<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON: January 3, 1999
REGISTRATION NO. 333-53589/811-08789
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4 [X]
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AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
KATHERINE L. STONER, ESQ.
2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 831-3164
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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THE CORPORATION TRUST COMPANY
1209 ORANGE STREET
WILMINGTON, DELAWARE 19801
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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Copy to:
JOHN A. DUDLEY, ESQ.
SULLIVAN & WORCESTER, LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
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It is proposed that this filing will become effective (check
appropriate box):
<TABLE>
<S> <C>
X immediately upon filing pursuant to paragraph (b)
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on January 3, 2000 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on January 3, 2000 pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of Rule 485
-----
</TABLE>
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
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American General Series Portfolio Company 3
2929 Allen Parkway
Houston, Texas 77019
January 3, 2000
The American General Series Portfolio Company 3 (the "Series Company") is an
open-end mutual fund made up of 18 separate Funds (the "Funds"). Each of the
Funds has a different investment objective. Here are summaries of the investment
goals for the 18 Funds:
ACTIVELY MANAGED EQUITY FUNDS:
THESE FUNDS INVEST MOSTLY IN STOCKS AND ARE DESIGNED TO INCREASE THE VALUE OF
YOUR INVESTMENT OVER THE LONG TERM.
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 International Value Fund ("International Value Fund")
Growth of capital and future income through investments in non-U.S. issuers.
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 Large Cap Value Fund ("Large Cap Value Fund")
Total returns exceeding the Russell 1000(R) Value Index through investments
in equity securities.
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 Mid Cap Value Fund ("Mid Cap Value Fund")
Growth through investments in medium capitalization companies.
American General Small Cap Growth Fund ("Small Cap Growth Fund")
Long-term growth through investments in small growth companies.
American General Small Cap Value Fund ("Small Cap Value Fund")
Maximum long-term return through investments in small capitalization
companies.
American General Socially Responsible Fund ("Socially Responsible Fund")
Growth through investments in companies meeting social criteria of the Fund.
BALANCED FUND:
THIS FUND INVESTS IN A COMBINATION OF STOCKS AND BONDS TO ALLOW FOR LONG-TERM
GROWTH WHILE REDUCING MARKET RISKS.
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:
THESE FUNDS ARE DESIGNED TO PROVIDE CURRENT INCOME WHILE CONSERVING CAPITAL.
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.
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 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.
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.
<PAGE> 3
LIFESTYLE FUNDS:
THESE FUNDS ALLOCATE ASSETS TO OTHER AMERICAN GENERAL FUNDS IN ORDER TO PROVIDE
A DIVERSIFIED, LESS RISKY INVESTMENT.
American General Conservative Growth Lifestyle Fund ("Conservative Growth
Lifestyle Fund")
Current income and a low to moderate level of growth through investments in
a combination of the Series Company Funds.
American General Growth Lifestyle Fund ("Growth Lifestyle Fund")
Growth through investments in a combination of the Series Company Funds.
American General Moderate Growth Lifestyle Fund ("Moderate Growth Lifestyle
Fund")
Growth and current income through investments in a combination of the Series
Company Funds.
MONEY MARKET FUNDS:
THIS FUND PROVIDES LIQUIDITY AND PRESERVATION OF CAPITAL.
American General Money Market Fund ("Money Market Fund")
Income through investments in short-term money market securities.
In this prospectus, "we", "us", and "our" refers to the American General Fund
Group.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The SEC maintains an internet website at http://www.sec.gov that contains the
Statement of Additional Information ("SAI"), material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
TOPIC PAGE
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<S> <C>
RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE 3
Balanced Fund 3
Conservative Growth Lifestyle Fund 4
Core Bond Fund 5
Domestic Bond Fund 6
Growth Lifestyle Fund 8
High Yield Bond Fund 9
International Growth Fund 10
International Value Fund 12
Large Cap Growth Fund 13
Large Cap Value Fund 14
Mid Cap Growth Fund 15
Mid Cap Value Fund 16
Moderate Growth Lifestyle Fund 17
Money Market Fund 18
Small Cap Growth Fund 19
Small Cap Value Fund 20
Socially Responsible Fund 21
Strategic Bond Fund 22
MORE ABOUT PORTFOLIO INVESTMENTS 24
MORE ABOUT RISK 28
WELCOME TO AMERICAN GENERAL CORPORATION (ADVISER AND
SUB-ADVISER INFORMATION) 30
ACCOUNT INFORMATION 35
FINANCIAL HIGHLIGHTS 37
PERFORMANCE INFORMATION 39
</TABLE>
2
<PAGE> 4
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RISK/RETURN SUMMARIES: INVESTMENTS, RISKS, AND PERFORMANCE
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BALANCED FUND
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INVESTMENT CATEGORY
Balanced
INVESTMENT ADVISER
The Variable Annuity Life Insurance Company ("VALIC")
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
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. This investment objective can be changed by the Board of
Trustees, without the approval of the Fund shareholders.
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. We select securities for the Fund's
portfolio by identifying fixed-income (bonds and preferred stock) and equity
(stock) 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.
Fixed-income Portion: Up to 75% of the Fund's total assets may be invested in
fixed-income securities rated A or better by Moody's Investors Service
("Moody's") or Standard & Poor ("S&P") or of comparable investment quality. The
Sub-Adviser is not required to sell the security, however, if the rating is
downgraded. At all times, at least 25% of the Fund's total assets are invested
in fixed-income senior securities. The Fund may hold up to 20% of its total
assets in high-yielding, high risk fixed-income securities ("junk bonds").
Equity Portion: Up to 75% of the Fund's total assets may be invested in equity
securities listed on national securities exchanges or in the over-the-counter
market ("NASDAQ"). Equity securities include American Depositary Receipts
("ADRs"), which are certificates issued by a U.S. depositary bank, representing
foreign shares held by the bank. ADRs carry the same currency, political and
economic risks as the underlying foreign shares. Up to 10% of the Fund's total
assets may be invested in the securities of U.S. small capitalization companies
("Small Caps"). Small Caps are companies that have total assets (capitalization)
of approximately $150 million to $1.25 billion. See "More About Portfolio
Investments."
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-Income Securities: A 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 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
3
<PAGE> 5
upon the Sub-Adviser's investment analysis. Accordingly, the Fund's investments
may be worth less than what the Fund paid for them.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgment that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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CONSERVATIVE GROWTH LIFESTYLE FUND
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INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks current income and low to moderate growth of capital through investments
in a combination of the Series Company Funds ("Underlying 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. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
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 and sample Underlying Fund choices for this
Fund.
<TABLE>
<S> <C>
International Equity Securities 5%-15%
Sample Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 5%-15%
Sample Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 5%-15%
Sample Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
Sample Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 30%-50%
Sample Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</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 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 Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
4
<PAGE> 6
INVESTMENT RISKS
The Fund is a non-diversified investment company under the Investment Company
Act of 1940 (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 Underlying 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 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, 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 Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
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 Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager Risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds. The Fund is also
subject to the risk that a Fund that is non-diversified under the 1940 Act will
invest more of its assets in fewer issuers and, therefore, is more likely to be
adversely affected by a downturn in any one issuer or security. The securities
that Underlying Funds invest in also involve various risks.
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CORE BOND FUND
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INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
American General Investment Management, L.P. ("AGIM")
INVESTMENT OBJECTIVE
Seeks the highest possible total return consistent with conservation of capital
through investments in medium to high quality fixed-income securities. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of its total assets in medium to high quality
fixed-income securities, or in securities issued or guaranteed by the U.S.
Government, mortgage-backed or asset-backed securities. U.S. Government
securities are securities issued or guaranteed by the U.S. Government which are
supported by the full faith and credit of the U.S. Government; the right of the
issuer to borrow from the U.S. Treasury; the credit of the issuing government
agency; or the authority of the U.S. Government to purchase obligations of the
agency. A portion of the 65% may also be invested in U.S. dollar-denominated
fixed-income securities issued by foreign issuers, although the Fund currently
intends to limit these investments to no more than 40% of its total assets.
These fixed-income securities are rated investment grade or higher. The
Sub-Adviser is not required to dispose of a security if its rating is
downgraded, however. Up to 10% of the Fund's total assets may be invested in
lower quality fixed-income securities, those rated below Baa3 by Moody's and BBB
by S&P.
Up to 35% of the Fund's total assets may be invested in interest-bearing
short-term investments, such as commercial paper, bankers' acceptances, bank
certificates of deposit, and other cash equivalents and cash. Equity securities,
including common or preferred stocks, convertible securities, and warrants, may
comprise up to 20% of the Fund's total assets. See "More About Portfolio
Investments."
The Fund's transactions are reflected in its portfolio turnover rate, 489.09%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
5
<PAGE> 7
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-income Securities: A 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 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 become worth less than what
the Fund paid for them.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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DOMESTIC BOND FUND
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INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
6
<PAGE> 8
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. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
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. At least 65% of the Fund's total assets will be
invested in investment grade U.S. corporate fixed-income securities rated at
least A by Moody's or S&P, in securities issued or guaranteed by the U.S.
Government, Yankee bonds, or in mortgage-backed or asset-backed securities. U.S.
Government securities are securities issued or guaranteed by the U.S. Government
which are supported by the full faith and credit of the U.S. Government; the
right of the issuer to borrow from the U.S. Treasury; the credit of the issuing
government agency; or the authority of the U.S. Government to purchase
obligations of the agency. The Sub-Adviser is not required to dispose of a
security if its rating is downgraded.
Up to 35% of total assets may be invested in non-U.S. investment grade
intermediate and long-term corporate fixed-income securities rated at least A by
Moody's or S&P, including Eurodollar fixed-income securities, securities issued
or guaranteed by the Canadian Government, its provinces or their
instrumentalities, or interest bearing short-term investments, such as
commercial paper, bankers' acceptances, bank certificates of deposit and other
cash equivalents and cash. Currently, Eurodollar fixed-income securities will be
limited to no more than 20% of the Fund's total assets.
To increase the Fund's earning potential, we may use up to 25% of the Fund's
assets to make some higher risk investments in mortgage-related securities or
bonds rated less than A by Moody's or S&P. No minimum rating requirement applies
to these junk bonds. See "More About Portfolio Investments."
The Fund's transactions are reflected in its portfolio turnover rate, 156.07%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
7
<PAGE> 9
Risk of Lower Rated Fixed-income Securities: A 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.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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GROWTH LIFESTYLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth through investments in a combination of the Series Company Funds
("Underlying Funds"). This Fund is suitable for investors seeking the potential
for capital growth that a fund investing predominately in equity securities may
offer. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
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 and sample Underlying Fund choices for this
Fund.
<TABLE>
<S> <C>
International Equity Securities 25%-35%
Sample Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 15%-25%
Sample Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
Sample Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 20%-30%
Sample Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 5%-15%
Sample Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
American General High Yield Bond Fund
</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 Funds have been
selected to represent a reasonable spectrum of investment options for the Fund.
We have based
8
<PAGE> 10
the target investment percentages for the Fund on the degree to which we believe
the Underlying Funds, in combination, to be appropriate for the Fund's
investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
INVESTMENT RISKS
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 Underlying 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 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, 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 Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
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 Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds. The Fund is also
subject to the risk that a Fund that is non-diversified under the 1940 Act will
invest more of its assets in fewer issuers and, therefore, is more likely to be
adversely affected by a downturn in any one issuer or security. The securities
that Underlying Funds invest in also involve various risks.
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
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. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
Up to 65% of the Fund's total assets are invested in below-investment grade junk
bonds. These high yielding, high risk fixed-income securities are rated below
Baa3 by Moody's and BBB- by S&P. Up to 15% can be rated below Caa3 by Moody's or
CCC- by S&P. The Fund may also invest up to 35% of total assets in
below-investment grade foreign fixed-income securities.
To balance this risk, the Fund may invest up to 35% in investment grade
securities, those rated Baa3 or higher by Moody's and BBB- or higher by S&P. In
addition, the Fund may invest up to 15% in zero coupon securities (securities
not paying current cash interest), and up to 20% of total assets in equity
securities. Equity securities includes common or preferred stocks, warrants, and
convertible securities. The Sub-Adviser is not required to dispose of a bond
that is downgraded to below-investment grade. See "More About Portfolio
Investments."
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
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<PAGE> 11
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Risk of Lower Rated Fixed-income Securities: 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 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.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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INTERNATIONAL GROWTH FUND
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INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Jacobs Asset Management
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. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in the foreign equity
securities of at least three countries outside the United States. Since the Fund
normally intends to be fully invested, foreign equity securities will usually
represent closer to 80-85% of the Fund's total assets. Foreign equity securities
include common and preferred stock, convertible preferred stock, rights, and
warrants, American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), and Global Depositary Receipts
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<PAGE> 12
("GDRs"). ADRs are certificates issued by a U.S. depositary bank, representing
foreign shares held by the bank, to facilitate trading in foreign securities.
GDRs and EDRs are very similar to ADRs. Generally, ADRs are designed for use in
U.S. securities markets and EDRs are designed for use in European securities
markets. GDRs are designed for use when the issuer is raising capital in more
than one market simultaneously, such as the issuer's local market and the U.S.
ADRs, EDRs and GDRs each carry the same currency, political and economic risks
as the underlying foreign shares.
The Fund may invest up to 40% of total assets in the equity securities of
issuers located in emerging market countries. 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 (known as
"The World Bank") and the International Finance Corporation. 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.
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 ("Small
Caps"). Up to 50% of the Fund's total assets may be invested in Small Caps,
which are companies that have total assets (capitalization) of approximately
$150 million to $1.25 billion. See "More About Portfolio Investments."
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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<PAGE> 13
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INTERNATIONAL VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Capital Guardian Trust Company
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. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund must invest at least 65% of its total assets in foreign securities.
Since the Fund normally intends to be fully invested, foreign equity securities
will usually represent closer to 80-85% of the Fund's total assets. 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.
Up to 90% of the amount invested in foreign securities may be invested in put
and call options on foreign currencies and forward currency contracts. A put
option on foreign currency is a security that gives the Fund the right to sell a
particular foreign currency within a stated period of time. A call option on
foreign currency gives the Fund the right to buy a particular foreign currency
within a stated period of time. A forward currency contract is an agreement to
buy or sell foreign currency at an agreed-upon price and date.
The Fund may invest in the equity securities of issuers located in emerging
market countries. 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 (known as "The World
Bank") and the International Finance Corporation. 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.
This Fund may invest up to 10% of total assets in the securities of foreign
small capitalization companies ("Foreign Small Caps"). Foreign Small Caps are
companies that have total assets (capitalization) of approximately $150 million
to $1.25 billion. See "More About Portfolio Investments."
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
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<PAGE> 14
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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LARGE CAP GROWTH FUND
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INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Goldman Sachs Asset Management
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. This investment objective can
be changed by the Board of Trustees, without the approval of the Fund
shareholders.
INVESTMENT STRATEGY
The Fund invests up to 65% of its total assets 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 Fund's benchmark, the Russell 1000(R) Growth
Index. 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.
The Fund may invest up to 25% of total assets in the equity securities of other
U.S. and foreign issuers. The securities of the foreign issuers must be traded
in the United States. This includes convertible securities, ADRs and GDRs. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. GDRs are very
similar to ADRs. Generally, ADRs are designed for use in the United States
securities markets, while GDRs are designed for use when the issuer is raising
capital in more than one market simultaneously, such as the issuer's local
market and the U.S. ADRs and GDRs each carry the same currency, political and
economic risks as the underlying foreign shares. See "More About Portfolio
Investments."
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<PAGE> 15
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Derivatives Risk: The risk that loss may result from a Fund's investments in
options, futures, swaps, structured securities and other derivative instruments.
These instruments may be leveraged so that small changes may produce
disproportionate losses to a Fund.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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LARGE CAP VALUE FUND
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INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
State Street Bank & Trust Company/State Street Global Advisers
INVESTMENT OBJECTIVE
Seeks to provide total returns that exceed over time the Russell 1000(R) Value
Index ("Index") through investment in equity securities. This investment
objective can be changed by the Board of Trustees, without the approval of the
Fund shareholders.
The Index is a sub-index of the Russell 3000(R) Index. The Russell 3000(R) Index
follows the 3,000 largest U.S. companies, based on total market capitalization.
The Index measures the performance of the 1,000 largest companies in the Russell
3000(R) Index, focusing on those with lower price-to-book ratios and lower
forecasted growth values.
INVESTMENT STRATEGY
The Fund will invest at least 65% of total assets in the equity securities of
the largest 1200 companies by market capitalization traded in the United States.
The Sub-Adviser combines financial accounting data with earnings forecasts
provided by many security analysts. This quantitative method allows the
Sub-Adviser to quickly and systematically evaluate large amounts of data.
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<PAGE> 16
The constructed portfolio is well-diversified, maintaining industry and sector
exposures and macroeconomic and risk characteristics that are similar to the
Index.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Market Risk also refers to the risk that the value of the securities purchased
by the Fund may decline as a result of economic, political or market conditions
or an issuer's financial circumstances. 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. 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.
Quantitative Risk: The different factors that go into the quantitative analysis
can be changed periodically. The weight of each factor may also change; thus,
the analytical model may have different historical or future performance
compared to the Fund.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Brown Capital Management, Inc.
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. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund will invest at least 65% of total assets in the equity securities of
medium capitalization companies. Medium capitalization companies generally
include companies with a market capitalization of $1 to $10 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 appear to be 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. The Sub-Adviser uses 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.
Up to 35% of the Fund's total assets may be invested in other domestic equity
securities, including common and preferred stocks, and convertible securities.
See "More About Portfolio Investments."
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<PAGE> 17
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Style Risk: The risk that the portfolio manager's judgments that a particular
security is undervalued relative to its growth potential in the securities
markets may prove incorrect.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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MID CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Neuberger Berman Management Inc.
INVESTMENT OBJECTIVE
Seeks capital growth, through investment in equity securities of medium
capitalization companies using a value-oriented investment approach. This
investment objective can be changed by the Board of Trustees, without the
approval of the Fund shareholders.
INVESTMENT STRATEGY
This Fund invests at least 65% of total assets 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, 1999, the largest company included
in the Russell Midcap(TM) Index had an approximate market capitalization of
$11.2 billion, while the average market capitalization was approximately $3.9
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 of a company in
its particular field. Up to 35% of the Fund's total assets may be invested in
other equity securities, including common and preferred stocks, convertible
securities, and related equities. See "More About Portfolio Investments."
The Fund's transactions are reflected in its portfolio turnover rate, 196.95%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
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<PAGE> 18
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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MODERATE GROWTH LIFESTYLE FUND
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INVESTMENT CATEGORY
Lifestyle
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks growth and current income through investments in a combination of the
Series Company Funds ("Underlying 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. This investment objective
can be changed by the Board of Trustees, without the approval of the Fund
shareholders.
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 and sample Underlying Fund choices for this
Fund.
<TABLE>
<S> <C>
International Equity Securities 10%-20%
Sample Underlying Funds:
American General International Value Fund
American General International Growth Fund
Small Capitalization Equity Securities 10%-20%
Sample Underlying Funds:
American General Small Cap Value Fund
American General Small Cap Growth Fund
Medium Capitalization Equity Securities 10%-20%
Sample Underlying Funds:
American General Mid Cap Value Fund
American General Mid Cap Growth Fund
Large Capitalization Equity Securities 25%-35%
Sample Underlying Funds:
American General Large Cap Growth Fund
American General Large Cap Value Fund
Bonds 20%-30%
Sample Underlying Funds:
American General Core Bond Fund
American General Domestic Bond Fund
</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 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 Funds, in combination, to be appropriate for the
Fund's investment objective. We may change the asset allocation ranges and the
particular Underlying Funds in which the Fund may invest from time to time.
INVESTMENT RISKS
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.
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<PAGE> 19
The allocation among the different Underlying 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 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, 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 Underlying
Funds in which it invests. Changes in the net asset values of the Underlying
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 Funds to meet
their investment objectives.
Investment in the Underlying Funds involves manager risk. Manager risk is the
risk that the Fund's management strategy may not achieve the desired results and
the Fund's performance may lag behind that of similar funds. The Fund is also
subject to the risk that a Fund that is non-diversified under the 1940 Act will
invest more of its assets in fewer issuers and, therefore, is more likely to be
adversely affected by a downturn in any one issuer or security. The securities
that Underlying Funds invest in also involve various risks.
