio manager of the Manufacturers Investment Trust Strategic
Bond Trust, the New England Zenith Fund Salomon Brothers Strategic Bond
Opportunities Series, the North American Funds Strategic Income Fund, the JNL
Series Trust Salomon Brothers/JNL Global Bond Series, the Salomon Brothers
Series Funds Inc. Strategic Bond Fund and the Nationwide Separate Account Trust
Nationwide Multi-Sector Bond. Mr. Massie, Senior Vice President, joined the
Sub-adviser in April 1998. Previously, Mr. Massie was Director of High Yield
Research at American General Corporation from August 1985 to April 1998. Mr.
Hiebert, Vice President and Senior Portfolio Manager, joined the Sub-adviser in
April 1998. Previously, Mr. Hiebert served as Senior Corporate Bond Trader at
American General Corporation from August 1995 to April 1998. Prior to that, Mr.
Hiebert served as Senior Trader with Cargill Financial Services Corp. from June
1992 to August 1995. Mr. Mitchell, Vice President and Senior Portfolio Manager,
joined the Sub-adviser in April 1998 and American General Corporation in May
1995. From July 1992 to April 1995, Mr. Mitchell served as Assistant Portfolio
Manager and, subsequently, Portfolio Manager at Providian Corporation. Mr. Roth,
Vice President, Fixed Income Trading, joined the Sub-adviser in April 1998.
Previously, Mr. Roth was Senior Portfolio Manager at American General
Corporation from August 1994 to March 1998. Prior to that, Mr. Roth was National
Sales Manager, Department of Capital Markets with the Resolution Trust
Corporation from February 1994 to July 1994 and Capital Markets Specialist from
June 1991 to January 1994. Mr. Steelman, Associate Portfolio Manager, joined the
Sub-adviser in April 1998. From April 1996 to April 1998, Mr. Steelman served as
Associate Portfolio Manager for American General Corporation. Mr. Steelman was
Senior Financial Analyst for American General Corporation's Treasury Department
from December 1994 to April 1996. Mr. Ferrell, Director, joined the Sub-adviser
in April 1998, where he has primary responsibility for sovereign political and
economic research. Previously, Mr. Ferrell was a sovereign analyst with The
Principal Financial Group from November 1993 to April 1998, where he was
involved in the co-ordination of its emerging market and non-dollar investment
efforts. Mr. Trimbur, Vice President and Investment Officer of the Series
Company, joined the Sub-adviser in May 1998. As Portfolio Manager for the
Sub-adviser, Mr. Trimbur is primarily responsible for the management and trading
of non-dollar denominated bonds and equities. Mr. Trimbur managed domestic bonds
and equities for VALIC from 1987 to 1991 and has been managing foreign bonds and
equities for VALIC since 1991.
INVESTMENT OBJECTIVE
Seeks the highest possible total return and income consistent with conservation
of capital through investment in a diversified portfolio of income producing
securities.
INVESTMENT RISK
A significant portion of the Fund's investments may be in high yielding, high
risk fixed income securities that are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Because investment in lower rated fixed income securities (commonly
referred to as junk bonds) involves significantly greater credit risk, market
risk and interest rate risk than higher rated fixed income securities
achievement of the Fund's investment objective is dependent upon the Sub-
adviser's investment analysis. Accordingly, the Fund's investments may be worth
less than what the Fund paid for them. The Fund is also subject to risks
associated with foreign securities. For a discussion of these risks see "A Word
About Risk" in the prospectus.
INVESTMENT STRATEGY
The Fund invests in a broad range of fixed income securities including
investment grade bonds, U.S.
Additional information
about THE FUND'S
INVESTMENTS provided
under "Types of
Investments."
38
<PAGE> 41
STRATEGIC BOND FUND
Fact Sheet
- --------------------------------------------------------------------------------
Government and agency obligations, mortgage backed securities, high yield bonds,
emerging market debt and non-dollar bonds, to provide you with the highest
possible total return from current income and capital gains, while preserving
your investment. A substantial portion of the Fund may be invested in high
yielding, high risk securities.
We follow the guidelines listed below for making the primary investment for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- --------------------------------------------
<S> <C>
Investment grade fixed income at least 65%
securities**, U.S.
Government and agency and
mortgage related securities,
U.S., Canadian and foreign
high yield, high risk fixed
income securities rated C or
higher by Moody's or CC or
higher by S&P and comparable
unrated securities***
- --------------------------------------------
Foreign non-dollar bonds up to 25%
(currency exposure may be
hedged or unhedged)
- --------------------------------------------
Equity securities up to 20%
preferred stocks,
convertible securities,
common stocks and warrants
- --------------------------------------------
Illiquid securities**** up to 15%
- --------------------------------------------
Rule 144A securities (liquid) up to 50%
- --------------------------------------------
</TABLE>
* At time of purchase.
** The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
*** Commonly referred to as high yield, high risk, junk
or below investment grade fixed income securities.
**** Percent of Fund's net assets applied at all times.
39
<PAGE> 42
DOMESTIC BOND FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal HIGH TOTAL RETURN CONSISTENT
WITH CONSERVATION OF CAPITAL
THROUGH INVESTMENTS
PRIMARILY IN INVESTMENT
GRADE FIXED INCOME
SECURITIES
- -------------------------------------------------
Investment Category INCOME
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
PORTFOLIO MANAGER
James S. Baker and James R. Mulally serve as the Fund's portfolio managers. Mr.
Baker, Vice President and fixed-income portfolio manager of an affiliate of the
Sub-adviser, has focused on the application of quantitative valuations to
investment grade bonds and portfolios for the Sub-adviser since 1987. Mr.
Mulally, Senior Vice President, Director and Chairman of the Sub-adviser's Fixed
Income Subcommittee, joined the Sub-adviser in 1980.
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments primarily in investment grade fixed income securities and
other income producing securities.
INVESTMENT RISK
The securities the Fund invests in involve certain risks, such as interest rate
risk, credit risk, market risk and risk associated with foreign securities. This
may cause the investments that the Fund owns to be worth less than what the Fund
paid. For a discussion of these risks see "A Word About Risk" in this
prospectus.
INVESTMENT STRATEGY
The Fund invests in high quality fixed income securities to provide you with the
highest possible total return from current income and capital gains while
preserving your investment. To increase the Fund's earning potential, we may use
a small part of the Fund's assets to make some higher risk investments.
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ---------------------------------------------
<S> <C>
Investment grade U.S. at least 65%
corporate fixed income
securities rated at least A
by Moody's or S&P**, and
securities issued or
guaranteed by the U.S.
Government***, Yankee
bonds, asset backed bonds,
mortgage backed bonds,
interest bearing short term
investments such as
commercial paper, bankers'
acceptances, bank
certificates of deposit and
other cash equivalents and
cash
- ---------------------------------------------
Non-U.S. investment grade up to 35%
intermediate and long-term
corporate fixed income
securities rated at least A
by Moody's or S&P** or of
comparable quality,
Eurodollar fixed income
securities****, securities
issued or guaranteed by the
Canadian Government, its
provinces or their
instrumentalities, interest
bearing short-term
investments, such as
commercial paper, bankers'
acceptances, bank
certificates of deposit and
other cash equivalents and
cash
- ---------------------------------------------
Other fixed income securities up to 25%
Corporate bonds rated less
than A by Moody's or S&P,
mortgage-related
securities, high yield,
high risk, bonds
- ---------------------------------------------
Rule 144A securities (liquid) up to 15%
- ---------------------------------------------
Illiquid Securities****** up to 15%
- ---------------------------------------------
</TABLE>
*At time of purchase.
**The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
***U.S. Government securities are securities issued or
guaranteed by the U.S. Government which are supported by at least one of
the following: (i) the full faith and credit of the U.S. Government (e.g.,
Government National Mortgage Association), (ii) the right of the issuer to
borrow from the U.S. Treasury (e.g., Federal Home Loan Banks), (iii) the
credit of the issuing government agency (e.g., Student Loan Marketing
Association) or (iv) the discretionary authority of the U.S. Government to
purchase certain obligations of the agency.
****The Fund currently intends to limit these
investments to no more than 20% of its total assets.
*****No minimum rating requirement applies.
Commonly referred to as high yield, high risk, junk or below investment
grade fixed income securities.
******Percent of Fund's net assets applied at all times.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
40
<PAGE> 43
- --------------------------------------------------------------------------------
The Domestic Bond Fund recently commenced operations and, therefore, has no
investment performance record. However, the Domestic Bond Fund's investment
objectives, policies and strategies will be substantially similar, but not
necessarily identical, to those employed by the Sub-adviser with respect to
discretionary investment accounts ("Discretionary Accounts") managed by the
Sub-adviser. The chart herein shows the historical investment performance for a
composite of all of the Sub-adviser's Discretionary Accounts ("Sub-adviser
Composite") which were managed by the Sub-adviser in substantially the same
manner as the Domestic Bond Fund. The Sub-adviser Composite represents the total
return of all Discretionary Accounts net of the highest management fee charged
and other account fees and expenses. The inception dates of the Discretionary
Accounts comprising Sub-adviser Composite range from December 31, 1972 to March
1, 1998.
The Discretionary Accounts in the Sub-adviser Composite are not subject to the
investment limitations, diversification requirements and other restrictions
imposed on registered mutual funds by the 1940 Act and Subchapter M of the
Internal Revenue Code. If the Discretionary Accounts included in the Sub-adviser
Composite had been subject to the requirements imposed on mutual funds, their
performance might have been lower.
Total fees (after expense reimbursements) for the Domestic Bond Fund are higher
than the highest management fees and other fees historically incurred by the
Discretionary Accounts comprising the Sub-adviser Composite. Consequently, the
performance results for the Sub-adviser Composite would have been lower if the
Sub-adviser Composite had the same expenses as the Domestic Bond Fund. The
performance of the Sub-adviser Composite has been calculated in accordance with
SEC performance standards. See "Performance and Yield Information" in the
Statement of Additional Information for a description of SEC performance
standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON A COMPOSITE OF THE
SUB-ADVISER'S DISCRETIONARY ACCOUNTS WHICH ARE MANAGED IN SUBSTANTIALLY THE SAME
MANNER AS THE DOMESTIC BOND FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE
DOMESTIC BOND FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF SUB-ADVISER COMPOSITE
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -------------------------------------------------------------
11.78% 6.61% 9.12%
- -------------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Domestic Bond Fund is
likely to differ from the Sub-adviser's Discretionary Accounts in size, cash
flow patterns and certain tax matters. Accordingly the portfolio holdings of the
Domestic Bond Fund may vary from those of the Sub-adviser's Discretionary
Accounts and the performance of the Domestic Bond Fund may vary from that of the
Sub-adviser Composite.
41
<PAGE> 44
CORE BOND FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal HIGHEST POSSIBLE TOTAL
RETURN CONSISTENT WITH
CONSERVATION OF CAPITAL
THROUGH INVESTMENTS IN
MEDIUM TO HIGH QUALITY FIXED
INCOME SECURITIES
- -------------------------------------------------
Investment Category INCOME
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. The Sub-adviser was formed in April
1998 as successor to the Investment Management Division of American General
Corporation.
PORTFOLIO MANAGER
Roger E. Hahn, CFA, serves as the Fund's portfolio manager and is assisted by
Craig A. Mitchell, CFA, James J. Roth and Leon A. Olver. Mr. Hahn, Senior Vice
President, joined the Sub-adviser in April 1998. Previously, Mr. Hahn was with
American General Corporation from 1983 to April 1998, where he was responsible
for portfolio management and asset/liability management. Mr. Mitchell, Vice
President and Senior Portfolio Manager, joined the Sub-adviser in April 1998 and
American General Corporation in May 1995. From July 1992 to April 1995, Mr.
Mitchell served as Assistant Portfolio Manager and, subsequently, Portfolio
Manager at Providian Corporation. Mr. Roth, Vice President, Fixed Income
Trading, joined the Sub-adviser in April 1998. Previously, Mr. Roth was Senior
Portfolio Manager at American General Corporation from August 1994 to March
1998. Prior to that, Mr. Roth was National Sales Manager, Department of Capital
Markets, with the Resolution Trust Corporation from February 1994 to July 1994
and Capital Markets Specialist from June 1991 to January 1994. Mr. Olver,
Portfolio Manager, has been with the Sub-adviser since April 1998. As Portfolio
Manager for the Sub-adviser, Mr. Olver is responsible for portfolio management
of domestic fixed income assets. Mr. Olver has been with VALIC since June 1995
and was with First Heights Bank as manager of research and analysis from May
1991 to June 1995. Mr. Olver serves as Vice President and Investment Officer of
the American General Series Portfolio Company and USLIFE Income Fund, Inc., each
a registered investment company managed by VALIC. He is also the Portfolio
Manager for USLIFE Income Fund, Inc. and the American General Series Portfolio
Company Government Securities Fund, the Capital Conservation Fund and the Asset
Allocation Fund.
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed income securities.
INVESTMENT RISK
The securities the Fund invests in involve certain risks, such as interest rate
risk, credit risk, market risk and risk associated with foreign securities. This
may cause the Fund's investments to be worth less than what the Fund paid for
them. For a discussion of these risks see "A Word About Risk" in this
prospectus.
INVESTMENT STRATEGY
The Fund invests in medium to high quality fixed income securities to provide
you with the highest possible total return from current income and capital gains
while preserving your investment. To increase the Fund's earning potential, we
may use a small part of the Fund's assets to make some higher risk investments.
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
42
<PAGE> 45
CORE BOND FUND
Fact Sheet
- --------------------------------------------------------------------------------
We follow the guidelines listed below for making the primary investments for the
Fund.
<TABLE>
<CAPTION>
Percent of
Fund's Total
Fund Investments Assets*
- ---------------------------------------------------
<S> <C>
Investment grade intermediate at least 65%
and long-term corporate
fixed income securities
rated at least Baa3 by
Moody's or BBB- by S&P** or
of comparable quality, U.S.
dollar denominated fixed
income securities issued by
foreign issuers***,
securities issued or
guaranteed by the U.S.
Government****, mortgaged
backed and other asset
backed securities, interest
bearing short-term
investments, such as
commercial paper, bankers'
acceptances, bank
certificates of deposit and
other cash equivalents and
cash
- ---------------------------------------------------
Other fixed income securities up to 10%
corporate bonds rated
below Baa3 by Moody's
and BBB- by S&P*****
- ---------------------------------------------------
Equity securities up to 20%
preferred stocks,
convertible securities,
common stocks and warrants
- ---------------------------------------------------
Illiquid securities****** up to 15%
- ---------------------------------------------------
Rule 144A securities (liquid) up to 30%
- ---------------------------------------------------
</TABLE>
* At time of purchase.
** The Sub-adviser will not necessarily dispose of a
fixed income security when its rating is down graded to below investment
grade.
*** The Fund currently intends to limit these
investments to no more than 40% of its total assets.
**** U.S. Government securities are securities issued or
guaranteed by the U.S. Government which are supported by at least one of
the following: (i) the full faith and credit of the U.S. Government
(e.g., Government National Mortgage Association), (ii) the right of the
issuer to borrow from the U.S. Treasury (e.g., Federal Home Loan Banks),
(iii) the credit of the issuing government agency (e.g., Student Loan
Marketing Association) or (iv) the discretionary authority of the U.S.
Government to purchase certain obligations of the agency.
***** Commonly referred to as high yield, high risk,
junk or below investment grade bonds.
****** Percent of Fund's net assets applied at all times.
43
<PAGE> 46
- --------------------------------------------------------------------------------
The Core Bond Fund recently commenced operations and, therefore, has no
investment performance record. However, the Fund's investment objectives,
policies and strategies will be substantially similar to those employed by the
Sub-adviser with respect to a separately managed account of the Sub-adviser
(Separately Managed Account). The chart herein shows the historical investment
performance for the Sub-adviser's Separately Managed Account which was managed
by the Sub-adviser in substantially the same manner as the Core Bond Fund. The
performance presented is net of management fees (after expense reimbursements)
charged by the Core Bond Fund. No other fees and expenses were incurred by the
Separately Managed Account. The inception date of the Separately Managed Account
was November 1, 1948. The Sub-adviser manages no other accounts or funds with
investment objectives, policies and strategies that are substantially similar to
those of the Core Bond Fund.
The Separately Managed Account was not subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code. If the
Separately Managed Account had been subject to the requirements imposed on
registered mutual funds, its performance might have been lower.
The performance of the Separately Managed Account has been calculated in
accordance with SEC performance standards. See "Performance and Yield
Information" in the Statement of Additional Information for a description of SEC
performance standards. THE PERFORMANCE INFORMATION HEREIN IS BASED ON THE
SUB-ADVISER'S SEPARATELY MANAGED ACCOUNT WHICH WAS MANAGED IN SUBSTANTIALLY THE
SAME MANNER AS THE CORE BOND FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE
CORE BOND FUND ITSELF.
AVERAGE ANNUAL TOTAL RETURN OF
SUB-ADVISER COMPOSITE
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
--------------------------------------------------
11.79% 7.00% 9.35%
--------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Core Bond Fund is
likely to differ from the Sub-adviser's Separately Managed Account in size, cash
flow patterns and certain tax matters. Accordingly the portfolio holdings and
performance of the Core Bond Fund may vary from those of the Sub-adviser's
Separately Managed Account.
44
<PAGE> 47
MONEY MARKET FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal INCOME THROUGH INVESTMENTS
IN SHORT-TERM MONEY MARKET
SECURITIES
- -------------------------------------------------
Investment Category STABILITY
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER
Teresa Moro has been this Fund's portfolio manager and Vice President and
Investment Officer of the Series Company since its inception. Since 1991, Ms.
Moro has served as Vice President and Investment Officer of American General
Series Portfolio Company, a registered investment company managed by VALIC and
as Portfolio Manager of the American General Series Portfolio Company Money
Market Fund ("AGSPC Money Market Fund").
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments.
INVESTMENT RISK
The short-term money market securities that this Fund invests in are high
quality investments, posing low credit and interest rate risk. The current yield
of the Fund will generally go up or down with changes in the level of interest
rates. The Fund uses the amortized cost method to value its portfolio securities
and tries to keep its net asset value at $1.00 per share. There can be no
assurance that the net asset value will be $1.00 per share at all times.
Because the risk to the money you invest is low, the potential for profit is
also low. The Fund may experience risks including interest rate risk, market
risk, credit risk and risk associated with foreign securities. For a discussion
of these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. We use 95% of the
Fund's total assets to buy short-term securities that are rated within the
highest rating category for short term debt obligations by at least two
nationally recognized rating services or unrated securities of comparable
investment quality. These eligible securities must mature in 13 months or less
and the Fund must have a dollar-weighted average portfolio maturity of 90 days
or less. These practices are designed to minimize any fluctuation in the value
of the Fund's portfolio.
The investments this Fund may buy include:
- Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- Certificates of deposit and other obligations of domestic banks that have
total assets in excess of $1 billion
- Commercial paper sold by corporations and finance companies
- Corporate debt obligations with remaining maturities of 13 months or less
- Repurchase agreements
- Money market instruments of foreign issuers payable in U.S. dollars (limited
to no more than 20% of the Fund's net assets)
- Asset-backed securities
- Loan participations
- Adjustable rate securities
- Illiquid and restricted securities*
- Rule 144A securities (liquid)
- ---------------
*Limited to 10% of the Fund's net assets at all times
Additional information
about THE FUND'S
INVESTMENTS is provided
under "Types of
Investments."
45
<PAGE> 48
- --------------------------------------------------------------------------------
The Money Market Fund recently commenced operations and, therefore, has no
investment performance record. However, the Money Market Fund's investment
objectives, policies and strategies are substantially similar to those of the
AGSPC Money Market Fund and it is managed by VALIC in substantially the same
manner and by the same individuals as the AGSPC Money Market Fund. The chart
herein shows the historical investment performance for the AGSPC Money Market
Fund for the period of April 1, 1988 through March 31, 1998, net of AGSPC Money
Market Fund's fees and expenses. The inception date for the AGSPC Money Market
Fund was December 16, 1985.
The AGSPC Money Market Fund is subject to the investment limitations,
diversification requirements and other restrictions imposed on registered mutual
funds by the 1940 Act and Subchapter M of the Internal Revenue Code.
Total fees (after expense reimbursements) for the Money Market Fund are higher
than the total fees incurred by the AGSPC Money Market Fund. Consequently, the
performance results for the AGSPC Money Market Fund would have been lower if the
AGSPC Money Market Fund had the same expenses as the Money Market Fund. The
performance of the AGSPC Money Market Fund has been calculated in accordance SEC
performance standards. See "Performance and Yield Information" in the Statement
of Additional Information for a description of SEC performance standards. THE
PERFORMANCE INFORMATION HEREIN IS BASED ON THE AGSPC MONEY MARKET FUND WHICH IS
MANAGED IN SUBSTANTIALLY THE SAME MANNER AND BY THE SAME INDIVIDUALS AS THE
MONEY MARKET FUND AND DOES NOT REFLECT THE PERFORMANCE OF THE MONEY MARKET FUND
ITSELF.
AVERAGE ANNUAL TOTAL RETURN
OF AGSPC MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- -----------------------------------------------------------
5.24% 4.51% 5.42%
- -----------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF $10,000
STIPULATED PAYMENT MADE APRIL 1, 1988
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE. THE PERFORMANCE
PRESENTED ABOVE DOES NOT REFLECT INSURANCE COMPANY SEPARATE ACCOUNT FEES AND
EXPENSES. Historical returns reflect investment management fees and other
operating expenses, if any. You should be aware that the Money Market Fund is
likely to differ from the AGSPC Money Market Fund in size, cash flow patterns
and certain tax matters. Accordingly, the portfolio holdings and performance of
the Money Market Fund may vary from those of the AGSPC Money Market Fund.
46
<PAGE> 49
GROWTH LIFESTYLE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH THROUGH INVESTMENTS
IN SERIES COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER
The Fund is managed by a team led by William Trimbur, Jr. Mr. Trimbur has been
this Fund's portfolio manager and Vice President and Investment Officer of the
Series Company since its inception. Since 1987, Mr. Trimbur has served as Vice
President and Investment Officer of American General Series Portfolio Company, a
registered investment company managed by VALIC. Kirsten E. Mires and Jeanie G.
Weathington assist Mr. Trimbur in the management of the Fund. Ms. Mires,
Investment Analyst, joined VALIC in October 1997. Prior to this, Ms. Mires was
an Investment Officer at Chase Securities of Texas from November 1995 to October
1997. From June 1995 to November 1995, Ms. Mires was employed as an Investment
Account Executive at Copeland Companies. Prior to this, Ms. Mires was a
Marketing Specialist at Transamerica Investment Management from July 1993 to
June 1995. Ms. Weathington, Investment Analyst, joined VALIC in April 1998.
Prior to this, Ms. Weathington was a Financial Analyst at Bank One from December
1996 to April 1998. From July 1994 to December 1996, Ms. Weathington was
Director-Portfolio Management at Goodman Financial Corporation. Prior to this,
Ms. Weathington was a Portfolio Analyst at JMC Capital Management, Inc. from
February 1994 to July 1994.
INVESTMENT OBJECTIVE
Seeks growth through investments in Series Company Funds. This Fund is suitable
for investors seeking the potential for capital growth that a fund investing
predominately in equity securities may offer.
INVESTMENT RISK
The Fund is a "non-diversified" investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
The allocation among the different Series Company Funds is designed to achieve
the Fund's investment objective and reduce risk. The allocation of assets within
the Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Series Company Funds and asset
classes based on VALIC's current outlook on financial markets and the world's
economies. Because the Fund's assets will be adjusted only periodically and only
within the investment ranges described herein, there should not be any sudden
large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Series
Company Funds in which it invests. Changes in the net asset values of the
underlying Series Company Funds affect this Fund's net asset value. Also, the
Fund's ability to meet its investment objective depends upon the ability of the
underlying Series Company Funds to meet their investment objective.
Investment in the Series Company Funds involves manager risk. The securities
that Series Company Funds invest in involve market risk, credit risk, interest
rate risk and risk associated with foreign investments. For a discussion of
these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges for this Fund.
<TABLE>
<S> <C>
International Equity Securities 25%-35%
Small Capitalization Equity
Securities 15%-25%
Medium Capitalization Equity
Securities 10%-20%
Large Capitalization Equity
Securities 25%-35%
Bonds 5%-15%
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Series Company
Funds have been selected to represent a reasonable spectrum of investment
options for the Fund. We have based the target investment percentages for the
Fund on the degree to which we believe the Underlying Series Company Funds, in
combination, to be appropriate for the Fund's investment objective. We may
change the asset allocation ranges, the particular Underlying Series Company
Funds in which the Fund may invest and the target investment percentages set
from time to time by VALIC, subject to the supervision of the Series Company's
Board of Trustees.
47
<PAGE> 50
GROWTH LIFESTYLE FUND
Fact Sheet
- --------------------------------------------------------------------------------
We intend to allocate the Fund's assets among the Series Company Funds as
follows:
<TABLE>
<S> <C>
American General International 15%
Value Fund
American General International 15%
Growth Fund
American General Small Cap 10%
Value Fund
American General Small Cap 10%
Growth Fund
American General Mid Cap 8%
Value Fund
American General Mid Cap 7%
Growth Fund
American General Large Cap 13%
Growth Fund
American General Large Cap 12%
Value Fund
American General Domestic 10%
Bond Fund
</TABLE>
48
<PAGE> 51
MODERATE GROWTH
LIFESTYLE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal GROWTH AND CURRENT INCOME
THROUGH INVESTMENTS IN
SERIES COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER
The Fund is managed by a team led by William Trimbur, Jr. Mr. Trimbur has been
this Fund's portfolio manager and Vice President and Investment Officer of the
Series Company since its inception. Since 1987, Mr. Trimbur has served as Vice
President and Investment Officer of American General Series Portfolio Company, a
registered investment company managed by VALIC. Kirsten E. Mires and Jeanie G.
Weathington assist Mr. Trimbur in the management of the Fund. Ms. Mires,
Investment Analyst, joined VALIC in October 1997. Prior to this, Ms. Mires was
an Investment Officer at Chase Securities of Texas from November 1995 to October
1997. From June 1995 to November 1995, Ms. Mires was employed as an Investment
Account Executive at Copeland Companies. Prior to this, Ms. Mires was a
Marketing Specialist at Transamerica Investment Management from July 1993 to
June 1995. Ms. Weathington, Investment Analyst, joined VALIC in April 1998.
Prior to this, Ms. Weathington was a Financial Analyst at Bank One from December
1996 to April 1998. From July 1994 to December 1996, Ms. Weathington was
Director-Portfolio Management at Goodman Financial Corporation. Prior to this,
Ms. Weathington was a Portfolio Analyst at JMC Capital Management, Inc. from
February 1994 to July 1994.
INVESTMENT OBJECTIVE
Seeks growth and current income through investments in Series Company Funds.
This Fund is suitable for investors who wish to invest in equity securities, but
who are not willing to assume the substantial market risks of the Growth
Lifestyle Fund.
INVESTMENT RISK
The Fund is a "non-diversified" investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
The allocation among the different Series Company Funds is designed to achieve
the Fund's investment objective and reduce risk. The allocation of assets within
the Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Series Company Funds and asset
classes based on VALIC's current outlook on financial markets and the world's
economies. Because the Fund's assets will be adjusted only periodically and only
within the investment ranges described below, there should not be any sudden
large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Series
Company Funds in which it invests. Changes in the net asset values of the
underlying Series Company Funds affect this Fund's net asset value. Also, the
Fund's ability to meet its investment objective depends upon the ability of the
underlying Series Company Funds to meet their investment objective.
Investment in the Series Company Funds involves manager risk. The securities
that Series Company Funds invest in involve market risk, credit risk, interest
rate risk and risk associated with foreign investments. For a discussion of
these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges for this Fund.
<TABLE>
<S> <C>
International Equity Securities 10%-20%
Small Capitalization Equity
Securities 10%-20%
Medium Capitalization Equity
Securities 10%-20%
Large Capitalization Equity
Securities 25%-30%
Bonds 20%-30%
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Series Company
Funds have been selected to represent a reasonable spectrum of investment
options for the Fund. We have based the target investment percentages for the
Fund on the degree to which we believe the Underlying Series Company Funds, in
combination, to be appropriate for the Fund's investment objective. We may
change the asset allocation ranges, the particular Underlying Series Company
Funds in which the Fund may invest and the target investment percentages set
from time to time by
49
<PAGE> 52
MODERATE GROWTH LIFESTYLE FUND
Fact Sheet
- --------------------------------------------------------------------------------
VALIC, subject to the supervision of the Series Company's Board of Trustees.
We intend to allocate the Fund's assets among the Series Company Funds as
follows:
<TABLE>
<S> <C>
American General International 8%
Value Fund
American General International 7%
Growth Fund
American General Small Cap 8%
Value Fund
American General Small Cap 7%
Growth Fund
American General Mid Cap 8%
Value Fund
American General Mid Cap 7%
Growth Fund
American General Large Cap 15%
Growth Fund
American General Large Cap 15%
Value Fund
American General Domestic 25%
Bond Fund
</TABLE>
50
<PAGE> 53
CONSERVATIVE GROWTH
LIFESTYLE FUND
Fact Sheet
<TABLE>
<S> <C>
- -------------------------------------------------
Investment Goal CURRENT INCOME AND LOW TO
MODERATE GROWTH THROUGH
INVESTMENTS IN SERIES
COMPANY FUNDS
- -------------------------------------------------
Investment Category LIFESTYLE
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
VALIC
PORTFOLIO MANAGER
The Fund is managed by a team led by William Trimbur, Jr. Mr. Trimbur has been
this Fund's portfolio manager and Vice President and Investment Officer of the
Series Company since its inception. Since 1987, Mr. Trimbur has served as Vice
President and Investment Officer of American General Series Portfolio Company, a
registered investment company managed by VALIC. Kirsten E. Mires and Jeanie G.
Weathington assist Mr. Trimbur in the management of the Fund. Ms. Mires,
Investment Analyst, joined VALIC in October 1997. Prior to this, Ms. Mires was
an Investment Officer at Chase Securities of Texas from November 1995 to October
1997. From June 1995 to November 1995, Ms. Mires was employed as an Investment
Account Executive at Copeland Companies. Prior to this, Ms. Mires was a
Marketing Specialist at Transamerica Investment Management from July 1993 to
June 1995. Ms. Weathington, Investment Analyst, joined VALIC in April 1998.
Prior to this, Ms. Weathington was a Financial Analyst at Bank One from December
1996 to April 1998. From July 1994 to December 1996, Ms. Weathington was
Director-Portfolio Management at Goodman Financial Corporation. Prior to this,
Ms. Weathington was a Portfolio Analyst at JMC Capital Management, Inc. from
February 1994 to July 1994.
INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in Series Company Funds. This Fund is suitable for investors who wish to invest
in equity securities, but who are not willing to assume the market risks of
either the Growth Lifestyle Fund or the Moderate Growth Lifestyle Fund.