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MONEY MARKET FUND
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INVESTMENT CATEGORY
Stability
INVESTMENT ADVISER
VALIC
INVESTMENT OBJECTIVE
Seeks liquidity, protection of capital and current income through investments in
short-term money market instruments. This investment objective can be changed by
the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests in short-term money market securities to provide you with
liquidity, protection of your investment and current income. In accordance with
Rule 2a-7 of the 1940 Act, such 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
- - Variable Rate Demand Notes
- - Illiquid and restricted securities (limited to 10% of the Fund's net assets at
all times)
- - Rule 144A securities (liquid)
INVESTMENT RISKS
The Fund invests in short-term money market securities, which present low credit
and interest rate risks. Because the risk to the money you invest is low, the
potential for profit is also low. The rate of income for the Money Market Fund
varies daily depending on short-term interest rates.
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
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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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
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SMALL CAP GROWTH FUND
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INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
J.P. Morgan Investment Management Inc.
INVESTMENT OBJECTIVE
Seeks to provide long-term growth from a portfolio of equity securities of small
capitalization growth companies. This investment objective can be changed by the
Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGY
At least 65% of the Fund's total assets are invested in the equity securities of
small capitalization companies, which are companies whose approximate market
capitalizations are greater than $150 million and less than $1.25 billion. These
equities include U.S. and foreign common and preferred stocks, warrants and
rights, and convertible securities. On an industry-by-industry basis, the Fund's
weightings are similar to those of the Russell 2000(R) 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.
The Fund may invest up to 35% of total assets in other equity securities of U.S.
and foreign large and medium capitalization issuers, including those equities
listed above, and the securities of investment companies. Large and medium
capitalization issuers are those companies with total assets of approximately $1
billion or more. See "More About Portfolio Investments."
The Fund's transactions are reflected in its portfolio turnover rate, 126.02%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Currency Risk: The risk that a foreign currency will decline in value. The
Fund generally will trade, for hedging purposes, in currencies other than
the U.S. dollar. An increase in the value of the U.S. dollar relative to a
foreign currency will adversely affect the value of the Fund.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
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<PAGE> 21
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
Fiduciary Management Associates, Inc. (actively managed portion)
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. This investment objective can be
changed by the Board of Trustees, without the approval of the Fund shareholders.
INVESTMENT STRATEGIES
This Fund invests at least 65% of its total assets in equity securities of small
capitalization companies, which are companies whose total market capitalizations
range from approximately $150 million to $1.25 billion and companies included in
the Russell 2000(R) Index ("Index"). One portion of the Fund's investment
portfolio will be actively managed and the other portion will be passively
managed.
Actively Managed Portion: 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.
Passively Managed Portion: This portion of the Fund is comprised of a sampling
of stocks in the Index that, as a group, should reflect its performance. Since
it may not be possible for this Fund to buy every stock included in the Index or
in the same proportions, the Fund will select stocks to purchase by 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.
The Fund may invest up to 35% of its total assets in short-term investments,
such as foreign and domestic money market instruments, certificates of deposit,
bankers acceptances, time deposits, U. S. Government obligations, agency
securities, high quality commercial paper, repurchase agreements, and short-term
corporate fixed-income securities. U.S. Government securities are securities
issued or guaranteed by the U.S. Government which are supported by the full
faith and credit of the
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<PAGE> 22
U.S. Government; the right of the issuer to borrow from the U.S. Treasury; the
credit of the issuing government agency; or the authority of the U.S. Government
to purchase obligations of the agency. See "More About Portfolio Investments."
The Fund's transactions are reflected in its portfolio turnover rate, 102.22%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you may lose money:
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Small Capitalization Company Risk: The risk that smaller companies may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or markets, generally.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: The risk that the portfolio manager's judgments that a
particular security is undervalued in relation to the company's fundamental
economic value may prove incorrect.
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SOCIALLY RESPONSIBLE FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Growth
INVESTMENT ADVISER
VALIC
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. This investment objective can be changed by the Board of Trustees, without
the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund will invest at least 80% of total assets in the equity securities of
companies meeting the Fund's social 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").
The Fund does not invest in companies that are significantly engaged in:
- - the production of nuclear energy;
- - the manufacture of weapons or delivery systems;
- - the manufacture of alcoholic beverages or tobacco products;
- - the operation of gambling casinos; or
- - business practices or the production of products that significantly pollute
the environment.
At least once a year, the IRRC surveys state laws to see if there are any new or
revised state laws that govern or affect the investments of public funds. If the
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.
Up to 20% of the Fund's total assets may be invested in high quality money
market securities and warrants, or in other types of equity securities of
companies meeting social criteria, including American Depositary Receipts
("ADRs"), foreign securities, preferred stock, and convertible securities. ADRs
are certificates issued by a U.S. depositary bank, representing foreign shares
held by the bank, to facilitate trading in foreign securities. ADRs carry the
same currency, political and economic risks as the underlying foreign shares.
See "More About Portfolio Investments."
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<PAGE> 23
INVESTMENT RISKS
Because of these principal risks, the value of your investment may fluctuate and
you could lose money:
Foreign Securities Risk:
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.
Sovereign Risk -- the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk -- foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk -- the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk -- the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Social Criteria Risk: 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.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
INVESTMENT CATEGORY
Income
INVESTMENT ADVISER
VALIC
INVESTMENT SUB-ADVISER
AGIM
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. This investment objective can be changed by the Board of Trustees,
without the approval of the Fund shareholders.
INVESTMENT STRATEGY
The Fund invests at least 65% of total assets in a broad range of fixed-income
securities, including
- - investment grade bonds (rated Baa or higher by Moody's and BBB or higher by
S&P)
- - U.S. Government and agency obligations
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<PAGE> 24
- - mortgage backed securities
- - U.S., Canadian, and foreign high risk, high yield bonds (rated C or higher by
Moody's and CC or higher by S&P, or comparable unrated securities)
Up to 25% of the Fund's total assets may be invested in foreign emerging market
debt, and up to an additional 25% in non-U.S. dollar bonds. The Fund may also
invest up to 20% of total assets in equity securities, such as common and
preferred stocks, convertible securities, and warrants.
The Fund's transactions are reflected in its portfolio turnover rate, 142.97%,
for the fiscal year ended August 31, 1999. The rate of portfolio turnover is
calculated by dividing the lesser of the amount of purchases or sales of
portfolio securities during the fiscal year by the average of the value of the
portfolio securities. A high rate of portfolio turnover generally involves
correspondingly greater brokerage commission expenses, thus increasing the
Fund's operating expenses. The Fund's active trading strategy may cause the Fund
to have a relatively high amount of short-term capital gains, which are taxable
to you at your ordinary income tax rate.
INVESTMENT RISKS
Because of the following principal risks, the value of your investment may
fluctuate and you could lose money:
Credit Risk: The risk that an issuer of a fixed-income security owned by the
Fund may be unable to make interest or principal payments.
Foreign Securities Risks:
Political Risk: The risk that a change in a foreign government will occur
and that the assets of a company in which the Fund has invested will be
affected.
Sovereign Risk: The risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk: Foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Limited Information Risk: The risk that foreign companies may not be subject
to accounting standards or governmental supervision comparable to U.S.
companies and that less public information about their operations may exist.
Developing Country Risk: The risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
Settlement and Clearance Risk: The risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace
with the volume of securities transactions and may cause delays.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
Manager Risk: There is a risk that the Fund's management strategy may not
achieve the desired results and the Fund's performance may lag behind that of
similar funds.
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
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MORE ABOUT PORTFOLIO INVESTMENTS
- --------------------------------------------------------------------------------
Each Fund's principal investment strategy and risks are shown above. Funds may
invest in other investments and may use investment techniques as described
below. All Money Market Fund investments must comply with Rule 2a-7 of the 1940
Act, which allows the purchase of only high quality money market instruments.
The Lifestyle Funds invest in other Funds described in this Prospectus and thus
are not specifically mentioned below. Please refer to the SAI for more
information about investments.
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. Examples of assets supporting asset-backed
securities include credit card receivables, retail installment loans, home
equity loans, auto loans, and manufactured housing loans. All of the Funds
except International Growth Fund, International Value Fund, Large Cap Growth,
and Mid Cap Growth may invest in asset-backed securities.
DEPOSITARY RECEIPTS
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. All of the Funds except for
the Money Market Fund and the Strategic Bond Fund may purchase 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 Balanced Fund, Core
Bond Fund, Domestic Bond Fund, High Yield Bond Fund, International Growth Fund,
International Value Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund and the Socially Responsible Fund may invest
in EDRs and GDRs. The Large Cap Growth Fund may invest in GDRs but may not
invest in EDRs.
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. Each share of stock represents a part of
the ownership of the company. The holder of stock participates in the growth of
the company through the stock price and receipt of dividends. All the Funds may
invest in equities except for the Money Market Fund, though equities may not be
a primary strategy for each Fund.
Generally, there are three types of stocks:
1. Common stock -- Common stock usually has voting rights, which allow an
investor to vote for the company Board of Directors. Common stock also gives
each owner a share in a company's profits through dividend payments or the
capital appreciation of the security.
2. Preferred stock -- Each share of preferred stock allows the holder to get a
fixed dividend before the common stock shareholders receive any dividends on
their shares.
3. Convertible preferred stock -- A stock with a fixed dividend which the holder
may exchange for a certain amount of common stock.
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.
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.
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<PAGE> 26
The types of bonds that most Funds purchase, for example, includes U.S.
Government bonds and investment grade corporate bonds. VALIC and the
Sub-Advisers will not necessarily dispose of a bond if its ratings are
downgraded to below investment grade. All of the Funds except Mid Cap Growth
Fund and the Money Market Fund may invest in investment grade bonds. Of those
that invest in bonds, only the Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, Mid Cap Value Fund, Small Cap Growth Fund, Small Cap
Value, and Strategic Bond Fund may also invest in below-investment grade bonds.
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, though most commercial paper matures in 50 days or less.
Bonds are not the only type of fixed-income security. Other fixed-income
securities include, for example, 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.
FOREIGN CURRENCY
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. All the
Funds except for the Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth
Fund, Money Market Fund and the Small Cap Value Fund may invest in foreign
currency.
FOREIGN SECURITIES
Securities of foreign issuers 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. The Large Cap
Growth Fund may only invest in the equity securities of foreign issuers that are
traded in the United States. Generally, all of the Funds may invest in foreign
securities except for Mid Cap Growth Fund.
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
ADRs, EDRs and GDRs. See "Depositary Receipts".
FUTURES AND OPTIONS
Futures and options are considered derivative securities, since the value of the
future or option is derived in part from the value and characteristics of
another security. A "future" is a contract which involves the sale of a security
for future delivery. An "option" gives the buyer the opportunity to buy or sell
a security at a set price on or before a date specified in the contract. A call
option buyer thinks the stock price may go up in the future, while a put option
buyer thinks the stock price may go down. All of the Funds except for
International Growth Fund, Mid Cap Growth Fund and Money Market Fund may invest
in derivatives.
The Funds use stock and bond futures to invest cash and cash equivalents to:
- - 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.
- - 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.
ILLIQUID SECURITIES
An illiquid security is one that may not be frequently traded or cannot be
disposed of promptly within seven days and in the usual course of business
without taking a materially reduced price. Illiquid securities include, but are
not limited to, time deposits and repurchase agreements not maturing within
seven days and restricted securities. Non-money market funds may invest up to
15% in illiquid securities, while money market funds are limited to 10%. This
restriction applies at all times to all assets.
A restricted security is one that has not been registered with the SEC and,
therefore, cannot be sold to the general public. Unregistered securities
eligible for sale to certain buyers, such as mutual funds, under federal Rule
144A and commercial paper offered pursuant to Section 4(2) of the Securities Act
of 1933, as amended, are not deemed by VALIC or the Fund's Sub-
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<PAGE> 27
Adviser to be illiquid solely by reason of being restricted. Instead, VALIC or
the Sub-Adviser will determine whether such securities are liquid based on
trading markets and pursuant to guidelines adopted by the Series Company's Board
of Trustees. If VALIC or the Sub-Adviser concludes that a security is not
liquid, that investment will be included within the Fund's limitation on
illiquid securities.
INVESTMENT COMPANIES
All of 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.
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. International Growth Fund, International Value
Fund, Large Cap Growth Fund, Mid Cap Value Fund and the Small Cap Growth Fund
may invest in investment funds.
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 of the Funds except the Mid Cap Value Fund may invest in loan
participations.
MONEY MARKET SECURITIES
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. All
the Funds may invest in money market securities, though it is not a primary
strategy for all Funds.
Examples of high quality money market securities 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.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities include, but are not limited to, mortgage
pass-through securities, collateralized mortgage obligations and commercial
mortgage-backed securities. All of the Funds except for International Growth
Fund, International Value Fund, Mid Cap Growth Fund, Money Market Fund and the
Socially Responsible Fund may invest in mortgage-related 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. 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 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, coupon, and prepayment preference. 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.
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
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<PAGE> 28
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.
REAL ESTATE SECURITIES
Real estate securities are securities issued by companies that invest in real
estate or interests therein. All of the Funds except for the Domestic Bond Fund
and the High Yield Bond Fund may invest in real estate securities and 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.
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). 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 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.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
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.
If a Fund's positions in reverse repurchase agreements or similar transactions
are not covered by liquid assets in a segregated account, such transactions
would be subject to the Funds' limitations on borrowings. The Funds will not
borrow money, except as provided in each Fund's investment restrictions. Reverse
repurchase agreements may be entered into by all Funds except the Mid Cap Growth
Fund.
The Core Bond Fund, High Yield Bond Fund, Large Cap Value Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and the Strategic Bond Fund
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.
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, Core Bond Fund, Domestic Bond Fund, High Yield Bond Fund, and the
Strategic Bond Fund may enter into structured securities.
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. The Large Cap
Growth Fund, Large Cap Value Fund, Mid Cap Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, and the Strategic Bond Fund may enter into swap
agreements.
U.S. GOVERNMENT SECURITIES
All the Funds may invest in 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
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<PAGE> 29
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.
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. The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value Fund, and the
Strategic Bond Fund may invest in the variable amount demand master notes.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Money Market Fund may also may invest in participation
VRDNs, which provide a Fund with an undivided interest in underlying VRDNs held
by major investment banking institutions. All the Funds may invest in VRDNs.
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. All of the Funds except for the Mid Cap Growth Fund and
Money Market Fund may invest in warrants and rights.
WHEN-ISSUED SECURITIES
When-issued securities are those investments that have been announced by the
issuer and will soon be on the market. 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. All of the Funds except the Mid
Cap Value Fund and the Money Market Fund may invest in when-issued securities.
- --------------------------------------------------------------------------------
MORE ABOUT RISK
- --------------------------------------------------------------------------------
There are several basic types of investment risk. Generally, stocks are
considered to be subject to market risk, while fixed-income securities, such as
U.S. Government bonds and money market securities are subject to interest rate
risk. Other fixed-income 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.
Several types of investment risks are discussed below.
Credit (Financial) Risk: Credit risk refers to the risk that the issuer of a
fixed-income security may default or be unable to pay interest or principal due
on a fixed-income security.
To help the Funds' Investment Adviser or Sub-Advisers decide which U.S.
corporate and foreign fixed-income securities 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
fixed-income security of a company that may not pay the interest and principal
on the fixed-income security.
Certain of the Funds in this prospectus may buy fixed-income securities that are
rated as investment grade. There are four different levels of investment grade,
from AAA to BBB; see Description of Bond Ratings herein. All fixed-income
securities with these ratings are considered to have adequate ability to pay
interest and principal.
All of the Funds in this prospectus may buy fixed-income securities issued by
the U.S. Government. The U.S. Government guarantees it will always pay principal
and interest.
Derivatives Risk: Derivatives risk refers to the risk that loss may result from
a Fund's investments in options, futures, swaps, structured securities and other
derivative instruments. These instruments may be leveraged so that small changes
may produce disproportionate losses to a Fund.
Foreign Securities Risk: Certain Funds may 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.
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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.
Sovereign Risk -- the risk that a foreign government will interfere with
currency trading or transferring money out of the country.
Liquidity Risk -- foreign markets may be less liquid and more volatile than
U.S. markets and offer less protection to investors.
Developing Country Risk -- the risks associated with investment in foreign
securities are heightened in connection with investments in the securities
of issuers in developing countries, as these markets are generally more
volatile than the markets of developed countries.
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.
When interest rates rise, the value of fixed-income securities will usually
fall, and vice versa. Longer term securities are subject to greater interest
rate risk.
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.
Lower Rated Fixed-Income Securities Risk: 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
VALIC or a Sub-Adviser relies on in evaluating lower-rated fixed-income
securities. The analysis by VALIC or 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. VALIC or the Sub-Adviser also may consider
relative values based on anticipated cash flow, interest or dividend coverage,
balance sheet analysis, and earnings prospects.
An economic downturn or increase in interest rates is likely to have a greater
negative effect on the ability of the issuers of lower rated fixed-income
securities 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 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 non-rated securities, these securities
will be valued by a method VALIC or 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.
Manager Risk: Manager risk refers to the risk that the Fund's management
strategy may not achieve the desired results and the Fund's performance may lag
behind that of similar funds.
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<PAGE> 31
Market Risk: Market risk refers to the potential 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 or bonds to fall in price. When this happens, even though a company is
experiencing growth in profits, the price of its stock or bonds could fall.
Prepayment Risk: Prepayment risk refers to the risk that issuers of fixed-income
securities will make payments earlier than anticipated. During periods of
falling interest rates, the Fund may invest in new securities with lower
interest rates, thus reducing the stream of cash payments that flow through the
Fund.
Settlement and Clearance Risk: the risks associated with the clearance and
settlement procedures in non-U.S. markets, which may be unable to keep pace with
the volume of securities transactions and may cause delays.
Temporary Defensive Investment Risk: From time to time, the Fund may take
temporary defensive positions that are inconsistent with its principal
investment strategies, in attempting to respond to adverse market, economic,
political, or other conditions. If the Fund takes such a temporary defensive
position, it may not achieve its investment objective.
Value Investing Risk: Value investing risk refers to the risk that the portfolio
manager's judgments that a particular security is undervalued in relation to the
company's fundamental economic value may prove incorrect.
Year 2000 Risk: American General initiated its Year 2000 readiness plan in 1995.
Since that time, management, along with a team of skilled information technology
and business professionals, have been dedicated to achieving the objectives of
the plan. This plan calls for the renovation upgrade and/or replacement of our
mission critical computer systems, whether developed internally or otherwise. It
includes the five steps essential to Year 2000 readiness: inventory and
discovery; analysis; construction; testing; and implementation. American General
has completed all steps with respect to the Series critical systems.
American General's plan also includes an evaluation of the status of the Series
key third party relationships and their efforts in addressing Year 2000 issues.
If significant third parties fail to achieve Year 2000 readiness on a timely
basis, then the Year 2000 issue could have a material adverse impact on the
operations of the Series. However, the third party contingency plans American
General has developed are meant to identify those risks and provide alternative
actions should a third party not achieve readiness. While we believe no one can
predict with certainty outcomes as to all the issues that may arise, we are
confident that our comprehensive plan and resource commitment will allow us to
meet our Year 2000 objectives.
- --------------------------------------------------------------------------------
WELCOME TO AMERICAN GENERAL CORPORATION
- --------------------------------------------------------------------------------
American General Corporation, with assets of approximately $110 billion and
shareholders' equity of $19 billion as of August 31, 1999, is the parent company
of one of the nation's largest diversified financial services organizations.
American General's operating divisions deliver a wide range of retirement
services, life insurance, and consumer finance products and services to diverse
markets through focused distribution channels. American General, headquartered
in Houston, was incorporated as a general business corporation in Texas in 1980
and is the successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
American General Fund Group is the mutual fund division of American General
Corporation. The address of American General Corporation and its subsidiaries,
including VALIC and AGIM, is 2929 Allen Parkway, Houston, Texas 77019.
INVESTMENT ADVISER
VALIC, a stock life insurance company, has been in the investment advisory
business since 1960, and is the investment adviser for all the Funds. VALIC had
over $12 billion in assets under management, as of June 30, 1999. VALIC and
AGIM, a Sub-Adviser, are both members of the American General Corporation group
of companies. Each entity is a registered investment adviser with the SEC.
Several of VALIC's principal officers, directors and portfolio managers hold
similar positions with AGIM.
As Investment Adviser, VALIC oversees the Fund's day to day operations,
supervises the purchase and sale of Fund investments, and performs the cash
management function. VALIC employs Investment Sub-Advisers who make investment
decisions for the Funds, including Balanced Fund, Core Bond Fund, Domestic Bond
Fund, High Yield Bond Fund, International Growth Fund, International Value Fund,
Large Cap Growth Fund, Large Cap Value Fund, Mid Cap Growth Fund, Mid Cap Value
Fund, Small Cap Growth Fund, Small Cap Value Fund, and Strategic Bond Fund.
VALIC makes investment decisions for and is directly responsible for the
day-to-day team management of the Lifestyle Funds, the Socially Responsible
Fund, and the Money Market Fund. The investment advisory agreement between VALIC
and the Series Company 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. These expenses are allocated to each Fund in a
manner approved by the Board of Trustees.
Teresa Moro has been the Money Market 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
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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.
HOW VALIC IS PAID FOR ITS SERVICES
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. 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 or bearing certain expenses.
<TABLE>
<CAPTION>
ADVISORY FEE PAID TO VALIC
FUND NAME (AS A % OF AVERAGE DAILY NET ASSETS)
- --------- ------------------------------------
<S> <C>
Balanced Fund 0.80% on the first $25 million
0.65% on the next $25 million
0.45% on assets over $50 million
Conservative Growth Lifestyle Fund 0.10%
Core Bond Fund 0.50% on the first $200 million
0.45% on the next $300 million
0.40% 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% over $300 million
Growth Lifestyle Fund 0.10%
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
International Growth Fund 0.90% on the first $100 million
0.80% on assets over $100 million
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 Growth Fund 0.55%
Large Cap Value Fund 0.50%
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
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
Moderate Growth Lifestyle Fund 0.10%
Money Market Fund 0.25%
Small Cap Growth Fund 0.85%
Small Cap Value Fund 0.75% on the first $50 million
0.65% on the assets over $50 million
Socially Responsible Fund 0.25%
Strategic Bond Fund 0.60% on the first $200 million
0.50% on the next $300 million
0.45% on assets over $500 million
</TABLE>
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INVESTMENT SUB-ADVISERS
For some of the Funds, VALIC works with investment Sub-Advisers through an
agreement each entered into with VALIC. Sub-Advisers are 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.
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 cannot 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 may be considered 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.
VALIC and the Sub-Advisers may enter into simultaneous purchase and sale
transactions for the Funds or affiliates of the Funds.
In selecting Sub-Advisers, the Trustees of the Series Company 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 by VALIC to each Sub-Adviser. The Sub-Advisory
fees are not paid by the Funds.
The Series Company relies upon an exemptive order from the SEC which permits
VALIC, subject to certain conditions, to select new sub-advisers or replace
existing sub-advisers without first obtaining shareholder approval for the
change. The Board of Directors, including a majority of the "independent"
Directors, must approve each new sub-advisory agreement. This allows VALIC to
act more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90 days of the hiring of a new
sub-adviser. VALIC is responsible for selecting, monitoring, evaluating and
allocating assets to the Sub-advisers and oversees the Sub-advisers' compliance
with the relevant Fund's investment objective, policies and restrictions.
The Sub-Advisers are:
AGIM
2929 Allen Parkway, Houston, Texas 77015
AGIM is the Sub-Adviser for the Core Bond Fund, Domestic Bond Fund, High Yield
Bond Fund, Money Market Fund and the Strategic Bond Fund. AGIM was formed in
1998 as a successor to the investment management division of American General
Corporation, and is an indirect wholly-owned subsidiary of American General
Corporation. AGIM also provides investment management and advisory services to
pension and profit sharing plans, financial institutions and other investors.
Investment decisions for several Funds are made by teams as noted below. Each
team meets regularly to review portfolio holdings and discuss purchase and sale
activity.
Magali E. Azema-Barac is responsible for AGIM's equity group. She heads the team
making investment decisions for the Socially Responsible Fund and the passively
managed portion of the Small Cap Value Fund. Ms. Azema-Barac joined American
General in September, 1999. Prior to that, she worked on the equity desk of
USWest Investment Management Company in Englewood, Colorado, where she incepted
and managed an enhanced equity portfolio.
Robert N. Kase, CF, has been the Core Bond Fund's Portfolio Manager since
November 1998. He has been Investment Officer of VALIC since September 1998, and
Senior Portfolio Manager of AGIM since September 1998. Previously, Mr. Kase was
Senior Portfolio Manager with CL Capital Management, Inc. from September 1992
until July 1998.
Investment decisions for the Strategic Bond Fund are made by a team, headed by
Steven Guterman. Mr. Guterman, Executive Vice President, joined the Sub-adviser
in June 1998. Previously, Mr. Guterman was with Salomon Brothers, Inc. from 1983
to
32
<PAGE> 34
May 1998, where he served as Managing Director from 1996 to May 1998 and with
Salomon Brothers Asset Management, Inc., where he was a Senior Portfolio Manager
and head of the U.S. Fixed Income Portfolio Group from 1990 to May 1998.
Investment decisions for the High Yield Bond Fund are made by a team, headed by
Gordon Massie. 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.
BROWN CAPITAL MANAGEMENT, INC. ("BROWN CAPITAL")
1201 N. Calvert St., Baltimore, Maryland 21202
Brown Capital is the Sub-Adviser for the Mid Cap Growth Fund. Established as a
Maryland corporation in 1983, Brown Capital served as investment adviser to
approximately $4.7 billion in assets as of June 30, 1999. Investment decisions
for the Mid Cap Growth Fund are made by a team of portfolio managers/analysts
organized for that purpose. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.
CAPITAL GUARDIAN TRUST COMPANY ("CAPITAL GUARDIAN")
333 South Hope Street, Los Angeles, California 90071
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, 1999,
Capital Guardian had more than $275 billion in assets under management.
The Balanced 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 22 years and has been with the Sub-Adviser or an affiliate for
19 years; and (ii) Jim Baker, Vice President of the Sub-Adviser, who has been an
investment professional for 18 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 33 years and has been with the Sub-Adviser or an
affiliate for 29 years; (ii) Gene Stein, Executive Vice President of the
Sub-Adviser, who has been an investment professional for 27 years and has been
with the Sub-Adviser or an affiliate for 26 years; (iii) Michael Ericksen,
Senior Vice President of the Sub-Adviser, who has been an investment
professional for 18 years and has been with the Sub-Adviser or an affiliate for
12 years; (iv) Ted Samuels, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 20 years and has been with the Sub-Adviser
or an affiliate for 18 years; and (v) Donnalisa Barnum, 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 13 years.
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 46 years and has been with the Sub-Adviser or an
affiliate for 33 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; and (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.
The International Value Fund's portfolio managers include: (i) Robert Ronus,
President of the Sub-Adviser, who has been an investment professional for 30
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 33 years and has been with the Sub-Adviser or an affiliate for
29 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 27 years and has been with the Sub-Adviser or an affiliate for
26 years; (iv) Nancy Kyle, Senior Vice President of the Sub-Adviser, who has
been an investment professional for 25 years and has been with the Sub-Adviser
or an affiliate for 8 years; (v) Nilly Sikorsky, Director of The Capital Group
of Companies, Inc., the ultimate parent of the Sub-Adviser, who has been an
investment professional for 36 years and has been with the Sub-Adviser or an
affiliate for 36 years; (vi) Lionel Sauvage, Senior Vice President of the
Sub-Adviser, who has been an investment professional for 12 years and has been
with the Sub-Adviser or an affiliate for 12 years; (vii) Richard Havas, Sr.,
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
13 years; and (viii) Rudolf Staehelin, Sr., Senior Vice President of Capital
International Research, Inc., an affiliate the Sub-Adviser, who has been an
investment professional for 21 years and has been with the Sub-Adviser or an
affiliate for 17 years.
James S. Baker and James R. Mulally serve as the Domestic Bond 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
33
<PAGE> 35
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.
FIDUCIARY MANAGEMENT ASSOCIATES, INC. ("FMA")
55 West Monroe Street, Suite #2550, Chicago, Illinois 60603
FMA is the Sub-Adviser for the actively managed portion of the assets of 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 profit-sharing plans, trusts,
estates and other institutions as well as individuals. As of June 30, 1999, FMA
had over $1.3 billion in assets under management.
Investment decisions are made by a team that consists of portfolio managers and
analysts who specialize their research by sectors. Kathryn Vorisek is the lead
portfolio manager. The team meets regularly to review portfolio holdings and to
discuss purchase and sale activity.
GOLDMAN SACHS ASSET MANAGEMENT ("GSAM")
32 Old Slip, New York, New York 10005
GSAM is the Sub-Adviser for the Large Cap Growth Fund. As of September 1, 1999,
the Investment Management Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). The newly created entity
includes GSAM. 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, 1999,
GSAM, along with other units of IMD, had assets under management of over $191.1
billion.
The Large Cap Growth 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. Mr. Clark, Managing Director, joined
the Sub-Adviser's quantitative equity management team as a portfolio manager in
1992. Mr. Pinter, Vice President, joined the Sub-Adviser as a research analyst
in 1990, and became a portfolio manager in 1992. Ms. Brown, Vice President,
joined the Sub-Adviser in 1998. From 1984 to 1998, Ms. Brown was the director of
Quantitative Equity Research and served on the Investment Policy Committee at
Prudential Securities.
J.P. MORGAN INVESTMENT MANAGEMENT, INC. ("J.P. MORGAN")
522 Fifth Avenue, New York, New York 10036
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, 1999, J.P. Morgan and
its affiliates employed over 380 analysts and portfolio managers around the
world and had more than $326 billion in assets under management.
Candice Eggerss, Saira Malik and Carolyn Jones are the members of the
Sub-Adviser's team who will be primarily responsible for the day-to-day
management of the Small Cap Growth 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. Ms.
Malik joined the Sub-Adviser in 1995 as a small company equity analyst and
portfolio manager after completing her graduate studies at the University of
Wisconsin. Ms. Jones has been with the Sub-Adviser since July 1998. Prior to
this, Ms. Jones served as a portfolio manager in J.P. Morgan's private banking
group and as a product specialist at Merrill Lynch Asset Management.
JACOBS ASSET MANAGEMENT
200 East Broward Boulevard, Suite 1920, Fort Lauderdale, Florida 33301
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, 1999, Jacobs Asset Management had more than $432 million in
assets under management.
Investment decisions for the International Growth Fund are made by a team that
consists of portfolio managers and analysts who specialize their research by
region. Dan Jacobs, President, is the lead portfolio manager and has final
approval on purchase and sales. The team meets regularly to review portfolio
holdings and discuss purchase and sale activity.
34
<PAGE> 36
NEUBERGER BERMAN MANAGEMENT, INC. ("NB MANAGEMENT")
605 Third Avenue, Second Floor, New York, New York 10158-0180
NB Management is the Sub-Adviser for the Mid Cap Value Fund. NB Management and
its predecessor firms have specialized in the management of no-load mutual funds
since 1950. As of June 30, 1999, NB Management and its affiliates managed
approximately $56 billion in aggregate net assets, including approximately $20
billion in mutual fund assets.
Robert I. Gendelman and S. Basu Mullick serve as co-managers of the Mid Cap
Value Fund. Messrs. Gendelman and Mullick are Vice Presidents of the Sub-Adviser
and Mr. Gendelman is a managing director of Neuberger Berman, LLC. Messrs.
Gendelman and Mullick have been associated with the Sub-Adviser since 1994 and
1998, respectively.
STATE STREET BANK & TRUST COMPANY ("STATE STREET BANK")/STATE STREET GLOBAL
ADVISORS ("STATE STREET GLOBAL ADVISORS")
2 International Place, Boston, Massachusetts 02110
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 $575
billion under management as of June 30, 1999.
The Large Cap Value Fund is managed by a team of investment professionals. In
addition to the ongoing activity of portfolio management, the team is
responsible for research focused on enhancing the Sub-Adviser's quantitative
process.
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
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.
BUYING AND SELLING SHARES
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.
For more information on how to participate, see 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.
HOW SHARES ARE VALUED
The price of the shares for each Fund is based on net asset value ("NAV"). NAV
is computed by adding the value of a Fund's holdings plus other assets,
subtracting liabilities, and then dividing the result by the number of shares
outstanding.
Portfolio securities and other assets are valued based on market price
quotations. If market quotations are not readily available, securities are
valued by a method that reflects fair value. These are reviewed by the Fund's
Board of Trustees. Some Funds hold securities that are primarily listed on
foreign exchanges. Foreign exchanges may trade at times or on days when the New
York Stock Exchange ("NYSE") is closed, such as on weekends or other days. This
will affect the value of the Fund's shares; thus, the value of the Fund's shares
may change on days when the separate accounts will not be able to buy or sell
your shares.
35
<PAGE> 37
The Money Market Fund and any securities maturing within 60 days are valued
according to the "amortized cost" method, which is intended to stabilize the NAV
at $1 per share.
The NAV is calculated as of the close of each business day, which coincides with
the closing of the regular session of the NYSE (normally 4 p.m. Eastern Time).
Each Fund is open for business each day the NYSE is open. Please note that there
are some federal holidays, however, such as Columbus Day and Veterans' Day, when
the NYSE is open and the Funds are open but purchases cannot be made due to the
closure of the banking system.
DIVIDENDS AND CAPITAL GAINS
Each Fund pays dividends from its net investment income as shown below. Net
investment income consists of interest income, net short-term capital gains, if
any, and dividends declared and paid on investments, less expenses. Dividends
are declared quarterly for all Funds, except for Money Market Fund, which
declares dividends daily. Distributions of net short-term capital gains (treated
as dividends for tax purposes) and net long-term capital gains, if any, are
normally paid once a year; however, the Funds do not anticipate making any such
distributions unless available capital loss carryovers have been used or have
expired. Dividends and any distributions are automatically reinvested in the
same Fund.
TAX CONSEQUENCES
As the owner of a Contract or a participant under your employer's Contract, you
will not be directly affected by the federal income tax consequences of
distributions, sales or redemptions of Fund shares. You should consult the
prospectus for your Contract for further information concerning the federal
income tax consequences to you of investing in the Funds. See your contract
prospectus for further tax information. You may also wish to consult your tax
advisor before investing.
36
<PAGE> 38
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance. Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned on an investment in a Fund (assuming reinvestment of
all dividends and distributions). This information has been audited by Ernst &
Young LLP, whose reports, along with the Fund's financial statements, are
included in the Annual Report, which is available upon request and which is
incorporated into this document by this reference. Per share data assumes that
you held each share from the beginning to the end of each fiscal year. Total
return assumes that you bought additional shares with dividends paid by the
Fund. Total returns are not annualized.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------------
AMERICAN
GENERAL AMERICAN AMERICAN
AMERICAN CONSERVATIVE AMERICAN GENERAL GENERAL
GENERAL GROWTH GENERAL DOMESTIC GROWTH
BALANCED LIFESTYLE CORE BOND BOND LIFESTYLE
FUND FUND FUND FUND FUND
-------- ------------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net investment income 0.25 0.25 0.50 0.52 0.08
Net realized & unrealized gain 2.39 1.65 (0.39) (0.44) 2.74
------ ------ ------ ------ ------
Total from investment operations 2.64 1.90 0.11 0.08 2.82
------ ------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.25) (0.17) (0.50) (0.52) (0.05)
Net realized gains (0.07) -- (0.03) (0.13) --
------ ------ ------ ------ ------
Total distributions to shareholders (0.32) (0.17) (0.53) (0.65) (0.05)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.32 $11.73 $ 9.58 $ 9.43 $12.77
====== ====== ====== ====== ======
TOTAL RETURN 26.49% 19.00% 1.12% 0.59% 28.28%
====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.80% 0.10% 0.80% 0.77% 0.10%
Net investment income to average net assets 2.15% 2.29% 5.06% 5.41% 0.76%
Portfolio turnover rate 78% 94% 489% 156% 9%
Net assets at end of year (000's) $8,537 $7,429 $5,119 $8,252 $8,480
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
------------------------------------------------------------------
AMERICAN AMERICAN AMERICAN AMERICAN AMERICAN
GENERAL GENERAL GENERAL GENERAL GENERAL
HIGH YIELD INTERNATIONAL INTERNATIONAL LARGE CAP LARGE CAP
BOND GROWTH VALUE GROWTH VALUE
FUND FUND FUND FUND FUND
---------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $ 10.00 $10.00
------ ------ ------ ------- ------
INVESTMENT OPERATIONS
Net investment income 0.87 0.13 0.09 0.01 0.13
Net realized & unrealized gain (0.31) 1.09 4.65 3.96 2.85
------ ------ ------ ------- ------
Total from investment operations 0.56 1.22 4.74 3.97 2.98
------ ------ ------ ------- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.87) -- (0.02) (0.01) (0.13)
Net realized gains -- -- -- -- --
------ ------ ------ ------- ------
Total distributions to shareholders (0.87) -- (0.02) (0.01) (0.13)
------ ------ ------ ------- ------
NET ASSET VALUE, END OF PERIOD $ 9.69 $11.22 $14.72 $ 13.96 $12.85
====== ====== ====== ======= ======
TOTAL RETURN 5.50% 12.20% 47.41% 39.77% 29.87%
====== ====== ====== ======= ======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.98% 1.13% 1.01% 0.81% 0.80%
Net investment income to average net assets 8.51% 1.40% 0.67% 0.13% 1.10%
Portfolio turnover rate 74% 87% 60% 76% 93%
Net assets at end of year (000's) $5,397 $6,815 $8,148 $19,309 $7,856
</TABLE>
37
<PAGE> 39
FINANCIAL HIGHLIGHTS -- CONTINUED
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
--------------------------------------------------------------
AMERICAN
AMERICAN AMERICAN GENERAL AMERICAN
GENERAL GENERAL MODERATE AMERICAN GENERAL
MID CAP MID CAP GROWTH GENERAL SMALL CAP
GROWTH VALUE LIFESTYLE MONEY MARKET GROWTH
FUND FUND FUND FUND FUND
-------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $ 10.00 $ 1.00 $ 10.00
------ ------- ------- ------ -------
INVESTMENT OPERATIONS
Net investment income (0.03) 0.08 0.17 0.05 (0.05)
Net realized & unrealized gain 2.48 4.11 2.18 -- 4.96
------ ------- ------- ------ -------
Total from investment operations 2.45 4.19 2.35 0.05 4.91
------ ------- ------- ------ -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.08) (0.11) (0.05) --
Net realized gains -- (0.29) -- -- (0.05)
------ ------- ------- ------ -------
Total distributions to shareholders -- (0.37) (0.11) (0.05) (0.05)
------ ------- ------- ------ -------
NET ASSET VALUE, END OF PERIOD $12.45 $13.82 $ 12.24 $ 1.00 $ 14.86
====== ======= ======= ====== =======
TOTAL RETURN 24.50% 42.38% 23.52% 4.66% 48.82%
====== ======= ======= ====== =======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.77% 1.03% 0.10% 0.54% 1.11%
Net investment income to average net assets (0.24)% 0.73% 1.60% 4.43% (0.45)%
Portfolio turnover rate 38% 197% 13% N/A 126%
Net assets at end of year (000's) $7,394 $9,039 $10,349 $9,784 $10,843
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, 1999
-----------------------------------
AMERICAN AMERICAN AMERICAN
GENERAL GENERAL GENERAL
SMALL CAP SOCIALLY STRATEGIC
VALUE RESPONSIBLE BOND
FUND FUND FUND
--------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $ 10.00 $10.00
------ ------- -------
INVESTMENT OPERATIONS
Net investment income 0.13 0.14 0.69
Net realized & unrealized gain 0.61 3.45 (0.16)
------ ------- -------
Total from investment operations 0.74 3.59 0.53
------ ------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.13) (0.14) (0.65)
Net realized gains (0.13) (0.57) (0.02)
------ ------- -------
Total distributions to shareholders (0.26) (0.71) (0.67)
------ ------- -------
NET ASSET VALUE, END OF PERIOD $10.48 $ 12.88 $ 9.86
====== ======= =======
TOTAL RETURN 7.34% 36.27% 5.33%
====== ======= =======
RATIOS AND SUPPLEMENTAL DATA
Expenses to average net assets 0.96% 0.55% 0.88%
Net investment income to average net assets 1.28% 1.10% 6.76%
Portfolio turnover rate 102% 29% 143%
Net assets at end of year (000's) $6,414 $10,304 $5,296
</TABLE>
38
<PAGE> 40
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
AMERICAN GENERAL BALANCED FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE BALANCED FUND
AND THE LEHMAN BROTHERS GOVERNMENT & CORPORATE S&P 500 INDEX, AND A BLENDED
BENCHMARK (40% LEHMAN AND 60% S&P 500
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
23.77%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Balanced 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. 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 at right 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 July 1, 1988 to June 30,
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 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. This performance information 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>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
<S> <C> <C>
20.32% 16.38% 14.35%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JULY 1, 1988
[CHART]
PERIOD ENDED JUNE 30, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
39
<PAGE> 41
- --------------------------------------------------------------------------------
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE CONSERVATIVE GROWTH LIFESTYLE FUND
AND THE S&P 500 & BLENDED INDEX*
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
15.99%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.