INVESTMENT RISK
The Fund is a "non-diversified" investment company under the 1940 Act because it
invests in a limited number of the Underlying Funds. However, the Underlying
Funds themselves are diversified companies.
The allocation among the different Series Company Funds is designed to achieve
the Fund's investment objective and reduce risk. The allocation of assets within
the Fund is determined by VALIC according to fundamental quantitative analysis.
Modest shifts may be made among Underlying Series Company Funds and asset
classes based on VALIC's current outlook on financial markets and the world's
economies. Because the Fund's assets will be adjusted only periodically and only
within the investment ranges described below, there should not be any sudden
large-scale changes in the Fund's asset allocations.
The Fund's performance is directly related to the performance of the Series
Company Funds in which it invests. Changes in the net asset values of the
underlying Series Company Funds affect this Fund's net asset value. Also, the
Fund's ability to meet its investment objective depends upon the ability of the
underlying objectives.
Investment in the Series Company Funds involves manager risk. The securities
that Series Company Funds invest in involve market risk, credit risk, interest
rate risk and risk associated with foreign investments. For a discussion of
these risks, see "A Word About Risk" in this prospectus.
INVESTMENT STRATEGY
Asset allocation among the equity securities of international companies, large
capitalization companies, medium capitalization companies, small capitalization
companies and bonds is the most critical investment decision that you make as an
investor. Selecting the appropriate combination should be based on your personal
investment goals, time horizons and risk tolerance. The chart below reflects the
projected asset allocation ranges for this Fund.
<TABLE>
<S> <C>
International Equity Securities 5%-15%
Small Capitalization Equity
Securities 5%-15%
Medium Capitalization Equity
Securities 5%-15%
Large Capitalization Equity
Securities 25%-35%
Bonds 30%-50%
</TABLE>
This Fund is managed so that it can serve as a complete investment program for
you or as a core part of your larger portfolio. The Underlying Series Company
Funds have been selected to represent a reasonable spectrum of investment
options for the Fund. We have based the target investment percentages for the
Fund on the degree to which we believe the Underlying Series Company Funds, in
combination, to be appropriate for the Fund's investment objective. We may
change the asset allocation ranges, the particular Underlying Series Company
Funds in which the Fund may invest and the target investment percentages set
from time to time by
51
<PAGE> 54
CONSERVATIVE GROWTH LIFESTYLE FUND
Fact Sheet
- --------------------------------------------------------------------------------
VALIC, subject to the supervision of the Series Company's Board of Trustees.
We intend to allocate the Fund's assets among the Series Company Funds as
follows:
<TABLE>
<S> <C>
American General International 5%
Value Fund
American General International 5%
Growth Fund
American General Small Cap 5%
Value Fund
American General Small Cap 5%
Growth Fund
American General Mid Cap 5%
Value Fund
American General Mid Cap 5%
Growth Fund
American General Large Cap 15%
Growth Fund
American General Large Cap 15%
Value Fund
American General Domestic 40%
Bond Fund
</TABLE>
52
<PAGE> 55
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
EQUITY SECURITIES
Equity securities represent an ownership position in a company. The prices of
equity securities fluctuate based on changes in the financial condition of the
issuing company and on market and economic conditions. If you own an equity
security, you own a part of the company that issued it. Companies sell equity
securities to get the money they need to grow.
Stocks are one type of equity security. Generally, there are three types of
stocks:
Common stock -- Each share of common stock represents a part of the ownership of
the company. The holder of common stock participates in the growth of the
company through increasing stock price and receipt of dividends. If the company
runs into difficulty, the stock price can decline and dividends may not be paid.
Preferred stock -- Each share of preferred stock allows the holder to get a set
dividend before the common stock shareholders receive any dividends on their
shares.
Convertible preferred stock -- A stock with a set dividend which the holder may
exchange for a certain amount of common stock.
All of the Funds, except the Lifestyle Funds and the Money Market Fund, may
invest in common, preferred, and convertible preferred stock in accordance with
their investment strategies.
Stocks are not the only type of equity security. Other equity securities include
but are not limited to convertible securities, depository receipts, warrants,
rights and partially paid shares, investment company securities, real estate
securities, convertible bonds and foreign equity securities such as ADRs, GDRs
and EDRs. More information about these equity securities is set forth herein or
contained in the Statement of Additional Information.
FIXED INCOME SECURITIES
Fixed income securities include a broad array of short, medium and long term
obligations, including notes and bonds. Fixed income securities may have fixed,
variable, or floating rates of interest, including rates of interest that vary
inversely at a multiple of a designated or floating rate, or that vary according
to changes in relative values of currencies. Fixed income securities generally
involve an obligation of the issuer to pay interest on either a current basis or
at the maturity of the security and to repay the principal amount of the
security at maturity.
Bonds are one type of fixed income security and are sold by governments on the
local, state, and federal levels, and by companies. There are many different
kinds of bonds. For example, each bond issue has specific terms. U.S. Government
bonds are guaranteed to pay interest and principal by the federal government.
Revenue bonds are usually only paid from the revenue of the issuer. An example
of that would be an airport revenue bond. Debentures are a very common type of
corporate bond (a bond sold by a company). Payment of interest and return of
principal is subject to the company's ability to pay. Convertible bonds are
corporate bonds that can be exchanged for stock. The types of bonds that most
Funds may invest in include, but are not limited to: U.S. Government bonds and
investment grade corporate bonds (the Mid Cap Value Fund, the Balanced Fund, the
Domestic Bond Fund, the High Yield Bond Fund, the Strategic Bond Fund and the
Core Bond Fund may also invest in below investment grade bonds). For a
description of investment grade bonds and below investment grade bonds see "A
Word about Risk -- Market Risk" in this prospectus.
Investing in a bond is like making a loan for a fixed period of time at a fixed
interest rate. During the fixed period, the bond pays interest on a regular
basis. At the end of the fixed period, the bond matures and the investor usually
gets back the principal amount of the bond. Fixed periods to maturity are
categorized as short term (generally less than 12 months), intermediate (one to
10 years), and long term (10 years or more). Commercial paper is a specific type
of corporate or short term note. In fact, it's very short term, being paid in
less than 270 days. Most commercial paper matures in 50 days or less.
Bonds that are rated Baa by Moody's or BBB by S&P have speculative
characteristics. Bonds that are unrated or rated below Baa3 by Moody's or BBB-
by S&P (commonly referred to as high yield, high risk or "junk bonds") are
regarded, on balance, as predominantly speculative. Changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and principal in accordance with the terms of the
obligation than is the case with higher rated bonds. While such bonds may have
some quality and protective characteristics, these are outweighed by
uncertainties or risk exposures to adverse conditions. Lower rated bonds may be
more susceptible to real or perceived adverse economic and individual corporate
developments than would investment grade bonds. See "A Word about Risk -- Risks
Associated with Lower Rated Fixed Income Securities" herein.
For example, a projected economic downturn or the possibility of an increase in
interest rates may affect prices because such an event might lessen the ability
of highly leveraged high yield issuers to
ISSUED means the
Company (ISSUER) sold it
originally to the public.
For more information
about FIXED INCOME
SECURITIES AND THEIR
RATINGS, see the
Appendix herein and the
Statement of Additional
Information.
53
<PAGE> 56
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meet their principal and interest payment obligations, meet projected business
goals, or obtain additional financing. In addition, the secondary trading market
for lower rated bonds may be less liquid than the market for investment grade
bonds. This potential lack of liquidity may make it more difficult to accurately
value certain of these lower rated portfolio securities.
VALIC and the Sub-advisers will not necessarily dispose of a bond when its
ratings are down graded to below investment grade.
Bonds are not the only type of fixed income security. Other fixed income
securities include but are not limited to U.S. and foreign corporate fixed
income securities, including convertible securities (bonds, debentures, notes
and other similar instruments) and corporate commercial paper; mortgage-related
and other asset-backed securities; inflation-indexed bonds issued by both
governments and corporations; structured notes, including hybrid or "indexed"
securities, preferred or preference stock, catastrophe bonds, and loan
participations; bank certificates of deposit, fixed time deposits and bankers'
acceptances; repurchase agreements and reverse repurchase agreements; fixed
income securities issued by states or local governments and their agencies,
authorities and other instrumentalities; obligations of foreign governments or
their subdivisions, agencies and instrumentalities; and obligations of
international agencies or supranational entities. Fixed income securities may be
acquired with warrants attached. For more information about specific fixed
income securities see the Statement of Additional Information.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as those
of the Student Loan Marketing Association, the Tennessee Valley Authority and
the Small Business Authority are supported only by the credit of the
instrumentality. U.S. Government securities include securities that have no
coupons, or have been stripped of their unmatured interest coupons, individual
interest coupons from such securities that trade separately, and evidences of
receipt of such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. Because interest on
zero coupon securities is not distributed on a current basis but is, in effect,
compounded, zero coupon securities tend to be subject to greater market risk
than interest-paying securities of similar maturities. Custodial receipts issued
in connection with so-called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(STRIPs and CUBEs) are direct obligations of the U.S. Government.
Mortgage-Related Securities
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities.
Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property.
Payments of interest and principal on these securities are generally made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the mortgage loans which underlie the securities (net of fees paid
to the issuer or guarantor of the securities). Mortgage-related securities are
subject to interest rate risk and prepayment risk.
Payment of principal and interest on some mortgage pass-through securities may
be guaranteed by the full faith and credit of the U.S. Government (i.e.,
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (i.e., securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage-related securities created by non-governmental issuers
(such as commercial banks, private mortgage insurance companies and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. CMOs may be collateralized by whole mortgage loans
For more information
about MORTGAGE-RELATED
SECURITIES, see the
Statement of Additional
Information.
54
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- --------------------------------------------------------------------------------
or by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC,
or FNMA. CMOs are structured into multiple classes, with each class bearing a
different stated maturity. CMOs that are issued or guaranteed by the U.S.
Government or by any of its agencies or instrumentalities will be considered
U.S. Government securities by the Funds, while other CMOs, even if
collateralized by U.S. Government securities, will have the same status as other
privately issued securities for purposes of applying a Fund's diversification
tests.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities is relatively small compared to
the market for residential single-family mortgage-backed securities. Many of the
risks of investing in commercial mortgage-backed securities reflect the risks of
investing in the real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on real estate
markets, the ability of tenants to make loan payments, and the ability of a
property to attract and retain tenants. Commercial mortgage-backed securities
may be less liquid and exhibit greater price volatility than other types of
mortgage-related or asset-backed securities.
Mortgage-Related Securities include mortgage pass-through securities described
above and securities that directly or indirectly represent a participation in,
or are secured by and payable from, mortgage loans on real property, such as
mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities.
These securities may be structured in classes with rights to receive varying
proportions of principal and interest.
Asset-Backed Securities
Asset-backed securities are bonds or notes that are normally supported by a
specific property. If the issuer fails to pay the interest or return the
principal when the bond matures, then the issuer must give the property to the
bondholders or noteholders. All of the Funds in this prospectus, except the
Lifestyle Funds and the Mid Cap Value Fund, may invest in asset-backed
securities. Examples of assets supporting asset-backed securities include credit
card receivables, retail installment loans, home equity loans, auto loans, and
manufactured housing loans.
Loan Participations
A loan participation is an investment in a loan made to a U.S. company that is
secured by the company's assets. The assets must be, at all times, worth enough
money to cover the balance due on the loan. Major national and regional banks
make loans to companies and then sell the loans to investors. These banks don't
guarantee the companies will pay the principal and interest due on the loans.
All the Funds in this prospectus, other than the Lifestyle Funds and the Mid Cap
Value Fund, may invest in loan participations.
VARIABLE AMOUNT DEMAND MASTER NOTES
The Mid Cap Growth Fund, the Large Cap Value Fund, the Mid Cap Value Fund, the
Balanced Fund, the Domestic Bond Fund, the High Yield Bond Fund, the Strategic
Bond Fund and the Core Bond Fund may invest in variable amount demand master
notes. Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula.
STRUCTURED SECURITIES
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment.
The Balanced Fund, the Domestic Bond Fund, the High Yield Bond Fund, the
Strategic Bond Fund and the Core Bond Fund may invest in structured securities.
REAL ESTATE SECURITIES
All of the Funds in this prospectus, except the Lifestyle Funds and the Domestic
Bond Fund, may invest in real estate securities. Real estate securities are
securities issued by companies that invest in real estate or interests therein.
Certain Funds also may invest in real estate investment trusts ("REITs"). REITs
are generally publicly traded on the national stock exchanges and in the
over-the-counter market and have varying degrees of liquidity. More information
about REITs and real estate securities generally is contained in the Statement
of Additional Information.
For more information about
ASSET-BACKED SECURITIES
see the Statement of
Additional Information.
For more information
about LOAN PARTICIPANTS
see the Statement
of Additional Information.
For more information
about ILLIQUID AND RESTRICTED
SECURITIES see the
Statement of Additional
Information.
For more information
about REAL ESTATE
SECURITIES, see the Statement
of Additional Information.
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ILLIQUID AND RESTRICTED SECURITIES
An illiquid security is one that may not be frequently traded. If it must be
sold quickly, it may have to be sold at a loss. For example, if a fund owns a
stock that is not sold very often and the fund needs to sell this stock quickly,
it may have to offer the investment at a low price for someone to buy it.
A restricted security is one that has not been registered with the SEC and
therefore can't be sold in the public market. Restricted securities do include
securities eligible for resale under Rule 144A of the Securities Act of 1933.
Some Rule 144A securities may be liquid as determined by VALIC or a Sub-adviser.
These investments can be very risky because the Fund's ability to sell a
restricted security is very limited and Rule 144A securities deemed to be
illiquid will have the effect of increasing the amount of the Fund's investments
in illiquid securities. In addition, investing in Rule 144A securities could
have the effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
these securities. For more information about Rule 144A securities and the Fund's
investment limitations see the Statement of Additional Information.
All the Funds, except the Lifestyle Funds, may buy illiquid and restricted
securities, but are restricted as to how much money they may invest in them.
FOREIGN SECURITIES
All of the Funds, except the Lifestyle Funds, may invest in securities of
foreign issuers. Such foreign securities may be denominated in foreign
currencies, except with respect to the Money Market Fund and the Core Bond Fund
which may only invest in U.S. dollar-denominated securities of foreign issuers.
Securities of foreign issuers include obligations of foreign branches of U.S.
banks and of foreign banks, common and preferred stocks, fixed income securities
issued by foreign governments, corporations and supranational organizations, and
American Depository Receipts, European Depository Receipts and Global Depository
Receipts ("ADRs", "EDRs" and "GDRs"). See "Depository Receipts" below.
DEPOSITORY RECEIPTS
All of the Funds in this prospectus, except the Lifestyle Funds, may invest in
ADRs. ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank. ADRs in which a Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank. We
consider ADRs, EDRs and GDRs to be foreign securities. The International Growth
Fund, the Small Cap Growth Fund, the International Value Fund, the High Yield
Bond Fund, the Strategic Bond Fund, and the MidCap Value Fund may invest in EDRs
and/or GDRs. The Large Cap Growth Fund may invest in GDRs but may not invest in
EDRs.
INVESTMENT FUNDS
Some countries have laws and regulations that currently preclude direct foreign
investment in the securities of their companies. However, indirect foreign
investment in the securities of companies listed and traded on the stock
exchanges in these countries is permitted through investment funds which have
been specifically authorized. The International Growth Fund, the Large Cap
Growth Fund, the Small Cap Growth Fund, the International Value Fund and the Mid
Cap Value Fund may invest in investment funds.
FOREIGN CURRENCY
All of the Funds, except the Lifestyle Funds, the Large Cap Value Fund, the
Small Cap Value Fund, the Large Cap Growth Fund, the Mid Cap Growth Fund, the
Small Cap Growth Fund, the Balanced Fund, the Domestic Bond Fund, the Core Bond
Fund and the Money Market Fund, may buy and sell foreign currencies the same way
they buy and sell other investments. Funds buy foreign currencies when they
believe the value of the currency will increase. If it does increase, they sell
the currency for a profit. If it decreases they will experience a loss.
Generally, the International Growth Fund and the International Value Fund may
also buy and sell foreign currencies to settle transactions for foreign
securities bought or sold in the Fund.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will be on the market soon. The Funds negotiate the price with a
broker before it goes on the market. If the security ends up selling on the
market at a lower price than negotiated, the Funds may have a loss. If it sells
at a higher price, the Funds may have a profit.
For more information about
FOREIGN SECURITIES, see the
Statement of Additional
information.
For more information
about WHEN-ISSUED SECURITIES,
see the Statement
of Additional Information.
For more information about
MONEY MARKET SECURITIES OF
FOREIGN ISSUERS the Funds
may purchase, see the
Statement of Additional
Information.
For more information
about FOREIGN CURRENCY
EXCHANGE TRANSACTIONS, see
the Statement of
Additional Information.
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All of the Funds, other than the Lifestyle Funds, the Money Market Fund and the
Mid Cap Value Fund, may buy when-issued securities in accordance with their
investment strategy.
MONEY MARKET SECURITIES
All of the Funds may invest part of their assets in high quality money market
securities payable in U.S. dollars. A listing of the types of money market
securities in which the Money Market Fund may invest is in that Fund's Fact
Sheet. A money market security is high quality when it is rated in one of the
two highest credit categories by Moody's or S&P or another nationally recognized
rating service or if unrated, deemed high quality by VALIC or a Sub-adviser.
These high quality money market securities may include:
- Cash and cash equivalents
- Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities
- Certificates of deposit and other obligations of domestic banks having total
assets in excess of $1 billion
- Commercial paper sold by corporations and finance companies
- Corporate debt obligations with remaining maturities of 13 months or less
- Repurchase agreements, money market securities of foreign issuers if payable
in U.S. dollars, asset-backed securities, loan participations, and
adjustable rate securities
INVESTMENT COMPANIES
The Funds may invest in the securities of other open-end or closed-end
investment companies subject to the limitations imposed by the 1940 Act. A Fund
will indirectly bear its proportionate share of any management fees and other
expenses paid by an investment company in which it invests.
DERIVATIVES
Unlike stocks and bonds that represent actual ownership of that stock or bond,
derivatives are investments which "derive" their value from securities issued by
a company, government, or government agency. In certain cases, derivatives may
be purchased for non-speculative investment purposes or to protect ("hedge")
against a change in the price of the underlying security. There are some
investors who take higher risk ("speculate") and buy derivatives to profit from
a change in price of the underlying security. We may purchase derivatives to
hedge the investment portfolios and to earn additional income in order to help
achieve the Funds' objectives. Generally, we do not buy derivatives to
speculate.
The Funds, other than the Lifestyle Funds, the Money Market Fund, the Mid Cap
Growth Fund and the International Growth Fund may buy and sell derivatives, such
as futures and/or options.
Options
An option is the right to buy or sell any type of investment for a preset price
over a specific period of time.
Call Option
For example, you can buy an option from Mr. Smith that gives you the right to
buy 10 shares of stock X at $25.00 per share anytime between now and six weeks
from now. You believe stock X will be selling for more than $25.00 per share
between now and then. Mr. Smith believes it won't be. If you exercise this
option before it expires, Mr. Smith must sell you 10 shares of stock X at $25.00
per share.
On the other hand, you can sell an option to Mr. Smith that gives him the right
to buy 10 shares of stock X at $25.00 per share anytime between now and six
weeks from now. You believe stock X will be selling for less than $25.00 per
share between now and then. Mr. Smith believes it won't be. If he exercises this
option before it expires, you must sell to Mr. Smith 10 shares of stock X at
$25.00 per share.
Put Option
Or, you can buy an option from Mr. Smith that gives you the right to sell him 10
shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, you believe stock X will be selling for less than $25.00
per share between now and then. Mr. Smith thinks it will be selling for more.
Or, you can sell an option to Mr. Smith that gives him the right to sell to you
10 shares of X stock at $25.00 per share anytime between now and six weeks from
now. In this example, he believes stock X will be selling for less than $25.00
per share between now and then.
The Funds use stock and bond futures to invest cash and cash equivalents. When
certain levels are reached the Fund will sell the futures and buy stocks or
bonds.
All of the Funds except the Lifestyle Funds, the Money Market Fund, the Mid Cap
Growth Fund, and the International Growth Fund may invest in one or more of the
following types of futures and options:
- Write (sell) exchange traded covered put and call options on securities and
stock indices.
- Purchase exchange traded put and call options on securities and stock
indices.
For more information on put
and call options AND FINANCIAL
FUTURES CONTRACTS AND OPTIONS, see
the Statement of Additional
information.
57
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- Purchase and sell exchange traded financial futures contracts.
- Write (sell) covered call options and purchase exchange traded put and call
options on financial futures contracts.
- Write (sell) covered call options and purchase non-exchange traded call and
put options on financial futures contracts.
The International Value Fund, the Large Cap Value Fund, the High Yield Bond
Fund, the Strategic Bond Fund, the Core Bond Fund and the Small Cap Growth Fund
may write and purchase put and call options on securities and stock indices that
are not traded on an exchange.
The Funds, except the Lifestyle Funds, the Large Cap Value Fund, the Small Cap
Value Fund, the Large Cap Growth Fund, the Mid Cap Growth Fund, the Small Cap
Growth Fund, the Core Bond Fund and the Money Market Fund, may write and
purchase options on foreign currencies. These Funds also may purchase forward
foreign currency exchange contracts to protect against a decline in the value of
the U.S. dollar, to effect cross-hedges involving two non-U.S. currencies, or
for, settlement purposes.
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make
payments to the other party based on the change in market value of a specified
index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified index or asset. Additional
information about swap agreements is contained in the Statement of Additional
Information.
The Core Bond Fund, the Domestic Bond Fund, the Strategic Bond Fund, the Small
Cap Value Fund and the Small Cap Growth Fund may enter into swap agreements.
WARRANTS AND RIGHTS
Warrants and rights are instruments which entitle the holder to buy underlying
equity securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying securities.
The International Growth Fund, the Large Cap Value Fund, the Large Cap Growth
Fund, the Small Cap Value Fund, the International Value Fund, the Balanced Fund,
the Domestic Bond Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Core Bond Fund and the Small Cap Growth Fund are authorized to use warrants or
rights.
REPURCHASE AGREEMENTS
A repurchase agreement requires the seller of the security to buy it back at a
set price at a certain time. If a Fund enters into a repurchase agreement, it is
really making a short term loan (usually for one day to one week). A Fund may
enter into repurchase agreements only with well-established securities dealers
or banks that are members of the Federal Reserve System. All the Funds in this
prospectus may invest in repurchase agreements.
The risk in a repurchase agreement is the failure of the seller to be able to
buy the security back. If the value of the security declines, the Fund may have
to sell at a loss.
A repurchase agreement of more than 7 days duration is illiquid. A discussion of
repurchase agreements, illiquid securities and Fund limitations is contained in
the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS AND BORROWINGS
A reverse repurchase agreement involves the sale of a security by a Fund and its
agreement to repurchase the instrument at a specified time and price. Under a
reverse repurchase agreement, the Fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
The Fund generally will segregate assets determined to be liquid by the VALIC or
a Sub-adviser. In effect, these assets cover the Fund's obligations under
reverse repurchase agreements.
Certain Funds also may enter into dollar rolls. In a dollar roll transaction, a
Fund sells mortgage-backed or other securities for delivery in the current month
and simultaneously contracts to purchase substantially similar securities on a
specified future date. The time period from the date of sale to the date of
purchase under a dollar roll is known as the roll period. A Fund foregoes
principal and interest paid during the roll period on the securities sold in a
dollar roll. However, a Fund receives an amount equal to the difference between
the current sales price and the lower price for the future purchase as well as
by any interest earned on the proceeds of the securities sold.
If a Fund's positions in reverse repurchase agreements, dollar rolls or similar
transactions are not covered by liquid assets in a segregated account, as
described above, such transactions would be subject to the Funds' limitations on
borrowings. Apart from such transactions, a Fund will not borrow money, except
as provided in its investment restrictions. See "Investment Restrictions" in the
Statement of Additional
For more information about
SWAP AGREEMENTS, see the
Statement of Additional
Information.
For more information about
REPURCHASE AGREEMENTS, see the
Statement of Additional
Information.
For more information about
REVERSE REPURCHASE AGREEMENTS,
DOLLAR ROLLS AND BORROWINGS, see
the Statement of Additional
Information.
58
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Information for a complete listing of each Fund's investment restrictions.
A WORD ABOUT RISK
There are five basic types of investment risk you may be subject to:
- Market Risk
- Credit (Financial) Risk
- Interest Rate Risk
- Risk Associated with Foreign Securities
- Manager Risk (Lifestyle Funds only)
Generally stocks are considered to be subject to market risk, while debt
securities, such as U.S. government bonds and money market securities are
subject to interest rate risk. Other debt securities, such as corporate bonds,
involve both interest rate and credit (financial) risk. Lastly, risks associated
with foreign securities can involve political, currency and limited information
risks. Each of these types of investment risks, including manager risk, is
discussed below.
Market Risk
Market risk refers to the loss of capital resulting from changes in the prices
of investments. For example, market risk occurs when expectations of lower
corporate profits in general cause the broad market of stocks to fall in price.
When this happens, even though a company is experiencing growth in profits, the
price of its stock could fall.
Credit (Financial) Risk
Credit risk refers to the risk that the issuer of a bond may default or be
unable to pay interest or principal due on a bond.
To help the Funds' Investment Adviser or Sub-advisers decide which U.S.
corporate and foreign bonds to buy, they rely on Moody's and S&P (two nationally
recognized bond rating services), and on VALIC's and/or a Sub-adviser's own
research. This research lowers the risk of buying a bond of a company that may
not pay the interest and principal on the bond.
Certain of the Funds in this prospectus may buy bonds that are rated as
investment grade. There are four different levels of investment grade, from AAA
to BBB; see Description of Corporate Bond Ratings herein. All bonds with these
ratings are considered to have adequate ability to pay interest and principal.
All of the Funds in this prospectus may buy bonds issued by the U.S. Government.
The U.S. Government guarantees it will always pay principal and interest.
Risks Associated with Lower Rated Fixed Income Securities
Certain of the Funds also may purchase fixed income securities that are rated
below investment grade. Fixed income securities rated below BBB- by S&P or Baa3
by Moody's are considered to be below investment grade. Fixed income securities
with a below investment grade rating present a comparatively greater risk of
default in the timely payment of interest and principal than fixed income
securities rated as investment grade.
The lower rated but higher yielding fixed income securities purchased by the
Funds may be issued in connection with corporate restructurings, such as
leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events. In addition, high yield fixed income securities are often issued by
smaller, less creditworthy companies or by companies with substantial debt. The
securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor a
Sub-adviser relies on in evaluating lower-rated fixed income securities. The
analysis by the Sub-adviser of a lower rated security may also include
consideration of the issuer's experience and managerial strength, changing
financial condition, borrowing requirements or debt maturity schedules,
regulatory concerns, and responsiveness to changes in business conditions and
interest rates. The Sub-adviser also may consider relative values based on
anticipated cash flow, interest or dividend coverage, balance sheet analysis,
and earnings prospects.
The market for lower rated fixed income securities is relatively new and until
recently its growth has paralleled a long economic expansion. Past experience,
therefore, may not provide an accurate indication of future performance of this
market, particularly during an economic recession. An economic downturn or
increase in interest rates is likely to have a greater negative effect on the
ability of the issuers to pay principal and interest, meet projected business
goals, and obtain additional financing. These circumstances also may result in a
higher incidence of defaults compared to higher rated securities. As a result,
adverse changes in economic conditions and increases in interest rates may
adversely affect the market for lower rated fixed income securities, the value
of such securities in a Fund's portfolio, and, therefore, the Fund's net asset
value. As a
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result, investment in a Fund in lower rated fixed income securities is more
speculative than investment in a fund that invests primarily in higher rated
fixed income securities.
Although certain Funds intend generally to purchase lower rated securities that
have secondary markets, these markets may be less liquid and less active than
markets for higher rated securities. These factors may limit the ability of a
Fund to sell lower rated securities at their expected value. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of lower rated fixed income securities,
especially in a thinly traded market. If market quotations are not readily
available for the Fund's lower rated or nonrated securities, these securities
will be valued by a method the Sub-adviser believes accurately reflects fair
value. Judgment plays a greater role in valuing lower rated fixed income
securities than it does in valuing securities for which more extensive
quotations and last sale information are available.
See the Appendix to the prospectus for a description for corporate bond ratings.
Interest Rate Risk
Interest rate risk refers to the risk that fluctuations in interest rates may
affect the value of interest paying securities in a Fund. If a fund sells a bond
before it matures, it may lose money, even if the bond is guaranteed by the U.S.
Government. Say, for example, a fund bought an intermediate government bond last
year that was paying interest at a fixed rate of 6%. Now, intermediate
government bonds are paying interest at a rate of 7%. If the Fund wants to sell
the bond paying 6%, it will have to sell it at a discount (and realize a loss)
to attract buyers because they can buy new bonds paying 7% interest.
Manager Risk
The Lifestyle Funds, which do not hold securities directly, are subject to
manager risk, which is the possibility that the portfolio managers of the
underlying Funds may fail to execute the underlying Funds' investment strategies
effectively. As a result, the Lifestyle Funds may fail to meet their stated
objectives.
Risk Associated with Foreign Securities
Certain Funds may, subject to limits stated in the Fund's Fact Sheet, invest in
foreign securities including ADRs, EDRs and GDRs and securities of companies
domiciled in emerging market countries. A foreign security is a security issued
by an entity domiciled or incorporated outside of the U.S.
Among the principal risks of owning foreign securities:
Political risk -- the chance of a change in government and the assets of the
company being taken away.
Currency risk -- a change in the value of the foreign currency compared to the
dollar. If the foreign currency declines in value, your investment valued in
U.S. dollars will decline even if the value of the foreign stock or bond is
unchanged.
Limited information -- foreign companies generally are not regulated to the
degree U.S. companies are and may not report all of the information we are used
to getting. To minimize taxes they may not report some income or they may report
higher expenses.
INVESTMENT PRACTICES
Limitations
Each Fund has limitations on the percentage of its assets that it may allocate
to certain investments. These limits are determined by the Fund's investment
objectives and risk level.
Some Funds are restricted from buying certain types of investments altogether.
For example, the Money Market Fund may not invest in futures and options.
Each Fund's limitations are shown in the Investment Strategy section of its Fact
Sheet.
Lending Portfolio Securities
Each Fund, except the Lifestyle Funds, may lend its investment securities to
broker-dealers and other financial institutions to earn more money for the Fund.
Assets are placed in a special account by the borrower to cover the market value
of the securities on loan. The assets serving as collateral for the loan are
valued daily.
A risk of lending portfolio investments is that there may be a delay in the Fund
getting its investments back when a loaned security is sold.
The Funds will only make loans to broker-dealers and other financial
institutions approved by its Custodian, as monitored by VALIC and authorized by
the Board of Trustees.
For more information about
FOREIGN SECURITIES AND EMERGING
MARKETS, see the Statement
of Additional Information.
For more information about
LENDING PORTFOLIO SECURITIES, see
the Statement of Additional Information.
For more information about
INVESTMENT LIMITATIONS, see the
Statement of Additional
Information.
60
<PAGE> 63
ABOUT THE SERIES COMPANY
- --------------------------------------------------------------------------------
SERIES COMPANY SHARES
The Series Company is an open-end mutual fund and may offer shares of the Funds
for sale at any time. However, the Series Company offers shares of the Funds
only to registered and unregistered separate accounts of VALIC, and its
affiliates, or employee thrift plans maintained by VALIC or American General
Corporation.
The Series Company was organized on May 6, 1998, under the laws of the state of
Delaware as a business trust, and presently is authorized to sell 18 series.
Each of these series is authorized to issue an unlimited number of shares of
beneficial interest, par value $0.01 per share.
The Series Company does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares of the Series Company may by written request require a
meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting. The Series
Company will assist such holders in communicating with other shareholders of the
Series Company to the extent required by the 1940 Act. More detailed information
concerning the Series Company is set forth in the Statement of Additional
Information.
The Series Company's Declaration of Trust provides that no Trustee, officer or
shareholder of the Series Company shall be held to any personal liability, nor
shall resort be had to their private property for the satisfaction of any
obligation or liability of the Series Company but the assets of the Fund only
shall be liable.
As a participant, you do not directly buy shares of the Funds that make up the
Series Company. Instead, you buy units in either a registered or unregistered
separate account of VALIC or of its affiliates. When you buy these units, you
specify which Funds you want the separate account to invest your money in. The
separate account, in turn, buys the shares of the Funds according to your
instructions. Share certificates are not available. See your contract prospectus
for more information on the separate account associated with your contract.
When the separate accounts buy, sell, or transfer shares of the Funds, they do
not pay any charges related to these transactions.
None of the Funds currently foresees any disadvantages to participants arising
out of the fact that it may offer its shares to separate accounts of various
insurance companies to serve as the investment medium for their variable annuity
and variable life insurance contracts. Nevertheless, the Board of Trustees
intends to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. If such a conflict were to occur, one or
more insurance companies' separate accounts might be required to withdraw their
investments in one or more Funds and shares of another Fund may be substituted.
This might force a Fund to sell portfolio securities at disadvantageous prices.
In addition, the Board of Trustees may refuse to sell shares of any Fund to any
separate account or may suspend or terminate the offering of shares of any Fund
if such action is required by law or regulatory authority or is in the best
interests of the shareholders of the Fund.
As distributor, VAMCO sells shares of the Funds to the separate accounts. VAMCO
is a wholly owned subsidiary of VALIC and acts as a distributor under an
agreement it has with the Series Company. VAMCO does not charge the Series
Company or the separate accounts for its services. Also, VAMCO is not required
to sell a minimum number of shares to the separate accounts.
VAMCO sends orders to buy, sell or transfer shares to the Series Company's
transfer agent daily. The price of any share affected by the request is the next
net asset value calculated after the order is received.
For more information on how to participate, see your contract prospectus.
NET ASSET VALUE OF THE SERIES COMPANY SHARES
How Net Asset Value is Calculated
Here is how the Series Company calculates the net asset value of each Fund's
shares:
<TABLE>
<S> <C> <C> <C>
Step 1:
Total value of the Fund's
assets* (including money The Fund's
owed to the Fund but not yet Total Net Asset
collected) = Value
- - The Fund's liabilities
(including money owed by the
Fund but not yet paid)
Step 2:
The Fund's total net asset
value (from Step 1)
/ The total number of the
Fund's shares that are NET ASSET VALUE
outstanding. = PER SHARE
</TABLE>
- ---------------
* The Series Company uses the fair market value of a Fund's
investments to calculate the Fund's total value. However, it uses the
amortized cost method to determine the values of all the Money Market Fund's
investments and of any other Fund's short-term securities maturing within 60
days. The amortized cost method approximates fair market value.
If a Fund's portfolio includes investments that are not sold often or are not
sold on any exchanges, the Series Company's Board of Trustees or its delegate
will, in good faith, estimate fair market value of these investments.
THE VARIABLE ANNUITY
MARKETING COMPANY
(VAMCO) acts as the
Series Company's
distributor.
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<PAGE> 64
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When Net Asset Value is Calculated
The Series Company calculates the net asset value of each Fund's shares at
approximately 4pm EST each day the New York Stock Exchange is open. (The New
York Stock Exchange is open Monday through Friday but is closed on certain
federal and other holidays.)
Through the Distributor, the separate accounts send orders to the Series Company
to buy, sell, or transfer shares based on requests received from participants.
ADMINISTRATIVE SERVICE AGREEMENT
The Series Company has entered into an Administrative Service Agreement
("Service Agreement") with VALIC for the provision of recordkeeping and
shareholder services to retirement and employee benefit plans. Under the terms
of the Service Agreement, the Series Company pays VALIC monthly, a fee equal to
0.25% of the aggregate net asset value of each Fund, other than the Lifestyle
Funds, on an annual basis. Under the Service Agreement, VALIC provides
recordkeeping services, including the establishment and maintenance of plan and
participant accounts and records; participant services, including the provision
of customer service representatives to respond to participant inquiries and
process telephone transactions; and plan services, including the production of
plan documentation and summary plan descriptions.
DIVIDENDS AND CAPITAL GAINS
Dividends from Net Investment Income
Net investment income generally includes stock dividends received and bond
interest earned less expenses paid by a Fund. Each Fund pays dividends from net
investment income occasionally. Dividends from net investment income are
automatically reinvested for you into additional shares of the Fund. Each Fund,
except the Money Market Fund pays dividends quarterly. The Money Market Fund
pays dividends daily.
Distributions from Capital Gains
When a Fund sells a security for more than it paid for that security, a capital
gain results. Once a year, each Fund pays distributions from capital gains, as
long as total capital gains exceed total capital losses. Distributions from
capital gains are automatically reinvested for you into additional shares of the
Fund.
DIVERSIFICATION
Each Fund's diversification policy limits the amount that the Fund may invest in
certain securities. Each Fund's diversification policy is also designed to
comply with the diversification requirements of the Internal Revenue Code (the
"Code") as well as the 1940 Act.
All of the Funds, except the Lifestyle Funds, may, with respect to 75% of their
total assets, invest up to 5% of their total assets in a single issuer. An
issuer, or "company" does not include the U.S. Government or agencies of the
U.S. Government according to the Code and the 1940 Act. For diversification
purposes, repurchase agreements are considered to be issued by the U.S.
Government if backed by U.S. Government securities. Also, these Funds may not
own more than 10% of the voting securities of a company.
The Lifestyle Funds are "non-diversified" under the 1940 Act, which means that
the Lifestyle Funds are not limited in the proportion of their assets that may
be invested in the securities of a single issuer.
Also, the Money Market Fund may not invest more than 5% of its total assets in
any company rated as "second tier" by a national rating service (as described in
Types of Investments).
TAXES
By paying out all earnings as described in the Dividends and Capital Gains
section above and by complying with the diversification requirements under the
Code, each Fund expects to qualify as a Registered Investment Company (RIC)
under Subchapter M of the Code. By qualifying as a RIC the Fund will not have to
pay federal income taxes.
VOTING RIGHTS
One Vote Per Share
Each outstanding share has one vote on all matters that shareholders vote on. As
a participant, you vote on these matters indirectly by voting your units. The
way you vote your units as a participant depends on your contract. See your
contract prospectus for specific details.
When a matter comes up for vote, the separate account will vote its shares in
the same proportion
See the Statement of
Additional information and
your contract prospectus for
further tax discussions. You
should also consult your tax
advisor before investing.
62
<PAGE> 65
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as the unit votes it actually receives. If VALIC determines that it may, under
the current interpretation of the 1940 Act, vote shares directly instead of
voting through its units, it may decide to vote that way.
Controlling Shareholder
VALIC, as the initial sole shareholder of the Funds as of the commencement date
of the Series Company, controls each Fund. VALIC does not anticipate that its
initial control of each Fund will adversely effect the rights of future
shareholders.
Shareholder Meetings
Delaware law does not require the Series Company to hold regular, annual
shareholder meetings. But, the Series Company must hold shareholder meetings on
the following matters:
- to approve certain agreements as required by the 1940 Act;
- to change fundamental investment objectives in the Diversification section
and to change fundamental investment restrictions, above;
- to fill vacancies on the Series Company's Board of Trustees if the
shareholders have elected less than a majority of the Trustees.
Shareholder Communications
The Series Company will assist in shareholder communications.
YEAR 2000 RISKS
VALIC is in the process of modifying its systems to achieve Year 2000 readiness.
This endeavor is directed and managed by VALIC and monitored by the parent
company, American General Corporation. VALIC has developed clearly defined and
documented plans that have been implemented to minimize the risk of significant
negative impact on its operations.
These plans include the following activities: (1) perform an inventory of
VALIC's information technology and non-information technology systems; (2)
assess which items in the inventory may expose VALIC to business interruptions
due to Year 2000 issues; (3) test systems for Year 2000 readiness; (4) reprogram
or replace systems that are not Year 2000 ready; and (5) return the systems to
operation. VALIC expects to complete the forgoing activities for all critical
business systems relevant to the Series Company by December 1998. Accordingly,
VALIC has no contingency plans because any open Year 2000 issues may be
addressed in 1999.
In addition, the Series Company and VALIC have business relationships with
various third parties, each of which must also be Year 2000 ready. Therefore,
VALIC's plans also include assessing and attempting to mitigate the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. Due to the various stages of the third parties' Year 2000 readiness,
VALIC's efforts in this regard will extend through 1999.
Through June 30, 1998 VALIC has incurred and expensed $13 million (pretax)
related to Year 2000 readiness, including $6.5 million incurred during the first
six months of 1998. VALIC currently anticipates that it will incur future costs
of $3 million (pretax) for additional internal staff, third party vendors, and
other expenses to achieve Year 2000 readiness.
Due to the magnitude and complexity of this project, risks and uncertainties
exist. If conversion of VALIC's systems is not completed on a timely basis (due
to non-performance by significant third-party vendors or other unforeseen
circumstances), or if significant third parties fail to achieve Year 2000
readiness on a timely basis, the Year 2000 issue could have a material adverse
impact on the operations of VALIC and the Series Company.
EURO CONVERSION
The planned introduction of a single European currency, the Euro, on January 1,
1999 for participating European nations in the Economic and Monetary Union (EMU)
presents unique risks and uncertainties for investors in those countries. The
European Union currently consists of: Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
Spain, Sweden and the United Kingdom. The risks associated with the introduction
of the Euro include: (i) whether the payment and operational systems of banks
and other financial institutions will be ready by the scheduled launch date;
(ii) the creation of suitable clearing and settlement payment schemes for the
Euro; (iii) the legal treatment of outstanding financial contracts after January
1, 1999 that refer to existing currencies rather than the Euro; (iv) the
fluctuation of the Euro relative to non-Euro currencies during the transition
period from January 1, 1999 to December 31, 2000 and beyond; and (v) whether the
interest rate, tax and labor regimes of the European countries participating in
the Euro will converge over time. Further, the conversion of the currencies of
other EMU countries, such as the United Kingdom, and the admission of other
countries, including Central and Eastern European countries, to the EMU could
adversely affect the Euro. These or other factors may cause market disruptions
before or after the introduction of the Euro and could adversely affect the
value of foreign securities and currencies held by the Funds. The Euro
conversion also raises tax issues such as whether the conversion of a non-Euro
currency to the
63
<PAGE> 66
- --------------------------------------------------------------------------------
Euro creates a "realization event" for a financial instrument denominated in the
non-Euro currency and the appropriate time to recognize any gain or loss.
Depending on how the tax authorities rule on these issues, the Euro conversion
may result in taxable gain or loss on non-Euro denominated instruments that have
not been sold by the Funds at the time of conversion.
Additionally, while it is not possible to predict the impact of the Euro
implementation plan on the Funds, the transition to the Euro may change the
economic environment and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries participating
in the EMU as a single entity, and VALIC and the Sub-advisers may need to adapt
their investment strategies accordingly. The process of implementing the Euro
also may adversely affect financial markets world-wide and may result in changes
in the relative strength and value of the U.S. dollar or other major currencies.
Also, the transition to the Euro is likely to have a significant impact on
fiscal and monetary policy in the participating countries and may produce
unpredictable effects on trade and commerce generally. These resulting
uncertainties could create increased volatility in financial markets world-wide.
REPORTS
The Series Company sends Annual Reports containing audited financial statements,
Semi-Annual Reports containing unaudited financial statements, and proxy
materials to contract owners or participants. Also, the Series Company includes
an Annual Report with each Statement of Additional Information it sends out.
If you have any questions about the Annual or Semi-Annual Reports, call or write
to the Series Company at the phone number / address found on the cover page of
this prospectus.
64
<PAGE> 67
APPENDIX -- DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Nonrated: Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believe
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
65
<PAGE> 68
- --------------------------------------------------------------------------------
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate bonds
as they do for preferred stock, except in the case of Moody's preferred stock
ratings, the initial letter rating is not capitalized. While the descriptions
are tailored for preferred stocks, the relative quality distinctions are
comparable to those described above for corporate bonds.
66
<PAGE> 69
APPENDIX -- DESCRIPTION OF COMMERCIAL PAPER RATINGS
- --------------------------------------------------------------------------------
A AND PRIME COMMERCIAL PAPER RATINGS.
Commercial paper rated A by S&P has the following characteristics: Liquidity
ratios are adequate to meet cash requirements. Long-term senior debt is rated
"A" or better, although, in some cases "BBB" credits may be allowed. The issuer
has access to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. The rating is described by S&P as the investment grade category,
the highest rating classification. Relative strength or weakness of the above
factors determine whether the issuer's commercial paper is rated A-1, A-2 or
A-3.
Among the factors considered by Moody's in assigning commercial paper ratings
are the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. Relative differences in
strengths and weaknesses in respect of these criteria establish a rating in one
of three classifications. The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Its other two ratings, Prime-2 and Prime-3 are
designated Higher Quality and High Quality, respectively.
67
<PAGE> 70
Please tear off, complete and return the form below to Suite A3-01,
Communications Unit, The Variable Annuity Life Insurance Company, 2929 Allen
Parkway, Houston, Texas 77019 to order a Statement of Additional Information for
the Series Company. A Statement of Additional Information may also be ordered by
calling 1-800-44-VALIC.
................................................................................
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Please send me a free copy of the Statement of Additional Information for American General Series Portfolio Company 3.
Name: --------------------------------------------------- GA #:-------------------------------------------------
Address: Policy #:----------------------------------------------
-------------------------------------------------
- -----------------------------------------------------------
Social Security Number: --------------------------------
- -----------------------------------------------------------
</TABLE>
<PAGE> 71
(This page intentionally left blank)
<PAGE> 72
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INVESTMENT ADVISER:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
INVESTMENT SUB-ADVISERS:
American General Investment Management, L.P.
2929 Allen Parkway
Houston, Texas 71019
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty St., 36th Floor
New York, New York 10006
Brown Capital Management, Inc.
809 Cathedral Street
Baltimore, Maryland 21201
Capital Guardian Trust Company
333 South Hope Street
Los Angeles, California 90071
Fiduciary Management Associates, Inc.
55 West Monroe Street
Suite 2550
Chicago, Illinois 60603
Goldman Sachs Asset Management
One New York Plaza
New York, New York 10004
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Jacobs Asset Management
200 East Broward Boulevard
Suite 1920
Fort Lauderdale, Florida 33301
Neuberger&Berman Management Inc.
605 Third Avenue
Second Floor
New York, New York 10158-0180
State Street Global Advisors
2 International Place
Boston, Massachusetts 02110
DISTRIBUTOR:
The Variable Annuity Marketing Company
2929 Allen Parkway
Houston, TX 77019
CUSTODIAN:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INDEPENDENT AUDITORS:
Ernst & Young LLP
1221 McKinney Street
Houston, Texas 77010
TRANSFER AND SHAREHOLDER SERVICE AGENT:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
TRUSTEES OFFICERS
-------- --------
<S> <C> <C>
Judith L. Craven Thomas L. West, Jr. Chairman
Timothy J. Ebner John A. Graf President
Gustavo E. Gonzales, Jr. Craig R. Rodby Vice Chairman
John A. Graf Michael G. Atnip Executive Vice President
Norman Hackerman Joe C. Osborne Executive Vice President
John Wm. Lancaster Peter V. Tuters Senior Investment Officer
Ben H. Love Teresa S. Moro Vice President and Investment Officer
John E. Maupin, Jr. William Trimbur, Jr. Vice President and Investment Officer
F. Robert Paulsen Brent C. Nelson Vice President
Craig R. Rodby Cynthia A. Toles Vice President and Secretary
R. Miller Upton Nori L. Gabert Vice President and Assistant Secretary
Thomas L. West, Jr. Maruti D. More Vice President-Investments
Gregory R. Seward Treasurer
Kathryn A. Pearce Controller
Cynthia A. Gibbons Assistant Vice President
Jaime M. Sepulveda Assistant Treasurer
Donna L. Hathaway Assistant Controller
Earl E. Allen, Jr. Assistant Treasurer
</TABLE>
Printed Matter
Printed in U.S.A.
VA 10832 VER. 9/98 Recycled Paper LOGO
- --------------------------------------------------------------------------------
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<PAGE> 73
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
AMERICAN GENERAL LARGE CAP GROWTH
AMERICAN GENERAL MID CAP GROWTH FUND
AMERICAN GENERAL SMALL CAP GROWTH FUND
AMERICAN GENERAL INTERNATIONAL VALUE FUND
AMERICAN GENERAL LARGE CAP VALUE FUND
AMERICAN GENERAL MID CAP VALUE FUND
AMERICAN GENERAL SMALL CAP VALUE FUND
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
AMERICAN GENERAL BALANCED FUND
AMERICAN GENERAL HIGH YIELD BOND FUND
AMERICAN GENERAL STRATEGIC BOND FUND
AMERICAN GENERAL DOMESTIC BOND FUND
AMERICAN GENERAL CORE BOND FUND
AMERICAN GENERAL MONEY MARKET FUND
AMERICAN GENERAL GROWTH LIFESTYLE FUND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
--------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------
PART B
SEPTEMBER 21, 1998
This Statement of Additional Information is not a prospectus and contains
information in addition to that in the Prospectus for American General Series
Portfolio Company 3 (the "Series Company"). It should be read in conjunction
with the Prospectus. The Statement of Additional Information and the related
Prospectus are dated September 21, 1998. For an individual interested in a
variable annuity contract issued by The Variable Annuity Life Insurance Company
("VALIC") a Prospectus may be obtained by calling 1-800-44-VALIC or writing the
Series Company or The Variable Annuity Marketing Company ("VAMCO") at 2929 Allen
Parkway, Houston, Texas 77019. Shares in the Series Company are available to the
public only through the purchase of certain variable annuity contracts or
variable life insurance policies issued and employee thrift plans maintained by
VALIC and its affiliates.
<PAGE> 74
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History............................. 4
Performance and Yield Information........................... 4
Average Annual Total Return............................... 4
Portfolio Total Return.................................... 5
Index Total Return........................................ 5
Seven Day Yields.......................................... 5
30 Day Current Yield...................................... 5
Performance Returns of Certain Investment Companies and
Private Accounts Other Than the Funds.................. 6
Investment Restrictions..................................... 8
American General International Growth Fund................ 8
American General Large Cap Growth Fund.................... 9
American General Mid Cap Growth Fund...................... 10
American General Small Cap Growth Fund.................... 11
American General International Value Fund................. 12
American General Large Cap Value Fund..................... 13
American General Mid Cap Value Fund....................... 15
American General Small Cap Value Fund..................... 16
American General Socially Responsible Fund................ 17
American General Balanced Fund............................ 18
American General High Yield Bond Fund..................... 19
American General Strategic Bond Fund...................... 19
American General Core Bond Fund........................... 19
American General Domestic Bond Fund....................... 20
American General Money Market Fund........................ 21
American General Growth Lifestyle Fund.................... 22
American General Moderate Growth Lifestyle Fund........... 22
American General Conservative Growth Lifestyle Fund....... 22
Investment Practices........................................ 23
Repurchase Agreements..................................... 23
Lending Portfolio Securities.............................. 24
Borrowing, Reverse Repurchase Agreements and Dollar
Rolls.................................................. 24
Convertible Securities.................................... 25
Foreign Securities........................................ 26
Brady Bonds............................................... 27
Sovereign Debt Obligations................................ 27
Performance Indexed Paper................................. 28
Bank Obligations.......................................... 28
International Bonds....................................... 29
Emerging Markets.......................................... 29
Foreign Currency Exchange Transactions.................... 30
Standard and Poor's Depository Receipts................... 30
When-Issued Securities.................................... 30
Fixed Income Securities................................... 30
Lower Rated Fixed Income Securities....................... 31
Zero Coupon Fixed Income Securities....................... 31
Inflation-Indexed Bonds................................... 32
Hybrid Instruments........................................ 33
Catastrophe Bonds......................................... 33
Real Estate Securities and Real Estate Investment
Trusts................................................. 34
Warrants.................................................. 34
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C>
Swap Agreements........................................................................................... 34
Structured Notes.......................................................................................... 36
Eurodollar Obligations.................................................................................... 36
Mortgage-Related Securities............................................................................... 36
Commercial Mortgage-Backed Securities..................................................................... 39
Other Mortgage-Related Securities......................................................................... 39
Asset-Backed Securities................................................................................... 40
Loan Participations....................................................................................... 40
Adjustable Rate Securities................................................................................ 40
Illiquid Securities....................................................................................... 41
Rule 144A Securities...................................................................................... 41
Options on Securities and Securities Indices.............................................................. 42
Writing Covered Call and Put Options and Purchasing Call and Put Options.................................. 43
Financial Futures Contracts............................................................................... 45
Options on Financial Futures Contracts.................................................................... 46
Certain Additional Risks of Options and Financial Futures Contracts....................................... 47
Limitations............................................................................................... 48
Short Sales and Short Sales Against the Box............................................................... 49
Money Market Securities of Foreign Issuers................................................................ 49
Investment Adviser.......................................................................................... 49
Investment Sub-Advisers..................................................................................... 50
Portfolio Transactions and Brokerage........................................................................ 52
Offering, Purchase and Redemption of Fund Shares............................................................ 54
Determination of Net Asset Value............................................................................ 55
Calculation of Yield for the Money Market Fund.............................................................. 57
Accounting and Tax Treatment................................................................................ 57
Calls and Puts............................................................................................ 57
Financial Futures Contracts............................................................................... 58
Subchapter M of the Internal Revenue Code of 1986......................................................... 58
Section 817(h) of the Code................................................................................ 58
Other Information........................................................................................... 59
Shareholder Reports....................................................................................... 59
Voting and Other Rights................................................................................... 59
Custody of Assets......................................................................................... 59
Independent Auditors...................................................................................... 60
Trustees and Officers....................................................................................... 60
Financial Statements........................................................................................ 64
</TABLE>
3
<PAGE> 76
GENERAL INFORMATION AND HISTORY
American General Series Portfolio Company 3 (the "Series Company") was
organized as a Delaware business trust on May 6, 1998 by VALIC and is registered
under the Investment Company Act of 1940, as amended, (the "1940 Act") as an
open-end, management investment company. Pursuant to an Investment Advisory
Agreement with the Series Company and subject to the authority of the Series
Company's Board of Trustees, VALIC serves as the Series Company's investment
adviser and conducts the business and affairs of the Series Company.
Additionally, VALIC has engaged investment sub-advisers to provide investment
sub-advisory services for each Fund other than the American General Socially
Responsible Fund, the American General Money Market Fund, the American General
Conservative Growth Lifestyle Fund, the American General Moderate Growth
Lifestyle Fund and the American General Growth Lifestyle Fund, subject to
VALIC's control, direction and supervision. The Series Company consists of
eighteen separate investment portfolios (hereinafter collectively referred to as
the "Funds" or individually as a "Fund"), each of which is, in effect, a
separate mutual fund issuing its own separate class of shares of beneficial
interest.
The Series Company issues shares of interest of each Fund to registered and
unregistered separate accounts of VALIC and its affiliates to fund variable
annuity or variable life contracts (the "Contracts"). Currently the Series
Company acts as an investment vehicle for assets of VALIC's Separate Account, a
unit investment trust registered as an investment company under the 1940 Act.
Additionally, retirement plans maintained by VALIC and American General
Corporation may own shares of certain of the Funds.
The Series Company and VALIC have Codes of Ethics which establish for their
officers, directors or trustees, and certain employees procedures and
restrictions as to those individual's personal investment trading activities.
PERFORMANCE AND YIELD INFORMATION
The Funds have not commenced operations and, therefore, have no
performance. Accordingly, the performance information for each Fund included in
the Prospectus is the performance of either: (i) a mutual fund with similar
investment objectives, policies and strategies as the Fund that is currently
managed by the same individuals; (ii) an unregistered discretionary account of
the Sub-adviser with similar investment objectives, policies and strategies;
and/or (iii) a composite of such registered management investment companies or
unregistered discretionary accounts. The inception date indicated is that of the
other mutual fund, account or composite. See the Prospectus for detailed
information relating to the mutual fund, unregistered discretionary account or
composite.
The total return of a mutual fund, discretionary account or composite
("Average Annual Total Return"), is the total return of the mutual fund,
discretionary account or composite before expenses ("Portfolio Total Return").
The Series Company may compare Portfolio Total Return to the total return of the
mutual fund, discretionary account or composite's benchmark index ("Index Total
Return"). The difference between Portfolio Total Return and Index Total Return
is referred to as "tracking difference." Tracking difference represents the
amount that the return on the investment portfolio (which results from VALIC or
the Sub-adviser's investment selection) deviates from its benchmark's Index
Total Return. If you invest in a Fund through an annuity contract, you should be
aware the performance presented does not reflect contract charges or separate
account charges which will reduce Fund values which are available to
Participants. Information about Separate Account performance is available in the
applicable contract prospectus.
AVERAGE ANNUAL TOTAL RETURN
Average Annual Total Return quotations for periods of 1, 3, 5, and 10
years, or, since inception of a mutual fund, discretionary account or composite,
are calculated according to the following formula:
P (1+T)(n) = ERV
4
<PAGE> 77
Where:
<TABLE>
<S> <C>
P = A hypothetical initial Purchase Payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 Purchase
Payment made at the beginning of the first period.
</TABLE>
Average Annual Total Return reflects the deduction of mutual fund,
discretionary account or composite expenses and assumes that all dividends and
distributions are reinvested when paid.
PORTFOLIO TOTAL RETURN
Portfolio Total Return quotations for periods of 1, 3, 5, and 10 years, or,
since inception are calculated by adding to the Average Total Annual Return
(described above) the expenses of the mutual fund, discretionary account or
composite. Expenses of the Fund are calculated at the end of each mutual fund,
discretionary account or composite's fiscal year and are expressed as a
percentage of average net assets. Expenses as a percentage of average net assets
are prorated equally over the months in the fiscal year in which the ratio was
calculated when determining expenses for periods crossing over fiscal years.
INDEX TOTAL RETURN
Index Total Return quotations for periods 1, 3, 5, and 10 years, or, since
inception, are calculated by determining the percentage change in value of the
benchmark index over the applicable period including reinvestment of dividends
and interest as applicable. Index Total Return is calculated according to the
formula described above for Average Annual Total Return, however it does not
include an expense component; if an expense component were included the return
would be lower.
SEVEN DAY YIELDS
The American General Money Market Fund may quote a Seven Day Current Yield
and a Seven Day Effective Yield. The Seven Day Current Yield is calculated by
determining the total return for the current seven day period ("based period
return") and annualizing the base period return by dividing by seven days, then
multiplying the result by 365 days. The Seven Day Effective Yield annualizes the
base period return while compounding weekly the base period return according to
the following formula:
Seven Day Effective Yield = [(Base Period Return + 1)(365/7)-1]
30 DAY CURRENT YIELD
The American General Domestic Bond Fund, the American General High Yield
Bond Fund, the American General Strategic Bond Fund and the American General
Core Bond Fund may quote a 30 Day Current Yield which is determined based on the
current 30 day period, according to the following standardized formula:
Yield = 2[(1 + NII )(6)-1]
S X NAV
Where:
<TABLE>
<S> <C> <C>
NII = Net investment income (interest income, plus dividend
income, plus other income, less fund expenses.
S = Average daily shares outstanding.
NAV = Net asset value per share on the last day of the period.