The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
40
<PAGE> 42
- --------------------------------------------------------------------------------
AMERICAN GENERAL CORE BOND FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE CORE BOND FUND
AND THE LEHMAN BROTHERS AGGREGATE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
-0.17%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31, 1998
Prior Performance of Similar Accounts
The Fund's investment objectives, policies and strategies will be substantially
similar to those employed by the Sub-adviser with respect to the Canada Life
Commingled Fund, which was managed by Robert N. Kase, the Core Bond Fund's
portfolio manager, from January 1, 1993 to July 1998. The Canada Life Commingled
Fund has substantially similar, though not necessarily identical investment
objectives, policies and strategies as the Core Bond Fund. The chart herein
shows the historical investment performance for the period February 1, 1993
through March 31, 1998, net of the Canada Life Commingled Fund fees and
expenses.
The Canada Life Commingled Fund 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
Canada Life Commingled Fund had been subject to the requirements imposed on
registered mutual funds, its performance might have been lower.
Total fees (after expense reimbursements) for the Core Bond Fund are higher than
the total fees incurred by the Canada Life Commingled Fund. Consequently, the
performance results for the Canada Life Commingled Fund would have been lower if
the Canada Life Commingled Fund had the same expenses as the Core Bond Fund. The
performance of the Canada Life Commingled 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. This performance information is based on the Canada Life Commingled
Fund which was managed in substantially the same manner and by the same
individual as the Core Bond Fund and does not reflect the performance of the
Core Bond Fund itself.
AVERAGE ANNUAL TOTAL RETURN OF
CANADA LIFE COMMINGLED FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
10.42% 7.57% 7.69%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE FEBRUARY 1, 1993
[CHART]
PERIOD ENDED MARCH 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
41
<PAGE> 43
- --------------------------------------------------------------------------------
AMERICAN GENERAL DOMESTIC BOND FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE DOMESTIC BOND FUND
AND THE LEHMAN BROTHERS AGGREGATE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
-1.19%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Domestic Bond 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 at right 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 August 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. This performance information 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>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
9.79% 6.59% 9.31%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JULY 1, 1988
[CHART]
PERIOD ENDED JUNE 30, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
42
<PAGE> 44
- --------------------------------------------------------------------------------
AMERICAN GENERAL GROWTH LIFESTYLE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE GROWTH LIFESTYLE FUND
AND THE S&P 500 & BLENDED INDEX*
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
26.38%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.
The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.
AMERICAN GENERAL HIGH YIELD BOND FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE HIGH YIELD BOND FUND
AND THE SALOMON BROTHERS HIGH YIELD MARKET INDEX*
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
5.40%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were incurred above.
43
<PAGE> 45
- --------------------------------------------------------------------------------
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL GROWTH FUND AND
THE SALOMON BROTHERS PRIMARY MARKET INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
19.11%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Fund's investment objectives, policies and strategies are 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 [at right] 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. This performance information 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
- ---------------------------------------------------
-13.74% 10.30%
- ---------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 1, 1995
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
44
<PAGE> 46
- --------------------------------------------------------------------------------
AMERICAN GENERAL INTERNATIONAL VALUE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE INTERNATIONAL VALUE FUND
AND THE SALOMON BROTHERS PRIMARY MARKET INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
55.82%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
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 at right 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. This performance information 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>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
<S> <C> <C>
-3.53% 9.19% 10.34%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
45
<PAGE> 47
- --------------------------------------------------------------------------------
AMERICAN GENERAL LARGE CAP GROWTH FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP GROWTH FUND
AND THE RUSSELL 1000 GROWTH
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
38.11%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Large Cap Growth Fund's investment objective, policies and strategies are
substantially similar to those employed by the Sub-adviser with respect to 22
accounts ("Combined Accounts"), including fourteen advisory accounts
("Accounts") and 6 registered mutual funds ("Funds"). The chart at right 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. This performance information 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>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
2.48% 21.87% 18.31%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE NOVEMBER 11, 1991
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
46
<PAGE> 48
- --------------------------------------------------------------------------------
AMERICAN GENERAL LARGE CAP VALUE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP VALUE FUND
AND THE RUSSELL 1000 VALUE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
21.26%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Large Cap Value Fund is 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 at right 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 31, 1998. 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. This performance information is based on a composite of 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>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
4.78% 18.15% 18.61%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE AUGUST 1, 1992
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
47
<PAGE> 49
- --------------------------------------------------------------------------------
AMERICAN GENERAL MID CAP GROWTH FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MID CAP GROWTH FUND
AND THE RUSSELL MIDCAP GROWTH INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
16.36%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
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 at right 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 August 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. This
performance information 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 Mid Cap Growth Fund itself.
AVERAGE ANNUAL TOTAL RETURN OF
COMBINED ACCOUNTS COMPOSITE
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
0.04% 16.80% 14.95%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE JANUARY 1, 1993
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
48
<PAGE> 50
- --------------------------------------------------------------------------------
AMERICAN GENERAL MID CAP VALUE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MID CAP VALUE FUND
AND THE RUSSELL MIDCAP VALUE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
35.60%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
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 Mid Cap
Value Fund will have. The chart at right shows the investment performance for
Neuberger Berman Partners Fund for the period April 1, 1988 through August 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. This performance information is based on NeubergerBerman
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
NEUBERGERBERMAN PARTNERS FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEAR
- ---------------------------------------------------------
<S> <C> <C>
-10.03% 14.09% 14.75%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
49
<PAGE> 51
- --------------------------------------------------------------------------------
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE MODERATE GROWTH LIFESTYLE FUND
AND THE S&P 500 INDEX & BLENDED INDEX*
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
20.39%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
* Reflects returns from October 1, 1998, to August 31, 1999, because the
benchmark's value is only published at the end of each month.
The Blended Index is calculated by including the pro rata portion of each of
the Underlying Fund's respective indices.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
50
<PAGE> 52
- --------------------------------------------------------------------------------
AMERICAN GENERAL MONEY MARKET FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE LARGE CAP GROWTH FUND
AND THE NYC 30 DAY PRIMARY CD RATE
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
4.66%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
The Money Market Fund's investment objectives, policies and strategies are
substantially similar, although not identical, 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 at right shows
the historical investment performance for the AGSPC Money Market Fund for the
period of April 1, 1988 through August 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. This
performance information is based on a composite of the Sub-adviser's
Discretionary Accounts which are managed in substantially the same manner 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>
- ---------------------------------------------------------
1 YEAR 5 YEAR 10 YEARS
- ---------------------------------------------------------
<S> <C> <C>
5.23% 4.77% 5.39%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1988
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
51
<PAGE> 53
- --------------------------------------------------------------------------------
AMERICAN GENERAL SMALL CAP GROWTH FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SMALL CAP GROWTH FUND
AND THE RUSSELL 2000 GROWTH INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
38.31%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
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 at right 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. This performance information 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>
<CAPTION>
- ---------------------------------------------------
1 YEAR SINCE INCEPTION
- ---------------------------------------------------
<S> <C>
-19.90% 13.46%
- ---------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE SEPTEMBER 1, 1994
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
52
<PAGE> 54
- --------------------------------------------------------------------------------
AMERICAN GENERAL SMALL CAP VALUE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SMALL CAP VALUE FUND
AND THE RUSSELL 2000 VALUE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
3.61%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
53
<PAGE> 55
- --------------------------------------------------------------------------------
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE SOCIALLY RESPONSIBLE FUND
AND THE S&P 500 INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
27.83%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
Prior Performance of Similar Accounts
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 at right shows the historical investment performance for the
AGSPC Social Awareness Fund for the period of October 2, 1989 through August 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. This performance information 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>
<CAPTION>
- ---------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
- ---------------------------------------------------------
<S> <C> <C>
7.43% 17.21% 13.97%
- ---------------------------------------------------------
</TABLE>
VALUE AT MONTHLY INTERVALS OF A $10,000
STIPULATED PAYMENT MADE OCTOBER 2, 1989
[CHART]
PERIOD ENDED AUGUST 31, 1998
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
54
<PAGE> 56
- --------------------------------------------------------------------------------
AMERICAN GENERAL STRATEGIC BOND FUND
COMPARISON OF A CHANGE IN THE VALUE OF A $10,000
INVESTMENT IN THE STRATEGIC BOND FUND AND THE
LEHMAN BROTHERS AGGREGATE INDEX
AVERAGE ANNUAL TOTAL RETURN -- FUND
- -------------------------------------------------
SINCE INCEPTION (9/21/98)
- -------------------------------------------------
4.09%
- -------------------------------------------------
[CHART]
FISCAL YEAR ENDED AUGUST 31
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
The Fund returns reflect investment management fees and other Fund expenses.
Fees or charges included in the annuity contract or variable life policy for
mortality and expense guarantees, administrative fees or surrender charges, for
example, are not reflected above. The Fund returns would be lower if these fees
were included above.
55
<PAGE> 57
INTERESTED IN LEARNING MORE?
- --------------------------------------------------------------------------------
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about each Fund's investments
is available in the Fund's Annual and Semi-Annual reports to shareholders.
Statement of Additional Information ("SAI"): The SAI provides more detailed
information about the Funds and is incorporated into this prospectus by
reference.
You can get free copies of reports and SAIs, request other information and
discuss your questions about the Funds by contacting your broker, or the Funds
at:
Telephone: 1-800-813-5065 or 1-800-633-8960
American General Web-Site Address: http://www.agc.com
You can review the Funds' reports and SAI at the public Reference Room of the
SEC.
You can get text only copies:
- For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009, Telephone: 1-800-SEC-0330.
- Free from the Commission's Internet website at http://www.sec.gov.
Investment Company Act File No. 811-08789 (AGSPC 3)
Printed Matter
Printed in U.S.A.
VA10832 VER. 1/2000 Recycled Paper [LOGO]
56
<PAGE> 58
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
AMERICAN GENERAL BALANCED FUND
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND
AMERICAN GENERAL CORE BOND FUND
AMERICAN GENERAL DOMESTIC BOND FUND
AMERICAN GENERAL GROWTH LIFESTYLE FUND
AMERICAN GENERAL HIGH YIELD BOND FUND
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
AMERICAN GENERAL INTERNATIONAL VALUE FUND
AMERICAN GENERAL LARGE CAP GROWTH FUND
AMERICAN GENERAL LARGE CAP VALUE FUND
AMERICAN GENERAL MID CAP GROWTH FUND
AMERICAN GENERAL MID CAP VALUE FUND
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND
AMERICAN GENERAL MONEY MARKET FUND
AMERICAN GENERAL SMALL CAP GROWTH FUND
AMERICAN GENERAL SMALL CAP VALUE FUND
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
AMERICAN GENERAL STRATEGIC BOND FUND
--------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------
PART B
JANUARY 3, 2000
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 January 3, 2000. 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 American General Distributors, Inc. (the "Distributor") 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> 59
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History............................. 2
Performance and Yield Information........................... 2
Investment Restrictions..................................... 8
Investment Practices........................................ 25
Investment Adviser.......................................... 51
Investment Sub-Advisers..................................... 52
Portfolio Transactions and Brokerage........................ 54
Distribution and Service Agreement.......................... 56
Determination of Net Asset Value............................ 57
Accounting and Tax Treatment................................ 58
Other Information........................................... 59
Management of the Series Company............................ 61
Appendix -- Bond Ratings.................................... 66
</TABLE>
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, VALIC and each sub-adviser 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 Series Company's inception date was September 21, 1998. Accordingly,
the performance information for each Fund for periods prior to that inception
date 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 fund, mutual fund, discretionary account or composite
("Average Annual
2
<PAGE> 60
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 or average annual total return to the total
return of the fund, mutual fund, discretionary account or composite's benchmark
index ("Index Total Return"). The difference between Portfolio Total Return or
average annual 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, 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
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, 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 of 1, 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]
3
<PAGE> 61
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>
PERFORMANCE RETURNS OF THE FUNDS
AS OF AUGUST 31, 1999
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE INCEPTION
--------- ---------
<S> <C> <C>
AMERICAN GENERAL BALANCED FUND 9/21/98
Average Annual Total Return 23.77%
Portfolio Total Return 24.53%
S&P 500 30.57%
Lehman Brothers Corporate and Government Bond Index (1.21)%
Benchmark(1) 17.08%
AMERICAN GENERAL CONSERVATIVE GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 15.99%
Portfolio Total Return 16.09%
S&P 500 30.57%
Benchmark(2)(3) 14.59%
AMERICAN GENERAL CORE BOND FUND 9/21/98
Average Annual Total Return (0.17)%
Portfolio Total Return 0.59%
Lehman Brothers Aggregate (0.42)%
AMERICAN GENERAL DOMESTIC BOND FUND 9/21/98
Average Annual Total Return (1.19)%
Portfolio Total Return (0.47)%
Lehman Brothers Aggregate (0.42)%
AMERICAN GENERAL GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 26.38%
Portfolio Total Return 26.48%
S&P 500 30.57%
Benchmark(4)(3) 23.33%
AMERICAN GENERAL HIGH YIELD BOND FUND 9/21/98
Average Annual Total Return 5.40%
Portfolio Total Return 6.33%
Salomon Smith Barney High Yield Market Index(3) 4.30%
AMERICAN GENERAL INTERNATIONAL GROWTH FUND 9/21/98
Average Annual Total Return 19.11%
Portfolio Total Return 20.18%
Salomon Smith Barney Primary Market 31.58%
</TABLE>
4
<PAGE> 62
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE INCEPTION
--------- ---------
<S> <C> <C>
AMERICAN GENERAL INTERNATIONAL VALUE FUND 9/21/98
Average Annual Total Return 55.82%
Portfolio Total Return 56.79%
Salomon Smith Barney Primary Market 31.58%
AMERICAN GENERAL LARGE CAP GROWTH FUND 9/21/98
Average Annual Total Return 38.11%
Portfolio Total Return 38.87%
Russell 1000 Growth 37.26%
AMERICAN GENERAL LARGE CAP VALUE FUND 9/21/98
Average Annual Total Return 21.26%
Portfolio Total Return 22.02%
Russell 1000 Value 22.44%
AMERICAN GENERAL MID CAP GROWTH FUND 9/21/98
Average Annual Total Return 16.36%
Portfolio Total Return 17.08%
Russell MidCap Growth 36.92%
AMERICAN GENERAL MID CAP VALUE FUND 9/21/98
Average Annual Total Return 35.60%
Portfolio Total Return 36.57%
Russell MidCap Value 14.71%
AMERICAN GENERAL MODERATE GROWTH LIFESTYLE FUND 9/21/98
Average Annual Total Return 20.39%
Portfolio Total Return 20.49%
S&P 500 30.57%
Benchmark(5)(3) 18.55%
AMERICAN GENERAL MONEY MARKET FUND 9/21/98
Average Annual Total Return 4.66%
Portfolio Total Return 5.18%
30-day Certificate of Deposit Primary Offering Rate by New
York City Banks 4.11%
AMERICAN GENERAL SMALL CAP GROWTH FUND 9/21/98
Average Annual Total Return 38.31%
Portfolio Total Return 39.35%
Russell 2000 Growth 30.72%
AMERICAN GENERAL SMALL CAP VALUE FUND 9/21/98
Average Annual Total Return 3.61%
Portfolio Total Return 4.51%
Russell 2000 Value 8.34%
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND 9/21/98
Average Annual Total Return 27.83%
Portfolio Total Return 28.35%
S&P 500 30.57%
AMERICAN GENERAL STRATEGIC BOND FUND 9/21/98
Average Annual Total Return 4.09%
Portfolio Total Return 4.92%
Lehman Brothers Aggregate (0.42)%
</TABLE>
- ---------------
(1) Benchmark: Consists of 60% S&P 500 Index and 40% Lehman Brothers Corporate
and Government Bond Index.
(2) Benchmark: Consists of 5% EAFE, 5% Salomon Smith Barney Primary Market
Index, 15% S&P 500 Index, 15% Russell 1000 Value, 5% Russell Mid Cap Growth,
5% Russell Mid Cap Value, 40% Lehman Brothers Aggregate Index, 5% Russell
2000 Growth, and 5% Russell 2000 Value.
(3) Return period from 10/01/98 to 8/31/99.
(4) Benchmark: Consists of 15% EAFE, 15% Salomon Smith Barney Primary Market
Index, 15% S&P 500 Index, 15% Russell 1000 Value, 7% Russell Mid Cap Growth,
8% Russell Mid Cap Value, 25% Lehman Brothers Aggregate Index, 7% Russel
2000 Growth, and 8% Russell 2000 Value.
(5) Benchmark: Consists of 7% EAFE, 8% Salomon Smith Barney Primary Market
Index, 15% S&P 500 Index, 15% Russell 1000 Value, 7% Russell Mid Cap Growth,
8% Russell Mid Cap Value, 25% Lehman Brothers Aggregate Index, 7% Russell
2000 Growth, and 8% Russell 2000 Value.
5
<PAGE> 63
PERFORMANCE RETURNS OF CERTAIN INVESTMENT COMPANIES
AND PRIVATE ACCOUNTS OTHER THAN THE FUNDS
AS OF AUGUST 31, 1998
<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 5 YEAR INCEPTION
--------- ------ ------ ---------
<S> <C> <C> <C> <C>
AMERICAN GENERAL BALANCED FUND(4)
Composite Average Annual Total Return 12/31/74 20.32% 16.38% 14.35%
Composite Portfolio Total Return 21.03% 17.02% 14.97%
S&P 500 Index 8.11% 18.25% 17.05%
Lehman Brothers Government and Corporate Bond Index 11.42% 5.60% 8.76%
Blended Benchmark: 60% S&P 500 Index & 40% Lehman Brothers
Government and Corporate Bond Index 10.03% 13.25% 13.87%
AMERICAN GENERAL CORE BOND FUND(2)
Canada Life Commingled Fund Average Annual Total Return 2/1/93 10.42% 7.57% 7.69%
Lehman Brothers Aggregate 12.00% 6.94% 8.94%
AMERICAN GENERAL DOMESTIC BOND FUND(3)
Composite Average Annual Total Return 12/31/72 9.79% 6.59% 9.31%
Composite Portfolio Total Return 10.18% 6.96% 9.69%
Lehman Brothers Aggregate 10.56% 6.78% 9.29%
AMERICAN GENERAL INTERNATIONAL GROWTH FUND
Composite Average Annual Return 10/1/95 (13.74)% -- 10.30%
Composite Portfolio Total Return (12.99)% -- 11.05%
Salomon Smith Barney Primary Market Index 3.90% -- 13.90%
AMERICAN GENERAL INTERNATIONAL VALUE FUND
Composite Average Annual Total Return 12/31/78 (3.53)% 9.19% 10.34%
Composite Portfolio Total Return (2.62)% 10.05% 11.17%
Salomon Smith Barney Primary Market Index 3.90% 12.60% N/A(4)
AMERICAN GENERAL LARGE CAP GROWTH
Composite Average Annual Total Return 11/11/91 2.48% 21.87% 18.31%
Composite Portfolio Total Return 3.15% 22.44% 18.87%
Russell 1000 Growth Index 8.26% 18.83% 19.70%
AMERICAN GENERAL LARGE CAP VALUE FUND
Discretionary Account Average Annual Total Return 8/1/92 4.78% 18.15% 18.61%
Discretionary Account Portfolio Total Return 5.16% 18.45% 18.92%
Russell 1000 Value Index 3.89% 15.87% 16.78%
AMERICAN GENERAL MID CAP GROWTH FUND
Composite Average Annual Total Return 1/1/93 0.04% 16.80% 14.95%
Composite Portfolio Total Return 0.35% 17.38% 15.53%
Russell MidCap Growth Index (11.48)% 11.30% 11.12%
AMERICAN GENERAL MID CAP VALUE FUND
Neuberger Berman Partners Fund Average Annual Total Return 1/20/75 (10.03)% 14.09% 14.75%
Neuberger Berman Partners Fund Portfolio Total Return (9.22)% 14.95% 15.56%
Russell MidCap Value Index (3.37)% 13.17% 14.45%
AMERICAN GENERAL MONEY MARKET FUND
American General Series Portfolio Company Money Market
Fund Average Annual Total Return 1/16/86 5.23% 4.77% 5.39%
American General Series Portfolio Company Money Market
Fund Portfolio Total Return 5.77% 5.40% 6.27%
30-Day Certificate of Deposit Primary Offering Rate by New
York City Banks 4.80% 4.37% 5.15%
AMERICAN GENERAL SMALL CAP GROWTH FUND
Composite Average Annual Total Return 9/1/94 (19.90)% -- 13.46%
Composite Portfolio Total Return (18.10)% -- 14.96%
Russell 2000 Growth Index (26.31)% -- 5.11%
</TABLE>
6
<PAGE> 64
<TABLE>
<CAPTION>
10 YEAR
INCEPTION OR SINCE
DATE 1 YEAR 5 YEAR INCEPTION
--------- ------ ------ ---------
<S> <C> <C> <C> <C>
AMERICAN GENERAL SOCIALLY RESPONSIBLE FUND
American General Series Portfolio Company Social Awareness
Fund Average Annual Total Return 10/2/89 7.43% 17.21% 13.97%
American General Series Portfolio Company Social Awareness
Fund Portfolio Total Return 7.99% 17.84% 14.20%
S&P 500 Index 8.11% 18.25% 15.04%
</TABLE>
- ---------------
(1) Inception date of benchmark 6/1/89.