</TABLE>
5
<PAGE> 78
PERFORMANCE RETURNS OF CERTAIN INVESTMENT COMPANIES
AND PRIVATE ACCOUNTS OTHER THAN THE FUNDS*
MARCH 31, 1998
<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 3 YEAR 5 YEAR INCEPTION (A)
--------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
AMERICAN GENERAL INTERNATIONAL GROWTH FUND 5/1/92
Templeton International Fund Average Annual
Total Return 10.14% 14.13% -- 12.33%
Templeton International Fund Portfolio Total
Return 10.85% 14.96% -- 13.28%
Salomon Brothers Primary Market Index 20.34% 10.92% -- 9.97%
AMERICAN GENERAL INTERNATIONAL GROWTH FUND 10/1/95
Composite Average Annual Return 19.02% -- -- 22.04%
Composite Portfolio Total Return 19.77% -- -- 22.79%
Salomon Brothers Primary Market Index 20.34% -- -- 13.68%
AMERICAN GENERAL LARGE CAP GROWTH 11/11/91
Composite Average Annual Total Return 51.22% 35.03% 26.08% 22.95%
Composite Portfolio Total Return 51.89% 35.64% 26.65% 23.51%
Russell 1000 Growth Index 48.32% 32.38% 21.96% 20.73%
AMERICAN GENERAL MID CAP GROWTH FUND 1/1/93
Composite Average Annual Total Return 47.95% 30.62% 23.51% 21.86%
Composite Portfolio Total Return 48.26% 31.13% 24.09% 22.44%
Russell Midcap Growth Index 42.36% 24.90% 18.41% 17.02%
AMERICAN GENERAL SMALL CAP GROWTH FUND 9/1/94
Composite Average Annual Total Return 53.70% 33.60% -- 29.20%
Composite Portfolio Total Return 55.50% 35.20% -- 30.70%
Russell 2000 Growth Index 41.17% 20.40% -- 12.94%
AMERICAN GENERAL INTERNATIONAL VALUE FUND 12/31/78
Composite Average Annual Total Return 24.02% 18.71% 14.85% 11.35%
Composite Portfolio Total Return 24.93% 19.59% 15.71% 12.18%
Salomon Brothers Primary Market Index 20.34% 10.92% 11.10% 5.34%
AMERICAN GENERAL LARGE CAP VALUE FUND 8/1/92
Discretionary Account Average Annual Total
Return 58.95% 36.98% 24.14% 24.04%
Discretionary Account Portfolio Total Return 59.33% 37.32% 24.44% 24.35%
Russell 1000 Value Index 47.17% 32.37% 21.81% 18.52%
AMERICAN GENERAL MID CAP VALUE FUND 1/20/75
Neuberger&Berman Partners Fund Average Annual
Total Return 41.54% 31.07% 21.80% 17.95%
Neuberger&Berman Partners Fund Portfolio Total
Return 42.35% 31.90% 22.66% 18.76%
Russell Midcap Value Index 45.32% 29.65% 20.15% 17.78%
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND 10/2/89
AGSPC Social Awareness Fund Average Annual Total
Return 47.45% 12.76% 25.67% 16.57%
AGSPC Social Awareness Fund Portfolio Total
Return 48.01% 13.34% 26.30% 16.80%
S&P 500 Index 47.97% 32.81% 22.40% 18.94%
AMERICAN GENERAL BALANCED FUND 12/31/74
Composite Average Annual Total Return 31.17% 27.63% 15.84% 14.44%
Composite Portfolio Total Return 31.88% 23.29% 16.48% 15.06%
S&P 500 Index 47.97% 32.81% 22.40% 18.94%
Lehman Brothers Government and Corporate Bond
Index 12.39% 9.20% 6.96% 8.92%
AMERICAN GENERAL DOMESTIC BOND FUND 12/31/72
Composite Average Annual Total Return 11.78% 9.13% 6.61% 9.12%
Composite Portfolio Total Return 12.17% 9.51% 6.98% 9.50%
Benchmark(B) 12.00% 9.18% 6.99% 8.93%
</TABLE>
6
<PAGE> 79
<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 3 YEAR 5 YEAR INCEPTION (A)
--------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
AMERICAN GENERAL CORE BOND FUND 11/1/48
Separately Managed Account Average Annual Total
Return 11.79% 9.29% 7.00% 9.35%
Separately Managed Account Portfolio Total
Return ** ** ** **
Benchmark(B) 12.00% 9.18% 6.99% 8.93%
AMERICAN GENERAL MONEY MARKET FUND 12/16/85
AGSPC Money Market Fund Average Annual Total
Return 5.24% 5.20% 4.51% 5.42%
AGSPC Money Market Fund Portfolio Total Return 5.78% 5.77% 5.14% 6.30%
30-Day Certificate of Deposit Primary Offering
Rate
by New York City Banks 4.82% 4.73% 4.19% 5.25%
</TABLE>
- ---------------
* Performance information for each Fund included in the Prospectus is the
performance of either: (i) a mutual fund with similar investment
objectives, policies and strategies as the Fund that is currently managed
by the same individuals; (ii) an unregistered discretionary account of the
Sub-adviser with similar investment objectives, policies and strategies;
and/or (iii) a composite of such registered management investment
companies or unregistered discretionary accounts.
** Since the performance information for the American General Core Bond Fund
is the performance of a managed account with which there were no fees and
expenses other than the management fee there is no portfolio total return
information.
(A) Amounts shown are returns for ten years or since inception if the fund has
been in existence for less than ten years.
(B) Benchmark consists of the Lehman Brothers Aggregate Index.
7
<PAGE> 80
INVESTMENT RESTRICTIONS
The Funds have each adopted certain fundamental investment restrictions
which, unlike the other investment objective(s), policies, and investment
program of each Fund, may only be changed with the consent of a majority of the
outstanding voting securities of the particular Fund. The 1940 Act defines such
a majority as the lesser of (1) 67% or more of the voting securities present in
person or by proxy at a shareholders' meeting, if the holders of more than 50%
of the outstanding voting securities of a Fund are present or represented by
proxy, or (2) more than 50% of a Fund's outstanding voting securities. Also,
certain of the Funds have non-fundamental investment restrictions, which may be
changed by the Series Company's Board of Trustees without shareholder approval.
Calculation of each Fund's total assets for compliance with any of the
following fundamental or non-fundamental investment restrictions or any other
investment restrictions set forth in the Series Company's Prospectus or
Statement of Additional Information will not include cash collateral held in
connection with securities lending activities.
The fundamental and, in certain cases, non-fundamental, investment
restrictions of each Fund are listed below. The percentage limitations
referenced in some of the restrictions are to be determined at the time of
purchase. However, percentage limitations for illiquid securities and borrowings
apply at all times.
AMERICAN GENERAL INTERNATIONAL GROWTH FUND ("INTERNATIONAL GROWTH FUND")
INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the International Growth Fund may not:
(1) With respect to 75% of its total assets, invest more than 5% of its total
assets at the time of purchase in the securities of any single issuer
(other than obligations issued or guaranteed as to principal and interest
by the U.S. Government or any of its agencies or instrumentalities); except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
(2) With respect to 75% of its total assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer; except that the
Fund may purchase securities of other investment companies without regard
to such limitation to the extent permitted by (i) the 1940 Act, as amended
from time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption or
other relief from the provisions of the 1940 Act.
(3) Invest more than 20% of its total assets in companies within a single
industry, provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's pro
rata portion of the securities and other assets owned by any such company.
There are no limitations on investments made in instruments issued or
guaranteed by the U.S. Government and its agencies.
(4) Make loans except by purchasing debt securities in accordance with its
investment objective and policies or entering into repurchase agreements,
or by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as the loans are made in compliance with the
1940 Act, as amended, or the rules and regulations or interpretations of
the Securities and Exchange Commission ("SEC").
(5) Borrow, except (i) from banks; (ii) to enter into reverse repurchase
agreements or to employ similar investment techniques, and pledge its
assets in connection therewith; and (iii) as a temporary measure for
extraordinary or emergency purposes and then, in no event, in excess of
33 1/3% of the Fund's total assets valued at the lower of market or cost.
If borrowings exceed 5% of the Fund's total assets, the Fund will not
purchase additional securities.
(6) Invest in physical commodities or contracts on physical commodities.
(7) Purchase or sell real estate, although it may purchase and sell securities
of companies which deal in real estate and may purchase
8
<PAGE> 81
and sell securities which are secured by interests in real estate.
(8) Underwrite the securities of other issuers.
(9) Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into
repurchase transactions.
As a matter of non-fundamental policy, the International Growth Fund may
not:
(1) Invest more than 5% of its assets at the time of purchase in the securities
of companies that have (with predecessors) a continuous operating history
of less than 3 years.
(2) Invest in futures and/or options on futures.
(3) Purchase on margin or sell short.
(4) Invest more than an aggregate of 15% of the Fund's net assets in illiquid
or restricted securities.
(5) Invest for the purpose of exercising control over management of any
company; except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(6) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL LARGE CAP GROWTH FUND
("LARGE CAP GROWTH FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Large Cap Growth Fund may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act.
(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
(3) Borrow money, except (a) the Fund may borrow from banks (as defined in the
1940 Act) or through reverse repurchase agreements in amounts up to 33 1/3%
of its total assets (including the amount borrowed), (b) the Fund may, to
the extent permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes, (c) the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase securities on
margin to the extent permitted by applicable law and (e) the Fund may
engage in transactions in mortgage dollar rolls which are accounted for as
financings.
(4) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other financial
institutions, and (c) loans of securities as permitted by applicable laws
but not to exceed 33 1/3% of the Fund's total assets.
(5) Underwrite securities issued by others, except to the extent that the sale
of portfolio securities by the Fund may be deemed to be an underwriting.
(6) Purchase, hold or deal in real estate, although the Fund may purchase and
sell securities that are secured by real estate or interests therein,
securities of real estate investment trusts and mortgage-related securities
and may hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures
9
<PAGE> 82
contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate,
securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
(8) Issue senior securities to the extent such issuance would violate
applicable law.
As a matter of non-fundamental policy, the Large Cap Growth Fund may not:
(1) Invest in companies for the purpose of exercising control or management;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(2) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(3) Purchase additional securities if the Fund's borrowings (excluding covered
mortgage dollar rolls) exceed 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
(5) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL MID CAP GROWTH FUND ("MID CAP GROWTH FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Mid Cap Growth Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities or of any class of securities of any one issuer (except that
securities of the U.S. Government, its agencies and instrumentalities are
not subject to these limitations); except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(2) Invest 25% or more of the value of its total assets in any one industry or
group of industries (except that securities of the U.S. Government, its
agencies and instrumentalities are not subject to these limitations);
provided, however, that this limitation excludes shares of other open-end
investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company.
(3) Invest in interests in real estate, real estate mortgage loans, real estate
limited partnerships, oil, gas or other mineral exploration or development
programs or leases, except that the Fund may invest in the readily
marketable securities of companies which own or deal in such things.
(4) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter under the federal securities laws, in
connection with the disposition of portfolio securities.
(5) Make loans of money, except that the Fund may invest in repurchase
agreements.
(6) Issue senior securities as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into
repurchase transactions.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instru-
10
<PAGE> 83
ments, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities or
commodities laws.
(8) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(9) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except
to the extent permitted by applicable law, and provided that the Fund will
not purchase additional securities if borrowings exceed 5% of total assets.
As a matter of non-fundamental policy, the Mid Cap Growth Fund may not:
(1) Invest in the securities of any issuer if any of the officers, directors or
trustees of the Series Company, VALIC or the Sub-adviser own beneficially
more than 1/2 of 1% of the outstanding securities of such issuer or
together own more than 5% of the outstanding securities of such issuer.
(2) Invest for the purpose of exercising control or management of another
issuer; except that the Fund may purchase securities of other investment
companies without regard to such limitation to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(3) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions).
(4) Make short sales of securities or maintain a short position, except short
sales "against the box"; (A short sale is made by selling a security the
Fund does not own. A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain at no additional
cost securities identical to those sold short.)
(5) Participate on a joint or joint and several basis in any trading account in
securities.
(6) Invest in securities of issuers which have a record of less than three
years' continuous operation (including predecessors and, in the case of
bonds, guarantors), if more than 5% of its total assets would be invested
in such securities.
(7) Invest more than 10% of the value of its net assets in illiquid securities.
(8) Purchase foreign securities, except the Fund may invest up to 10% of total
assets in foreign securities sold as American Depository Receipts.
(9) Invest in restricted securities.
(10) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL SMALL CAP GROWTH FUND
("SMALL CAP GROWTH FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Small Cap Growth Fund may not:
(1) Make any investment inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; except that the Fund may
purchase securities of other investment companies without regard to such
limitation to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC under
the 1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
(2) Invest 25% or more of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or any of its agencies or
instrumentalities); provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
11
<PAGE> 84
(3) Issue senior securities, except as permitted under the 1940 Act or any
rule, order or interpretation thereunder.
(4) Borrow money, enter into reverse repurchase agreements, or employ similar
investment techniques, and pledge, assets in connection therewith, except
to the extent permitted by applicable law, and provided that the Fund will
not purchase additional securities if borrowings exceed 5% of total assets.
(5) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities may be deemed an underwriter within
the meaning of the 1933 Act.
(6) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in (a) securities directly or
indirectly secured by real estate, or (b) securities issued by issuers that
invest in real estate.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(8) Make loans to other persons, except in accordance with the Fund's
investment objectives and policies and to the extent permitted by
applicable law.
As a matter of non-fundamental policy, the Small Cap Growth Fund may not:
(1) Purchase securities on margin, make short sales of securities, or maintain
a short position, except in the course of the Fund's hedging activities,
provided that this restriction shall not be deemed to be applicable to the
purchase or sale of when-issued securities or delayed delivery securities.
(2) Invest more than 15% of the Fund's net assets in illiquid securities.
(3) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL INTERNATIONAL VALUE FUND
("INTERNATIONAL VALUE FUND") INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the International Value Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow money, enter into repurchase
agreements, or employ similar investment techniques, and pledge its assets
in connection therewith, except to the extent permitted by applicable law,
and provided that the Fund will not purchase additional securities if
borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities
12
<PAGE> 85
issued by companies investing in real estate, such as real estate
investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
As a matter of non-fundamental policy, the International Value Fund may
not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except
in connection with investment in options and futures contracts. The Fund
may use short-term credits when necessary to clear transactions.
AMERICAN GENERAL LARGE CAP VALUE FUND ("LARGE CAP VALUE FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Large Cap Value Fund may not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the U.S.
Government, its agencies and instrumentalities), provided, however, that
this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the
securities and other assets owned by any such company.
(2) Borrow money, except to enter into reverse repurchase agreements and employ
similar investment techniques and pledge its assets in connection
therewith, and as a temporary measure for extraordinary or emergency
purposes or to facilitate redemptions (not for leveraging or investment),
provided that borrowings do not exceed an amount equal to 33 1/3% of the
current value of the Fund's total assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's borrowings
exceed this limitation due to a decline in net assets, such borrowings will
within three days be reduced to the extent necessary to comply with this
limitation. The Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
13
<PAGE> 86
(3) With respect to 75% of its total assets, invest in securities of any one
issuer (other than securities issued by the U.S. Government, its agencies,
and instrumentalities), if immediately after and as a result of such
investment the current market value of the Fund's holdings in the
securities of such issuer exceeds 5% of the value of the Fund's assets;
except that the Fund may purchase securities of other investment companies
without regard to such limitation to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time, or
(iii) an exemption or other relief from the provisions of the 1940 Act.
(4) Make loans to any person or firm; provided, however, that the making of a
loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily
purchased by institutional investors, or (ii) the entry into repurchase
agreements or reverse repurchase agreements. The Fund may lend its
portfolio securities to broker-dealers or other institutional investors if
the aggregate value of all securities loaned does not exceed 33 1/3% of the
value of the Fund's total assets.
(5) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(6) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(7) Engage in the business of underwriting securities issued by others, except
that the Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restriction on disposition.
(8) Issue senior securities, except as permitted by its investment objective,
policies and restrictions, and except as permitted by the 1940 Act.
As a matter of non-fundamental policy, the Large Cap Value Fund may not:
(1) Purchase from or sell portfolio securities to its officers or trustees or
other interested persons (as defined in the 1940 Act) of the Fund,
including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(2) Invest more than 15% of the Fund's net assets in illiquid securities or
restricted securities.
(3) Make investments for the purpose of gaining control of an issuer's
management.
(4) Pledge, mortgage or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure borrowings
permitted by paragraph (2) above under fundamental policies.
(5) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the
Fund's aggregate investment in such securities would exceed 5% of the
Fund's total assets.
(6) Make short sales of securities or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation
margin payments in connection with transactions in futures contracts and
related options.
(7) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time,
14
<PAGE> 87
or (iii) an exemption or other relief from the provisions of the 1940 Act.
AMERICAN GENERAL MID CAP VALUE FUND ("MID CAP VALUE FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Mid Cap Value Fund may not:
(1) Borrow money, except that the Fund may (i) borrow money from banks for
temporary or emergency purposes and not for leveraging or investment and
(ii) enter into reverse repurchase agreements and employ similar investment
techniques, and pledge its assets in connection therewith, for any purpose;
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less liabilities
(other than borrowings). If borrowings exceed 33 1/3% of the value of the
Fund's total assets, the Fund will reduce its borrowings within three days
(excluding Sundays and holidays) to the extent necessary to comply with the
33 1/3% limitation.
(2) Purchase physical commodities or contracts thereon, unless acquired as a
result of the ownership of securities or instruments, but this restriction
shall not prohibit the Fund from purchasing futures contracts or options
(including options on futures contracts, but excluding options or futures
contracts on physical commodities) or from investing in securities of any
kind. For purposes of the limitations on commodities, the Fund does not
consider foreign currencies or forward contracts to be physical
commodities.
(3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the
U.S. Government or any of its agencies or instrumentalities) if, as a
result, (i) more than 5% of the value of the Fund's total assets would be
invested in the securities of that issuer or (ii) the Fund would hold more
than 10% of the outstanding voting securities of that issuer; except that
the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
(4) Purchase any security if, as a result, 25% or more of its total assets
(taken at current value) would be invested in the securities of issuers
having their principal business activities in the same industry, provided,
however, that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of the
securities and other assets owned by any such company. This limitation does
not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
(5) Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets (taken at current value) would be lent to other
parties, except, in accordance with its investment objective, policies, and
limitations, (i) through the purchase of a portion of an issue of debt
securities or (ii) by engaging in repurchase agreements.
(6) Purchase real estate unless acquired as a result of the ownership of
securities or instruments, but this restriction shall not prohibit the Fund
from purchasing securities issued by entities or investment vehicles that
own or deal in real estate or interests therein or instruments secured by
real estate or interests therein.
(7) Issue senior securities, except as permitted under the 1940 Act.
(8) Underwrite securities of other issuers, except to the extent that the Fund,
in disposing of portfolio securities, may be deemed to be an underwriter
within the meaning of the 1933 Act.
As a matter of non-fundamental policy, the Mid Cap Value Fund may not:
(1) Purchase securities if outstanding borrowings, including any reverse
repurchase agreements, exceed 5% of its total assets.
(2) Purchase securities on margin from brokers or other lenders, except that
the Fund may obtain such short-term credits as are necessary for the
clearance of securities transactions. Margin payments in connection with
transactions in futures contracts and options on futures contracts shall
not constitute the
15
<PAGE> 88
purchase of securities on margin and shall not be deemed to violate the
foregoing limitation.
(3) Invest more than 10% of the value of its total assets in securities of
foreign issuers, provided that the limitation shall not apply to foreign
securities denominated in U.S. dollars, including American Depositary
Receipts ("ADRs").
(4) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(5) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL SMALL CAP VALUE FUND ("SMALL CAP VALUE FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Small Cap Value Fund may not:
(1) Borrow money or mortgage or hypothecate assets of the Fund, except that in
an amount not to exceed 1/3 of the current value of the total Fund's
assets, it may borrow money as a temporary measure for extraordinary or
emergency purposes and enter into reverse repurchase agreements or dollar
roll transactions, and except that it may pledge, mortgage or hypothecate
not more than 1/3 of such assets to secure such borrowings (it is intended
that money would be borrowed only from banks and only either to accommodate
requests for the withdrawal of beneficial interests (redemption of shares)
while effecting an orderly liquidation of portfolio securities or to
maintain liquidity in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations) or reverse
repurchase agreements, provided that collateral arrangements with respect
to options and futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of this
restriction and except that assets may be pledged to secure letters of
credit solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute. If borrowings exceed
5% of the Fund's total assets, the Fund will not purchase additional
securities.
(2) Underwrite securities issued by other persons except insofar as the Series
Company (or the Fund) may technically be deemed an underwriter under the
1933 Act in selling a portfolio security.
(3) Make loans to other persons except: (a) through the lending of the Fund's
portfolio securities and provided that any such loans not exceed 33 1/3% of
the Fund's total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately.
(4) Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), in the
ordinary course of business (except that the Series Company may hold and
sell, for the Fund's portfolio, real estate acquired as a result of the
Fund's ownership of securities and the securities of companies that deal in
real estate).
(5) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
(6) Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures, including deposits of initial deposit
and variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction.
(7) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures
16
<PAGE> 89
contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate,
securities-related or foreign currency-related hedging instruments,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws.
As a matter of non-fundamental policy, the Small Cap Value Fund may not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
("SOCIALLY RESPONSIBLE FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Socially Responsible Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow money, enter into reverse
repurchase agreements, or employ similar investment techniques, and pledge
its assets in connection therewith, except to the extent permitted by
applicable law, and provided that the Fund will not purchase additional
securities if borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which a Fund may
invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(8) Enter into financial futures contracts (by exercise of any option or
otherwise) or acquire any options thereon, if, immediately thereafter, the
total of the initial margin deposits required with respect to all open
futures posi-
17
<PAGE> 90
tions at the time such positions were established plus the sum of the
premiums paid for all unexpired options on futures contracts would exceed
5% of the value of its total assets.
(9) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry (excluding the U.S.
Government or any of its agencies or instrumentalities), provided, however,
that this limitation excludes shares of other open-end investment companies
owned by the Fund but includes the Fund's pro rata portion of the
securities and other assets owned by any such company.
As a matter of non-fundamental policy, the Socially Responsible Fund may
not:
(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except
in connection with investment in options and futures contracts. The Fund
may use short-term credits when necessary to clear transactions.
AMERICAN GENERAL BALANCED FUND ("BALANCED FUND") INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Balanced Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow money, enter into reverse
repurchase agreements, or employ similar investment techniques and pledge
its assets in connection therewith, except to the extent permitted by
applicable law, and provided that the Fund will not purchase additional
securities if borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consis-
18
<PAGE> 91
tent with its investment objective(s) and policies or by purchasing
securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
As a matter of non-fundamental policy, the Balanced Fund may not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except
in connection with investment in options and futures contracts. The Fund
may use short-term credits when necessary to clear transactions.
AMERICAN GENERAL HIGH YIELD BOND FUND ("HIGH YIELD BOND FUND"); AMERICAN GENERAL
STRATEGIC BOND FUND ("STRATEGIC BOND FUND"); AND AMERICAN GENERAL CORE BOND FUND
("CORE BOND FUND") INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the High Yield Bond Fund, the Strategic Bond
Fund and the Core Bond Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that a Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow from banks or enter into
reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, unless immediately after each
borrowing there is asset coverage of 300%.
19
<PAGE> 92
(3) Acquire real estate or real estate contracts, although a Fund may acquire
obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which a Fund may
invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provisions of the federal
securities or commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of a Fund's
total assets.
(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by a Fund but includes a
Fund's pro rata portion of the securities and other assets owned by any
such company.
As a matter of non-fundamental policy, the High Yield Fund, the Strategic
Bond Fund and the Core Bond Fund may not:
(1) Invest more than 15% of a Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that a Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except
in connection with investment in options and futures contracts. A Fund may
use short-term credits when necessary to clear transactions.
AMERICAN GENERAL DOMESTIC BOND FUND
("DOMESTIC BOND FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Domestic Bond Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limitation if the collateral underlying the
repurchase agreements are U.S. Government securities.
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(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow from banks or enter into
repurchase agreements, or employ similar investment techniques, and pledge
its assets in connection therewith, unless immediately after each borrowing
there is asset coverage of 300%.
(3) Acquire real estate, real estate contracts or real estate securities.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Purchase or sell commodities or commodities contracts. This restriction
shall not prohibit the Fund, subject to restrictions described in the
Prospectus and elsewhere in this Statement of Additional Information, from
purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or
any interest rate, securities-related or foreign currency-related hedging
instruments, including swap agreements and other derivative instruments,
subject to compliance with any applicable provision of the federal
securities or commodities laws.
(7) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(8) Invest more than 25% of its total assets in issuers primarily engaged in a
single industry (excluding the U.S. Government or any of its agencies or
instrumentalities), provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
As a matter of non-fundamental policy, the Domestic Bond Fund may not:
(1) Invest more than 15% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Effect short sales of securities or purchase securities on margin, except
in connection with investment in options and futures contracts. The Fund
may use short-term credits when necessary to clear transactions.
AMERICAN GENERAL MONEY MARKET FUND ("MONEY MARKET FUND") INVESTMENT RESTRICTIONS
As a matter of fundamental policy, the Money Market Fund may not:
(1) Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting
securities, or any other class of securities, of any one issuer; except
that the Fund may purchase securities of other investment companies without
regard to such limitation to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act. For purposes
of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered
as one class. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies, or instrumentalities. As a
matter of operating policy, the Series Company will not consider repurchase
agreements subject to the 5% limi-
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<PAGE> 94
tation if the collateral underlying the repurchase agreements are U.S.
Government securities.
(2) (a) Issue senior securities except in connection with investments in
options and futures contracts; or (b) borrow money, enter into reverse
repurchase agreements, or employ similar investment techniques, and pledge
its assets in connection therewith, except to the extent permitted by
applicable law, and provided that the Fund will not purchase additional
securities if borrowings exceed 5% of total assets.
(3) Acquire real estate or real estate contracts, although the Fund may acquire
obligations that are secured by real estate or securities issued by
companies investing in real estate, such as real estate investment trusts.
(4) Underwrite securities of other issuers except where the sale of restricted
portfolio securities constitutes an underwriting under the federal
securities laws.
(5) Lend money, except by purchasing debt obligations in which the Fund may
invest consistent with its investment objective(s) and policies or by
purchasing securities subject to repurchase agreements.
(6) Lend its portfolio securities to broker-dealers and other financial
institutions in an amount in excess of 33 1/3% of the value of the Fund's
total assets.
(7) Purchase or sell commodity contracts.
(8) Invest more than 25% of the value of its total assets in the securities of
issuers primarily engaged in any one industry, except investments in
obligations issued or guaranteed by the U.S. Government, its agencies, or
instrumentalities, provided, however, that this limitation excludes shares
of other open-end investment companies owned by the Fund but includes the
Fund's pro rata portion of the securities and other assets owned by any
such company.
As a matter of non-fundamental policy, the Money Market Fund may not:
(1) Invest more than 10% of the Fund's net assets in illiquid and restricted
securities.
(2) Invest in securities issued by other investment companies except as part of
a merger, reorganization or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the rules
and regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
(3) Acquire securities for the purpose of influencing the management of, or
exercising control over, the issuer; except that the Fund may purchase
securities of other investment companies without regard to such limitation
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
(4) Purchase any security which matures more than 13 months from the date of
purchase.
(5) Invest in warrants, or write, purchase or sell puts, calls, straddles,
spreads or combinations thereof.
AMERICAN GENERAL GROWTH LIFESTYLE FUND
("GROWTH LIFESTYLE FUND"); AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
("MODERATE GROWTH LIFESTYLE FUND"); AND AMERICAN GENERAL CONSERVATIVE GROWTH
LIFESTYLE FUND ("CONSERVATIVE GROWTH LIFESTYLE FUND") INVESTMENT
RESTRICTIONS
As a matter of fundamental policy, the Growth Lifestyle Fund, the Moderate
Growth Lifestyle Fund and the Conservative Growth Lifestyle Fund may not:
(1) Issue senior securities.
(2) Borrow money, except to the extent permitted by applicable law, and
provided that the Fund may not purchase additional securities if borrowings
exceed 5% of total assets.
(3) Underwrite the securities of other issuers.
(4) Purchase real estate or real estate mortgage loans, although the underlying
mutual funds in which a Fund will invest may purchase marketable securities
of companies which deal in real estate, real estate mortgage loans or
interests therein.
(5) Purchase or sell commodities or commodity contracts.
(6) Make loans except by purchasing bonds, debentures or similar obligations
which are ei-
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ther publicly distributed or customarily purchased by institutional
investors.
(7) Invest more than 25% of its assets in any one industry, other than Funds
that are part of the Series Company.
As a matter of non-fundamental policy, the Growth Lifestyle Fund, the
Moderate Growth Lifestyle Fund and the Conservative Growth Lifestyle Fund may
not:
(1) Purchase any securities on margin, make short sales of securities or
purchase or sell puts and calls, or combinations thereof.
(2) Invest directly in oil, gas, or other mineral exploration or development
programs; provided, however, that the underlying mutual funds in which the
Fund will invest may purchase the securities of companies engaged in such
activities.
(3) Purchase or retain any security other than shares of the underlying Series
Company Funds if (i) one or more officers or trustees of the Series Company
individually own or would own, directly or beneficially, more than 1/2 of 1
percent of the securities of such issuer and (ii) in the aggregate such
persons own or would own more than 5% of such securities.
(4) Invest in companies for the purpose of exercising control of management.
INVESTMENT PRACTICES
REPURCHASE AGREEMENTS
Each Fund may hold commercial paper, certificates of deposits, and
government obligations (including government guaranteed obligations) subject to
repurchase agreements with certain well established domestic banks and certain
broker-dealers, including primary government securities dealers, approved as
creditworthy by the Board of Trustees. The underlying security must be a U.S.
Government security or a security rated in the highest rating category by the
requisite NRSROs (Nationally Recognized Statistical Rating Organization) (except
for the International Growth Fund, the International Value Fund, the Strategic
Bond Fund and the High Yield Bond Fund which may utilize foreign money market
securities) and the seller must be a well established securities dealer or bank
that is a member of the Federal Reserve System. For the Money Market Fund, the
underlying security must be a U.S. Government security or a security rated in
the highest rating category by the requisite NRSROs and must be determined to
present minimal credit risk. Repurchase agreements are generally for short
periods, often less than a week. Repurchase agreements typically obligate a
seller, at the time it sells securities to a Fund, to repurchase the securities
at a specific future time and price. The price for which the Fund resells the
securities is calculated to exceed the price the Fund initially paid for the
same securities, thereby determining the yield during the Fund's holding period.
This result is a fixed market rate of interest, agreed upon by that Fund and the
seller, which is accrued as ordinary income. Most repurchase agreements mature
within seven days although some may have a longer duration. The underlying
securities constitute collateral for these repurchase agreements, which are
considered loans under the 1940 Act.
The Funds do not intend to sell the underlying securities subject to a
repurchase agreement (except to the seller upon maturity of the agreement).
During the term of the repurchase agreement, the Funds (i) retain the securities
subject to the repurchase agreement as collateral securing the seller's
obligation to repurchase the securities, (ii) monitor on a daily basis the
market value of the securities subject to the repurchase agreement, and (iii)
require the seller to deposit with the Series Company's custodian collateral
equal to any amount by which the market value of the securities subject to the
repurchase agreement falls below the resale amount provided under the repurchase
agreement. In the event that a seller defaults on its obligation to repurchase
the securities, the Funds must hold the securities until they mature or may sell
them on the open market, either of which may result in a loss to a Fund if, and
to the extent that, the values of the securities decline. Additionally, the
Funds may incur disposition expenses when selling the securities. Bankruptcy
proceedings by the seller may also limit or delay realization and liquidation of
the collateral by a Fund and may result in a loss to that Fund. The Board of
Trustees of the Series Company will evaluate the creditworthiness of all banks
and broker-dealers with which the Series Company proposes to enter into
repurchase agreements. The Funds will not invest in repurchase agreements that
do not mature within seven days if any such investment,
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together with any illiquid assets held by a Fund, exceeds 10% of the value of
that Fund's total assets (15% in the case of the International Growth Fund, the
Large Cap Growth Fund, the Small Cap Growth Fund, the Large Cap Value Fund, the
Mid Cap Value Fund, the Small Cap Value Fund, the High Yield Bond Fund, the
Balanced Fund, the International Value Fund, the Domestic Bond Fund, the
Strategic Bond Fund and the Core Bond Fund).
LENDING PORTFOLIO SECURITIES
For purposes of realizing additional income, each Fund, except the
Lifestyle Funds, may make secured loans of its portfolio securities. Securities
loans are made to broker-dealers and other financial institutions approved by
State Street Bank and Trust Company (the "Custodian"), custodian to the Funds
and pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the loaned securities marked to market
on a daily basis. VALIC will monitor the activities of the Custodian as
authorized by the Board of Trustees. The collateral received will consist of
cash, U.S. government securities, letters of credit or such other collateral as
permitted by interpretations or rules of the SEC. While the securities are on
loan, the Funds will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower.
Any loan of portfolio securities by any Fund will be callable at any time
by the lending Fund upon notice of five business days. When voting or consent
rights which accompany loaned securities pass to the borrower, the lending Fund
will call the loan, in whole or in part as appropriate, to permit the exercise
of such rights if the matters involved would have a material effect on that
Fund's investment in the securities being loaned. If the borrower fails to
maintain the requisite amount of collateral, the loan will automatically
terminate, and the lending Fund will be permitted to use the collateral to
replace the securities while holding the borrower liable for any excess of
replacement cost over collateral. As with any extensions of credit, there are
risks of delay in receiving additional collateral or in the recovery of the
securities or, in some cases, even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only when the Custodian, as monitored by VALIC,
considers the borrowing broker-dealers or financial institutions to be
creditworthy and of good standing and the interest earned from such loans to
justify the attendant risks. On termination of the loan, the borrower will be
required to return the securities to the lending Fund. Any gain or loss in the
market price during the loan would inure to the lending Fund. The lending Fund
may pay reasonable finders', administrative, and custodial fees in connection
with a loan of its securities.
BORROWING, REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
A Fund, subject to its investment restrictions, may borrow money. This
borrowing may be unsecured. Provisions of the 1940 Act require a Fund to
maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed, with
an exception for borrowings not in excess of 5% of the Fund's total assets made
for temporary administrative purposes. Any borrowings for temporary
administrative purposes in excess of 5% of the Fund's total assets must maintain
continuous asset coverage. If the 300% asset coverage should decline as a result
of market fluctuations or other reasons, a Fund may be required to sell some of
its portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. As noted below, a Fund also may
enter into certain transactions, including reverse repurchase agreements,
mortgage dollar rolls, and sale-buybacks, that can be viewed as constituting a
form of borrowing or financing transaction by the Fund. To the extent a Fund
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the segregation of assets determined in accordance with
procedures adopted by the Trustees, equal in value to the amount of the Fund's
commitment to repurchase, such an agreement will not be considered a "senior
security" by the Fund and therefore will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the Funds. Borrowing
will tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased. A Fund also may be required
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to maintain minimum average balances in connection with such borrowing or to pay
a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
In addition to borrowing for temporary purposes, a Fund may enter into
reverse repurchase agreements, mortgage dollar rolls, and economically similar
transactions. A reverse repurchase agreement involves the sale of a
portfolio-eligible security by a Fund, coupled with its agreement to repurchase
the instrument at a specified time and price. Under a reverse repurchase
agreement, the Fund continues to receive any principal and interest payments on
the underlying security during the term of the agreement. The Fund typically
will segregate assets determined to be liquid by VALIC or a Sub-adviser in
accordance with procedures established by the Board of Trustees, equal (on a
daily mark-to-market basis) to its obligations under reverse repurchase
agreements. However, reverse repurchase agreements involve the risk that the
market value of securities retained by the Fund may decline below the repurchase
price of the securities sold by the Fund which it is obligated to repurchase. To
the extent that positions in reverse repurchase agreements are not covered
through the segregation of liquid assets at least equal to the amount of any
forward purchase commitment, such transactions would be subject to the Funds'
limitations on borrowings.
A "mortgage dollar roll" is similar to a reverse repurchase agreement in
certain respects. In a "dollar roll" transaction, a Fund sells a
mortgage-related security, such as a security issued by the Government National
Mortgage Association ("GNMA"), to a dealer and simultaneously agrees to
repurchase a similar security (but not the same security) in the future at a
pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase
agreement, as a collateralized borrowing in which a Fund pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which a Fund enters into a dollar
roll transaction is not obligated to return the same securities as those
originally sold by the Fund, but only securities which are "substantially
identical." To be considered "substantially identical," the securities returned
to a Fund generally must: (1) be collateralized by the same types of underlying
mortgages; (2) be issued by the same agency and be part of the same program; (3)
have a similar original stated maturity; (4) have identical net coupon rates;
(5) have similar market yields (and therefore price); and (6) satisfy "good
delivery" requirements, meaning that the aggregate principal amounts of the
securities delivered and received back must be within 1.0% of the initial amount
delivered.
A Fund's obligations under a dollar roll agreement must be covered by
segregated liquid assets equal in value to the securities subject to repurchase
by the Fund. As with reverse repurchase agreements, to the extent that positions
in dollar roll agreements are not covered by segregated liquid assets at least
equal to the amount of any forward purchase commitment, such transactions would
be subject to the Funds' limitations on borrowings. Furthermore, because dollar
roll transactions may be for terms ranging between one and six months, dollar
roll transactions may be deemed "illiquid" and subject to a Fund's overall
limitations on investments in illiquid securities.
CONVERTIBLE SECURITIES
Certain Funds may invest in convertible securities of foreign or domestic
issues. A convertible security is a security (a bond or preferred stock) which
may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in a corporation's capital
structure but are usually subordinated to similar nonconvertible securities.
Convertible securities provide, through their conversion feature, an opportunity
to participate in capital appreciation resulting from a market price advance in
a convertible security's underlying common stock. The price of a convertible
security is influenced by the market value of the underlying common stock and
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines.
A Fund may be required to permit the issuer of a convertible security to
redeem the security, convert it into the underlying common stock, or sell it to
a third party. Thus, a Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on a Fund's ability to achieve
its investment objectives.
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To the extent that convertible securities are intended by a Fund to be
equity securities, the following equity quality criteria typically are
considered: industry prospects (growth rate, competitive pressures,
supply/demand characteristics), market valuations (including price-to-book
ratios, price-earnings ratios and return on equity), company profile (suppliers,
competitors, end-users and customers), discretionary cash flow and quality of
management. To the extent that convertible securities are intended by a Fund to
be fixed income securities, the quality criteria typically applied by the Fund
to investments in fixed income securities (i.e., Moody's and S&P ratings) are
applied.
FOREIGN SECURITIES
All Funds, other than the Lifestyle Funds, may invest in foreign
securities. A foreign security includes corporate debt securities of foreign
issuers (including preferred or preference stock), certain foreign bank
obligations (see "Bank Obligations") and U.S. dollar or foreign
currency-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities.
Included within the definition of foreign securities are the following
depository receipts: American Depository Receipts (ADRs), European Depositary
Receipts (EDRs) and Global Depository Receipts (GDRs). Depository receipts that
are denominated in U.S. dollars are not considered foreign securities in
determining compliance with the Mid Cap Value Fund's investment restrictions.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in a
domestic bank or foreign branch of a United States bank and traded on a United
States exchange or in an over-the-counter market. Generally, ADRs are in
registered form. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are easily transferable and for which market
quotations are readily available, and (ii) issuers whose securities are
represented by ADRs are generally subject to auditing, accounting and financial
reporting standards similar to those applied to domestic issuers. EDRs and GDRs
are receipts evidencing an arrangement with a non-U.S. bank similar to that for
ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs
are not necessarily quoted in the same currency as the underlying security. In
addition, certain Funds may invest in other types of depositary securities such
as international depository receipts, global depository shares, European
depository shares and international depository shares.
A Fund may also, in accordance with its specific investment objective(s)
and investment program, policies and restrictions purchase U.S. dollar-
denominated money market securities of foreign issuers. Such money market
securities may be registered domestically and traded on domestic exchanges or in
the over-the-counter market (e.g., Yankee securities) or may be (1) registered
abroad and traded exclusively in foreign markets or (2) registered domestically
and issued in foreign markets (e.g., Eurodollar securities).
In addition, all the Funds, except the Lifestyle Funds, the Large Cap
Growth Fund, the Large Cap Value Fund, and the Money Market Fund, may invest in
non-U.S. dollar-denominated foreign securities, in accordance with their
specific investment objective(s), investment programs, policies, and
restrictions. Investing in foreign securities may involve advantages and
disadvantages not present in domestic investments. There may be less publicly
available information about securities not registered domestically, or their
issuers, than is available about domestic issuers or their domestically
registered securities. Stock markets outside the U.S. may not be as developed as
domestic markets, and there may also be less government supervision of foreign
exchanges and brokers. Foreign securities may be less liquid or more volatile
than U.S. securities. Trade settlements may be slower and could possibly be
subject to failure. In addition, brokerage commissions and custodial costs with
respect to foreign securities may be higher than those for domestic investments.
Accounting, auditing, financial reporting and disclosure standards for foreign
issuers may be different than those applicable to domestic issuers. Non-U.S.
dollar-denominated foreign securities may be affected favorably or unfavorably
by changes in currency exchange rates and exchange control regulations
(including currency blockage) and a Fund may incur costs in connection with
conversions between various currencies. Foreign securities may also involve
risks due to changes in the political or economic conditions of such foreign
countries, the possibility of expropriation of assets or
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nationalization, and possible difficulty in obtaining and enforcing judgments
against foreign entities.
BRADY BONDS
The Domestic Bond Fund, the Balanced Fund, the High Yield Bond Fund, the
Strategic Bond Fund and the Core Bond Fund may invest in Brady Bonds. Brady
Bonds are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented in a number of countries, including:
Argentina, Bulgaria, Ecuador, Mexico, Nigeria, the Philippines, Poland, Uruguay,
and Venezuela.
Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily the U.S. dollar) and are actively traded
in the over-the-counter secondary market. U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discounts bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized on a one-year or
longer rolling-forward basis by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of interest payments or,
in the case of floating rate bonds, initially is equal to at least one year's
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the collateralized
interest payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. There can be no assurance that Brady
Bonds in which the Funds may invest will not be subject to restructuring
arrangements or to requests for new credit, which may cause the Funds to suffer
a loss of interest or principal on any of its holdings.
SOVEREIGN DEBT OBLIGATIONS
Investment in sovereign debt can involve a high degree of risk. The
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of the debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also depend on expected disbursements from foreign
governments, multilateral agencies and others to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair
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such debtor's ability or willingness to service its debts in a timely manner.
Consequently, governmental entities may default on their sovereign debt. Holders
of sovereign debt (including the Funds) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
There is no bankruptcy proceeding by which sovereign debt on which governmental
entities have defaulted may be collected in whole or in part.
A Fund will consider an issuer to be economically tied to a country with an
emerging securities market if (1) the issuer is organized under the laws of, or
maintains its principal place of business in, the country, (2) its securities
are principally traded in the country's securities markets, or (3) the issuer
derived at least half of its revenues or profits from goods produced or sold,
investments made, or services performed in the country, or has at least half of
its assets in that country.
PERFORMANCE INDEXED PAPER
Performance indexed paper ("PIPs(SM)") is U.S. dollar-denominated
commercial paper the yield of which is linked to certain foreign exchange rate
movements. The yield to the investor on performance indexed paper is established
at maturity as a function of spot exchange rates between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
BANK OBLIGATIONS
Each Fund, other than the Lifestyle Funds, may invest in bank obligations.
Bank obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. A Fund will not invest in
fixed time deposits which (1) are not subject to prepayment or (2) provide for
withdrawal penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 10% of its net assets (15% in the case of the International
Growth Fund, the Large Cap Growth Fund, the Small Cap Growth Fund, the Large Cap
Value Fund, the Small Cap Value Fund, the High Yield Bond Fund, the Balanced
Fund, the International Value Fund, the Domestic Bond Fund, the Strategic Bond
Fund and the Core Bond Fund) would be invested in such deposits, repurchase
agreements maturing in more than seven days and other illiquid assets.
The Funds limit investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total assets at the time of investment and are members of the
Federal Reserve System or are examined by the Comptroller of the Currency or
whose deposits are insured by the Federal Deposit Insurance Corporation. A Fund
also may invest in certificates of deposit of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Funds limit investments in foreign bank obligations to United States
dollar-or foreign currency-denominated obligations of foreign banks (including
United States branches of foreign banks) which at the time of investment (i)
have more than $10 billion, or the equivalent in other currencies, in total
assets; (ii) in terms of assets are among the 75 largest foreign banks in the
world; (iii) have branches or agencies (limited purpose offices which do not
offer all banking services) in the United States; and (iv) in the opinion of
VALIC or a Sub-adviser, are of an investment quality comparable to obligations
of United States banks in which the Funds may invest. The Core Bond Fund may
invest
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in the same types of bank obligations as the other Funds, but they must be U.S.
dollar-denominated. Subject to a Fund's limitation on concentration in the
securities of issuers in a particular industry, there is no limitation on the
amount of a Fund's assets which may be invested in obligations of foreign banks
which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any U.S.
Government agency or instrumentality.
INTERNATIONAL BONDS
Certain Funds also may invest in international bonds, which include U.S.
dollar-denominated bonds issued by foreign corporations for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Euro Bonds"). International bonds may involve
special risks and considerations not typically associated with investing in U.S.
companies, including differences in accounting, auditing and financial reporting
standards; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, dispositions of foreign securities and dividends and interest
payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility. A
Fund's investment in international bonds also may be affected either unfavorably
or favorably by fluctuations in the relative rates of exchange between
currencies of different nations, by exchange control regulations and by
indigenous economic and political developments.
EMERGING MARKETS
Investments in companies domiciled in emerging market countries may be
subject to additional risks. Specifically, volatile social, political and
economic conditions may expose investments in emerging or developing markets to
economic structures that are generally less diverse and mature. Emerging market
countries may have less stable political systems than those of more developed
countries. As a result, it is possible that recent favorable economic
developments in certain emerging market countries may be suddenly slowed or
reversed by unanticipated political or social events in such countries.
Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the US economy in such respects as the rate of
growth in gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Another risk is that the small current size of the markets for such
securities and the currently low or nonexistent volume of trading can result in
a lack of liquidity and in greater price volatility. Until recently, there has
been an absence of a capital market structure or market-oriented economy in
certain emerging market countries. If a Fund's securities will generally be
denominated in foreign currencies, the value of such securities to the Fund will
be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the U.S. dollar
will result in a corresponding change in the U.S. dollar value of a Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the U.S. dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the U.S.
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates
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have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.
A further risk is that the existence of national policies may restrict a
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. Also, some
emerging markets countries may not have developed structures governing private
or foreign investment and may not allow for judicial redress for injury to
private property.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Foreign currency transactions used by certain of the Funds may be either:
(i) on the spot (i.e., cash) basis at the spot rate prevailing in the foreign
exchange market, or (ii) conducted through the use of forward foreign currency
exchange contracts. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date. In general,
forward foreign currency exchange contracts are not guaranteed by a third party
and, accordingly, each party to a forward foreign currency exchange contract is
dependent upon the creditworthiness and good faith of the other party.
A Fund will enter into forward foreign currency exchange contracts only
under two circumstances. First, a Fund may enter into a forward foreign currency
exchange contract to purchase an amount of foreign currency to protect itself
against a possible loss that might occur between trade and settlement dates for
a particular security, resulting from a decline in the U.S. dollar against the
foreign currency in which such security is denominated. This practice may limit
the potential gains that might result from a positive change in such currency
relationships. Second, when VALIC or a Sub-adviser believes that the currency of
a particular foreign country may suffer or enjoy a substantial movement against
the U.S. dollar, a Fund may enter into a forward foreign currency exchange
contract to purchase or sell an amount of foreign currency approximating the
value of some or all of that Fund's portfolio securities denominated in such
foreign currency. The forecasting of short-term currency market movements is
extremely difficult and it is uncertain whether such short-term hedging
strategies will be successful.
STANDARD AND POOR'S DEPOSITORY RECEIPTS
The Large Cap Growth Fund may, consistent with its objectives, purchase
Standard & Poor's Depository Receipts ("SPDR's"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Large Cap Growth
Fund as the price movement of the instrument does not perfectly correlate with
the price action of the underlying index.
WHEN-ISSUED SECURITIES
Each of the Funds except the Lifestyle Funds, the Money Market Fund and the
Mid Cap Value Fund may purchase securities on a when-issued, delayed delivery or
forward commitment basis. When such transactions are negotiated, the price of
such securities is fixed at the time of commitment, but delivery and payment for
the securities may take place a month or more after the date of the commitment
to purchase. The securities so purchased are subject to market fluctuation, and
no interest accrues to the purchaser during this period. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. VALIC does not believe that a Fund's net asset
value or income will be adversely affected by the purchase of securities on a
when-issued basis.
FIXED INCOME SECURITIES
Fixed income securities are considered high quality if they are rated at
least A by Moody's or its equivalent by any other NRSRO or, if unrated, are
determined to be of equivalent investment quality. High quality fixed income
securities are considered to have a very strong capacity to pay principal and
interest. Fixed income securities are considered investment grade if they are
rated, for example, at least Baa by Moody's or BBB by S&P or their equivalents
by any other NRSRO or, if not rated, are determined to be of equivalent
investment quality. Investment grade fixed income securities are regarded as
having an adequate capacity to pay principal and interest. Lower rated
securities, for example, Ba by Moody's or its equivalent by any other NRSRO are
regarded on balance as high risk and predominantly speculative with respect to
the
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issuer's continuing ability to meet principal and interest payments.
The maturity of fixed income securities may be considered long (ten plus
years), intermediate (one to ten years), or short-term (thirteen months or
less). In general, the principal values of longer-term securities fluctuate more
widely in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
fixed income securities, while an increase in interest rates generally reduces
their value.
LOWER RATED FIXED INCOME SECURITIES
Issuers of lower rated or non-rated securities ("high yield, high risk"
securities, commonly known as "junk bonds") may be highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risks associated with acquiring the securities of such issuers generally are
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During such periods, such
issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations also may be
adversely affected by specific issuer developments, or the issuer's inability to
meet specific projected business forecasts, or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of lower rated securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
Lower rated securities frequently have call or redemption features which
would permit an issuer to repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, a Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to a Fund and dividends to
shareholders.
A Fund may have difficulty disposing of certain lower rated securities
because there may be a thin trading market for such securities. The secondary
trading market for high yield securities is generally not as liquid as the
secondary market for higher rated securities. Reduced secondary market liquidity
may have an adverse impact on market price and a Fund's ability to dispose of
particular issues when necessary to meet a Fund's liquidity needs or in response
to a specific economic event such as a deterioration in the creditworthiness of
the issuer.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of lower rated
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of lower rated securities are likely to adversely affect a
Fund's net asset value. In addition, a Fund may incur additional expenses to the
extent it is required to seek recovery upon a default on a portfolio holding or
participate in the restructuring of the obligation.
Finally, there are risks involved in applying credit ratings as a method
for evaluating lower rated fixed income securities. For example, credit ratings
evaluate the safety of principal and interest payments, not the market risks
involved in lower rated fixed income securities. Since credit rating agencies
may fail to change the credit ratings in a timely manner to reflect subsequent
events, the Sub-adviser will monitor the issuers of lower rated fixed income
securities in a Fund to determine if the issuers will have sufficient cash flow
and profits to meet required principal and interest payments, and to assure the
debt securities' liquidity within the parameters of the Fund's investment
policies. The Sub-adviser will not necessarily dispose of a portfolio security
when its ratings have been changed.
ZERO COUPON FIXED INCOME SECURITIES
The Large Cap Value Fund, the Mid Cap Value Fund, the Balanced Fund, the
High Yield Bond Fund, the Strategic Bond Fund, the Core Bond Fund and the
Domestic Bond Fund may invest in zero coupon fixed income securities, which are
debt obligations that do not entitle the holder to any periodic payment of
interest prior to maturity or that specify a future date when the securities
begin to pay current interest.
Zero coupon fixed income securities are issued and traded at a discount
from their face amount or par value. This discount varies depending on
prevailing interest rates, the time remaining until cash payments begin, the
liquidity of the security, and the perceived credit quality of the issuer.
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The discount on zero coupon fixed income securities ("original issue
discount") must be taken into income ratably by a Fund prior to the receipt of
any actual payments. Because the Fund must distribute substantially all of its
net income to its shareholders each year for income and excise tax purposes, the
Fund may have to dispose of portfolio securities under disadvantageous
circumstances to generate cash, or may be required to borrow, to satisfy its
corresponding Fund's distribution requirements.
The market prices of zero coupon fixed income securities generally are more
volatile than the prices of securities that pay interest periodically. Zero
coupon fixed income securities are likely to respond to changes in interest
rates to a greater degree than other types of debt securities having a similar
maturity and credit quality.
Custodial receipts issued in connection with zero coupon fixed income
securities, such as CATs and TIGRs, are not issued by the U.S. Treasury,
although the underlying bond represented by such receipt is a debt obligation of
the U.S. Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are
direct obligations of the U.S. Government.
INFLATION-INDEXED BONDS
The Core Bond Fund, the Balanced Fund, the Domestic Bond Fund, the High
Yield Bond Fund and the Strategic Bond Fund may invest in inflation-indexed
bonds. Inflation-indexed bonds are fixed income securities whose principal value
is periodically adjusted according to the rate of inflation. Such bonds
generally are issued at an interest rate lower than typical bonds, but are
expected to retain their principal value over time. The interest rate on these
bonds is fixed at issuance, but over the life of the bond this interest may be
paid on an increasing principal value, which has been adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially
have maturities of five or ten or thirty years, although it is anticipated that
securities with other maturities will be issued in the future. The securities
will pay interest on a semi-annual basis, equal to a fixed percentage of the
inflation-adjusted principal amount. For example, if a Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months
were 1%, the mid-year par value of the bond would be $1,010 and the first
semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year reached 3%, the end-of-year par value of the
bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Funds may
also invest in other inflation related bonds which may or may not provide a
similar guarantee. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original
principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions when
it would
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not be advantageous to do so. There also can be no assurance that the U.S.
Treasury will issue any particular amount of inflation-indexed bonds. Certain
foreign governments, such as the United Kingdom, Canada and Australia, have a
longer history of issuing inflation-indexed bonds, and there may be a more
liquid market in certain of these countries for these securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government.
There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and
services. Moreover, there can be no assurance that the rate of inflation in a
foreign country will be correlated to the rate of inflation in the United
States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Taxation" for information about the possible tax
consequences of investing in inflation-indexed bonds.
HYBRID INSTRUMENTS
A hybrid instrument can combine the characteristics of equity and fixed
income securities, futures, and options. For example, a hybrid instrument may
combine the characteristics of preferred stock and fixed income securities in
the form of quarterly income preferred stock or trust-originated preferred
stock. In other hybrid securities, the principal amount or interest rate may be
tied (positively or negatively) to the price of some commodity, currency or
securities index or another interest rate (each a "benchmark"). The interest
rate or the principal amount payable at maturity of a hybrid security may be
increased or decreased, depending on changes in the value of the benchmark.
Hybrid instruments can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark and, as
a result, may be leveraged and move (up or down) more steeply and rapidly than
the benchmark. These benchmarks may be sensitive to economic and political
events, such as commodity shortages and currency devaluations, which cannot be
readily foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid may
entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes a Fund to the credit risk of the issuer of the
hybrids. These risks may cause significant fluctuations in the net asset value
of the Fund. Accordingly, no Fund will invest more than 5% of its assets in
hybrid instruments.
Certain issuers of structured products such as hybrid instruments may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
Funds' investments in these products will be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
CATASTROPHE BONDS
The High Yield Bond Fund, the Strategic Bond Fund, the Balanced Fund, the
Domestic Bond Fund and the Core Bond Fund may invest in "catastrophe bonds."
Catastrophe bonds are fixed income securities, for which the return of principal
and payment of interest is contingent on the non-occurrence of a specific
"trigger" catastrophic event, such as a hurricane or an earthquake. They may be
issued by government agencies, insurance companies, reinsurers, special purpose
corporations or other on-shore of off-shore entities. If a trigger event causes
losses exceeding a specific amount in the geographic region and time period
specified in a bond, a Fund investing in the bond may lose a portion or all of
its principal invested in the bond. If no trigger event occurs, the Fund will
recover its principal plus interest. For some catastrophe bonds, the trigger
event or losses may be based on companywide losses, index-portfolio losses,
industry indices, or readings of scientific instruments rather than specified
actual losses. Often the catastrophe bonds provide for extensions of maturity
that are mandatory, or optional at the discretion of the issuer, in order to
process and audit loss claims in
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those cases where a trigger event has, or possibly has, occurred. In addition to
the specified trigger events, catastrophe bonds may also expose the Fund to
certain unanticipated risks including but not limited to issuer (credit)
default, adverse regulatory or jurisdictional interpretations, and adverse tax
consequences.
Catastrophe bonds are a relatively new type of financial instrument. As
such, there is no significant trading history of these securities, and there can
be no assurance that a liquid market in these instruments will develop. See
"Illiquid Securities" below. Lack of a liquid market may impose the risk of
higher transaction costs and the possibility that a Fund may be forced to
liquidate positions when it would not be advantageous to do so. Catastrophe
bonds are typically rated, and a Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.
REAL ESTATE SECURITIES AND REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund, other than the Lifestyle Funds and the Domestic Bond Fund, may
invest in real estate securities. Real estate securities are equity securities
consisting of (i) common stocks, (ii) rights or warrants to purchase common
stocks, (iii) securities convertible into common stocks and (iv) preferred
stocks issued by real estate companies. A real estate company is one that
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate or that has at least 50% of its assets invested in real estate.
Certain Funds also may invest in REITs. REITs are pooled investment
vehicles which invest primarily in income producing real estate or real estate
related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Like regulated investment companies
such as the Funds, REITs are not taxed on income distributed to shareholders
provided they comply with certain requirements under the Internal Revenue Code
(the "Code"). A Fund will indirectly bear its proportionate share of any
expenses paid by REITs in which it invests in addition to the expenses paid by a
Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers,
self-liquidation, and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Code and failing to maintain their
exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject
to interest rate risks.
WARRANTS
Certain Funds may invest in or acquire warrants to purchase equity or fixed
income securities. Bonds with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices may, to some
degree, reflect the performance of the underlying stock. Bonds also may be
issued with warrants attached to purchase additional fixed income securities at
the same coupon rate. A decline in interest rates would permit a Fund to buy
additional bonds at the favorable rate or to sell the warrants at a profit. If
interest rates rise, the warrants would generally expire with no value. Warrants
do not entitle a holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of the
issuing company. In addition, the value of warrants does not, necessarily, in
all cases change to the same extent as the value of the underlying securities to
which they relate. Warrants cease to have value if they are not exercised prior
to the expiration date. These factors can make warrants more speculative than
other types of investments.
SWAP AGREEMENTS
Certain Funds may enter into interest rate, index and currency exchange
rate swap agreements. These transactions are entered into in an attempt to
obtain a particular return when it is considered desirable to do so, possibly at
a lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return. Swap
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agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
rate, or "floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding minimum or maximum levels.
Most swap agreements entered into by the Funds would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, a
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). A Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owing to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by VALIC or a Sub-adviser in
accordance with procedures established by the Board of Trustees, to avoid any
potential leveraging of a Fund's portfolio. Obligations under swap agreements so
covered will not be construed to be "senior securities" for purposes of the
Fund's investment restriction concerning senior securities. A Fund will not
enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the
Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on VALIC or a Sub-adviser's
ability to predict correctly whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Funds will
enter into swap agreements only with counterparties that meet certain standards
of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect a
Fund's ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms
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of the swap agreement, including pricing, cost or credit enhancement terms.
Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
STRUCTURED NOTES
Structured notes are derivative fixed income securities, the interest rate
or principal of which is determined by an unrelated indicator. Indexed
securities include structured notes as well as securities other than debt
securities, the interest rate or principal of which is determined by an
unrelated indicator. Indexed securities may include a multiplier that multiplies
the indexed element by a specified factor and, therefore, the value of such
securities may be very volatile. To the extent a Fund invests in these
securities, however, VALIC or a Sub-adviser will analyze these securities in its
overall assessment of the effective duration of the Fund's portfolio in an
effort to monitor the Fund's interest rate risk.
EURODOLLAR OBLIGATIONS
Certain Funds, in accordance with their investment objective(s), policies,
and investment program, may invest in Eurodollar obligations, including
Eurodollar bonds and Eurodollar certificates of deposit. A Eurodollar obligation
is a security denominated in U.S. dollars and originated principally in Europe,
giving rise to the term Eurodollar.
Such securities are not registered with the SEC and generally may only be
sold to U.S. investors after the initial offering and cooling-off periods. The
market for Eurodollar securities is dominated by foreign-based investors and the
primary trading market for these securities is London.
Eurodollar obligations, including Eurodollar bonds and Eurodollar
certificates of deposit, are principally obligations of foreign branches of U.S.
banks. These instruments represent the loan of funds actually on deposit in the
U.S. The Series Company believes that the U.S. bank would be liable in the event
that its foreign branch failed to pay on its U.S. dollar denominated
obligations. Nevertheless, the assets supporting the liability could be
expropriated or otherwise restricted if located outside the U.S. Exchange
controls, taxes, or political and economic developments also could affect
liquidity or repayment. Due to possibly conflicting laws or regulations, the
foreign branch of the U.S. bank could maintain and prevail that the liability is
solely its own, thus exposing a Fund to a possible loss. Such U.S. dollar
denominated obligations of foreign branches of Federal Deposit Insurance
Corporation ("FDIC") member U.S. banks are not covered by the usual $100,000 of
FDIC insurance if they are payable only at an office of such a bank located
outside the U.S., Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Moreover, there may be less publicly available information about foreign
issuers whose securities are not registered with the SEC and such foreign
issuers may not be subject to the accounting, auditing, and financial reporting
standards applicable to issuers registered domestically. In addition, foreign
issuers, stock exchanges, and brokers generally are subject to less government
regulation. There are, however, no risks of currency fluctuation since the
obligations are U.S. dollar denominated.
Certain Funds also may purchase and sell Eurodollar futures contracts,
which enable purchasers to obtain a fixed rate for the lending of funds and
sellers to obtain a fixed rate for borrowings. A Fund might use Eurodollar
futures contracts and options thereon to hedge against changes in a foreign
prime lending interest rate to which many interest swaps and fixed income
securities are linked.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of residential or
commercial mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. See "Mortgage Pass-Through
Securities." Certain of the Funds may also invest in fixed income securities
which are secured with collateral
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consisting of mortgage-related securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
Mortgage Pass-Through Securities
Interests in pools of mortgage-related securities differ from other forms
of fixed income securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase.
The principal governmental guarantor of mortgage-related securities are
GNMA, Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage ("FHLMC"). GNMA is a wholly owned United States Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Administration (the "FHA"), or guaranteed by the Department of Veterans
Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the United States Government. FHLMC was created by Congress in 1970 for the
purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned by the twelve
Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC
issues Participation Certificates ("PCs") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining
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whether a mortgage-related security meets the Series Company's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. Certain Funds may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the originator/servicers and poolers, VALIC or a Sub-adviser
determines that the securities meet the Series Company's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in VALIC's or the Sub-adviser's opinion are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Growth Fund, the Small Cap Growth Fund,
the Large Cap Growth Fund, the Large Cap Value Fund, the MidCap Value Fund, the
Small Cap Value Fund, the High Yield Bond Fund, the Balanced Fund, the
International Value Fund, the Domestic Bond Fund, the Strategic Bond Fund and
the Core Bond Fund.)