(2) As of 3/31/98.
(3) As of 6/30/98.
7
<PAGE> 65
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 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 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.
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(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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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 either 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.
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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 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.
AMERICAN GENERAL DOMESTIC BOND FUND ("DOMESTIC BOND FUND"); 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 Domestic Bond Fund, 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%.
(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, how-
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<PAGE> 68
ever, 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 Domestic Bond Fund, High Yield
Fund, the Strategic Bond Fund and the Core Bond Fund may not:
(1) Invest more than 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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 instru-
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<PAGE> 69
ments 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 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 15% of the Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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
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<PAGE> 70
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 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
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<PAGE> 71
(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 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 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
14
<PAGE> 72
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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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.
(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.
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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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
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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
instruments, 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
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<PAGE> 75
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 Fund's net assets (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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,
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<PAGE> 76
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 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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
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<PAGE> 77
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 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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.
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<PAGE> 78
(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 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.
(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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
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<PAGE> 79
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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 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
22
<PAGE> 80
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 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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
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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 positions 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 (taken at the greater of cost
or market value) in securities that are illiquid or not readily marketable
including time deposits and repurchase agreements not maturing within seven
days or restricted securities, but excluding (a) Rule 144A securities that
have been determined to be liquid by VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, and (b) commercial paper that is sold under Section 4(2) of the
1933 Act which: (i) is not traded flat or in default as to interest or
principal; (ii) is rated in one of the two highest categories by at least
two nationally recognized statistical rating organizations and VALIC or the
Sub-Adviser, in accordance with guidelines adopted by the Series Company's
Board of Trustees, has determined the commercial paper to be liquid; or
(iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and VALIC or the Sub-adviser, in
accordance with guidelines adopted by the Series Company's Board of
Trustees, has determined that the commercial paper is of equivalent quality
and is liquid.
(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.
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INVESTMENT PRACTICES
This discussion of investment practices supplements that in the Prospectus.
The Lifestyle Funds may not be specifically discussed below, since each
Lifestyle Fund actually invests in other American General Funds mentioned in the
Prospectus.
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 Nationally Recognized Statistical Rating Organization ("NRSRO")
(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. Repurchase agreements that do not mature in seven days
are considered illiquid.
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
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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
Each Fund may borrow money, subject to the Fund's investment restrictions.
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 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.
DOLLAR ROLLS
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
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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. Dollar roll transactions for
terms exceeding three months may be deemed "illiquid" and subject to a Fund's
overall limitations on investments in illiquid securities.
CONVERTIBLE SECURITIES
All of the Funds except for the Money Market Fund 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.
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
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
depositary receipts: American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) and Global Depositary Receipts (GDRs). Depositary 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, the Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Bond
Fund, International Growth Fund, International Value Fund, Mid Cap Value Fund,
Small Cap Growth Fund, Small Cap Value Fund Socially Responsible Fund and the
Strategic Bond Fund may invest in other types of depositary securities such as
international depositary receipts, global depositary shares, European depositary
shares and international depositary shares.
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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).
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 nationalization, and
possible difficulty in obtaining and enforcing judgments against foreign
entities.
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 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 mini-
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mum 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 International
Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Large Cap Value Fund,
Small Cap Value Fund, High Yield Bond Fund, Balanced Fund, International Value
Fund, Domestic Bond Fund, Strategic Bond Fund and 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 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.
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INTERNATIONAL BONDS
The Balanced Fund, Core Bond Fund, Domestic Bond Fund, High Yield Fund,
International Value Fund, Large Cap Growth Fund, Mid Cap Value Fund, Small Cap
Growth Fund, Small Cap Value Fund, Socially Responsible Fund and the Strategic
Bond Fund 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
All of the Funds except for Large Cap Growth Fund, Large Cap Value Fund,
Mid Cap Growth Fund and the Money Market Fund may invest in companies located in
emerging market countries. The investments 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 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 U.S. 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. Additionally, investments in emerging countries may also be
adversely impacted due to the implementation of certain capital control measures
which could limit the a Fund's ability to access U.S. dollars, repatriate earned
interest and/or principal, and sell selected securities.
Investing in emerging market securities, whether in the U.S. or another
country, 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 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.
BRADY BONDS
Domestic Bond Fund, Balanced Fund, High Yield Bond Fund, Strategic Bond
Fund and Core Bond Fund may invest in Brady Bonds. Brady Bonds are securities
created through the exchange
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of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructurings under a debt restructuring plan agreed to by
the debtor nation and its creditors. Brady Plan debt restructurings have been
implemented in a number of countries.
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, but are not backed by the
U.S. Government. 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").
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.
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 DEPOSITARY RECEIPTS
The Large Cap Growth Fund may, consistent with its objectives, purchase
Standard & Poor's Depositary 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.
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WHEN-ISSUED SECURITIES
Securities may be purchased 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 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" 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
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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.
ZERO COUPON FIXED INCOME SECURITIES
Large Cap Value Fund, Mid Cap Value Fund, Balanced Fund, High Yield Bond
Fund, Strategic Bond Fund, Core Bond Fund and 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.
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
Core Bond Fund, Balanced Fund, Domestic Bond Fund, High Yield Bond Fund and
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. Interest payments are made to bondholders
semi-annually and are made up of two components: a fixed "real coupon" or
spread, and a variable coupon linked to an inflation index. Accordingly,
payments will increase or decrease each period as a result of changes in the
inflation index. In the period of deflation payments may decrease to zero, but
in any event will not be less than zero. Inflation-indexed 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, 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%).
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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 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
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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
High Yield Bond Fund, Balanced Fund, Strategic Bond Fund, Domestic Bond
Fund and 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 or 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 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")
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.
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
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(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
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
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 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
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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 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
All of the Funds except for International Growth Fund, Large Cap Growth
Fund, Large Cap Value Fund and Mid Cap Growth Fund 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
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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.
The Core Bond Fund, High Yield Bond Fund, Small Cap Growth Fund, Small Cap
Value Fund, Socially Responsible Fund and Strategic Bond Fund 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 consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. These securities may be structured in classes with rights to receive
varying proportions of principal and interest.
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 con-
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ventional (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 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. The 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 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.)
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
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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, coupon, and prepayment preference. 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.
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
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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.
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
Asset-backed securities (unrelated to first mortgage loans) 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 objec-
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tive(s) and policies, a Fund may invest in other asset-backed securities that
may be developed in the future.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes ("VRDNs") are either taxable or tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand to receive
payment of the principal balance plus accrued interest either at any time or at
specified intervals not exceeding one year and in either case upon no more than
seven days notice. The interest rates are adjustable at intervals ranging from
daily ("floating rate") to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.
Money Market Fund may also invest in VRDNs in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt obligations held
by a financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days. A
Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
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
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 considered 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.
All of the Funds except for International Growth Fund, International Value
Fund, Large Cap Growth Fund, Large Cap Value Fund and Money Market Fund may
invest in inverse floaters, which
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are derivative fixed income 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
Money Market Fund will not invest more than 10% (15% in the case of
International Growth Fund, the Small Cap Growth Fund, Large Cap Growth Fund,
Large Cap Value Fund, Mid Cap Value Fund, Small Cap Value Fund, High Yield Bond
Fund, Balanced Fund, International Value Fund, Domestic Bond Fund, Strategic
Bond Fund and 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
Privately placed securities 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 International Growth
Fund, Small Cap Growth Fund, Large Cap Growth Fund, Large Cap Value Fund, Mid
Cap Value Fund, Small Cap Value Fund, High Yield Bond Fund, Balanced Fund,
International Value Fund, Domestic Bond Fund, Strategic Bond Fund and 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 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 that have been determined to be liquid by Board approved guidelines.
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OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund, other than Large Cap Growth Fund, Mid Cap Growth Fund,
International Growth Fund, Lifestyle Funds and Money Market Fund, may write
covered call and put options on securities and securities indices. 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.
All the Funds except for International Growth Fund, Mid Cap Growth Fund and
Money Market Fund 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.
All the Funds except for International Growth Fund, Mid Cap Growth Fund and
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. These 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
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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 Large Cap Value Fund, Small
Cap Growth Fund, High Yield Bond Fund, Strategic Bond Fund and 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 International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund and 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 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.
All of the Funds except International Growth Fund, Mid Cap Growth Fund,
Large Cap Growth Fund and Money Market Fund 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 International Growth Fund, Large Cap Growth Fund, Mid
Cap Growth Fund and Money Market Fund, may also purchase exchange-traded call
and put options with respect to securities and stock indices that correlate with
that
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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 Large Cap Value Fund, Small Cap Growth
Fund, High Yield Bond Fund, Strategic Bond Fund and 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 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 or the Sub-Advisers 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 Mid Cap Growth Fund, International Growth Fund, Mid Cap
Value Fund, 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 de-
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creases 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").
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 Large Cap Value Fund, High Yield Bond Fund, 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 valua-
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tion. 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."
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. A Fund may not adhere to its internal
operating policy in circumstances where the Fund is required to invest a large
cash infusion.
OPTIONS ON FINANCIAL FUTURES CONTRACTS
For bona fide hedging purposes, each Fund, except Mid Cap Growth Fund,
International Growth Fund, the Mid Cap Value Fund, Lifestyle Funds and 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 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
The use of options and financial futures contracts may entail some 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.
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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 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.
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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. 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. 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 the investment restrictions concerning
borrowing money, mortgaging, or hypothecating assets of any Fund.
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.
SHORT SALES AND SHORT SALES AGAINST THE BOX
The Balanced Fund, International Value Fund and Socially Responsible Fund
may enter in short sales in connection with options and futures contracts only.
Mid Cap Value Fund 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. The Large Cap Growth Fund
and Mid Cap Growth Fund may only 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).
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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 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 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. For the fiscal year ended August 31, 1999, the Series Company paid
VALIC $30,278 for accounting services provided by VALIC.
For the fiscal year ended August 31, 1999, the Series Company paid the
following advisory fees to VALIC for each of the following Funds: International
Growth Fund, $51,153; Large Cap Growth Fund, $60,346; Mid Cap Growth Fund,
$43,155; Small Cap Growth Fund, $66,613; International Value Fund, $64,076;
Large Cap Value Fund, $33,827; Mid Cap Value Fund, $54,453; Small Cap Value
Fund, $43,369; Socially Responsible Fund, $19,258; Balanced Fund, $54,692; High
Yield Bond Fund, $37,138; Strategic Bond Fund, $31,455; Domestic Bond Fund,
$38,602; Core Bond Fund, $25,633; Money Market Fund, $17,307; Growth Lifestyle
Fund, $6,654; Moderate Growth Lifestyle
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Fund, $7,522; Conservative Growth Lifestyle Fund, $6,345.
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. 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. ("NB 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,
NB 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-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 relies upon an exemptive order from the SEC which
permits VALIC, subject to certain conditions, to select new sub-advisers or
replace existing sub-advisers without first obtaining shareholder approval for
the change. The Board of Directors, including a majority of the 'independent'
Directors, must approve each new sub-advisory agreement. This allows VALIC to
act more quickly to change sub-advisers when it determines that a change is
beneficial to shareholders by avoiding the delay of calling and holding
shareholder meetings to approve each change. In accordance with the exemptive
order, the Series Company will provide investors with information about each new
sub-adviser and its sub-advisory agreement within 90
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days of the hiring of a new sub-adviser. VALIC is responsible for selecting,
monitoring, evaluating and allocating assets to the Sub-advisers and oversees
the Sub-advisers' compliance with the relevant Fund's investment objective,
policies and restrictions.
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 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 Balanced
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 NB Management, for the services rendered to the Mid Cap
Value Fund and expenses paid by NB 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.
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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
transactions 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
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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.
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.
For the fiscal year ended August 31, 1999, the Series Company paid the
following brokerage commissions for each of the following Funds: Balanced Fund,
$8,381; International Growth Fund, $42,589; International Value Fund, $25,375;
Large Cap Growth Fund, $16,448; Large Cap Value Fund, $11,843; Mid Cap Growth
Fund, $10,081; Mid Cap Value Fund, $45,395; Small Cap Growth Fund, $12,012;
Small Cap Value Fund, $23,628; Socially Responsible Fund, $6,662.
Following are those Funds for which brokerage commissions were paid to
brokers selected on the basis of the quality of the execution together with
research services provided to VALIC or a Sub-Adviser along with the commissions
paid and the related transaction totals: Balanced Fund, $ ,
$ ; International Growth Fund, $ , $ ; International
Value Fund, $ , $ ; Large Cap Growth Fund, $16,691,
$ ; Large Cap Value Fund, $ , $ ; Mid Cap Growth
Fund, $ , $ ; Mid Cap Value Fund, $ , $ ;
Small Cap Growth Fund, $ , $ ; Small Cap Value Fund,
$ , $ ; Socially Responsible Fund, $ , $ .
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 transac-
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tions 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.
For the fiscal year ended August 31, 1999, the Series Company paid the
following brokerage commissions to affiliated brokers for each of the following
Funds: Balanced Fund, $ to ; International Growth Fund,
$ to ; International Value Fund, $ to ;
Large Cap Growth Fund, $ to ; Large Cap Value Fund,
$ to ; Mid Cap Growth Fund, $ to ; Mid Cap
Value Fund, $ to ; Small Cap Growth Fund, $ to
; Small Cap Value Fund, $ to ; Socially Responsible
Fund, $ to .
DISTRIBUTION AND SERVICE AGREEMENT
Pursuant to a Distribution and Service Agreement, the Distributor 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. The Distributor's address is the same as that of VALIC.
The Distribution and Service Agreement between the Distributor 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 the Distributor, 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 the Distributor 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 the Distributor for
these expenses. Thus all such expenses incurred by the Distributor 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.
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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 Merrill
Lynch Pierce Fenner & Smith and Interactive Data Corporation.
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 index 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
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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.
ACCOUNTING AND TAX TREATMENT
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.
If a Fund fails to qualify as a regulated investment company or fails to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as a ordinary corporation on its taxable income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge of 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated in order to qualify as a
regulated investment company in a subsequent year).
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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.
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.
Each outstanding share has one vote on all matters that shareholders vote
on. Participants vote on these matters indirectly by voting their units. The way
participants vote their units depends on their contract. See the contract
prospectus for specific details. When a matter comes up for vote, the separate
account will vote its shares in the same proportion 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.
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.
Delaware law does not require the Series Company to hold regular, annual
shareholder meetings.
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But, the Series Company must hold shareholder meetings on the following matters:
(a) to approve certain agreements as required by the 1940 Act; (b) to change
fundamental investment objectives in the Diversification section and to change
fundamental investment restrictions, above; and (c) to fill vacancies on the
Series Company's Board of Trustees if the shareholders have elected less than a
majority of the Trustees.
The Series Company will assist in shareholder communications.
VALIC's ownership of more than 25% of the outstanding shares may result in
VALIC's being deemed a controlling entity of each of those Funds as that term is
defined in the 1940 Act. Such control will dilute the effect of the votes of
other shareholders and contract owners.
As of August 31, 1999, VALIC Separate Account A owned of record the
following percentage of the outstanding shares of each Fund (only Funds of which
VALIC owned of record at least 5% are shown): 25.94% of the American General
Balanced Fund, 19.82% of the American General Conservative Growth Lifestyle
Fund, 6.08% of the American General Domestic Bond Fund, 24.66% of the American
General Growth Lifestyle Fund, 4.59% of the American General International
Growth Fund, 59.19% of the American General Large Cap Growth Fund, 6.54% of the
American General Large Cap Value Fund, 9.59% of the American General Mid Cap
Growth Fund, 17.99% of the American General Mid Cap Value Fund, 40.27% of the
American General Moderate Growth Lifestyle Fund, 46.57% of the American General
Money Market Fund, 28.42% of the American General Small Cap Growth Fund, 33.86%
of the American General Socially Responsible Fund.
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.
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 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
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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.
TRANSFER AGENT
VALIC serves as the Series Company's transfer agent, shareholder service
agent and dividend disbursement agent. VALIC performs these service at cost.
MANAGEMENT OF THE SERIES COMPANY
The Board of Trustees manages the business activities of the Series Company
in accordance with Series Company's Declaration of Trust and Applicable Delaware
Law. The Board elects officers who are responsible for the day-to-day operations
of the Series Company and who execute policies formulated by the Board. The
names and ages of the Trustees and officers of the Series Company, their
address, present positions and principal occupations during the past five years
are set forth below:
<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Kent E. Barrett*.................. Executive Vice Executive Vice President and Chief Financial
2929 Allen Parkway President and Officer, VALIC and AGAIC (1999-Present),
Houston, Texas 77019 Trustee since 1999 Executive Vice President and Chief Financial
Date of Birth: 09/20/56 Officer, American General Life & Accident
Insurance Company ("AGLA") (1998-1999),
Senior Vice President -- Finance and
Treasurer, AGLA (1997-1998), Senior Vice
President-Controller and Treasurer, AGLA
(1994-1997).(1)
Dr. Judith L. Craven.............. Trustee since 1998 Retired Administrator. Formerly, President,
3212 Ewing Street United Way of Texas Gulf Coast (1992-1998).
Houston, Texas 77004 Director, Houston Branch, Federal Reserve
Date of Birth: 10/06/45 Bank of Dallas (1992-Present), Compaq
Computer Corporation (1998-Present), Luby's
Inc. (1998-Present), A.H. Belo Corporation
(journalism, TV and radio) (1993-Present),
and Sysco Corporation (marketing and
distribution of food) (1996-Present).
Formerly, Director, Sisters of Charity of
Incarnate Word (1996-1999).(1)
</TABLE>
61
<PAGE> 119
<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Dr. Timothy J. Ebner.............. Trustee since 1998 Professor and Head, Department of
17994 NW Union Blvd. Neuroscience and Visscher Chair of
Elk River, Minnesota 55330 Physiology (1998-Present), Professor,
Date of Birth: 07/15/49 Departments of Neurosurgery and Physi-
ology, and Director, Graduate Program in
Neuroscience, University of Minnesota
(1991-1999). Formerly, Consultant to EMPI
Inc. (manufacturing of medical products)
(1994-1995) and Medtronic Inc. (manufacturer
of medical products) (1997-1998).(1)
Judge Gustavo E.
Gonzales, Jr.................... Trustee since 1998 Municipal Court Judge, Dallas, Texas
3731 Gilbert Ave. A (1995-Present); Director, Downtown Dallas
Dallas, Texas 75219 YMCA Board (1996-Present); Director, Dallas
Date of Birth: 07/27/40 Easter Seals Society (1997-Present).
Formerly, private attorney (litigation)
(1980-1995).(1)
Dr. Norman Hackerman.............. Trustee since 1998 Chairman -- Scientific Advisory Board for
2001 Pecos Street The Robert A. Welch Foundation
Austin, Texas 78703 (1983-Present), Director, Electrosource,
Date of Birth: 03/02/12 Inc. (develops, manufactures and markets
energy storage products), President
Emeritus, Rice University, Houston, Texas.
Formerly, President, Rice University,
Houston, Texas (1970-1985), Professor
Emeritus, University of Texas, Austin, Texas
(1970-1985).(1)
Alice T. Kane*.................... President and President of American General Fund Group
125 Maiden Lane Trustee since 1999 (1999- Present). Formerly, Executive Vice
New York, New York 10038 President, American General Investment
Date of Birth: 01/16/48 Management, L.P. (1998-99). Formerly,
Executive Vice President, New York Life
Insurance Company (1994-1998). President of
other investment companies advised by
VALIC.(1)
Dr. John Wm. Lancaster............ Trustee since 1998 Pastor Emeritus and Director of Planned
4624 Braeburn Giving, First Presbyterian Church, Houston,
Bellaire, Texas 77401 Texas (1996- Present). Formerly, Pastor,
Date of Birth: 12/15/23 First Presbyterian Church, Houston, Texas
(1961-1990).(1)
Ben H. Love....................... Trustee since 1998 Retired. Formerly, Director, Mid-American
4407 Eaton Circle (waste products) (1993-1997) and Chief
Colleyville, Texas 76034 Executive, Boy Scouts of America.
Date of Birth: 09/26/30 (1985-1993).(1)
Dr. John E. Maupin, Jr............ Trustee since 1998 President, Meharry Medical College,
Meharry Medical College Nashville, Tennessee (1994-Present),
1005 D.B. Todd Blvd. Nashville Advisory Board Member, First
Nashville, Tennessee 37208 American National Bank (1996-Present),
Date of Birth: 10/28/46 Director, Monarch Dental Corporation
(1997-Present), LifePoint Hospitals, Inc.
(1998-Present). Formerly, Executive Vice
President, Morehouse School of Medicine,
Atlanta, Georgia (1989-1994).(1)
</TABLE>
62
<PAGE> 120
<TABLE>
<CAPTION>
NAME POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH REGISTRANT DURING PAST 5 YEARS
----------- ---------------- -----------------------
<S> <C> <C>
Dr. F. Robert Paulsen............. Trustee since 1998 Dean and Professor Emeritus, University of
2801 N. Indian Ruins Arizona, Tucson, Arizona. Formerly, Dean and
Tucson, Arizona 85715 Professor, University of Connecticut,
Date of Birth: 07/05/22 Storrs, Connecticut and Carnegie Fellow,
University of Michigan, Ann Arbor,
Michigan.(1)
</TABLE>
- ---------------
* Interested persons of the Series Company as defined in the 1940 Act
specifically because of their capacity as officers, directors or consultants
of the Series Company, VALIC or American General Corporation.
(1) A Director or Trustee of American General Series Portfolio Company ("AGSPC")
and American General Series Portfolio Company 2 ("AGSPC 2"), each an
open-end investment company, and USLife Income Fund, Inc., a closed-end
investment company, for which VALIC serves as the investment adviser.
Trustees who are not interested persons of the Series Company receive an
annual retainer of $6,200. In addition, such Trustees are paid per board
meeting, committee meeting, and telephone meeting, a fee of $1,000, $250 and
$250, respectively, plus expenses incurred, 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, except for Ms. Kane who is located at 125 Maiden Lane, New
York, New York 10038. Each officer serves until his or her successor is elected
and shall qualify. Each officer serves in the same or a similar capacity to
AGSPC and AGSPC2, open-end investment companies which are managed by VALIC.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
Peter V. Tuters................... Senior Investment Executive Vice President, Trading and
Date of Birth: 04/18/52 Officer since 1998 Portfolio Management, AGIM (1998-Present);
Vice President and Investment Officer
(1998-Present), Vice President and Chief
Investment Officer (1993-1998), VALIC and
AGAIC (1998-Present). Formerly Director,
VALIC, Senior Vice President and Chief
Investment Officer, American General Corpo-
ration (1993-1998).
Teresa S. Moro.................... Vice President and Trader -- VALIC. Formerly, Money Market
Date of Birth: 08/14/60 Investment Officer Trader, VALIC (1986-1990).
since 1998
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).
Maruti D. More.................... Vice President -- Vice President, Investments, VALIC
Date of Birth: 02/02/44 Investments since (1998-Present), Portfolio Manager, American
1998 General Corporation (1996-1998). Formerly,
Managing Director, Marketable Securities,
Paul Revere Investment Management
Corporation (1993-1995); Senior Portfolio
Manager, Dewey Square Investors; Invest-
ment Vice President, New York Life Insurance
Company.
</TABLE>
63
<PAGE> 121
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME WITH REGISTRANT DURING PAST 5 YEARS
---- ---------------- -----------------------
<S> <C> <C>
Cynthia A. Toles.................. Vice President and Senior Vice President, General Counsel and
Date of Birth: 03/28/51 Secretary since Secretary, VALIC and AGAIC (1998-Present).
1998 Director and Secretary, the Distributor.
Formerly, Senior Associate General Counsel &
Secretary, VALIC (1990-1998); Vice
President, Associate General Counsel &
Secretary, VALIC (1988-1989); Second Vice
President, Associate General Counsel and As-
sistant Secretary, VALIC (1986-1988);
Assistant Vice President, Assistant General
Counsel and Assistant Secretary, VALIC
(1983-1986).
Gregory R. Seward................. Treasurer since Vice President -- Variable Product
Date of Birth: 06/27/56 1998 Accounting, AGIM; (1998-Present) Assistant
Controller, VALIC (1991-1998) and AGAIC
(1998-Present).
Kathryn A. Pearce................. Controller since Associate Director of Fund Accounting, AGIM
Date of Birth: 02/05/47 1998 (1996-Present). Formerly,
Supervisor -- Mutual Fund Accounting, Van
Kampen American Capital, Inc. (1977-1996).
Pauletta P. Cohn.................. Vice President Associate General Counsel and Assistant
Date of Birth: 06/06/48 since 1999 Secretary, American General Life Companies
(1998-Present), Senior Attorney, American
General (1993-1998).
Nori L. Gabert.................... Vice President and Associate General Counsel, VALIC (1997-Pre-
Date of Birth: 08/15/53 Assistant Secretary sent). Formerly, Of Counsel, Winstead
since 1998 Sechrest & Minick P.C. (1997); Vice
President and Associate General Counsel of
Van Kampen American Capital, Inc.
(1981-1996).
Cynthia A. Gibbons................ Assistant Vice Senior Compliance Analyst, VALIC (1995-
Date of Birth: 12/06/67 President since Present).
1998
Jaime M. Sepulveda................ Assistant Treasurer Director -- Variable Product Accounting and
Date of Birth: 01/09/52 since 1998 Financial Reporting, AGIM (1998-Present).
Formerly, Accounting Manager, Metro
Networks, Inc. (1997-1998); Controller and
Investment Officer, Port of Houston
Authority (1994-1997).
Donna L. Hathaway................. Assistant Manager -- Variable Product Accounting,
Date of Birth: 09/17/64 Controller since AGIM. Formerly, Gas Revenue Accountant,
1998 Texaco Inc.; Accounting Manager, Hewitt
Associates, LLC; Revenue Accounting Manager,
Trans Texas Gas.
Heriberto Valdez.................. Assistant Treasurer Associate Director -- Mutual Fund
Date of Birth: 04/25/57 since 1999 Accounting, AGIM (1999-Present), Manager,
Mutual Fund Accounting (1998-1999),
Manager -- Variable Product Accounting
(1997-1998), Staff Accountant -- Variable
Product Division (1989-1997), VALIC.
Gregory R. Kingston............... Assistant Treasurer Vice President, Fund Accounting, AGIM
Date of Birth: 06/27/56 since 1999 (October 1999). Formerly, Assistant
Treasurer, First Investor Management Company
(1994-1999).
</TABLE>
64
<PAGE> 122
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, Love, Maupin and Paulsen.
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 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 disinterested Trustees for the
fiscal year ending August 31, 1999.
COMPENSATION TABLE
FISCAL YEAR ENDING AUGUST 31, 1999
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS TOTAL
AGGREGATE ACCRUED AS COMPENSATION
COMPENSATION PART OF FROM FUND
FROM SERIES COMPANY COMPLEX(2)
NAME OF PERSON, POSITION SERIES COMPANY EXPENSES PAID TO TRUSTEES
- ------------------------ -------------- -------------- -----------------
<S> <C> <C> <C>
Dr. Judith Craven, Trustee.......................... $ 8,644 NA $44,225
Dr. Timothy Ebner, Trustee.......................... $ 8,611 NA $43,725
Judge Gustavo Gonzales, Trustee..................... $ 8,645 NA $44,475
Dr. Norman Hackerman, Trustee....................... $11,003 NA $60,932
Dr. John Wm. Lancaster, Trustee..................... $11,220 NA $61,682
Ben L. Love, Trustee................................ $11,285 NA $61,932
Dr. John Maupin, Trustee............................ $ 8,568 NA $43,725
Dr. F. Robert Paulsen, Trustee...................... $11,220 NA $61,682
Dr. R. Miller Upton, Former Trustee(1).............. $11,220 NA $61,682
</TABLE>
- ---------------
(1) Mr. Upton resigned as a Trustee of the Fund on December 31, 1999.
(2) The Fund is part of a fund complex which also includes AGSPC, AGSPC2 and
USLIFE Income Fund, Inc.
65
<PAGE> 123
BOND RATINGS
MOODY'S BOND RATINGS
Aaa: Bonds that 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 that 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 that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that 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
that suggest a susceptibility to impairment some time in the future.
Baa: Bonds that 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 that 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 both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
Caa: Bonds that 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 that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that 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.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
STANDARD & POOR'S RATINGS
AAA: An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation. Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree
66
<PAGE> 124
of speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated 'C' is currently
highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A 'C' also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated 'D' is in payment default. The 'D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized. 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.
67
<PAGE> 125
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<S> <C>
1. (a) 1. Agreement and Declaration of Trust(1)
2. Amendment to Agreement and Declaration of Trust(2)
(b) Certificate of Designation For:
(1) American General International Growth Fund(1)
(2) American General Large Cap Growth(1)
(3) American General Mid Cap Growth Fund(1)
(4) American General Small Cap Growth Fund(1)
(5) American General International Value Fund(1)
(6) American General Large Cap Value Fund(1)
(7) American General Mid Cap Value Fund(1)
(8) American General Small Cap Value Fund(1)
(9) American General Socially Responsible Fund(1)
(10) American General Balanced Fund(1)
(11) American General High Yield Bond Fund(2)
(12) American General Strategic Bond Fund(2)
(13) American General Domestic Bond Fund(1)
(14) American General Core Bond Fund(2)
(15) American General Money Market Fund(1)
(16) American General Growth Lifestyle Fund(1)
(17) American General Moderate Growth Lifestyle Fund(1)
(18) American General Conservative Growth Lifestyle Fund(1)
(19) American General S&P 500 Index Fund(1)
(20) American General Mid Cap Index Fund(1)
(21) American General Small Cap Index Fund(1)
(c) Certificate of Termination For:
(1) American General S&P 500 Index Fund(2)
(2) American General Mid Cap Index Fund(2)
(3) American General Small Cap Index Fund(2)
2. Bylaws(1)
3. Not Applicable
4. Not Applicable
</TABLE>
C-1
<PAGE> 126
<TABLE>
<C> <S>
5. (a) Investment Advisory Agreement between the Registrant and The Variable
Annuity Life Insurance Company ("VALIC")(2)
(b) Investment Sub-Advisory Agreements between VALIC and each
Sub-Adviser on behalf of the following Funds:
(1) American General International Growth Fund(3)
(2) American General Large Cap Growth(3)
(3) American General Mid Cap Growth Fund(3)
(4) American General Small Cap Growth Fund(3)
(5) American General International Value Fund, American General
Balanced Fund and American General Domestic Bond Fund(3)
(6) American General Large Cap Value Fund(3)
(7) American General Mid Cap Value Fund(3)
(8) American General Small Cap Value Fund (Bankers Trust Company (4),
Fiduciary Management Associates, Inc. (3))
(9) American General High Yield Bond Fund, American General
Strategic Bond Fund and American General Core Bond Fund(3)
6. Distribution and Service Agreement between the Registrant and A.G. Distributors, Inc.
7. Not Applicable
8. (a) Custodian Contract between Registrant and State Street Bank and
Trust Company
(b) Form of Securities Lending Authorization Agreement between Registrant
and State Street Bank and Trust Company(2)
9. (a) Transfer Agency and Service Agreement between Registrant and VALIC
(b) Form of Data Access Services Agreement between Registrant and State
Street Bank and Trust Company(2)
(c) Accounting Services Agreement between Registrant and VALIC
(d) Administrative Service Agreement among Registrant and VALIC
10. Opinion of Counsel
11. Consent of Independent Auditors
12. Not Applicable
13. Subscription Agreements(2)
14. Not Applicable
15. Not Applicable
16. Not Applicable
17. Not Applicable
18. Not Applicable
</TABLE>
C-2
<PAGE> 127
<TABLE>
<C> <S>
19. (a) Powers of Attorney for Messrs. Hackerman, Lancaster, Paulsen,
and Love(1)
(b) Powers of Attorney for Messrs. Ebner, Gonzales and Maupin and Ms.
Craven(2)
(c) Powers of Attorney for Mr. Barrett and Ms. Kane
</TABLE>
- ---------------
1 Incorporated herein by reference to the Registrant's Form N-1A registration
statement filed with the Securities and Exchange Commission on July 6, 1998
(File Nos. 333-53589/811-08789, Accession No. 0000950129-98-002909).
2 Incorporated herein by reference to the Registrant's Form N-1A registration
statement filed with the Securities and Exchange Commission on September 2,
1998 (File Nos. 333-53589/811-08789, Accession No. 0000950129-98-003747).
3 Incorporated herein by reference to the Registrant's Form N-SAR filed with
the Securities and Exchange Commission on April 29, 1999 (File Nos.
333-53589/811-08789, Accession No. 0001062374-99-000009).
4 Incorporated herein by reference to the Registrant's Form N-SAR filed with
the Securities and Exchange Commission on October 29, 1999 (File Nos.
333-53589/811-08789, Accession No. 0001062374-99-000019).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the Registrant. All
of the outstanding common stock of the Registrant is owned by VALIC, a Texas
life insurance corporation, VALIC Separate Account A, a separate account of
VALIC which is registered as a unit investment trust under the Investment
Company Act of 1940 (File No. 811-3240/33-75292).
C-3
<PAGE> 128
ITEM 25. INDEMNIFICATION
Incorporated herein by reference to Pre-Effective Amendment Number 2 to the
Registrant's Form N-1A Registration Statement filed with the Securities and
Exchange Commission on September 2, 1998 (File No. 333-53589/811-08789,
Accession No. 0000950129-98-003747).
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
See "About the Series Company Management" in Part A and "Investment
Adviser" and "Investment Sub-Advisers" in the Statement of Additional
Information regarding the businesses of VALIC and the Sub-advisers.
Set out below is a list of each director and officer of VALIC indicating
each other business, profession, vocation, or employment of a substantial nature
in which each such person has been, at any time during the past two fiscal
years, engaged for his or her own account or in the capacity of director,
officer, partner, or trustee. Unless otherwise specified, the principal business
address of VALIC is 2929 Allen Parkway, Houston, Texas 77019. See also the
information set out under the caption "Trustees and Officers" in Part B of this
Registration Statement, which is incorporated herein by reference to the extent
applicable. Companies, other than VALIC, identified in the list below are
American General Distributors, Inc. ("AG Distributors"), American General
Annuity Insurance Company ("AGAIC") and American General Corporation ("AG
Corporation").
C-4
<PAGE> 129
150
<TABLE>
<CAPTION>
NAME COMPANY TITLE
- ---- ------- -----
<S> <C> <C>
Robert M. Devlin VALIC, AGAIC Director
AG Corporation Director, Chairman and Chief Executive Officer
John A. Graf VALIC, AGAIC Chairman, Director, President and Chief Executive Officer
Kent E. Barrett VALIC, AGAIC Director, Executive Vice President and Chief Financial Officer
Bruce R. Abrams VALIC, AGAIC Director and Executive Vice President -- AGAIC Sales
Rebecca G. Campbell VALIC, AGAIC Director and Senior Vice President -- Human Resources
Robert P. Condon VALIC, AGAIC Director and Executive Vice President -- Institutional Marketing
Carl J. Santillo VALIC, AGAIC Director and Executive Vice President -- Operations
Kathleen Adamson VALIC, AGAIC Senior Vice President -- Customer Service
Michael J. Akers VALIC, AGAIC Senior Vice President and Chief Actuary
Dick Baily VALIC, AGAIC Senior Vice President -- Planning & Expense Management
Michael A. Betts VALIC, AGAIC Senior Vice President -- Systems
Dwight L. Cramer II VALIC, AGAIC Senior Vice President -- AG Fund Group
Patrick E. Grady VALIC, AGAIC Senior Vice President and Treasurer
Stephen G. Kellison VALIC, AGAIC Senior Vice President -- Product Management
Richard J. Lindsay VALIC, AGAIC Senior Vice President -- Marketing
Cynthia A. Toles VALIC, AGAIC Senior Vice President, General Counsel and Secretary
AG Distributors Director and Secretary
Rosemary Beauvais VALIC, AGAIC Vice President -- Corporate Technology Services
James D. Bonsall VALIC, AGAIC Vice President -- Financial Reporting
Gregory S. Broer VALIC, AGAIC Vice President -- Actuarial
Richard A. Combs VALIC, AGAIC Vice President -- Actuarial
Neil J. Davidson VALIC, AGAIC Vice President -- Actuarial
David H. denBoer VALIC, AGAIC Vice President -- Compliance
Stephen R. Duff VALIC, AGAIC Vice President -- New Account Acquisitions
Daniel Fritz VALIC, AGAIC Vice President -- Actuarial
Michael D. Gifford VALIC, AGAIC Vice President -- Case Development
Joseph P. Girgenti VALIC, AGAIC Vice President -- Sales Support
Sharla A. Jackson VALIC, AGAIC Vice President -- Customer Service -- Amarillo
Jeff S. Johnson VALIC, AGAIC Vice President -- Marketing Communications
Kent W. Lamb VALIC, AGAIC Vice President -- Financial Reporting
Traci P. Langford VALIC, AGAIC Vice President -- Account Management
James J. Michel VALIC, AGAIC Vice President -- Operations Support/Controller
Maruti More VALIC, AGAIC Vice President -- Investments
Thomas G. Norwood VALIC, AGAIC Vice President -- Broker/Dealer Operations
Stephen J. Poston VALIC, AGAIC Vice President -- Training & National Accounts
Steven D. Rubinstein VALIC, AGAIC Vice President -- Financial Planning and Reporting
Richard W. Scott VALIC, AGAIC Vice President and Chief Investment Officer
AG Corporation Executive Vice President and Chief Investment Officer
Gary N. See VALIC, AGAIC Vice President -- Group Actuarial
Gregory R. Seward VALIC, AGAIC Vice President -- Variable Product Accounting
Nancy K. Shumbera VALIC, AGAIC Vice President -- Applications Development
Norman A. Skinrood, Jr. VALIC, AGAIC Vice President -- Investment Products Group
David Snyder VALIC, AGAIC Vice President -- Electronic Commerce
Paula F. Snyder VALIC, AGAIC Vice President -- AGRS Marketing Communications
Robert E. Steele VALIC, AGAIC Vice President -- Specialty Products
Kenneth R. Story VALIC, AGAIC Vice President -- Information Technology
Brian R. Toldan VALIC, AGAIC Vice President and General Auditor
Michael A. Tompkins VALIC, AGAIC Vice President -- PR Acquisitions
Peter V. Tuters VALIC, AGAIC Vice President and Investment Officer
AG Corporation Senior Vice President -- Investments
William C. Vetterling VALIC, AGAIC Vice President -- Marketing Administration
William A. Wilson VALIC, AGAIC Vice President -- Government Affairs
Jane E. Bates VALIC Chief Compliance Officer
Roger E. Hahn VALIC, AGAIC Investment Officer
C. Scott Inglis VALIC, AGAIC Investment Officer
Craig R. Mitchell VALIC, AGAIC Investment Officer
Julia S. Tucker VALIC, AGAIC Investment Officer
AG Corporation Senior Vice President -- Investments
Rembert R. Owen, Jr VALIC, AGAIC Real Estate Investment Officer and Assistant Secretary
W. Lary Mask VALIC, AGAIC Real Estate Investment Officer and Assistant Secretary
D. Lynne Walters VALIC, AGAIC, Tax Officer
AG Distributors
AG Corporation Vice President -- Taxes
W. Joan Farmer VALIC, AGAIC Assistant Secretary
Otto B. Gerlach, III VALIC, AGAIC Assistant Secretary
Cheryl G. Hemley VALIC, AGAIC Assistant Secretary
Susan Miller VALIC, AGAIC Assistant Secretary
Connie E. Pritchett VALIC, AGAIC Assistant Secretary
Daniel R. Cricks VALIC, AGAIC Assistant Tax Officer
Terry Festervand VALIC, AGAIC Assistant Treasurer
Eric Alexander VALIC, AGAIC Assistant Treasurer
Kristy L. McWilliams VALIC, AGAIC Assistant Treasurer
William H. Murray VALIC, AGAIC Assistant Treasurer
Tara S. Rock VALIC, AGAIC Assistant Treasurer
Carolyn Roller VALIC, AGAIC Assistant Treasurer
Barbara G. Trygstad VALIC, AGAIC Assistant Treasurer
Marylyn S. Zlotnick VALIC, AGAIC Assistant Controller
Leslie K. Bates VALIC, AGAIC Administrative Officer
Mary C. Birmingham VALIC, AGAIC Administrative Officer
Donald L. Davis VALIC, AGAIC Administrative Officer
Robert A. Demchak VALIC, AGAIC Administrative Officer
Ruby K. Donelson VALIC, AGAIC Administrative Officer
David E. Green VALIC, AGAIC Administrative Officer
Ted D. Hennis VALIC, AGAIC Administrative Officer
William L. Hinkle VALIC, AGAIC Administrative Officer
Joan M. Keller VALIC, AGAIC Administrative Officer
William R. Keller, Jr VALIC, AGAIC Administrative Officer
Fred M. Lowery VALIC, AGAIC Administrative Officer
James F. McCulloch VALIC, AGAIC Administrative Officer
Michael E. Mead VALIC, AGAIC Administrative Officer
Elliott L. Shifman VALIC, AGAIC Administrative Officer
Kathryn T. Smith VALIC, AGAIC Administrative Officer
John M. Stanton VALIC, AGAIC Administrative Officer
James P. Steele VALIC, AGAIC Administrative Officer
</TABLE>
C-5
<PAGE> 130
ITEM 27. PRINCIPAL UNDERWRITERS
(a) American General Distributors, Inc. (the "Distributor") acts as
exclusive distributor and principal underwriter of the Registrant and as
principal underwriter for VALIC Separate Account A, American General Series
Portfolio Company and American General Series Portfolio Company 2.