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Funds take the position that mortgage-related securities do not
represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by a portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the FHA or the
Veterans' Administration. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government securities nor
U.S. Government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs)
A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through
security. Similar to a bond, interest and prepaid principal is paid, in most
cases, monthly. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured in multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
As an example of a CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
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COMMERCIAL MORTGAGE-BACKED SECURITIES
Commercial mortgage-backed securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues is relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage- or asset-backed securities.
OTHER MORTGAGE-RELATED SECURITIES
Other mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, including mortgage
dollar rolls, CMO residuals or stripped mortgage-backed securities ("SMBS").
Other mortgage-related securities may be equity or fixed income securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals
CMO residuals are mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may, or pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "1933 Act").
CMO residuals, whether or not registered under the 1933 Act, may be subject to
certain restrictions on transferability, and may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities ("SMBS")
SMBS are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
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SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO" class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to recoup some or all of its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
ASSET-BACKED SECURITIES
Certain Funds may invest in asset-backed securities (unrelated to first
mortgage loans) that represent fractional interests in pools of retail
installment loans, both secured (such as certificates for automobile
receivables) and unsecured, and leases, or revolving credit receivables both
secured and unsecured (such as credit card receivable securities). These assets
are generally held by a trust and payments of principal and interest, or
interest only are passed through monthly or quarterly to certificate holders and
may be guaranteed up to certain amounts by letters of credit issued by a
financial institution affiliated or unaffiliated with the trustee or originator
of the trust.
Underlying automobile sales contracts, leases or credit card receivables
are subject to prepayment, which may reduce the overall return to certificate
holders. Nevertheless, principal repayment rates tend not to vary much with
interest rates and the short-term nature of the underlying loans, leases, or
receivables tends to dampen the impact of any change in the prepayment level.
Certificate holders may also experience delays in payment on the certificates if
the full amounts due on underlying loans, leases or receivables are not realized
by the trust because of unanticipated legal or administrative costs of enforcing
the contracts or because of depreciation or damage to the collateral (usually
automobiles) securing certain contracts, or other factors. If consistent with
its investment objective(s) and policies, a Fund may invest in other
asset-backed securities that may be developed in the future.
LOAN PARTICIPATIONS
Loan Participations are debt obligations of corporations and are usually
purchased from major money center banks, selected regional banks, and major
foreign banks with branches in the U.S. which are regulated by the Federal
Reserve System or appropriate state regulatory authorities. VALIC and the
Sub-advisers believe that the credit standards imposed by such banks are
comparable to the standards such banks use in connection with loans originated
by them and in which they intend to maintain a full interest. The financial
institutions offering loan participations do not guarantee principal or interest
on the loan participations which they offer. VALIC and the Sub-advisers will not
purchase such securities for the Funds unless they believe that the collateral
underlying the corporate loans is adequate and the corporation will be able, in
a timely fashion, to pay scheduled interest and principal amounts.
ADJUSTABLE RATE SECURITIES
Certain of the Funds may invest in adjustable rate money market securities.
Adjustable rate securities (i.e., variable rate and floating rate instruments)
are securities that have interest rates that are adjusted periodically,
according to a set formula. The maturity of some adjustable rate securities may
be shortened under certain special conditions described more fully below.
Variable rate instruments are obligations (usually certificates of deposit)
that provide for the adjustment of their interest rates on predetermined dates
or whenever a specific interest rate changes. A variable rate instrument whose
principal amount is scheduled to be paid in 13 months or less is consid-
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ered to have a maturity equal to the period remaining until the next
readjustment of the interest rate. Many variable rate instruments are subject to
demand features which entitle the purchaser to resell such securities to the
issuer or another designated party, either (1) at any time upon notice of
usually 30 days or less, or (2) at specified intervals, not exceeding 13 months,
and upon 30 days notice. A variable rate instrument subject to a demand feature
is considered to have a maturity equal to the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.
Floating rate instruments (generally corporate notes, bank notes, or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The maturity of a floating rate
instrument is considered to be the period remaining until the principal amount
can be recovered through demand.
Certain Funds may invest in inverse floaters, which are derivative fixed
income or municipal securities. Inverse floaters may be issued by agencies or
instrumentalities of the U.S. government or by private issuers including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Inverse floaters generally have
greater volatility than other types of mortgage securities in which a Fund may
invest. Although inverse floaters are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers,
the market for such securities has not yet been fully developed. Accordingly,
inverse floaters are generally illiquid.
Inverse floaters are structured as a class of security that receives
distributions on a pool of mortgage assets and whose yields move in the opposite
direction of short-term interest rates and at an accelerated rate. Such
securities have the effect of providing a degree of investment leverage since
they will generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically two) of the rate
at which fixed-rate long-term debt obligations increase or decrease in response
to such changes. As a result, the market values of such securities will
generally be more volatile than the market value of fixed-rate securities.
ILLIQUID SECURITIES
The Funds will not invest more than 10% (15% in the case of the
International Growth Fund, the Small Cap Growth Fund, the Large Cap Growth Fund,
the Large Cap Value Fund, the Mid Cap Value Fund, the Small Cap Value Fund, the
High Yield Bond Fund, the Balanced Fund, the International Value Fund, the
Domestic Bond Fund, the Strategic Bond Fund and the Core Bond Fund), of the
value of their net assets in securities or other investments that are illiquid
or not readily marketable (including repurchase agreements with maturities
exceeding seven days). Securities received as a result of a corporate
reorganization or similar transaction affecting readily-marketable securities
already held in the portfolio of a Fund will not be considered securities or
other investments that are not readily marketable. However, the Funds will
attempt, in an orderly fashion, to dispose of any securities received under
these circumstances, to the extent that such securities are considered not
readily marketable, and together with other illiquid securities, exceed 10% (or
15%) of the value of a Fund's net assets.
RULE 144A SECURITIES
Each Fund, other than the Lifestyle Funds, may purchase securities which,
while privately placed, are eligible for purchase and sale pursuant to Rule 144A
under the 1933 Act. This Rule permits certain qualified institutional buyers,
such as the Funds, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Series Company, under the
supervision of the Board of Trustees, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Funds' restriction on
investing more than 10% (15% in the case of the International Growth Fund, the
Small Cap Growth Fund, the Large Cap Growth Fund, the Large Cap Value Fund, the
Mid Cap Value Fund, the Small Cap Value Fund, the High Yield Bond Fund, the
Balanced Fund, the International Value Fund, the Domestic Bond Fund, the
Strategic Bond Fund and the Core Bond Fund) of its net assets in illiquid
securities. Excluded from the Funds' investment limitations, however, are any
Rule 144A securities that have been determined to be liquid by the Board of
Trustees, VALIC or the Sub-adviser pursuant to Board approved guidelines.
Determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination the
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Series Company will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In addition
the Series Company could consider (i) frequency of trades and quotes, (ii)
number of dealers and potential purchasers, (iii) dealer undertakings to make a
market, and (iv) nature of the security and market place trades (for example,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). The liquidity of Rule 144A securities will also be
monitored by the Series Company and, if, as a result of changed conditions, it
is determined that a Rule 144A security is no longer liquid, the Funds' holding
of illiquid securities will be reviewed to determine what, if any, action is
required to assume that the Funds do not invest more than 10% (or 15%) of their
net assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Funds' investments in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities. Each Fund other than the Lifestyle Funds, may invest in Rule 144A
securities (in accordance with each Fund's investment restrictions as listed in
the prospectus) that have been determined to be liquid by Board approved
guidelines.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund, other than the Large Cap Growth Fund, the Mid Cap Growth Fund,
the International Growth Fund, the Lifestyle Funds and the Money Market Fund,
may write covered call and put options on securities and securities indices. The
Mid Cap Value Fund may write covered call options and purchase call options in
related closing transactions only. A call option is a contract that gives to the
holder the right to buy a specified amount of the underlying security or
currency at a fixed or determinable price (called the exercise or "strike"
price) upon exercise of the option. A put option is a contract that gives the
holder the right to sell a specified amount of the underlying security or
currency at a fixed or determinable price upon exercise of the option.
To "cover" a call option written, a Fund may, for example, identify and
have available for sale the specific portfolio security, group of securities, or
foreign currency to which the option relates. To cover a put option written, a
Fund may, for example, establish a segregated asset account with its custodian
containing cash or liquid assets that, when added to amounts deposited with its
broker or futures commission merchant ("FCM") as margin, equals the market value
of the instruments underlying the put option written.
Certain Funds may write options on securities and securities indices. If a
Fund writes an option which expires unexercised or is closed out by the Fund at
a profit, it will retain the premium received for the option, which will
increase its gross income. If the price of the underlying security or currency
moves adversely to the Fund's position, the option may be exercised and the
Fund, as the writer of the option, will be required to sell or purchase the
underlying security or currency at a disadvantageous price, which may only be
partially offset by the amount of premium received.
Options on stock indices are similar to options on stock, except that all
settlements are made in cash rather than by delivery of stock, and gains or
losses depend on price movements in the stock market generally (or in a
particular industry or segment of the market represented by the index) rather
than price movements of individual stocks. When a Fund writes an option on a
securities index, and the underlying index moves adversely to the Fund's
position, the option may be exercised. Upon such exercise, the Fund, as the
writer of the option, will be required to pay in cash an amount equal to the
difference between the exercise settlement value of the underlying index and the
exercise price of the option, multiplied by a specified index "multiplier."
Call or put options on a stock index may be written at an exercise or
"strike" price which is either below or above the current value of the index. If
the exercise price at the time of writing the option is below the current value
of the index for a call option or above the current value of the index for a put
option the option is considered to be "in the money." In such a case, the Fund
will cover such options written by segregating with its custodian or pledging to
its commodity broker as collateral cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.
Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, Computer
Technology Index, Oil Index, NYSE Options Index, Technology Index, Gold/Silver
Index, Institutional Index and NYSE Beta Index. The Funds may also use options
on such other indices as may now or in the future be available.
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Each Fund, except the Large Cap Growth Fund, the Mid Cap Growth Fund, the
Lifestyle Funds, the International Growth Fund, the International Value Fund,
the Mid Cap Value Fund, and the Money Market Fund, may also purchase put or call
options on securities and securities indices in order to (i) hedge against
anticipated changes in interest rates or stock prices that may adversely affect
the prices of securities that the Fund intends to purchase at a later date, (ii)
hedge its investments against an anticipated decline in value, or (iii) attempt
to reduce the risk of missing a market or industry segment advance. Certain
Funds also may purchase put options on foreign currencies that correlate with
the Fund's portfolio securities in order to minimize or hedge against
anticipated declines in the exchange rate of the currencies in which the Fund's
securities are denominated and may purchase call options on foreign currencies
that correlate with its portfolio securities to take advantage of anticipated
increases in exchange rates. In the event that the anticipated changes in
interest rates, stock prices, or exchange rates occur, the Fund may be able to
offset the resulting adverse effect on the Fund, in whole or in part, through
the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying security, securities index,
or currency changes sufficiently, the option may expire without value to the
Fund. To close option positions purchased by the Funds, the Funds may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.
Options used by the Funds may be traded on the national securities
exchanges or in the over-the-counter market. Only the Large Cap Value Fund, the
Small Cap Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund and the
Core Bond Fund may use over-the-counter options. Options traded in the
over-the-counter market may not be as actively traded as those on an exchange.
Accordingly, it may be more difficult to value such options. In addition, it may
be more difficult to enter into closing transactions with respect to options
traded over-the-counter. In this regard, the Funds may enter into contracts with
the primary dealers with whom they write over-the-counter options. The contracts
will provide that each Fund has the absolute right to repurchase an option it
writes at any time at a repurchase price which represents the fair market value
of such option, as determined in good faith through negotiations between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of the formula
may vary between contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by each Fund for
writing the option, plus the amount, if any, of the option's intrinsic value
(i.e., the amount the option is "in-the-money"). The formula will also include a
factor to account for the difference between the price of the security and the
strike price of the option if the option is written "out-of-the-money." Although
the specific details of the formula may vary with different primary dealers,
each contract will provide a formula to determine the maximum price at which
each Fund can repurchase the option at any time. The Funds have established
standards of creditworthiness for these primary dealers.
WRITING COVERED CALL AND PUT OPTIONS AND PURCHASING CALL AND PUT OPTIONS
All of the Funds, except the Mid Cap Growth Fund, the International Growth
Fund, the Large Cap Growth Fund, the Lifestyle Funds and the Money Market Fund,
may write exchange-traded covered call and put options on or relating to
specific securities in order to earn additional income or, in the case of a call
written, to minimize or hedge against anticipated declines in the value of the
Fund's securities. The Mid Cap Value Fund may write exchange-traded covered call
options, but not put options in this connection. To "cover" an option means, for
example, to identify and make available for sale the specific portfolio security
or foreign currency to which the option relates. Through the writing of a
covered call option a Fund receives premium income but obligates itself to sell
to the purchaser of such an option the particular security or foreign currency
underlying the option at a specified price at any time prior to the expiration
of the option period, regardless of the market value of the security or the
exchange rate for the foreign currency during this period. Through the writing
of a covered put option a Fund receives premium income but obligates itself to
purchase a particular security or foreign currency underlying the option at
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a specified price at any time prior to the expiration of the option period,
regardless of market value or exchange rate during the option period.
Certain Funds, in accordance with their investment objective(s) and
investment programs, may also write exchange-traded covered call and put options
on stock indices and may purchase call and put options on stock indices that
correlate with the Fund's portfolio securities. These Funds may engage in such
transactions for the same purposes as they may engage in such transactions with
respect to individual portfolio securities or foreign currencies, that is, to
generate additional income or as a hedging technique to minimize anticipated
declines in the value of the Fund's portfolio securities or the exchange rate of
the securities in which the Fund invested. In economic effect, a stock index
call or put option is similar to an option on a particular security, except that
the value of the option depends on the weighted value of the group of securities
comprising the index, rather than a particular security, and settlements are
made in cash rather than by delivery of a particular security.
Each Fund, other than the Large Cap Growth Fund, the Mid Cap Growth Fund,
the International Growth Fund, the Lifestyle Funds and the Money Market Fund,
may also purchase exchange-traded call and put options with respect to
securities and stock indices that correlate with that Fund's particular
portfolio securities. In this connection, the Mid Cap Value Fund may purchase
exchange traded call options only.
A Fund may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of its portfolio securities or
currencies. As the holder of a put option with respect to individual securities
or currencies, the Fund has the right to sell the securities or currencies
underlying the options and to receive a cash payment at the exercise price at
any time during the option period. As the holder of a put option on an index, a
Fund has the right to receive, upon exercise of the option, a cash payment equal
to a multiple of any excess of the strike price specified by the option over the
value of the index.
A Fund may purchase call options on individual securities, currencies or
stock indices in order to take advantage of anticipated increases in the price
of those securities or currencies by purchasing the right to acquire the
securities or currencies underlying the option or, with respect to options on
indices, to receive income equal to the value of such index over the strike
price. As the holder of a call option with respect to individual securities or
currencies, a Fund obtains the right to purchase the underlying securities or
currencies at the exercise price at any time during the option period. As the
holder of a call option on a stock index, a Fund obtains the right to receive,
upon exercise of the option, a cash payment equal to the multiple of any excess
of the value of the index on the exercise date over the strike price specified
in the option.
Unlisted options may be used by the Large Cap Value Fund, the Small Cap
Growth Fund, the High Yield Bond Fund, the Strategic Bond Fund and the Core Bond
Fund. Such options are not traded on an exchange and may not be as actively
traded as listed securities, making the valuation of these securities more
difficult. In addition, an unlisted option entails a risk not found in
connection with listed options -- that the party on the other side of the option
transaction will default. This may make it impossible to close out an unlisted
option position in some cases, and profits may be lost thereby. Such unlisted,
over-the-counter options, unless otherwise indicated, will be considered
illiquid securities. The Funds will engage in such transactions only with firms
of sufficient credit to minimize these risks. In instances in which a Fund has
entered into agreements with primary dealers with respect to the unlisted,
over-the-counter options it has written, and such agreements would enable the
Fund to have an absolute right to repurchase, at a pre-established formula
price, the over-the-counter options written by it, the Fund will treat as
illiquid only the amount equal to the formula price described above less the
amount by which the option is "in-the-money."
Although these investment practices will be used to generate additional
income and to attempt to reduce the effect of any adverse price movement in the
securities or currencies subject to the option, they do involve certain risks
that are different in some respects from investment risks associated with
similar funds which do not engage in such activities. These risks include the
following: writing covered call options -- the inability to effect closing
transactions at favorable prices and the inability to participate in the
appreciation of the underlying securities or currencies above the exercise
price; writing covered put options -- the inability to effect closing
transactions at favorable prices and the obligation to purchase the specified
securities or currencies or to make a cash settlement on the stock index at
prices
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which may not reflect current market values or exchange rates; and purchasing
put and call options -- possible loss of the entire premium paid. In addition,
the effectiveness of hedging through the purchase or sale (writing) of stock
index options will depend upon the extent to which price movements in the
portion of a Fund's portfolio being hedged correlate with price movements in the
selected stock index. Perfect correlation may not be possible because the
securities held or to be acquired by a Fund may not exactly match the
composition of the stock index on which options are purchased or written. If the
forecasts of VALIC regarding movements in securities prices, currencies or
interest rates are incorrect, a Fund's investment results may have been better
without the hedge.
FINANCIAL FUTURES CONTRACTS
Each Fund, except the Mid Cap Growth Fund, the International Growth Fund,
the Mid Cap Value Fund, the Lifestyle Funds and the Money Market Fund, in
accordance with its investment objective(s), investment program, policies, and
restrictions may purchase and sell exchange-traded financial futures contracts
as a hedge to protect against anticipated changes in prevailing interest rates,
overall stock prices or currency rates, or to efficiently and in a less costly
manner implement either increases or decreases in exposure to the equity or bond
markets. The Funds may also write covered call options and purchase put and call
options on financial futures contracts for the same purposes or to earn
additional income and the Small Cap Growth Fund, the Large Cap Value Fund and
the Large Cap Growth Fund may also write covered put options on stock index
futures contracts. The Large Cap Value Fund may utilize currency futures
contracts and both listed and unlisted financial futures contracts and options
thereon.
Financial futures contracts consist of interest rate futures contracts,
stock index futures contracts, and currency futures contracts. An interest rate
futures contract is a contract to buy or sell specified debt securities at a
future time for a fixed price. A stock index futures contract is similar in
economic effect, except that rather than being based on specific securities, it
is based on a specified index of stocks and not the stocks themselves. A
currency futures contract is a contract to buy or sell a specific foreign
currency at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the
purchaser on a specified future date a specified quantity of one of several
listed financial instruments, against payment of a settlement price specified in
the contract. A public market currently exists for futures contracts covering a
number of indexes as well as financial instruments and foreign currencies,
including: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of
deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the French franc;
the Swiss franc; the Mexican peso; and certain multinational currencies, such as
the European Currency Unit ("ECU"). It is expected that other futures contracts
will be developed and traded in the future.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the S&P Midcap 400, the
Nikkei 225, the New York Stock Exchange Composite Index, the Value Line Stock
Index, and the Major Market Index. It is expected that financial instruments
related to broad-based indices, in addition to those for which futures contracts
are currently traded, will in the future be the subject of publicly-traded
futures contracts, and the Funds may use any of these, which are appropriate, in
its hedging strategies.
A financial futures contract is an agreement to buy or sell a security (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery of a specified security)
for a set price in the future. Exchange-traded futures contracts are designated
by boards of trade which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC").
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Positions taken in the futures markets are not normally held until delivery
or cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities whenever it appears economically
advantageous to the Fund to do so. A clearing organization associated with the
relevant exchange assumes responsibility for closing out transactions and
guarantees that, as between the clearing members of an exchange, the sale and
purchase obligations will be performed with regard to all positions that remain
open at the termination of the contract.
Unlisted financial futures contracts, which may be purchased or sold only
by the Large Cap Value Fund, the High Yield Bond Fund, the Strategic Bond Fund
and the Core Bond Fund, like unlisted options, are not traded on an exchange
and, generally, are not as actively traded as listed futures contracts or listed
securities. Such financial futures contracts generally do not have the following
elements: standardized contract terms, margin requirements relating to price
movements, clearing organizations that guarantee counter-party performance, open
and competitive trading in centralized markets, and public price dissemination.
These elements in listed instruments serve to facilitate their trading and
accurate valuation. As a result, the accurate valuation of unlisted financial
futures contracts may be difficult. In addition, it may be difficult or even
impossible, in some cases, to close out an unlisted financial futures contract,
which may, in turn, result in significant losses to the Fund. Such unlisted
financial futures contracts will be considered by the Fund to be illiquid
securities and together with other illiquid securities will be limited to no
more than 10% (or 15%) of the value of such Fund's total assets. In making such
determination, the value of unlisted financial futures contracts will be based
upon the "face amount" of such contracts.
When financial futures contracts are entered into by a Fund, either as the
purchaser or the seller of such contracts, the Fund is required to deposit with
the Custodian in a segregated account in the name of the FCM an initial margin
of cash or U.S. Treasury bills equaling as much as 5% to 10% or more of the
contract settlement price. The nature of initial margin requirements in futures
transactions differs from traditional margin payments made in securities
transactions in that initial margins for financial futures contracts do not
involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a financial futures contract represents
a good faith deposit securing the customer's contractual obligations under the
financial futures contract. The initial margin deposit is returned, assuming
these obligations have been met, when the financial futures contract is
terminated. In addition, subsequent payments to and from the FCM, called
"variation margin," are made on a daily basis as the price of the underlying
security, stock index, or currency fluctuates, reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
Certain Funds may hold financial futures contracts in accordance with their
investment policies. A Fund may not adhere to its policy in circumstances where
the Fund is required to invest a large cash infusion. In this circumstance the
Fund's total invested position, including the security value of the financial
futures contracts may not exceed 100% of the Fund's net assets.
Financial futures contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, the Funds will normally close all futures positions by entering
into an offsetting transaction which operates to cancel the position held, and
which usually results in a profit or loss.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
For bona fide hedging purposes, each Fund, except the Mid Cap Growth Fund,
the International Growth Fund, the Mid Cap Value Fund, the Lifestyle Funds and
the Money Market Fund, may also purchase call and put options on financial
futures contracts and write call options on financial futures contracts of the
type which the particular Fund is authorized to enter into. Options on financial
future contracts used by the Funds are traded on exchanges that are licensed and
regulated by the CFTC. A call option on a financial futures contract gives the
purchaser the right in return for the premium paid, to purchase a financial
futures contract (assume a "long" position) at a specified exercise price at any
time before the option expires. A put option gives the purchaser the right, in
return for the premium paid, to sell a financial futures
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contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
Unlike entering into financial futures contracts, purchasing options on
financial futures contracts allows a Fund to decline to exercise the option,
thereby avoiding any loss beyond foregoing the purchase price (or "premium")
paid for the options. Therefore, the purchase of options on financial futures
contracts may be a preferable hedging strategy when a Fund desires maximum
flexibility. Whether, in order to achieve a particular objective, a Fund enters
into a financial futures contract, on the one hand, or an option contract, on
the other, will depend on all the circumstances, including the relative costs,
liquidity, availability and capital requirements of such financial futures and
options contracts. Also, the Funds will consider the relative risks involved,
which may be quite different. These factors, among others, will be considered in
light of market conditions and the particular objective to be achieved.
CERTAIN ADDITIONAL RISKS OF OPTIONS AND FINANCIAL FUTURES CONTRACTS
In addition to the risks described in the Series Company's Prospectus, the
use of options and financial futures contracts may entail the following risks.
First, although such instruments when used by the Funds are intended to
correlate with the Funds' portfolio securities or currencies, in many cases the
options or financial futures contracts used may be based on securities,
currencies, or stock indices the components of which are not identical to the
portfolio securities owned or intended to be acquired by the Funds. Second, due
to supply and demand imbalances and other market factors, the price movements of
financial futures contracts, options thereon, currency options, and stock index
options may not necessarily correspond exactly to the price movements of the
securities, currencies, or stock indices on which such instruments are based.
Accordingly, there is a risk that a Fund's transactions in those instruments
will not in fact offset the impact on the Fund of adverse market developments in
the manner or to the extent contemplated or that such transactions will result
in losses to the Fund which are not offset by gains with respect to
corresponding portfolio securities owned or to be purchased by that Fund.
To some extent, these risks can be minimized by careful management of
hedging activities. For example, where price movements in a financial futures or
option contract are expected to be less volatile than price movements in the
related portfolio securities owned or intended to be acquired by a Fund, it may,
in order to compensate for this difference, use an amount of financial futures
or option contracts which is greater than the amount of such portfolio
securities. Similarly, where the price movement of a financial futures or option
contract is anticipated to be more volatile, a Fund may use an amount of such
contracts which is smaller than the amount of portfolio securities to which such
contracts relate.
The risk that the hedging technique used will not actually or entirely
offset an adverse change in a Fund's portfolio securities is particularly
relevant to financial futures contracts and options written on stock indices and
currencies. A Fund, in entering into a futures purchase contract, potentially
could lose any or all of the contract's settlement price. In entering into a
futures sale contract, a Fund could potentially lose a sum equal to the excess
of the contract's value (marked to market daily) over the contract's settlement
price. In writing options on stock indices or currencies a Fund could
potentially lose a sum equal to the excess of the value of the index or currency
(marked to market daily) over the exercise price. In addition, because financial
futures contracts require delivery at a future date of either a specified
security or currency, or an amount of cash equal to a multiple of the difference
between the value of a specified stock index on that date and the settlement
price, an algebraic relationship exists between any price movement in the
underlying security or currency or index and the potential cost of settlement to
a Fund. A small increase or decrease in the value of the underlying security or
currency or stock index can, therefore, result in a much greater increase or
decrease in the cost to the Fund.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Fund's portfolio securities "covering"
a stock index call option written by it may decline during the time between
exercise of the option by the option holder and notice to the Fund of such
exercise (usually one day or more) thereby requiring the Fund to use additional
assets to settle the transaction. This risk is not present in the case of
covered call options on
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individual securities, which are settled by delivery of the actual securities.
There are also special risks in using currency options including the
following: (i) settlement of such options must occur in the country issuing the
currency in conformity with foreign regulations for such delivery, including the
possible imposition of additional costs and taxes, (ii) no systematic reporting
of "last sale" information for foreign currencies, and (iii) the need to use
"odd lot" transactions for underlying currencies at prices less favorable than
those for "round lot" transactions.
Although the Funds intend to establish positions in these instruments only
when there appears to be an active market, there is no assurance that a liquid
market for such instruments will exist when a Fund seeks to "close out" (i.e.
terminate) a particular financial futures contract or option position. This is
particularly relevant for over-the-counter options and financial futures
contracts, as previously noted. Trading in such instruments could be
interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Fund may be able, by adjusting
investment strategy in the cash or other contract markets, to offset to some
extent any adverse effects of being unable to liquidate a hedge position.
Nevertheless, in some cases, a Fund may experience losses as a result of such
inability. Therefore it may have to liquidate other more advantageous
investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to a
Fund's assets posted as margin in connection with these transactions as
permitted under the 1940 Act. See "Other Information -- Custody of Assets" in
this Statement of Additional Information. The Funds will use only FCMs or
brokers in whose reliability and financial soundness they have full confidence
and have adopted certain other procedures and limitations to reduce the risk of
loss with respect to any assets which brokers hold or to which they may have
access. Nevertheless, in the event of a broker's insolvency or bankruptcy, it is
possible that a Fund could experience a delay or incur costs in recovering such
assets or might recover less than the full amount due. Also the value of such
assets could decline by the time a Fund could effect such recovery.
The success of a Fund in using hedging techniques depends, among other
things, on VALIC's, or the Sub-adviser's ability to predict the direction and
volatility of price movements in both the futures and options markets as well as
the securities markets and on VALIC's or the Sub-adviser's ability to select the
proper type, time, and duration of hedges. There can be no assurance that these
techniques will produce their intended results. In any event, VALIC, or the
Sub-adviser will use financial futures contracts, options thereon, currency
options and stock index options only when it believes the overall effect is to
reduce, rather than increase, the risks to which a Fund is exposed. Hedging
transactions also, of course, may be more, rather than less, favorable to a Fund
than originally anticipated.
LIMITATIONS
No Fund will enter into any financial futures contract or purchase any
option thereon if, immediately thereafter, the total amount of its assets
required to be on deposit as initial margin to secure its obligations under
financial futures contracts, plus the amount of premiums paid by it for
outstanding options to purchase futures contracts, exceeds 5% of the market
value of its total assets; provided however, that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. This is a fundamental policy of the Socially
Responsible Fund.
In addition, each Fund has an operating policy which provides that it will
not enter into financial futures contracts or write put or call options with
respect to financial futures contracts unless such transactions are either
"covered" or subject to segregation requirements considered appropriate by the
SEC staff. Further, each Fund has an operating policy which provides that it
will not enter into custodial arrangements with respect to initial or variation
margin deposits or marked-to-market amounts unless the custody of such initial
and variation margin deposits and marked-to-market amounts are in compliance
with current SEC staff interpretive positions or no-action letters or rules
adopted by the SEC.
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SHORT SALES AND SHORT SALES AGAINST THE BOX
Certain Funds may engage in short sale transactions in securities listed on
one or more national securities exchanges or on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). Short selling
involves the sale of borrowed securities. At the time a short sale is effected,
a Fund incurs an obligation to replace the security borrowed at whatever its
price may be at the time that the Fund purchases it for delivery to the lender.
When a short sale transaction is closed out by delivery of the securities, any
gain or loss on the transaction is taxable as a short term capital gain or loss.
Until the security is replaced, the Fund is required to pay to the lender
amounts equal to any dividends or interest which accrue during the period of the
loan. All short sales will be fully collateralized. A Fund may also engage in
short sales against the box, which involves selling a security the Fund holds in
its portfolio for delivery at a specified date in the future. A Fund will not
engage in short sales or short sales against the box if immediately following
such transaction the aggregate market value of all securities sold short and
sold short against the box would exceed 10% of the Fund's net assets (taken at
market value).
MONEY MARKET SECURITIES OF FOREIGN ISSUERS
Foreign money market instruments utilized by certain of the Funds will be
limited to: (i) obligations of, or guaranteed by, a foreign government, its
agencies or instrumentalities; (ii) certificates of deposit, bankers'
acceptances, short-term notes, negotiable time deposits and other obligations of
the ten largest banks in each foreign country, measured in terms of net assets;
and (iii) other short-term unsecured corporate obligations (usually 1 to 270 day
commercial paper) of foreign companies. For temporary purposes or in light of
adverse foreign political or economic conditions, the Funds may invest in
short-term high quality foreign money market securities without limitation.
INVESTMENT ADVISER
VALIC is a stock life insurance company organized on May 1, 1969 under the
Texas Insurance Code as a successor to The Variable Annuity Life Insurance
Company of America, a District of Columbia insurance company organized in 1955.