(b) The following information is furnished with respect to each officer and
director of the Distributor.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DISTRIBUTOR WITH THE REGISTRANT
- ------------------ --------------------- ---------------------
<S> <C> <C>
(*)
Bruce R. Abrams..........................Chairman, Director, Chief Executive --
Officer and President
(*)
Patrick E. Grady.........................Director, Chief Financial Officer --
and Treasurer
(*)
Cynthia A. Toles.........................Director and Secretary Vice President and Secretary
(*)
D. Lynne Walters.........................Tax Officer --
(*)
V. Keith Roberts.........................Chief Compliance Officer --
(*)
Cheryl G. Hemley.........................Assistant Secretary --
(*)
Daniel R. Cricks.........................Assistant Tax Officer --
(*)
Terry Festervand.........................Assistant Treasurer --
(*)
Tara S. Rock.............................Assistant Treasurer --
(*)
Gregory R. Seward........................Assistant Treasurer Treasurer
(*)
Barbara Trygstad.........................Assistant Treasurer --
(*)
Marylyn S. Zlotnick......................Assistant Treasurer --
</TABLE>
- ---------------
(*) 2929 Allen Parkway, Houston, Texas 77019
(c) Not Applicable
C-6
<PAGE> 131
ITEM 28. LOCATION OF BOOKS AND RECORDS
The books or other documents required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the Rules promulgated thereunder will be
in the physical possession of either:
THE DEPOSITOR:
The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
THE PRINCIPAL UNDERWRITER:
American General Distributors, Inc.
2929 Allen Parkway
Houston, Texas 77019
THE CUSTODIAN:
The State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
INVESTMENT SUB-ADVISERS:
American General Investment Management, L.P.
2929 Allen Parkway
Houston, Texas 77019
Brown Capital Management
1201 N. Calvert St.
Baltimore, Maryland 21201
Capital Guardian Trust Company
333 South Hope St.
Los Angeles, California 90071
Fiduciary Management Associates, Inc.
55 W. Monroe St., Ste. 2550
Chicago, Illinois 60603
Goldman, Sachs & Co.
32 Old Slip
New York, New York 10005
Jacobs Asset Management, Inc.
200 E. Broward Blvd., Ste. 1920
Ft. Lauderdale, Florida 33301
JP Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Neuberger Berman Management Inc.
605 Third Avenue
New York, New York 10158
State Street Bank and Trust Company
2 International Place
Boston, Massachusetts 02110
ITEM 29. MANAGEMENT SERVICES
There is no management-related service contract not discussed in Parts A or
B of this Form N-1A
ITEM 30. UNDERTAKINGS
Not Applicable
C-7
<PAGE> 132
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, American General Series
Portfolio Company 3, certifies that it meets all of the requirements for
effectiveness of this registration statement under Rule 485(b) under the
Securities Act of 1933 and has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Houston, and State of Texas, on the 3rd day of January, 2000.
AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 3
By: /s/ ALICE T. KANE
--------------------------------
Alice T. Kane
President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ ALICE T. KANE President and Trustee January 3, 2000
- ----------------------------
Alice T. Kane
/s/ GREGORY R. SEWARD Treasurer January 3, 2000
- ----------------------------
Gregory R. Seward
* Trustee January 3, 2000
- ----------------------------
Kent E. Barrett
* Trustee January 3, 2000
- ----------------------------
Judith Craven
* Trustee January 3, 2000
- ----------------------------
Timothy J. Ebner
* Trustee January 3, 2000
- ----------------------------
Gustavo E. Gonzales, Jr.
* Trustee January 3, 2000
- ----------------------------
Norman Hackerman
* Trustee January 3, 2000
- ----------------------------
John Wm. Lancaster
* Trustee January 3, 2000
- ----------------------------
Ben H. Love
* Trustee January 3, 2000
- ----------------------------
John E. Maupin, Jr.
* Trustee January 3, 2000
- ----------------------------
F. Robert Paulsen
</TABLE>
<PAGE> 133
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
By: /s/ DAVID M. LEAHY January 3, 2000
------------------------
David M. Leahy
Attorney-in-Fact
</TABLE>
<PAGE> 134
INDEX TO EXHIBITS
6. Distribution and Service Agreement between the Registrant and
A.G. Distributors, Inc.
8. (a) Custodian Contract between Registrant and State Street Bank and
Trust Company
9. (a) Transfer Agency and Service Agreement between Registrant and VALIC
(c) Accounting Services Agreement between Registrant and VALIC
(d) Administrative Service Agreement among Registrant and VALIC
10. Opinion of Counsel
11. Consent of Independent Auditors
19. (c) Powers of Attorney for Mr. Barrett and Ms. Kane
<PAGE> 1
EXHIBIT 6
DISTRIBUTION AND SERVICE AGREEMENT
BETWEEN
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
AND
A.G. DISTRIBUTORS, INC.
THIS AGREEMENT made this 1st day of May, 1999 by and between
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3, a Delaware business trust,
hereafter referred to as the "Fund" and A.G. DISTRIBUTORS, INC., a Texas
corporation hereafter referred to as the "Distributor."
THE FUND AND THE DISTRIBUTOR RECOGNIZE THE FOLLOWING:
1. The Fund is registered as a diversified, open-end management
investment company under the Investment Company Act of 1940 (the "1940
Act"). The Fund consists of a number of investment portfolios, as may
now exist and may hereinafter be established ("Portfolios"), as set
forth on Schedule A hereto. The Fund intends to continuously offer
the shares of its various Portfolios for sale to The Variable Annuity
Life Insurance Company Separate Account A, other separate accounts of
VALIC, separate accounts of life insurance companies that are
affiliated with VALIC, employee thrift plans maintained by VALIC or
its affiliates, separate accounts of life insurance companies that are
not affiliated with VALIC and, subject to applicable law, the public
(all eligible purchasers of such shares being referred to collectively
as the "Purchasers"). The Fund also intends that the Purchasers may
provide certain beneficial ownership rights to individuals under
variable annuity and variable life insurance contracts, employee
thrift plans or other such arrangements (such individuals together
with any Purchasers who retain all beneficial ownership rights being
referred to collectively as the "Participants"). The Fund may suspend
sales of the shares of any one or more Portfolios at any time, and may
resume sales of any such Portfolio(s) at a later date.
2. The Distributor is registered as a broker-dealer under the Securities
Exchange Act of 1934 and is currently a member of the National
Association of Securities Dealers, Inc. (the "NASD").
THE FUND AND THE DISTRIBUTOR AGREE AS FOLLOWS:
1. The Fund hereby appoints the Distributor as principal underwriter and
distributor to sell to the Purchasers the shares of the Portfolios
(hereinafter "its shares" or "the Fund's shares"). The appointment of
the Distributor hereunder shall not preclude the Fund from selling its
shares directly to the Purchasers.
1
<PAGE> 2
2. The Distributor accepts such appointment. The Distributor shall offer
the Fund's shares only on the terms set forth in the Fund's then
current registration statement or related prospectus.
3. The Fund has no load or redemption charge and the Distributor will
receive no compensation for acting in such capacity. Notwithstanding
this, the Distributor assumes and will pay, from its own resources,
all expenses related to distribution of the Fund's shares and will
bear all other costs and expenses attributable to any activity
primarily intended to result in the sale of shares.
4. Allocation of Expenses.
(a) The Fund will pay (or will enter into arrangements providing
that persons other than the Fund will pay) for all expenses of
the offering of its shares incurred in connection with:
(1) The registration of the Fund or the registration or
qualification of the Fund's shares for offer or sale
under the federal securities laws and the securities
laws of any state or other jurisdiction in which the
Distributor may arrange for the sale of the Fund's
shares; and
(2) The printing and distribution of the Fund's
prospectuses to existing Participants as may be
required under the federal securities laws and the
applicable securities laws of any state or other
jurisdiction; and
(3) The preparation, printing and distribution of any
proxy statements, notices and reports, and the
performance of any acts required to be performed by
the Fund by and under the federal securities laws and
the applicable securities laws of any state or other
jurisdiction; and
(4) The issuance of the Fund's shares, including any
share issue and transfer taxes.
(b) The Distributor will pay from its own resources (or will enter
into arrangements providing that persons other than the
Distributor or the Fund shall pay), or promptly reimburse the
Fund, for all expenses in connection with:
(1) The printing and distribution of the Fund's
prospectuses utilized in the marketing of the
Portfolios to eligible Purchasers;
(2) The preparation, printing and distribution of
advertising and sales literature for use in the
offering of the Fund's shares and printing and
distribution of reports to Purchasers and/or
Participants used as sales literature;
2
<PAGE> 3
(3) The qualification of the Distributor as a distributor
or broker or dealer under any applicable federal or
state securities laws;
(4) Any investment program of the Fund, including the
reinvestment of dividends and capital gains
distributions, to the extent such expenses exceed the
Fund's normal costs of issuing its shares; and
(5) All other expenses in connection with offering for
sale and sale of the Fund's shares which have not
been herein specifically allocated to the Fund.
5. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to
effect sales of the Fund's shares, but it shall not be
obligated to sell any specific number of shares.
(b) The Distributor shall use its best efforts in all respects
duly to conform with the requirements of all federal and state
laws and regulations and the regulations of the NASD, in
relating to the sale of such securities. Neither the
Distributor nor any other person is authorized by the Fund to
give any information or to make any representations, other
than those contained in the Fund's then current registration
statement or related prospectus and any sales literature
authorized by responsible officers of the Distributor.
(c) The Distributor shall act as an independent contractor and
nothing herein contained shall constitute the Distributor, its
agents or representatives, or any employees thereof as
employees of the Fund in connection with the sale of the
Fund's shares.
The Distributor is responsible for its own conduct and the
employment, control and conduct of its agents and employees
and for injury to such agents or employees or to others
through its agents or employees. The Distributor assumes full
responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
6. Sale and Redemption of the Fund's Shares
(a) Orders for the purchase and redemption of the Fund's shares
(and payment for the Fund's shares, in the case of a purchase)
shall be transmitted directly from the Purchaser to the Fund
or its agent.
(b) The Fund shall have the right to suspend the redemption of the
Fund's shares pursuant to the conditions set forth in the
Fund's then current registration statement or related
prospectus. The Fund shall also have the right to suspend the
sale of the Fund's shares at any time.
3
<PAGE> 4
(c) The Fund will give the Distributor prompt notice of any such
suspension and shall promptly furnish such other information
in connection with the sale and redemption of the Fund's
shares as the Distributor reasonably requests.
(d) The Fund (or its agent) will make appropriate book entries
upon receipt by the Fund (or its agent) of orders and payments
for the Fund's shares or requests for redemption thereof, and
will issue and redeem the Fund's shares and confirm such
transactions in accordance with applicable laws and
regulations.
7. Indemnification.
The Distributor agrees to indemnify, defend and hold the Fund,
its officers and trustees (or former officers and trustees)
and any person who controls the Fund within the meaning of
Section 15 of the Securities Act of 1933 (the "1933 Act")
(collectively, "Indemnities") free and harmless from and
against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in
connection therewith) incurred by any Indemnitee under the
1933 Act or under common law or otherwise, which arise out of
or are based upon (1) any untrue or alleged untrue statement
of a material fact or omission or alleged omission of a
material fact in information furnished by the Distributor to
the Fund's registration statement or related prospectus, (2)
any misrepresentation or omission or alleged misrepresentation
or omission to state a material fact on the part of the
Distributor or any agent or employee of the Distributor or any
other person for whose acts the Distributor is responsible or
is alleged to be responsible, unless such misrepresentation or
omission or alleged misrepresentation or omission was made in
reliance on written information furnished by the Fund, or (3)
the willful misconduct or failure to exercise reasonable care
and diligence on the part of any such persons with respect to
services rendered under this Agreement. The foregoing rights
of indemnification shall be in addition to any other rights to
which any Indemnitee may be entitled as a matter of law. The
Fund agrees promptly to notify the Distributor of any action
brought against any Indemnitee, such notification being given
to the Distributor by letter or telegram addressed to the
Distributor at its principal business office, and the
Distributor's agreement to indemnify the Indemnities pursuant
to this paragraph is expressly conditioned upon such
notification.
The Fund agrees to indemnify, defend and hold the Distributor,
its officers and trustees (or former officers and trustees)
and any person who controls the Distributor within the meaning
of Section 15 of the 1933 Act (collectively, "Indemnities")
free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith)
incurred by any Indemnitee
4
<PAGE> 5
under the 1933 Act or under common law or otherwise, arising
out of or based upon any alleged untrue statement of a
material fact contained in the Fund's registration statement
or related prospectus arising out of or based upon any alleged
omission to state a material fact required to be stated or
necessary to make the Fund's registration statement or related
prospectus not misleading, provided that in no event shall
anything contained in this Agreement be construed so as to
protect the Distributor against any liability to the Fund, the
Purchasers or the Participants to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and
duties under this Agreement, and further provided that the
Fund shall not indemnify the Distributor for any claims,
demands, liabilities and expenses arising out of or based upon
any alleged untrue statement of a material fact or omission to
state a material fact in information furnished by the
Distributor to the Fund's registration statement or related
prospectus.
8. This Agreement is effective as of May 1, 1999 and shall
continue in force from year-to-year thereafter, provided that
such continuance for more than two years is specifically
approved at least annually (a)(I) by the Board of Trustees of
the Fund, or (ii) by vote of a majority of the Fund's
outstanding voting securities (as defined in Section 2(a)(42)
of the 1940 Act), and (b) by the affirmative vote of a
majority of the Trustees who are not interested persons (as
defined in Section 2(a)(19) of the 1940 Act) of the Fund by
votes cast in person at a meeting called for such purpose.
9. (a) This Agreement may be terminated at any time, without
penalty, by a vote of the Board of Trustees of the
Fund or by a vote of a majority of the outstanding
voting securities of the Fund, or by the Distributor,
on sixty (60) days' written notice to the other
party.
(b) This Agreement shall automatically terminate in the
event of its assignment, as defined in Section
2(a)(4) of the 1940 Act.
10. Notwithstanding anything to the contrary contained in this
Agreement, the Fund acknowledges and agrees that, as provided
by Section 8.1 of the Fund's Agreement and Declaration of
Trust, this Agreement is executed on behalf of the Fund or the
Trustees of the Fund as Trustees and not individually and that
the obligations of this Agreement are not binding upon any of
the Trustees, Officers, Purchasers or Participants
individually, but are binding only upon the assets and
property of the Fund. A Certificate of Trust in respect of
the Fund is on file with the Secretary of the State of
Delaware.
5
<PAGE> 6
11. Each party shall mail (postage paid) or deliver, in writing,
all notices to the other party, at an address designated for
this purpose by the other party. Until changed, this address
for both parties is: 2929 Allen Parkway, Houston, Texas 77019.
12. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED
BY, THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO
PRINCIPLES OF CONFLICT OF LAWS.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto execute this Agreement
on the date above.
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
on behalf of the Portfolios:
By: /s/ THOMAS L. WEST, JR.
--------------------------------
Name: Thomas L. West, Jr.
-----------------------------
Title: Chairman and CEO
----------------------------
ATTEST:
/s/ NORI L. GABERT
- --------------------------------
Name: Nori L. Gabert
---------------------------
Title: Vice President
and Assistant Secretary
--------------------------
A. G. DISTRIBUTORS, INC.
By: /s/ BRUCE ABRAMS
-------------------------------
Name: Bruce Abrams
----------------------------
Title: President and CEO
---------------------------
/s/ CYNTHIA TOLES
- ----------------------------
Name: Cynthia Toles
-----------------------
Title: Secretary
----------------------
7
<PAGE> 8
SCHEDULE A
American General Series Portfolio Company 3 Portfolios
<TABLE>
<S> <C>
American General Balanced Fund American General Mid Cap Index Fund
American General Conservative Growth American General Mid Cap Value Fund
Lifestyle Fund American General Moderate Growth
American General Domestic Bond Fund Lifestyle Fund
American General Growth Lifestyle Fund American General Money Market Fund
American General High Yield Bond Fund American General Small Cap Growth Fund
American General International Growth Fund American General Small Cap Value Fund
American General International Value Fund American General Socially Responsible Fund
American General Large Cap Growth Fund American General Strategic Bond Fund
American General Large Cap Value Fund American General Core Bond Fund
</TABLE>
8
<PAGE> 1
EXHIBIT 8(a)
CUSTODIAN CONTRACT
This Contract between AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3, a
business trust organized and existing under the laws of Delaware, having its
principal place of business at 2929 Allen Parkway, Houston, Texas 77019,
hereinafter called the "Fund," and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the
"Custodian."
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, the Fund intends to initially offer shares in eighteen (18)
series listed on Exhibit A hereto (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 19, being herein referred to as the "Portfolio(s)")
and desires to retain the Custodian to perform certain services therefor; and
WHEREAS, certain Portfolios (hereinafter sometimes referred to as the
"Lifestyle Portfolio(s)") may invest in uncertificated shares of certain other
Portfolios or uncertificated shares of any registered investment company, or
series thereof, which is part of the same "group of investment companies" (as
defined in Section 12 of the Investment Company Act of 1940, as amended (the
"1940 Act")) (hereinafter sometimes referred to as the "Underlying
Portfolios").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Fund, including securities which the Fund, on behalf
of the applicable Portfolio desires to be held in places within the United
States ("domestic securities") and securities it desires to be held outside the
United States ("foreign securities") pursuant to the provisions of the
Agreement and Declaration of Trust (the "Declaration of Trust"). The Fund on
behalf of the Portfolio(s) agrees to deliver to the Custodian all securities
and cash of the Portfolios, and all payments of income, payments of principal
or capital distributions received by it with respect to all securities owned by
the Portfolio(s) from time to time, and the cash consideration received by it
for such new or treasury shares of beneficial interest of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian. With
respect to uncertificated shares of the Underlying Portfolios (the "Underlying
Shares") the holding of confirmation statements that identify the shares as
being recorded in the Custodian's name on behalf of the Lifestyle Portfolios
will be deemed custody for purposes hereof.
<PAGE> 2
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only
in accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by
such Portfolio, other than (a) securities which are maintained
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the U.S.
Department of the Treasury (each, a "U.S. Securities System"); (b)
commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the
Custodian (the "Direct Paper System") pursuant to Section 2.11; and
(c) the Underlying Shares owned by the Lifestyle Portfolios which are
maintained pursuant to Section 2.10A in an account with State Street
Bank and Trust Company or such other entity which may from time to
time act as a transfer agent for the Underlying Portfolios and with
respect to which the Custodian is provided with Proper Instructions
(the "Underlying Transfer Agent").
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System Account")
or in an account at the Underlying Transfer Agent, only upon receipt
of Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
2.
<PAGE> 3
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment
for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the
Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
3.