VALIC's primary business consists of offering fixed and variable (and
combinations thereof) retirement annuity contracts. VALIC is an indirect wholly-
owned subsidiary of American General Corporation, Houston, Texas. Members of the
American General Corporation group of companies operate in each of the 50
states, the District of Columbia, and Canada and collectively engage in
substantially all forms of financial services. American General Corporation was
incorporated as a Texas business corporation on February 26, 1980 as the
successor to American General Life Insurance Company (organized in 1926) as the
result of a corporate reorganization completed on July 1, 1980.
VALIC serves as the investment adviser to each of the Funds pursuant to an
Investment Advisory Agreement with each Fund dated August 26, 1998, that was
approved by the Board of Trustees on August 26, 1998. Under the Investment
Advisory Agreement, each Fund pays VALIC an annual fee, payable monthly, based
on its average daily net asset value.
Pursuant to the Investment Advisory Agreement, the Series Company retains
VALIC to manage the investment of the assets of each Fund, maintain a trading
desk, and place orders for the purchase and sale of portfolio securities. As
investment adviser, VALIC obtains and evaluates as appropriate economic,
statistical, and financial information in order to formulate and implement
investment programs in furtherance of each Fund's investment objective(s) and
investment program. Pursuant to the Investment Advisory Agreements, VALIC
provides other services including furnishing the services of the President and
such other executives and clerical personnel as the Series Company requires to
conduct its day-to-day operations, to prepare the various reports and statements
required by law, and to conduct any other recurring or nonrecurring activity
which the Series Company may need to continue operations. The Investment
Advisory Agreement provides that the Series Company pay all expenses not
specifically assumed by VALIC under the Agreement. Examples of the expenses paid
by the Series Company include transfer agency fees, custodial fees, the fees of
outside legal and auditing firms, the costs of reports to shareholders and
expenses of servicing shareholder accounts (e.g., daily calculation of the net
asset
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value). The Series Company allocates advisory fees, SEC filing fees, interest
expenses and state filing fees, if any, to the Fund that incurs such charges and
allocates all other expenses among the Funds based on the net assets of each
Fund in relation to the net assets of the Series Company.
The Investment Advisory Agreement requires that VALIC's advisory fee be
reduced by any commissions, tender and exchange offer solicitation fees and
other fees, or similar payments (less any direct expenses incurred) received by
VALIC or its affiliates in connection with the purchase and sale of portfolio
investments of the Funds. In this regard, the Investment Advisory Agreement
requires VALIC to use its best efforts to recapture tender and exchange
solicitation offer fees for each Fund's benefits, and to advise the Series
Company's Board of Trustees of any other fees, or similar payments that it (or
any of its affiliates) may receive in connection with each Fund's portfolio
transactions or of other arrangements that may benefit any of the Funds or the
Series Company.
Pursuant to an Accounting Services Agreement dated August 26, 1998
("Agreement"), VALIC provides accounting services to the Series Company. The
Agreement provides that the Series Company will pay to VALIC an annual fee
payable monthly based on average daily net assets for providing the accounting
services.
The Investment Advisory Agreement may be continued with respect to any Fund
if specifically approved, after the initial two year term, at least annually by
(a)(i) the Series Company's Board of Trustees or (ii) a majority of that Fund's
outstanding voting securities (as defined by the 1940 Act), and (b) the
affirmative vote of a majority of the trustees who are not parties to the
agreement or "interested persons" of any such party (as defined by the 1940 Act)
by votes cast in person at a meeting called for this purpose. The Investment
Advisory Agreement also provides that it shall terminate automatically if
assigned. The Investment Advisory Agreement may be terminated as to any Fund at
any time by the Series Company's Board of Trustees, by vote of a majority of the
Fund's outstanding voting securities, or by VALIC, on not more than 60 days'
written notice, nor less than 30 days' written notice, or upon such shorter
notice as may be mutually agreed upon, without the payment of any penalty.
Additionally the Investment Advisory Agreement provides that VALIC shall not be
liable to the Series Company, or any shareholder in the Series Company, for any
act or omission in rendering services under the Agreement, or for any losses
sustained in the purchase, holding, or sale of any portfolio security, so long
as there has been no willful misfeasance, bad faith, negligence, or reckless
disregard of obligations or duties on the part of VALIC.
INVESTMENT SUB-ADVISERS
Pursuant to Investment Sub-advisory Agreements dated August 26, 1998 with
each Sub-adviser, VALIC has engaged American General Investment Management, L.P.
("AGIM") to provide sub-advisory services to the High Yield Bond Fund, the
Strategic Bond Fund and the Core Bond Fund and Bankers Trust Company ("Bankers
Trust") to provide sub-advisory services for a portion of the Small Cap Value
Fund. In addition, Capital Guardian Trust Company ("Capital Guardian") provides
sub-advisory services for the International Value Fund, the Domestic Bond Fund
and the Balanced Fund, Jacobs Asset Management provides sub-advisory services
for the International Growth Fund, State Street Bank and Trust Company/State
Street Global Advisors ("State Street Global Advisors") provides sub-advisory
services for the Large Cap Value Fund, Goldman Sachs Asset Management ("GSAM")
provides sub-advisory services for the Large Cap Growth Fund and
Neuberger&Berman Management Inc. ("N&B Management") provides sub-advisory
services for the Mid Cap Value Fund pursuant to separate Sub-advisory
Agreements. Brown Capital Management, Inc. ("Brown Capital Management") provides
sub-advisory services for the Mid Cap Growth Fund, Fiduciary Management
Associates, Inc. ("FMA") provides sub-advisory services for a portion of the
Small Cap Value Fund and J.P. Morgan Investment Management, Inc. ("JP Morgan")
provides sub-advisory services for the Small Cap Growth Fund pursuant to
separate sub-advisory Agreements, as well. AGIM, Bankers Trust, Capital
Guardian, Jacobs Asset Management, State Street Global Advisors, GSAM, N&B
Management, Brown Capital Management, FMA and JP Morgan (collectively, the
"Sub-advisers") will be subject to the control, supervision and direction of
VALIC, which will retain responsibility for the overall management of the Funds
to which these companies provide sub-
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advisory services (collectively, the "Sub-advised Funds").
In selecting Sub-advisers, the Series Company's Trustees carefully
evaluated: (i) the nature and quality of the services expected to be rendered to
the Fund(s) by the Sub-adviser, (ii) the distinct investment objective and
policies of the Fund(s); (iii) the history, reputation, qualification and
background of the Sub-adviser's personnel and its financial condition; (iv) its
performance track record; and (v) other factors deemed relevant. The Trustees
also reviewed the fees to be paid to each Sub-adviser.
The Series Company was issued an exemptive order by the SEC on September 9,
1998 for an exemption (the "Exemption") from certain provisions of the 1940 Act
which would otherwise require VALIC to obtain formal shareholder approval prior
to engaging and entering into sub-advisory agreements with Sub-advisers. The
relief is based on the conditions set forth in the Exemption that, among other
things; (1) VALIC will select, monitor, evaluate and allocate assets to the
Sub-advisers and oversee Sub-advisers compliance with the relevant Fund's
investment objective, policies and restrictions; (2) before a Fund may rely on
the Exemption, the Exemption must be approved by the shareholders of the Funds
operating under the Exemption; (3) the Series Company will provide to
shareholders certain information about a new Sub-adviser; (4) the Series Company
will disclose in its Prospectus the existence, substance and effect of the
Exemption; and (5) the Trustees, including a majority of the "non-interested"
Trustees, must approve each sub-advisory agreement in the manner required under
the 1940 Act. Any changes to the Investment Advisory Agreement between the
Series Company and VALIC would still require shareholder approval. As required
by the Exemption, the initial shareholder of each Fund on August 26, 1998,
consented to permit VALIC to terminate, replace or add Sub-advisers and to enter
into sub-advisory agreements with Sub-advisers upon approval of the Board of
Trustees but without formal shareholder approval.
Pursuant to the Investment Sub-advisory Agreements and subject to VALIC's
control, supervision and direction, the Sub-advisers will manage the investment
and reinvestment of the assets, other than cash, of the Sub-advised Funds,
including the evaluation of pertinent economic, statistical, financial and other
data, and the determination of industries and companies to be represented in the
Sub-advised Funds. Further, the Sub-advisers will maintain a trading desk and
place orders for the purchase and sale of portfolio investments for the
Sub-advised Funds, accounts with brokers and dealers selected by the
Sub-advisers, or arrange for any other entity to provide a trading desk and to
place orders with brokers and dealers selected by the Sub-advisers and VALIC.
The Investment Sub-advisory Agreements provide that the Sub-advisers will
bear the expense of discharging their responsibilities.
VALIC shall pay to AGIM, for the services rendered and expenses paid by
AGIM, a monthly fee computed at the annual rate of 0.25% of the first $200
million, 0.20% of the next $300 million and 0.15% of average daily net asset
values on the excess over $500 million of the Core Bond Fund, 0.35% of the first
$200 million, 0.25% of the next $300 million and 0.20% of average daily net
asset values over $500 million of the Strategic Bond Fund and 0.45% of the first
$200 million, 0.35% of the next $300 million and 0.30% of average daily net
asset values over $500 million of the High Yield Bond Fund.
VALIC shall pay to Bankers Trust, for the services rendered and expenses
paid by Bankers Trust, a monthly fee computed at the annual rate of 0.03% of the
average daily net asset values of the portion of the Small Cap Value Fund
portfolio that it manages.
VALIC shall pay to Brown Capital Management, for the services rendered to
the Mid Cap Growth Fund and expenses paid by Brown Capital Management, a monthly
fee computed at the annual rate of 0.40% of the first $25 million, 0.30% of the
next $25 million and 0.20% of average daily net asset values on the excess over
$50 million.
VALIC shall pay to Capital Guardian, for the services rendered and expenses
paid by Capital Guardian, a quarterly fee computed at the annual rate of 0.75%
of the first $25 million, 0.60% of the next $25 million, 0.425% of the next $200
million and 0.375% of average daily net assets values on the excess over $250
million of the International Value Fund, 0.35% of the first $50 million, 0.20%
of the next $50 million, 0.18% of the next $200 million and 0.15% of average
daily net asset values on the excess over $300 million of the Domestic Bond Fund
and 0.55% of the first $25 million, 0.40% of the next $25 million and 0.20% of
average daily net asset values on the excess over $50 million of the Bal-
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anced Fund. Capital Guardian aggregates fees with respect to the International
Value Fund, the Domestic Bond Fund and the Balanced Fund and applies a 5%
discount to all fees if total fees are between $1.25 million and $4 million, a
7.5% discount to all fees if total fees are between $4 million and $8 million, a
10% discount to all fees if total fees are between $8 million and $12 million
and a 12.5% discount to all fees if total fees exceed $12 million.
VALIC shall pay to FMA, for the services rendered to the portion of the
Small Cap Value Fund that it manages and expenses paid by FMA, a monthly fee
computed at the annual rate of 0.50% of the first $50 million and 0.40% of
average daily net asset values on the excess over $50 million.
VALIC shall pay to GSAM, for the services rendered to the Large Cap Growth
Fund and expenses paid by GSAM, a monthly fee computed at the annual rate of
0.30% of average daily net asset values of the Large Cap Growth Fund.
VALIC shall pay to J.P. Morgan, for the services rendered to the Small Cap
Growth Fund and expenses paid by JP Morgan, a monthly fee computed at the annual
rate of 0.60% of average daily net asset values of the Small Cap Growth Fund.
VALIC shall pay to Jacobs Asset Management, for the services rendered to
the International Growth Fund and expenses paid by Jacobs Asset Management, a
monthly fee computed at the annual rate of 0.65% of the first $100 million and
0.55% of average daily net asset values on the excess over $100 million.
VALIC shall pay to N&B Management, for the services rendered to the Mid Cap
Value Fund and expenses paid by N&B Management, a monthly fee computed at the
annual rate of 0.50% of the first $100 million, 0.475% of the next $150 million,
0.45% of the next $250 million, 0.425% of the next $250 million and 0.40% of
average daily net asset values on the excess over $750 million.
VALIC shall pay to State Street Global Advisors, for the services rendered
to the Large Cap Value Fund and expenses paid by State Street, a monthly fee
computed at the annual rate of 0.25% of average daily net asset values of the
Large Cap Value Fund, but in no event less than $50,000 per year.
The Investment Sub-advisory Agreements may be continued with respect to any
of the Funds if approved, after the initial two year term, at least annually by
the vote of the Series Company's Board of Trustees who are not parties to the
Investment Sub-advisory Agreements or interested persons of any such parties,
cast in person at a meeting called for the purpose of voting on such approval
and by a vote of a majority of the Series Company's Board of Trustees or a
majority of the relevant Fund's outstanding voting securities.
Subject to the Exemption, the Investment Sub-advisory Agreements may be
terminated at any time by VALIC, the relevant Sub-adviser, the Series Company's
Board of Trustees, or by vote of a majority of the outstanding voting securities
of the relevant Sub-advised Fund, on not more than 60 days' nor less than 30
days' written notice to the other entities, or upon such shorter notice as may
be mutually agreed upon. Such termination shall be without the payment of any
penalty.
The Investment Sub-advisory Agreements provide that the Sub-advisers shall
not be liable to VALIC, the Series Company or to any shareholder of the Series
Company for any act or omission in rendering services under the Investment
Sub-advisory Agreements or for any losses sustained in the purchase, holding or
sale of any portfolio security, so long as there has been no willful
misfeasance, bad faith, negligence or reckless disregard of obligations or
duties on the part of the Sub-advisers.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As investment adviser to the Series Company, VALIC has responsibility for
placing (and deciding when to place) orders for the purchase and sale of
investments for the portfolio of each Fund, selecting brokers or dealers to
handle these transactions, and negotiating commissions on these transactions.
VALIC utilizes the assistance of Sub-advisers in selecting brokers or dealers to
handle transactions for the Sub-advised Funds. The Sub-advisers may employ
affiliated brokers for portfolio transactions under circumstances described in
the Prospectus under the heading "About the Series Company's Management."
Virtually all of the over-the-counter transactions by the actively managed
portion of the Small Cap Value Fund, the High Yield Bond Fund, the Strategic
Bond Fund, the Domestic Bond Fund and the Mid Cap Growth Fund, are principal
transac-
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tions with issuers and dealers at net prices which entail no brokerage
commissions. The International Value Fund, the Mid Cap Value Fund, and the
Socially Responsible Fund, each purchase and sell most of their portfolio
securities on a national securities exchange on an agency basis. The
International Growth Fund, the Balanced Fund, the Mid Cap Growth Fund, the Small
Cap Value Fund, and the Large Cap Value Fund engage in over-the-counter
transactions with principals and transactions with national securities exchanges
on an agency basis. The Series Company normally enters into principal
transactions directly with the issuer or the market-maker.
When the Series Company purchases or sells securities or financial futures
contracts on an exchange, it pays a commission to any FCM or broker executing
the transaction. When the Series Company purchases securities from the issuer,
an underwriter usually receives a commission or "concession" paid by the issuer.
When the Series Company purchases securities from a market-maker, it pays no
commission, but the price includes a "spread" or "mark-up" (between the bid and
asked price) earned by the market-making dealer on the transaction.
In purchasing and selling each Fund's portfolio securities, it is the
policy of VALIC and the Sub-advisers (collectively, the "Advisers") to seek the
best execution at the most favorable price through responsible broker-dealers
and, in the case of agency transactions, at competitive commission rates. When
selecting brokers or dealers, and in negotiating prices and commissions, the
Advisers consider such factors as: the broker or dealer's reliability; the
quality of the broker or dealer's execution services on a continuing basis; the
rate of the commission; the size and difficulty of the order and the timeliness
of execution; the reliability, integrity, financial condition, general
execution, and operational capabilities of that firm and competing
broker-dealers. In over-the-counter transactions, the Advisers place orders
directly with the principal market-maker unless they believe the Series Company
can obtain a better price (or receive better execution of orders) from a broker
on an agency basis. In transactions executed on securities or commodities
exchanges, the Advisers seek the best overall price and execution at the most
favorable commission rate (except when higher brokerage commissions are paid to
obtain brokerage and research services, as explained below). When the Advisers
believe that more than one firm meets these criteria the Advisers may prefer
brokers who provide the Advisers or the Series Company with brokerage and
research services, described below.
The Advisers may cause a Fund to pay a broker-dealer a commission (for
executing a securities transaction) that is greater than the commission another
broker-dealer would have received for executing the same transaction, if the
Advisers determine in good faith that the greater commission paid to the first
broker-dealer is reasonable in relation to the value of brokerage and research
services provided to the Advisers viewed in terms of either that particular
transaction or the overall responsibilities of the Advisers.
The Advisers receive a wide range of research services from broker-dealers,
including: information on securities markets, the economy and individual
companies; statistical information; accounting and tax law interpretations;
technical market action; pricing and appraisal services; and credit analyses.
Research services are received by the Advisers primarily in the form of written
reports, telephone contacts, personal meetings with securities analysts,
corporate and industry spokespersons, and access to various computer-generated
data.
The Advisers have no agreements or understandings with broker-dealers by
which specific amounts of transactions or commissions are directed to specific
broker-dealers.
The Advisers evaluate whether such research services provide lawful and
appropriate assistance to them in the performance of their investment
decision-making responsibilities, for the Series Company. The Advisers will not
cause the Series Company to pay higher commissions without first determining, in
good faith, that the cost is reasonable considering the brokerage and research
services provided, with respect to either the particular transaction or the
Advisers' overall responsibilities with respect to accounts for which they
exercise investment discretion. The Advisers receive research services at no
cost and cannot assign any specific monetary value to them; nevertheless, the
Advisers believe these supplemental investment research services are essential
to the Advisers' ability to provide high quality portfolio management to the
Funds. Research services furnished by broker-dealers through whom a Fund effects
securities transactions may be used by the Advisers in servicing all of the
Funds, and the Advisers may not use all such services in managing the Funds.
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The amount of brokerage commissions paid, the quality of execution, the
nature and quality of research services provided, and the amount of commissions
paid to firms providing research services are reviewed quarterly by the Series
Company's Board of Trustees.
Occasions may arise when one or more of the Funds or other accounts that
may be considered affiliated persons of the Funds under the 1940 Act desire to
purchase or sell the same portfolio security at approximately the same time. On
those occasions when such simultaneous purchase and sale transactions are made
such transaction will be allocated in an equitable manner according to written
procedures approved by the Series Company's Board of Trustees. Specifically,
such written procedures provide that in allocating purchase and sale
transactions made on a combined basis the parties will seek to achieve the same
net unit price of securities for each Fund or other account and to allocate as
nearly as practicable, such transactions on a pro-rata basis substantially in
proportion to the amounts ordered to be purchased and sold by each Fund or other
account. In some cases, this procedure could have an adverse effect on the price
or quantity of securities available to the Funds. However, the Funds may,
alternatively, benefit from lower broker's commissions and/or correspondingly
lower costs for brokerage and research services by engaging in such combined
transactions. In the Advisers' opinion, the results of this procedure will, on
the whole, be in the best interest of each Fund.
OFFERING, PURCHASE AND REDEMPTION OF FUND SHARES
Pursuant to a distribution and service agreement, The Variable Annuity
Marketing Company ("VAMCO") acts without remuneration as the Series Company's
agent in the distribution of Fund Shares to registered and unregistered separate
accounts of VALIC and its affiliates. VAMCO's address is the same as that of
VALIC.
The distribution and service agreement between VAMCO and the Series Company
provides that it shall continue in force from year to year, after the initial
two year term, provided that such continuance is approved at least annually
(a)(i) by the Board of Trustees of the Series Company, or (ii) by vote of a
majority of the Series Company's outstanding voting securities (as defined in
the 1940 Act) and (b) by the affirmative vote of a majority of the Series
Company's Trustees who are not 'interested persons' (as defined in the 1940 Act)
of the Series Company by votes cast in person at a meeting called for such
purpose. The distribution and service agreement may be terminated at any time,
without penalty, by a vote of the Board of Trustees of the Series Company or by
a vote of a majority of the outstanding voting securities of the Series Company,
or by VAMCO, on sixty days' written notice to the other party. The distribution
and service agreement also automatically terminates in the event of an
assignment.
Pursuant to the distribution and service agreement VAMCO pays promotional
and advertising expenses and the cost of printing prospectuses used to offer and
sell shares of the Series Company (after typesetting and printing the copies
required for regulatory filings by the Series Company). Promotional and
advertising expenses include any expense related to distribution of shares of
the Funds or attributable to any activity primarily intended to result in the
sale of shares, including, for example, the preparation, printing, and
distribution of advertising and sales literature (including reports to
shareholders used as sales literature). VALIC reimburses VAMCO for these
expenses. Thus all such expenses incurred by VAMCO are passed directly on to
VALIC, its parent. The Series Company pays all expenses related to the
registration of Fund shares under federal and state laws, including registration
and filing fees, the cost of preparing the prospectus for such purpose, and
related expenses of outside legal and auditing firms.
As explained in the prospectus for the Contracts, payments of surrender
values, as well as lump sum payments available under the annuity options of the
Contracts, may be suspended or postponed at any time when redemption of shares
is suspended. Normally, the Series Company redeems Fund shares within seven days
of receipt of request therefor, but may postpone redemptions beyond seven days
when: (1) the New York Stock Exchange is closed for other than weekends and
customary holidays, or trading on the New York Stock Exchange becomes
restricted; (2) an emergency exists making disposal or valuation of a Fund's
assets not reasonably practicable; or (3) the SEC has so permitted by order for
the protection of the Series Company's shareholders.
The Series Company normally redeems Fund shares for cash. Although the
Series Company, with respect to each Fund, may make full or
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partial payment by assigning to investors, Series Company portfolio securities
at their value used in determining the redemption price (i.e. by
redemption-in-kind), the Series Company, pursuant to Rule 18f-1 under the 1940
Act, has filed a notification of election on Form 18f-1. Pursuant to this
election, the Series Company has committed itself to pay investors, in cash, all
redemptions made during any 90 day period, up to the lesser of $250,000 or 1% of
the Series Company's net asset value. The securities to be paid in-kind to an
investor will be selected in such manner as the Board of Trustees deems fair and
equitable. In such cases, investors would incur brokerage expenses should they
wish to liquidate these portfolio securities.
All shares are offered for sale and redeemed at net asset value. Net asset
value per share is determined by dividing the net assets of a Fund by the number
of that Fund's outstanding shares at such time.
DETERMINATION OF NET ASSET VALUE
Equity investments (including common stocks, preferred stocks, convertible
securities, and warrants) and call options written on all portfolio investments
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
and call options written on portfolio securities are valued at the last sale
price on the NASDAQ National Market System. In the absence of any National
Market System sales on that day, equity securities are valued at the last
reported bid price and call options written on all portfolio securities for
which other over-the-counter market quotations are readily available are valued
at the last reported asked price.
U.S. Treasury securities and other obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, are valued at representative
quoted prices. Such quotations generally are obtained from government securities
pricing services; however, in circumstances where it is deemed appropriate to do
so, quotations may be obtained from dealers in government securities.
Publicly-traded corporate bonds are valued at prices obtained from the
Custodian.
Short-term debt securities for which market quotations are readily
available are valued at the last reported bid price, except for those with a
remaining maturity of 60 days or less which are valued by the amortized cost
method (unless, due to special circumstances, the use of such a method with
respect to any security would result in a valuation which does not approximate
fair market value).
Convertible bonds are valued at prices obtained from one or more of the
major dealers in such bonds. Where there is a discrepancy between dealers or
when no quotes are readily available, values may be adjusted based on a
combination of yields and premium spreads to the underlying common stock.
Portfolio securities that are primarily traded on foreign securities
exchanges are generally valued at the last sale price on the exchange where such
security is primarily traded. All foreign securities traded on the
over-the-counter market are valued at the last sale quote, if market quotations
are available, or the last closing bid price, if there is no active trading in a
particular security for a given day. Where market quotations are not readily
available for such foreign over-the-counter securities, then such securities
will be valued in good faith by a method that the Series Company's Board of
Trustees, or its delegates, believes accurately reflects fair value. Quotations
of foreign securities in foreign currencies are converted, at current exchange
rates, to their U.S. dollar equivalents in order to determine their current
value. In addition, because of the need to value foreign securities (other than
ADRs) as of the close of trading on various exchanges and over-the-counter
markets throughout the world, the calculation of the net asset value of Funds
investing in such foreign securities may not take place contemporaneously with
the valuation of such foreign securities in those Funds' portfolios.
Options purchased by the Funds (including options on financial futures
contracts, stock indices, foreign currencies, and securities) listed on national
securities exchanges are valued on the exchange where such security is primarily
traded.
Over-the-counter options purchased or sold by the Funds are valued based
upon prices provided by market-makers in such securities or dealers in such
currencies.
Exchange-traded financial futures contracts (including interest rate
futures contracts, stock in-
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dex futures contracts, and currency futures contracts) are valued at the
settlement price for such contracts established each day by the board of trade
or exchange on which such contracts are traded. Unlisted financial futures
contracts are valued based upon prices provided by market-makers in such
financial futures contracts.
All of the assets of the Money Market Fund are valued on the basis of
amortized cost. Under the amortized cost method of valuation, securities are
valued at a price on a given date, and thereafter a constant accretion of any
discount or amortization of any premium to maturity is assumed, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation it may result in periods in
which value as determined by amortized cost is higher or lower than the price a
Fund would receive if it sold the security. During such periods, the yield to
investors may differ somewhat from that obtained by a similar fund or portfolio
which uses available market quotations to value all of its portfolio securities.
The Series Company's Board of Trustees has established procedures reasonably
designed, taking into account current market conditions and Money Market Fund's
investment objective, to stabilize the net asset value per share for purposes of
sales and redemptions at $1.00. These procedures include review by the Board, at
such intervals as it deems appropriate, to determine the extent, if any, to
which the net asset value per share calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation should
exceed one half of one percent, the Board will promptly consider initiating
corrective action. If the Board believes that the extent of any deviation from a
$1.00 amortized cost price per share may result in material dilution or other
unfair results to new or existing shareholders, it will take such steps as it
considers appropriate to eliminate or reduce these consequences to the extent
reasonably practicable. Such steps may include: selling portfolio securities
prior to maturity; shortening the average maturity of the portfolio; withholding
or reducing dividends; or utilizing a net asset value per share determined from
available market quotations. Even if these steps were taken, the Money Market
Fund's net asset value might still decline.
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CALCULATION OF YIELD FOR THE MONEY MARKET FUND
The yield of the Money Market Fund is its net income expressed as a
percentage of assets on an annualized basis for a seven day period. Rule 482
under the 1933 Act requires that a yield quotation set forth in an advertisement
for a money market fund be computed by a standardized method based on an
historical seven calendar day period. The current yield is computed by
determining the net change (exclusive of realized gains and losses from the sale
of securities and unrealized appreciation and depreciation) in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, and then dividing the net change in account value by the value of
the account at the beginning of the base period to obtain the base period
return. The base period return is then multiplied by (365/7) to annualize the
yield figure. The determination of net change in account value reflects the
value of additional shares purchased with dividends from the original share,
dividends declared on both the original share and such additional shares, and
any fees that are charged to all shareholder accounts, in proportion to the
length of the base period and the Money Market Fund's average account size. The
Money Market Fund may also calculate its compound effective yield by compounding
the unannualized base period return (calculated as described above) by adding
one to the base period return, raising the sum to a power equal to 365 divided
by 7, and subtracting one.
The yield quoted by the Money Market Fund at any time represents the amount
being earned on a current basis for the indicated period and is a function of
the types of instruments in the Money Market Fund's portfolio, their quality and
length of maturity, and the Money Market Fund's operating expenses. The length
of maturity for the portfolio is the average dollar weighted maturity of the
portfolio. In other words, the portfolio has an average maturity for all of its
issues, stated in numbers of days and weighted according to the relative value
of each investment.
The yield fluctuates daily as the income earned on the investments of the
Money Market Fund fluctuates. Accordingly, neither the Series Company nor VALIC
can assure the yield quoted on any given occasion will remain constant for any
period of time. For example, the Money Market Fund's yield will change if it
experiences a net inflow of new assets which it then invests in securities whose
yield is higher or lower than that being currently earned on investments.
Investments in the Money Market Fund are not insured and investors comparing
results of the Money Market Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand this
distinction. In addition, other money market funds as well as banks and savings
and loan associations may calculate their yields on a different basis and the
yield quoted by the Money Market Fund from time-to-time could vary upwards or
downwards if another method of calculation or base period were used.
ACCOUNTING AND TAX TREATMENT
CALLS AND PUTS
When a Fund writes a call or put option, an amount equal to the premium
received by it is included in that Fund's Statement of Assets and Liabilities as
an asset and as an equivalent liability. The amount of the liability is
subsequently "marked to market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded. If a call option
which a Fund has written either expires on its stipulated expiration date, or if
a Fund enters into a closing purchase transaction, it realizes a gain (or loss
if the cost of the closing transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a call
option which a Fund has written is exercised, the Fund realizes a capital gain
or loss from the sale of the underlying security and proceeds from such sale are
increased by the premium originally received.
The premium paid by a Fund for the purchase of a put option is included in
the asset section of its Statement of Assets and Liabilities as an investment
and subsequently adjusted daily to the current market value of the option. For
example, if the current market value of the option exceeds the
57
<PAGE> 130
premium paid, the excess would be unrealized appreciation and, conversely, if
the premium exceeds the current market value, such excess would be unrealized
depreciation. The current market value of a purchased option is the last sale
price on the principal Exchange on which such option is traded. If a put option
which a Fund has purchased expires unexercised it realizes a capital loss equal
to the cost of the option. If a Fund exercises a put option, it realizes a
capital gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid.
FINANCIAL FUTURES CONTRACTS
Accounting for financial futures contracts will be in accordance with
generally accepted accounting principles. Initial margin deposits made upon
entering into financial futures contracts will be recognized as assets due from
the FCM (the Fund's agent in acquiring the futures position). During the period
the financial futures contract is open, changes in the value of the contract
will be recognized as unrealized gains or losses by "marking-to-market" on a
daily basis to reflect the market value of the contract at the end of each day's
trading. Variation (or maintenance) margin payments will be made or received,
depending upon whether gains or losses are incurred. Financial futures contracts
held by a Fund at the end of each fiscal year will be required to be "marked to
market" for federal income tax purposes (that is, treated as having been sold at
market value).
SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986
Each Fund of the Series Company intends to qualify annually as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). A Fund must meet several requirements to obtain and
maintain its status as a regulated investment company. Among these requirements
are that: (i) at least 90% of a Fund's gross income be derived from dividends,
interest, payments with respect to securities loans and gains from the sale or
disposition of securities; and (ii) at the close of each quarter of a Fund's
taxable year (a) at least 50% of the value of the Fund's assets consist of cash,
government securities, securities of other regulated investment companies and
other securities (such other securities of any one issuer being not greater than
5% of the value of a Fund and the Fund holding not more than 10% of the
outstanding voting securities of any such issuer) and (b) not more than 25% of
the value of a Fund's assets be invested in the securities of any one issuer
(other than United States government securities or securities of other regulated
investment companies). Each Fund of the Series Company is treated as a separate
entity for federal income tax purposes.
The Internal Revenue Service ("Service") has ruled publicly that an
exchange-traded call option is a security for purposes of the 50% of assets test
and that its issuer is the issuer of the underlying security, not the writer of
the option, for purposes of the diversification requirements. It has ruled
privately (at the request of a taxpayer other than the Series Company) that
income from closing financial futures contracts is considered gain from a
disposition of securities for purposes of the 90% of gross income test. However,
since taxpayers other than the taxpayer requesting a particular private ruling
are not entitled to rely on such ruling, the Series Company intends to keep its
Funds' activity in futures contracts and options at a low enough volume such
that gains from closing futures contracts will not exceed 10% of a Fund's gross
income until the Service rules publicly on the issues or the Series Company is
otherwise satisfied that those gains are qualifying income.
SECTION 817(h) OF THE CODE
Each of the Funds intends to comply with Section 817(h) of the Code and the
regulations issued thereunder. Section 817(h) of the Code and Treasury
Department regulations thereunder impose certain diversification requirements on
variable annuity contracts based upon segregated asset accounts. These
requirements are in addition to the diversification requirements of Subchapter M
and the 1940 Act and may affect the securities in which a Fund may invest.
Failure to meet the requirements of Section 817(h) could result in immediate
taxation of the Contract Owner to the extent of appreciation on investment under
the Contract.
The Section 817(h) diversification requirements do not apply to pension
plan contracts. "Pension plan contracts" for these purposes generally means
annuity contracts issued with respect to plans qualified under Section 401(a) or
403(a) of the Code, Section 403(b) annuities, Individual Retirement Accounts,
Individual Retirement Annuities and annuities issued with respect to Section 457
plans.
58
<PAGE> 131
The Secretary of the Treasury may, in the future, issue additional
regulations that will prescribe the circumstances in which a Contract Owner's
control of the investments of the separate accounts investing in the Series
Company may cause the Contract Owner to be taxable with respect to assets
allocated to the separate account, before distributions are actually received
under the Contract.
In order to comply with the requirements of Section 817(h) and the
regulations thereunder, the Series Company may find it necessary to take action
to ensure that a Contract funded by the Series Company continues to qualify as
such under federal tax laws. The Series Company, for example, may be required to
alter the investment objectives of a Fund or Funds, or substitute the shares of
one Fund for those of another. No such change of investment objectives or
substitution of securities will take place without notice to the shareholders of
the affected Fund, and the approval of a majority of such shareholders (as
defined in the 1940 Act) and without prior approval of the SEC, to the extent
legally required.
It is not feasible to comment on all of the federal income tax consequences
concerning the Funds. Each owner of a Contract funded by the Series Company
should consult a qualified tax adviser for more complete information. The reader
should refer to the appropriate prospectus related to his or her Contracts for a
more complete description of the taxation of the separate account and of the
owner of the particular Contract.
OTHER INFORMATION
SHAREHOLDER REPORTS
Annual Reports containing audited financial statements of the Series
Company and Semiannual Reports containing unaudited financial statements, as
well as proxy materials, are sent to Contract Owners, annuitants, or
beneficiaries as appropriate.
VOTING AND OTHER RIGHTS
The Series Company was organized under the laws of the state of Delaware as
a business trust, and presently is authorized to sell 18 series. Each of these
series is authorized to issue an unlimited number of shares of beneficial
interest, par value $0.01 per share, divided into classes. VALIC, as the initial
sole shareholder of each of the Funds as of the commencement date of the Series
Company, controls each Fund. VALIC does not anticipate that its initial control
of each Fund will adversely effect the rights of future shareholders.
CUSTODY OF ASSETS
Pursuant to a Custodian Contract with the Series Company, State Street Bank
and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, holds the
cash and portfolio securities of the Series Company as custodian.
The Custodian is responsible for holding all securities and cash of each
Fund, receiving and paying for securities purchased, delivering against payment
securities sold, receiving and collecting income from investments, making all
payments covering expenses of the Series Company, and performing other
administrative duties, all as directed by persons authorized by the Series
Company. The Custodian does not exercise any supervisory function in such
matters as the purchase and sale of portfolio securities, payment of dividends,
or payment of expenses of the Funds or the Series Company. Portfolio securities
of the Funds purchased domestically are maintained in the custody of the
Custodian and may be entered into the book entry systems of securities
depositories approved by the Board of Trustees. Pursuant to the Custodian
Contract, portfolio securities purchased outside the United States will be
maintained in the custody of various foreign branches of the Custodian and such
other custodians, including foreign banks and foreign securities depositories,
as are approved by the Board of Trustees, in accordance with regulations under
the 1940 Act.
The Custodian holds securities of the Funds on which call options have been
written and certain assets of the Funds constituting margin deposits with
respect to financial futures contracts at the disposal of the FCMs through which
such transactions are effected. The Funds may also be required to post margin
deposits with respect to covered call and put options written on stock indices
and for this purpose certain assets of those Funds may be held by the custodian
pursuant to similar arrangements with the brokers involved.
59
<PAGE> 132
This arrangement regarding margin deposits essentially consists of the
Custodian creating a separate segregated account into which it transfers (upon
the Series Company's instructions) assets from a Fund's general (regular)
custodial account. The custody agreement for such arrangement provides that FCMs
or brokers will have access to the funds in the segregated accounts when and if
the FCMs or brokers represent that the Series Company has defaulted on its
obligation to the FCMs or brokers and that the FCMs or brokers have met all the
conditions precedent to their right to receive such funds under the agreement
between the Series Company and the FCMs or brokers. The Series Company has an
agreement with each FCM or broker which provides (1) that the assets of any Fund
held by the FCM or broker will be in the possession of the Custodian until
released or sold or otherwise disposed of in accordance with or under the terms
of such agreement, (2) that such assets \would not otherwise be pledged or
encumbered by the FCM or broker, (3) that when requested by the Series Company
the FCM or broker will cause the Custodian to release to its general custodial
account any assets to which a Fund is entitled under the terms of such
agreement, and (4) that the assets in the segregated account shall otherwise be
used only to satisfy the Series Company's obligations to the FCM or broker under
the terms of such agreement.
If on any day a Fund experiences net realized or unrealized gains with
respect to financial futures contracts or covered options on stock indices held
through a given FCM or broker, it is entitled immediately to receive from the
FCM or broker, and usually will receive by the next business day, the net amount
of such gains. Thereupon, such assets will be deposited in its general or
segregated account with the Custodian, as appropriate.
INDEPENDENT AUDITORS
Ernst & Young LLP, One Houston Center, 1221 McKinney, Suite 2400, Houston,
Texas 77010, serve as independent auditors of the Series Company.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Thomas L. West, Jr.*.............. Trustee and Chairman, Chief Executive Officer and
2929 Allen Parkway Chairman since 1998 Director, VALIC and American General Annuity
Houston, Texas 77019 Insurance Company ("AGAIC"); Director,
Date of Birth: 06/07/37 VAMCO. Formerly, Senior Vice
President -- Annuity Business Unit, Aetna
Life Insurance & Annuity Co. (1987-1994).(4)
Judith L. Craven.................. Trustee since 1998 Physician, Administrator; President, United
3212 Ewing St. Way of the Texas Gulf Coast (1992-Present);
Houston, Texas 77004 Director, A.H. Belo Corporation; Director,
Date of Birth: 10/06/45 Sysco Corporation; Board Member, Sisters of
Charity of the Incarnate Word.(6)
Timothy J. Ebner.................. Trustee since 1998 Professor, Departments of Neurosurgery and
17994 N.W. Union Street Physiology, University of Minnesota (1991-
Elk River, Minnesota 55330 Present). Formerly, Consultant, EMPI, Inc.
Date of Birth: 07/15/49 (1994- 1995) and Medtronic Inc.
(1997-1998).(6)
Gustavo E. Gonzales, Jr........... Trustee since 1998 Municipal Court Judge, Dallas, Texas;
8320 Coolgreen Dr. Director, Downtown Dallas YMCA Board
Dallas, Texas 75228 (1996-Present); Director, Dallas Easter
Date of Birth: 07/27/40 Seals Society (1997- Present). Formerly,
Attorney in private practice (1981-1995).(6)
</TABLE>
60
<PAGE> 133
<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
John A. Graf*..................... Trustee and President and Director, VALIC and AGAIC;
2929 Allen Parkway President since Director, Boy Scouts of America. Formerly,
Houston, Texas 77019 1998 Vice Chairman and Chief Marketing and
Date of Birth: 09/14/59 Administrative Officer, Western National
Corporation and Senior Vice President,
Conseco, Inc.
Dr. Norman Hackerman.............. Trustee since 1998 Chairman -- Scientific Advisory Board for
5555 San Felipe The Robert A. Welch Foundation
Suite 1900 (1983-Present); Director, Electro-source,
Houston, Texas 77056-2727 Inc.; President Emeritus, Rice University,
Date of Birth: 03/02/12 Houston, Texas. Formerly, Professor
Emeritus, University of Texas, Austin, Texas
(1970-1985).(1)(2)(3)(6)
Dr. John Wm. Lancaster............ Trustee since 1998 Retired. Pastor Emeritus and Director of
4624 Braeburn Planned Giving, First Presbyterian Church,
Bellaire, Texas 77401 Houston, Texas. Formerly, Pastor, First
Date of Birth: 12/15/23 Presbyterian Church, Houston, Texas.(3)(6)
Ben H. Love....................... Trustee since 1998 Retired. Formerly, Chief Executive, Boy
4407 Eaton Circle Scouts of America. (1985-1993).(3)(6)
Colleyville, Texas 76034
Date of Birth: 09/26/30
John E. Maupin, Jr................ Trustee since 1998 President, Meharry Medical College,
2 Morningside Ct. Nashville, Tennessee; Nashville Advisory
Nashville, Tennessee 37215 Board Member, First American National Bank
Date of Birth: 10/28/46 (1996-Present); Director, Monarch Dental
Corporation (1997-Present). Formerly,
Executive Vice President, Morehouse School
of Medicine, Atlanta, Georgia (1989-
1994).(6)
Dr. F. Robert Paulsen............. Trustee since 1998 Dean Emeritus and Professor Emeritus,
2801 N. Indian Ruins College of Higher Education, University of
Tucson, Arizona 85715 Arizona, Tucson, Arizona. Formerly, Dean and
Date of Birth: 07/05/22 Professor, University of Connecticut,
Storrs, Connecticut and Carnegie Fellow,
University of Michigan, Ann Harbor,
Michigan.(1)(2)(3)(6)
Craig R. Rodby*................... Trustee and Vice Vice Chairman, Chief Financial Officer and
2929 Allen Parkway Chairman since 1998 Director, VALIC and AGAIC. Formerly, Senior
Houston, Texas 77019 Vice President -- Financial Management,
Date of Birth: 07/05/49 ReliaStar (1994-1997) and President and
Chief Executive Officer, Northern Life
Insurance Company (1990-1994).(5)
Dr. R. Miller Upton............... Trustee since 1998 Consultant; President Emeritus, Beloit
914 Tarrant Dr. College, Beloit, Wisconsin. Formerly,
Fontana, Wisconsin 53125 Director, Home Life Insurance Company of New
Date of Birth: 12/27/16 York (1961-1991) and Director, Household
International, Inc. (1965-1989).(1)(2)(3)(6)
</TABLE>
- ---------------
* Interested persons of the Series Company as defined in the 1940 Act
specifically because of their capacity as officers, trustees or consultants
of the Series Company, VALIC or American General Corporation.
(1) Retired Managing General Partner of Van Kampen American Capital Exchange
Fund.
(2) Retired Trustee of Van Kampen American Capital Bond Fund, Van Kampen
American Capital Income Trust, Van Kampen American Capital Convertible
Securities Fund and the Common Sense Trust.
61
<PAGE> 134
(3) Director or Trustee of American General Series Portfolio Company, a
registered open-end investment company advised by VALIC, and USLIFE Income
Fund, Inc., a registered closed-end investment company advised by VALIC.
(4) Director of American General Series Portfolio Company, a registered open-end
investment company advised by VALIC.
(5) Director of USLIFE Income Fund, Inc., a registered closed-end investment
company advised by VALIC.
(6) Trustees who are not interested persons of the Series Company receive an
annual retainer of $5,000. In addition, such trustees are paid per board
meeting, committee meeting and telephone meeting, a fee of $500, $250 and
$250, respectively, plus expenses, if any.
Listed below are the Series Company's officers and their principal
occupations. All are affiliates of VALIC and are located at 2929 Allen Parkway,
Houston, Texas 77019. Each officer serves until his or her successor is elected
and shall qualify.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
Michael G. Atnip.................. Executive Vice Executive Vice President of Administration
Date of Birth: 07/08/48 President since and Information Systems and Director, VALIC
1998 and AGAIC. Formerly, Senior Vice President,
Operations Support, American General
Corporation (1994-1997); Senior Vice
President, Insurance and Administration,
American General Finance (1991-1993).
Joe. C. Osborne................... Executive Vice Executive Vice President of Marketing and
Date of Birth: 09/17/48 President since Director, VALIC and AGAIC.
1998
Teresa S. Moro.................... Vice President and Trader -- VALIC. Formerly, Money Market
Date of Birth: 08/14/60 Investment Officer Trader, VALIC (1986-1990); AIM Management
since 1998 Group Inc. (1983-1986).
William Trimbur, Jr............... Vice President and Portfolio Manager, VALIC. Formerly, Second
Date of Birth: 06/15/51 Investment Officer Vice President, VALIC (1985-1990);
since 1998 Controller, VALIC (1985-1986); Assistant
Controller, VALIC (1982-1985) and Assistant
Treasurer, VALIC (1982-1986).
Brent C. Nelson................... Vice President Senior Vice President, Controller and
Date of Birth: 07/24/51 since 1998 Director, VALIC and AGAIC. Formerly, Vice
President and Controller, VALIC (1990-1994);
Controller, VALIC (1987-1990); Second Vice
President and Controller, VALIC (1986-1987);
Second Vice President -- Fund Operations,
VALIC (1985-1986); Assistant Vice
President -- Controller, Lomas Financial
Security Insurance Co. (1982-1985).
Peter V. Tuters................... Senior Investment Executive Vice President, American General
Date of Birth: 04/18/52 Officer since 1998 Investment Management, L.P.; Vice President
and Investment Officer, VALIC and AGAIC;
Senior Vice President and Chief Investment
Officer, American General Corporation
(1993-1998).
</TABLE>
62
<PAGE> 135
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
Maruti D. More.................... Vice President -- Vice President, American General Investment
Date of Birth: 02/02/44 Investments since Management, L.P.; Vice President,
1998 Investments, VALIC. Formerly, Managing
Director, Marketable Securities, Paul Revere
Investment Management Corporation; Senior
Portfolio Manager, Dewey Square Investors;
Investment Vice President, New York Life
Insurance Company.
Cynthia A. Toles.................. Vice President and Senior Vice President, General Counsel and
Date of Birth: 03/28/51 Secretary since Secretary, VALIC and AGAIC; Secretary and
1998 Assistant Treasurer, VAMCO. Formerly, Senior
Associate General Counsel and Secretary,
VALIC (1990-1998); Vice President, Associate
General Counsel and Secretary, VALIC
(1988-1989); Second Vice President,
Associate General Counsel and Assistant
Secretary, VALIC (1986-1988); Assistant Vice
President, Assistant General Counsel and
Assistant Secretary, VALIC (1983-1986).
Nori L. Gabert.................... Vice President and Associate General Counsel, VALIC. Formerly,
Date of Birth: 08/15/53 Assistant Secretary Of Counsel, Winstead Sechrest & Minick P.C.
since 1998 (1997); Vice President and Associate General
Counsel of Van Kampen American Capital, Inc.
(1981-1996).
Gregory R. Seward................. Treasurer since Vice President -- Variable Product
Date of Birth: 06/27/56 1998 Accounting, VALIC and AGAIC. Formerly,
Director of Fund Operations and Assistant
Controller, VALIC and AGAIC; Controller,
Avanti Health Systems, Inc. (1988-1991);
Reports Manager, American Capital Asset
Management, Inc. (1986-1988); Senior
Auditor, Price Waterhouse (1982-1986).
Kathryn A. Pearce................. Controller since Associate Director of Fund Operations,
Date of Birth: 02/05/47 1998 VALIC. Formerly, Supervisor -- Mutual Fund
Accounting, Van Kampen American Capital,
Inc. (1977-1996).
Earl E. Allen, Jr................. Assistant Treasurer Manager -- Fund Reporting, VALIC. Formerly,
Date of Birth: 03/16/60 since 1998 Senior Auditor, Texas Treasury Department;
Manager, American General Corporation;
Assistant Vice President, Texas Commerce
Bank.
Cynthia A. Gibbons................ Assistant Vice Senior Compliance Analyst, VALIC.
Date of Birth: 12/06/67 President since
1998
Jaime M. Sepulveda................ Assistant Treasurer Director -- Variable Product Accounting and
Date of Birth: 01/09/52 since 1998 Financial Reporting, VALIC. Formerly,
Accounting Manager, Metro Networks, Inc.
(1997-1998); Controller and Investment
Officer, Port of Houston Authority
(1994-1997); Chief Financial Officer, Intile
Designs, Inc. (1993-1994).
Donna L. Hathaway................. Assistant Manager -- Variable Product Accounting,
Date of Birth: 09/17/64 Controller since VALIC. Formerly, Gas Revenue Accountant,
1998 Texaco Inc.; Accounting Manager, Hewitt
Associates, LLC; Revenue Accounting Manager,
Trans Texas Gas.
</TABLE>
63
<PAGE> 136
The officers conduct and supervise the daily business operations of the
Series Company, while the trustees, in addition to their functions set forth
under "Investment Adviser," review such actions and decide on general policy.
The Series Company has an Audit Committee. The Series Company's Audit
Committee consists of Messrs. Lancaster, Hackerman, Paulsen, Upton, and Love.
The Audit Committee recommends to the Board the selection of independent
auditors for the Series Company and reviews with such independent auditors the
scope and results of the annual audit, reviews the performance of the accounts,
and considers any comments of the independent auditors regarding the Series
Company's financial statements or books of account. The Series Company does not
have a standing nominating or compensation committee.
The nine trustees of the Series Company who are not affiliated with VALIC
are each paid annual trustees' fees and are reimbursed for certain out-of-pocket
expenses by the Series Company.
The trustees and officers of the Series Company and members of their
families, as a group, beneficially owned less than 1% of the shares of
beneficial interest of each Fund outstanding as of the commencement of
operations.
COMPENSATION OF TRUSTEES AND CERTAIN OFFICERS
The following table sets forth information regarding the estimated
compensation and benefits to be earned by the Trustees for the fiscal year
ending August 31, 1999.
COMPENSATION TABLE
FISCAL YEAR ENDING AUGUST 31, 1999
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATED COMPENSATION
AGGREGATE ACCRUED AS ANNUAL FROM
COMPENSATION PART OF BENEFITS FUND
FROM SERIES COMPANY UPON COMPLEX(1)
NAME OF PERSON, POSITION SERIES COMPANY EXPENSES RETIREMENT PAID TO TRUSTEES
------------------------ -------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C>
Thomas L. West, Jr.**...................... $ 0 $0 $0 $ 0
Judith L. Craven........................... $7,000 $0 $0 $38,000
Timothy J. Ebner........................... $7,000 $0 $0 $38,000
Gustavo E. Gonzales, Jr.................... $7,000 $0 $0 $38,000
John A. Graf**............................. $ 0 $0 $0 $ 0
Dr. Norman Hackerman....................... $7,500 $0 $0 $44,000
Dr. John W. Lancaster...................... $8,000 $0 $0 $46,000
Ben L. Love................................ $7,500 $0 $0 $44,000
John E. Maupin, Jr......................... $7,000 $0 $0 $38,000
Dr. F. Robert Paulsen...................... $7,500 $0 $0 $44,000
Craig R. Rodby**........................... $ 0 $0 $0 $ 0
Dr. R. Miller Upton........................ $7,500 $0 $0 $44,000
</TABLE>
- ---------------
** "Interested person," as defined in the 1940 Act, specifically because of
their capacity as officers, trustees or consultants of the Series Company,
VALIC or American General Corporation.
(1) Includes USLife Income Fund, Inc. and American General Series Portfolio
Company, which are managed by VALIC.
FINANCIAL STATEMENTS
The financial statements of the Series Company are included herein.
64
<PAGE> 137
American General Series Portfolio Company 3
Statement of Net Assets
August 26, 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................................................1
Audited Statement of Net Assets...............................................2
Notes to Statement of Net Assets..............................................3
</TABLE>
65
<PAGE> 138
Report of Independent Auditors
To the Shareholder and Board of Trustees of
American General Series Portfolio Company 3
We have audited the accompanying statement of net assets of International Growth
Fund, Large Cap Growth Fund, Mid Cap Growth Fund, Small Cap Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Value Fund, Socially Responsible Fund, Balanced Fund, High Yield Bond Fund,
Strategic Bond Fund, Domestic Bond Fund, Core Bond Fund, Money Market Fund,
Growth Lifestyle Fund, Moderate Growth Lifestyle Fund, and Conservative Growth
Lifestyle Fund (such "Funds" comprising the American General Series Portfolio
Company 3) as of August 26, 1998. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of each of the respective Funds
comprising the American General Series Portfolio Company 3 at August 26, 1998,
in conformity with generally accepted accounting principles.
August 28, 1998
66
<PAGE> 139
American General Series Portfolio Company 3
Statement of Net Assets
August 26, 1998
<TABLE>
<CAPTION>
NET ASSET
NET NUMBER OF VALUE PER
PORTFOLIO CASH ASSETS* SHARES SHARE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American General International Growth Fund $ 4,867 $ 4,867 486.7 $10
American General International Value Fund 4,800 4,800 480.0 10
American General Small Cap Growth Fund 5,200 5,200 520.0 10
American General Small Cap Value Fund 5,133 5,133 513.3 10
American General Mid Cap Growth Fund 5,400 5,400 540.0 10
American General Mid Cap Value Fund 5,267 5,267 526.7 10
American General Large Cap Growth Fund 3,800 3,800 380.0 10
American General Large Cap Value Fund 3,867 3,867 386.7 10
American General Socially Responsible Fund 6,667 6,667 666.7 10
American General Balanced Fund 6,667 6,667 666.7 10
American General Domestic Bond Fund 1,667 1,667 166.7 10
American General Money Market Fund 6,667 6,667 666.7 10
American General Growth Lifestyle Fund 6,667 6,667 666.7 10
American General Moderate Growth Lifestyle Fund
6,667 6,667 666.7 10
American General Conservative Growth Lifestyle
Fund 6,666 6,666 666.6 10
American General Core Bond Fund 6,666 6,666 666.6 10
American General Strategic Bond Fund 6,666 6,666 666.6 10
American General High Yield Bond Fund 6,666 6,666 666.6 10
--------------- -------------
$ 100,000 $ 100,000
=============== =============
</TABLE>
* Applicable to shares of beneficial interests issued and outstanding,
$.01 per value, per share, unlimited shares authorized.
See accompanying notes.
67
<PAGE> 140
American General Series Portfolio Company 3
Notes to Statement of Net Assets
August 26, 1998
1. ORGANIZATION
American General Series Portfolio Company 3 (the "Series") was organized as a
Delaware business trust on May 6, 1998 by The Variable Annuity Life Insurance
Company ("VALIC") and is registered under the Investment Company Act of 1940, as
amended, (the "1940 Act") as an open-end, management investment company. The
Series consists of 18 separate investment portfolios (hereinafter collectively
referred to as the "Funds" or individually referred to as a "Fund"), each of
which is, in effect, a separate mutual fund issuing its own separate class of
shares of beneficial interest.
American General International Growth Fund ("International Growth
Fund")
American General Large Cap Growth Fund ("Large Cap Growth Fund")
American General Mid Cap Growth Fund ("Mid Cap Growth Fund")
American General Small Cap Growth Fund ("Small Cap Growth Fund")
American General International Value Fund ("International Value Fund")
American General Large Cap Value Fund ("Large Cap Value Fund")
American General Mid Cap Value Fund ("Mid Cap Value Fund")
American General Small Cap Value Fund ("Small Cap Value Fund")
American General Socially Responsible Fund ("Socially Responsible
Fund")
American General Balanced Fund ("Balanced Fund")
American General High Yield Bond Fund ("High Yield Bond Fund")
American General Strategic Bond Fund ("Strategic Bond Fund")
American General Domestic Bond Fund ("Domestic Bond Fund")
American General Core Bond Fund ("Core Bond Fund")
American General Money Market Fund ("Money Market Fund")
68
<PAGE> 141
American General Series Portfolio Company 3
Notes to Statement of Net Assets (continued)
1. ORGANIZATION (CONTINUED)
American General Growth Lifestyle Fund ("Growth Lifestyle Fund") -
Growth through investment in Series Funds
American General Moderate Growth Lifestyle Fund ("Moderate Growth
Lifestyle Fund") - Growth and current income through investments in
Series Funds
American General Conservative Growth Lifestyle Fund ("Conservative
Growth Lifestyle Fund") Current income and a low to moderate level of
growth through investments in Series Funds
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP").
3. ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Pursuant to an Investment Advisory Agreement with the Series and subject to the
authority of the Series' Board of Trustees, VALIC (the "Adviser") serves as the
Series' investment adviser and conducts the business and affairs of the Series.
Additionally, VALIC has engaged investment Sub-advisers to provide investment
sub-advisory services for each Fund other than the American General Socially
Responsible Fund, the American General Money Market Fund, the American General
Conservative Growth Lifestyle Fund, the American General Moderate Growth
Lifestyle Fund, and the American General Growth Lifestyle Fund, subject to
VALIC's control, direction, and supervision. On August 26, 1998, the Adviser
entered into a sub-advisory agreement with the following Sub-advisers:
American General Investment Management, L.P. ("AGIM") - AGIM is the
Sub-adviser for the High Yield Bond Fund, the Strategic Bond Fund, and
the Core Bond Fund.
Bankers Trust Company ("Bankers Trust") - Bankers Trust is one of two
Sub-advisers for the Small Cap Value Fund.
69
<PAGE> 142
American General Series Portfolio Company 3
Notes to Statement of Net Assets (continued)
3. ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
Brown Capital Management, Inc. ("Brown Capital Management") - Brown
Capital Management is the Sub-adviser for the Mid Cap Growth Fund.
Capital Guardian Trust Company ("Capital Guardian") - Capital Guardian
is the Sub-adviser for the International Value Fund, the Balanced Fund,
and the Domestic Bond Fund.
Fiduciary Management Associates, Inc. ("FMA") - FMA is one of two
Sub-advisers for the Small Cap Value Fund.
Goldman Sachs Asset Management ("GSAM") - GSAM is the Sub-adviser for
the Large Cap Growth Fund.
J.P. Morgan Investment Management Inc. ("JP Morgan") - JP Morgan is the
Sub-adviser for the Small Cap Growth Fund.
Jacobs Asset Management - Jacobs Asset Management is the Sub-adviser
for the International Growth Fund.
Neuberger & Berman Management, Inc. ("N&B Management") - N&B Management
is the Sub-adviser for the Mid Cap Value Fund.
State Street Global Advisors ("State Street Global Advisors") - State
Street Global Advisors is the Sub-adviser for the Large Cap Value Fund.
Sub-advisers are compensated for such services by the Adviser.
70
<PAGE> 143
American General Series Portfolio Company 3
Notes to Statement of Net Assets (continued)
3. ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Adviser receives from the Series a monthly fee based on each Fund's average
daily net asset value at the following annual rates:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
International Growth 0.90% on the first $100 million Socially Responsible Fund 0.25%
Fund 0.80% on assets more than $100
million
Large Cap Growth Fund 0.55% Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets more than $50 million
Mid Cap Growth Fund 0.65% on the first $25 million High Yield Bond Fund 0.70% on the first $200 million
0.55% on the next $25 million 0.60% on the next $300 million
0.45% on assets more than $50 0.55% on assets more than $500 million
million
Small Cap Growth Fund 0.85% Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets more than $500 million
International Value 1% on the first $25 million Domestic Bond Fund 0.60% on the first $50 million
Fund 0.85% on the next $25 million 0.45% on the next $50 million
0.675% on the next $200 million 0.43% on the next $200 million
0.625% on assets more than $250 0.40% on assets more than $300 million
million
Large Cap Value Fund 0.50% Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% on assets more than $500 million
Mid Cap Value Fund 0.75% on the first $100 million Money Market Fund 0.25%
0.725% on the next $150 million
0.70% on the next $250 million
0.675% on the next $250 million
0.65% on the assets more than $750
million
Small Cap Value Fund 0.75% on the first $50 million Conservative Growth
0.65% on the assets more than $50 Lifestyle Fund 0.10%
million
Moderate Growth Lifestyle
Fund 0.10%
Growth Lifestyle Fund 0.10%
</TABLE>
Advisory fees will not be assessed until the commencement of investment
operations.
71
<PAGE> 144
American General Series Portfolio Company 3
Notes to Statement of Net Assets (continued)
3. ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Adviser has voluntarily agreed to waive a portion of its management fee or
to reimburse certain expenses of each Fund, other than the Lifestyle Funds,
during the first fiscal year. The Adviser may withdraw this voluntary
undertaking at any time. The table below reflects total operating expenses by
Fund, as voluntarily limited by the Adviser, shown as a percentage of net
assets:
<TABLE>
<CAPTION>
<S> <C>
International Growth Fund 1.18%
Large Cap Growth Fund .88%
Mid Cap Growth Fund .82%
Small Cap Growth Fund 1.18%
International Value Fund 1.07%
Large Cap Value Fund .83%
Mid Cap Value Fund 1.07%
Small Cap Value Fund 1.01%
Socially Responsible Fund .58%
Balanced Fund .85%
High Yield Bond Fund 1.03%
Strategic Bond Fund .93%
Domestic Bond Fund .81%
Core Bond Fund .83%
Money Market Fund .58%
Conservative Growth Lifestyle Fund .10%
Moderate Growth Lifestyle Fund .10%
Growth Lifestyle Fund .10%
</TABLE>
Pursuant to an accounting services agreement with the Series, VALIC serves as
the accounting services agent to the Series and will provide certain accounting
and administrative services to the Series. For its services, VALIC will receive
an annual fee of .03% of average daily net assets.
Certain officers of VALIC are also officers and/or trustees of the Fund.
The initial seed money for the Series was funded by VALIC Separate Account A (a
registered separate account of VALIC). VALIC Separate Account A owns 100% of the
outstanding shares of the Funds of the Series.
72
<PAGE> 145
American General Series Portfolio Company 3
Notes to Statement of Net Assets (continued)
3. ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES (CONTINUED)
Certain start-up costs were incurred in connection with the organization of the
Series. These costs were paid by VALIC on behalf of the Series.
4. SUBSEQUENT EVENT (UNAUDITED)
On September 1, 1998, VALIC contributed an additional $74,900,000 to the Series
for additional funding. At that time, investment operations of each Fund
commenced.
73
<PAGE> 146
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