<PAGE> 4
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption;
15) In the case of a sale processed through the Underlying
Transfer Agent for the Underlying Shares, in accordance with
Section 2.10A hereof; and
16) For any other proper corporate purpose, but only upon receipt
of Proper Instructions from the Fund on behalf of the
applicable Portfolio specifying the securities of the
Portfolio to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purpose to
be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment
adviser as the Portfolio, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities
accepted by the Custodian
4.
<PAGE> 5
on behalf of the Portfolio under the terms of this Contract shall be
in "street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income
due the Fund on such securities and to notify the Fund on a best
efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio
of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it
from or for the account of the Portfolio, other than cash maintained
by the Portfolio in a bank account established and used in accordance
with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for a Portfolio may be deposited by it to its credit
as Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall on behalf of each applicable Portfolio be approved by
vote of a majority of the Board of Trustees of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the
Custodian shall, upon the receipt of Proper Instructions from the Fund
on behalf of a Portfolio, make federal funds available to such
Portfolio as of specified times agreed upon from time to time by the
Fund and the Custodian in the amount of checks received in payment for
Shares of such Portfolio which are deposited into the Portfolio's
account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder
to which each Portfolio shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent and shall credit such income,
as collected, to such Portfolio's custodian account. Without limiting
the generality of the foregoing, the Custodian shall detach and
present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when due on securities held hereunder. Income due each Portfolio on
securities loaned pursuant to the provisions of Section 2.2 (10) shall
be the responsibility of the Fund except for securities loaned
pursuant to a securities lending agreement with the Custodian, in
which case any income due shall be the responsibility of the
Custodian. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such
5.
<PAGE> 6
information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to
which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase
of Underlying Shares, in accordance with the conditions set
forth in Section 2.10A hereof; (d) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (e) in the case of
repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of
the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such
securities from the Portfolio; or (f) for transfer to a time
deposit account of the Fund in any bank, whether domestic or
foreign; such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank
pursuant to Proper Instructions from the Fund as defined in
Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following
payments for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as deferred
expenses;
6.
<PAGE> 7
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short; and
7) For any other proper corporate purpose, but only upon receipt
of Proper Instructions from the Fund on behalf of the
Portfolio specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Portfolio is made by the Custodian in advance of receipt
of the securities purchased in the absence of specific written
instructions from the Fund on behalf of such Portfolio to so pay in
advance, the Custodian shall be absolutely liable to the Fund for such
securities to the same extent as if the securities had been received
by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder. The Underlying Transfer Agent shall not be
deemed an agent or subcustodian of the Custodian for purposes of this
Section 2.9 or any other provision of this Contract.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "U.S. Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
U.S. Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
7.
<PAGE> 8
2) The records of the Custodian with respect to securities of
the Portfolio which are maintained in a U.S. Securities
System shall identify by book-entry those securities
belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and
transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the Account, and (ii) the making of an entry on the
records of the Custodian to reflect such transfer and payment
for the account of the Portfolio. Copies of all advices from
the U.S. Securities System of transfers of securities for the
account of the Portfolio shall identify the Portfolio, be
maintained for the Portfolio by the Custodian and be provided
to the Fund at its request. Upon request, the Custodian shall
furnish the Fund on behalf of the Portfolio confirmation of
each transfer to or from the account of the Portfolio in the
form of a written advice or notice and shall furnish to the
Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the U.S. Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the U.S.
Securities System; and
5) Anything to the contrary in this Contract notwithstanding,
the Custodian shall be liable to the Fund for the benefit of
the Portfolio for any loss or damage to the Portfolio
resulting from use of the U.S. Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or
any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Portfolio has not been made whole for any such loss
or damage.
2.10A Deposit of Fund Assets with the Underlying Transfer Agent. Underlying
Shares shall be deposited and/or maintained in an account or accounts
maintained with the Underlying Transfer Agent. The Underlying Transfer
Agent shall be deemed to be acting as if it is a "depository" for
purposes of Rule 17f-4 under the 1940 Act. The Fund hereby directs the
Custodian to deposit and/or maintain such Underlying Shares with the
Underlying Transfer Agent, subject to the following provisions:
8.
<PAGE> 9
1) The Custodian shall keep Underlying Shares owned by a
Lifestyle Portfolio with the Underlying Transfer Agent
provided that such Underlying Shares are maintained in an
account or accounts on the books and records of the
Underlying Transfer Agent in the name of the Custodian as
custodian for the Portfolio.
2) The records of the Custodian with respect to Underlying
Shares which are maintained with the Underlying Transfer
Agent shall identify by book-entry those Underlying Shares
belonging to a Lifestyle Portfolio;
3) The Custodian shall pay for Underlying Shares purchased for
the account of a Lifestyle Portfolio upon (i) receipt of
advice from the Lifestyle Portfolio's investment adviser that
such Underlying Shares have been purchased and will be
transferred to the account of the Custodian, on behalf of the
Lifestyle Portfolio, on the books and records of the
Underlying Transfer Agent, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Lifestyle Portfolio. The
Custodian shall receive confirmation from the Underlying
Transfer Agent of the purchase of such Underlying Shares and
the transfer of such Underlying Shares to the Custodian's
account with the Underlying Transfer Agent only after such
payment is made. The Custodian shall transfer Underlying
Shares redeemed for the account of a Lifestyle Portfolio (i)
upon receipt of an advice from the Lifestyle Portfolio's
investment adviser that such Underlying Shares have been
redeemed and that payment for such Underlying Shares will be
transferred to the Custodian and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and
payment for the account of the Lifestyle Portfolio. The
Custodian will receive confirmation from the Underlying
Transfer Agent of the redemption of such Underlying Shares
and payment therefor only after such Underlying Shares are
redeemed. Copies of all advices from the Lifestyle
Portfolio's investment adviser of purchases and sales of
Underlying Shares for the account of the Lifestyle Portfolio
shall identify the Lifestyle Portfolio, be maintained for the
Lifestyle Portfolio by the Custodian, and be provided to the
investment adviser at its request; and
4) The Custodian shall be not be liable to the Fund or any
Lifestyle Portfolio for any loss or damage to the Fund or any
Lifestyle Portfolio resulting from maintenance of Underlying
Shares with the Underlying Transfer Agent except for losses
resulting directly from the negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of
its or their employees.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
9.
<PAGE> 10
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented
in an account ("Account") of the Custodian in the Direct
Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of
the Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to
the Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the
account of the Portfolio, in the form of a written advice or
notice, of Direct Paper on the next business day following
such transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the U.S. Securities System for the
account of the Portfolio; and
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal
accounting control as the Fund may reasonably request from
time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by
the Portfolio or commodity futures contracts or options thereon
purchased or
10.
<PAGE> 11
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of clause (iv),
upon receipt of Proper Instructions from the Fund on behalf of the
applicable Portfolio setting forth the purpose or purposes of such
segregated account and declaring such purposes to be a proper
corporate purpose.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Portfolio held by
it and in connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Fund on behalf of the
Portfolio such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to
the Fund for each Portfolio all written information (including,
without limitation, pendency of calls and maturities of domestic
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund on
behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Fund on behalf of the
Portfolio. With respect to tender or exchange offers, the Custodian
shall transmit promptly to the Fund on behalf of the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund on behalf
of the Portfolio desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the
Portfolio's securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, the Custodian and the Fund may agree to
amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to
act as sub-custodian. Upon
11.
<PAGE> 12
receipt of Proper Instructions, the Fund may instruct the Custodian to
cease the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Portfolio's foreign
securities transactions. The Custodian shall identify on its books as
belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall
be maintained in a clearing agency which acts as a securities
depository or in a book-entry system for the central handling of
securities located outside the United States (each a "Foreign
Securities System") only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to the
terms hereof (Foreign Securities Systems and U.S. Securities Systems
are collectively referred to herein as the "Securities Systems").
Where possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry those
securities and other non-cash property belonging to the Fund and (ii)
the Custodian shall require that securities and other non-cash
property so held by the foreign sub-custodian be held separately from
any assets of the foreign sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
each Portfolio will be freely transferable without the payment of
money or value other than for custody or administration; (c) adequate
records will be maintained identifying the assets as belonging to each
applicable Portfolio; (d) officers of or auditors employed by, or
other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with
the Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.
12.
<PAGE> 13
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Portfolio(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Portfolio(s) securities and other
assets and advices or notifications of any transfers of securities to
or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the
account of each applicable Portfolio may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor
(or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same
extent as set forth in Section 2.3 of this Contract, and the Fund
agrees to hold any such nominee harmless from any liability as a
holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and the Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.
13.
<PAGE> 14
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Nothwithstanding the foregoing provisions of this paragraph 3.10, in
delegating custody duties to State Street London Ltd., the Custodian
shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a
Portfolio including the purchase or sale of foreign exchange or of
contracts for foreign exchange, or in the event that the Custodian or
its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's
own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay
the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns
of a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission is notified by such
foreign sub-custodian that there appears to be a substantial
likelihood that its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or that its
shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Portfolios assets are maintained in a foreign
14.
<PAGE> 15
branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment
of any such branch as a sub-custodian shall be governed by paragraph 1
of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom
shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or
both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of
America or any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of the Fund by the
tax law of jurisdictions other than those mentioned in the above
sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Portfolio such payments as are received for Shares of that
Portfolio issued or sold from time to time by the Fund. The Custodian will
provide timely notification to the Fund on behalf of each such Portfolio and
the Transfer Agent of any receipt by it of payments for Shares of such
Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board
of Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a
commercial bank designated by the redeeming shareholders. In connection with
the redemption or repurchase of Shares of the Fund, the Custodian shall honor
checks drawn on the Custodian by a holder of Shares, which checks have been
furnished by the Fund to the holder of Shares, when presented to the Custodian
in accordance with such procedures and controls as are mutually agreed upon
from time to time between the Fund and the Custodian.
15.
<PAGE> 16
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral instructions
to be confirmed in writing. Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires
a segregated asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from
the Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the
Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund on behalf of
the Portfolio, checks, drafts and other negotiable
instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund on behalf of the Portfolio except as otherwise
directed by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Trustees pursuant to the Declaration of Trust as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
16.
<PAGE> 17
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
Share of the outstanding Shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per Share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such
Portfolio and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The Fund acknowledges and agrees
that, with respect to investments maintained with the Underlying Transfer
Agent, the Underlying Transfer Agent is the sole source of information on the
number of shares of an Underlying Portfolio held by it on behalf of a Lifestyle
Portfolio and that the Custodian has the right to rely on holdings information
furnished by the Underlying Transfer Agent to the Custodian in performing its
duties under this Contract, including without limitation, the duties set forth
in this Section 8 and in Section 9 hereof; provided, however, that the
Custodian shall be obligated to reconcile information as to purchases and sales
of Underlying Shares contained in trade instructions and confirmations received
by the Custodian and to report promptly any discrepancies to the Underlying
Transfer Agent. The calculations of the net asset value per Share and the daily
income of each Portfolio shall be made at the time or times described from time
to time in the Fund's currently effective prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly authorized officers, employees or agents of the
Fund and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by each Portfolio and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
17.
<PAGE> 18
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian
under this Contract; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so
state.
12. Rights of Inspection
The Custodian shall allow the inspection of the Fund's securities, at
any time as may be requested by the Fund's Independent Public Accountants
pursuant to Rule 17f-2 under the 1940 Act.
13. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian as provided in Schedule B, as agreed upon
from time to time between the Fund on behalf of each applicable Portfolio and
the Custodian.
14. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities
18.
<PAGE> 19
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls
or restrictions, the interruption, suspension or restriction of trading on or
the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, acts of war or terrorism, riots, revolutions, work stoppages,
natural disasters or other similar events or acts; (ii) errors by the Fund or
the Investment Advisor in their instructions to the Custodian provided such
instructions have been in accordance with this Contract; (iii) the insolvency
of or acts or omissions by a Securities System; (iv) any delay or failure of
any broker, agent or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge of registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security
or Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of
competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take
any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable for
the payment of money or incurring liability of some other form, the Fund on
behalf of the Portfolio, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
19.
<PAGE> 20
15. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Declaration of Trust, and further provided, that the Fund on behalf of
one or more of the Portfolios may at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or upon the
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its costs, expenses and disbursements.
16. Notices
Except as otherwise provided under this Contract, notices and other
writings shall be delivered or mailed postage prepaid to:
If to the Company: The Variable Annuity Life Insurance Company
2929 Allen Parkway
Houston, Texas 77019
Attention: Gregory R. Seward, Treasurer
If to the Custodian: State Street Bank and Trust Company
Insurance and Bank Services Division
105 Rosemont Road - WES/2S
Westwood, Massachusetts 02090-2318
Attention: Kenneth A. Bergeron, Vice President
or to such other address as the parties may hereafter specify in writing and
any notice or other writing when mailed shall be deemed to have been received
on the fifth business day after it was mailed.
Telephone and facsimile notices shall be sufficient if communicated to
the party entitled to receive such notice at the following numbers:
If to the Company:
Telephone: (713) 831-5301 Facsimile: (713) 831-5380
If to the Custodian:
Telephone: (781) 302-5348 Facsimile: (781) 302-8048
20.
<PAGE> 21
or to such other numbers as the parties may specify by written notice under
this Section and any facsimile notice shall be deemed to have been received on
the date of its transmission provided that if such day is not a business day or
it is received after normal business hours on the day of its transmission, it
shall be deemed to have been received at the opening of business on the first
business day next following the transmission thereof.
17. Successor Custodian
If a successor custodian for the Fund, of one or more of the
Portfolios shall be appointed by the Board of Trustees of the Fund, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities and other assets of each applicable Portfolio then held by it
hereunder and shall transfer to an account of the successor custodian all of
the securities and other assets of each such Portfolio held in a Securities
System or at the Underlying Transfer Agent.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to
transfer to an account of such successor custodian all of the securities of
each such Portfolio held in any Securities System or at the Underlying Transfer
Agent. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
21.
<PAGE> 22
18. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust of
the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
19. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to those listed on Exhibit A hereto, with respect to which it desires
to have the Custodian render services as custodian under the terms hereof, it
shall so notify the Custodian in writing, and if the Custodian agrees in
writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
20. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
21. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
22. Counterparts
This Contract may be executed in several counterparts, each of which
shall be deemed to be an original, and all such counterparts taken together
shall constitute but one and the same Contract.
23. Reproduction of Documents
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as
the original itself in any judicial or administrative proceeding, whether or
not the original is in existence and whether or not such reproduction was made
by a party in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.
22.
<PAGE> 23
24. Shareholder Communications Election
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below,
the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any
funds or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
25. Miscellaneous Provision
The execution of this Contract has been authorized by the Fund's
Trustees and by the sole shareholder. This Contract is executed on behalf of
the Fund or the Trustees of the Fund as Trustees and not individually and that
the obligations of this Contract are not binding upon any of the Trustees,
officers or shareholders of the Fund individually, but are binding only upon
the assets and property of the Fund. A certificate of Trust in respect of the
Fund is on file with the Secretary of the State of Delaware.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
23.
<PAGE> 24
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 26th day of August, 1998.
ATTEST AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 3
/s/ CYNTHIA TOLES By: /s/ NORI L. GABERT
- ------------------ --------------------------------
Name: Nori L. Gabert
Its: Vice President and Assistant
Secretary
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ KEN BERGERON By: /s/ MARK J. BOWLER
- ------------------ --------------------------------
Name: Mark J. Bowler
Its: Senior Vice President
<PAGE> 25
EXHIBIT A
to
Custodian Contract
by and between
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
and
STATE STREET BANK AND TRUST COMPANY
American General International Growth Fund
American General Large Cap Growth Fund
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 Domestic Bond Fund
American General Money Market Fund
American General Growth Lifestyle Fund
American General Moderate Growth Lifestyle Fund
American General Conservative Growth Lifestyle Fund
American General Core Bond Fund
American General Strategic Bond Fund
American General High Yield Bond Fund
<PAGE> 1
EXHIBIT 9(a)
TRANSFER AGENCY and SERVICE AGREEMENT
BETWEEN
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
AND
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
1
<PAGE> 2
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 26th day of August 1998, by and between
American General Series Portfolio Company 3, a Delaware business trust,
having its principal office and place of business at Houston, Texas (the
"Fund"), and The Variable Annuity Life Insurance Company, a stock life
insurance company organized under the Texas Insurance Code having its
principal office and place of business at Houston, Texas (the "Transfer
Agent").
WHEREAS, the Fund desires to appoint the Transfer Agent as its transfer
agent, dividend disbursing agent and agent in connection with certain other
activities, and the Transfer Agent desires to accept such appointments;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1. Terms of Appointment: Duties of the Transfer Age.
1.01 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Transfer Agent as its transfer
agent, dividend disbursing agent and agent in connection with any
accumulation, open-account or similar plans provided to the
shareholders of the Fund ("Shareholders') and set forth in the
currently effective prospectus of the Fund.
1.02 The Transfer Agent hereby accepts such employment and appointment and
agrees that on and after the effective date of this Agreement it will
act as the Fund's transfer agent, dividend disbursing agent and agent
in connection with the other activities described in paragraph 1.01
hereof, on the terms and conditions set forth herein.
1.03 The Transfer Agent agrees that its duties and obligations hereunder
will be performed in a competent, efficient and workman-like manner
with due diligence in accordance with reasonable industry practice,
and that the necessary facilities, equipment and personnel for such
performance will be provided.
Article 2. Expenses.
2.01 The Fund agrees to reimburse the Transfer Agent promptly for its
reasonable costs of performing its duties and obligations under this
Agreement, including overhead and out-of-pocket expenses or advances
paid by the Transfer Agent for postage, envelopes, checks, drafts,
continuous forms, reports and statements, telephone, telegraph, cost of
outside mailing firms, necessary outside record storage costs, media
for storage of records (e.g., microfile, microfiche, computer tapes)
and printing costs incurred due to special requirements of the Fund. In
addition, any other costs or special out-of-pocket expenses paid by the
Transfer
2
<PAGE> 3
Agent at the specific request of the Fund will be promptly reimbursed
by the Fund. Any postage for mailings of dividends, proxies, Fund
reports and other mailings to all Shareholder accounts shall be
advanced to the Transfer Agent three business days prior to the mailing
date of such materials.
Article 3, Representations and Warranties of the Transfer Agent.
The Transfer Agent represents and warrants to the Fund that:
3.01 It is a stock life insurance company duly organized and existing and in
good standing under the laws of the State of Texas.
3.02 It is duly qualified to carry on its business in the State of Texas.
3.03 It is empowered under applicable laws and by its charter and bylaws to
enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.05 It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to perform
its duties and obligations hereunder.
Article 4. Representations and Warranties of the Fund
4.01 It is duly organized and existing and in good standing under the laws
of the State of Delaware.
4.02 It is empowered under applicable laws and regulations any by its
Agreement and Declaration of Trust and Bylaws to enter into and perform
this Agreement.
4.03 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
4.04 It is an open-end diversified management investment company registered
under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 is currently
effective and will remain effective, and appropriate state securities
laws filing have been made and will continue to be made, with respect
to all shares of the Fund being offered for sale.
3
<PAGE> 4
Article 5. Indemnification.
5.01 The Transfer Agent shall not be responsible and the Fund shall
indemnify and hold the Transfer Agent harmless from and against any and
all losses, damages, costs, charges, reasonable counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) All actions of the Transfer Agent required to be taken by the
Transfer Agent pursuant to this Agreement, provided the Transfer
Agent has acted in good faith with due diligence and without
negligence or willful misconduct,
(b) The reasonable reliance by the Transfer Agent on, or reasonable
use of the Transfer Agent of, information, records and documents
which have been prepared or maintained by or on behalf of the Fund
or have been furnished to the Transfer Agent or on behalf of the
Fund.
(c) The reasonable reliance by the Transfer Agent on, or the carrying
out by the Transfer Agent of, any instructions or requests of the
Fund.
(d) The offer or sale of Fund shares in violation of any requirement
under the Federal securities laws or regulations or the securities
laws or regulations of any state or in violation of any stop order
or other determination or ruling by any Federal agency or any
state with respect to the offer or sale of such shares in such
state unless such violation results from any failure by the
Transfer Agent to comply with written instructions of the Fund
that no offers or sales of Fund shares be made in general or to
the residents of a particular state.
(e) The Fund's refusal or failure to comply with the terms of this
Agreement, or the Fund's lack of good faith, negligence or willful
misconduct or the breach of any representative or warranty of the
Fund hereunder.
5.02 The Transfer Agent shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, reasonable counsel
fees, payments, expenses and liability arising out of or attributable
to the Transfer Agent's refusal or failure with the terms of this
agreement, or the Transfer Agent's lack of good faith, negligence or
willful misconduct, or the breach of any representation or warranty of
the Transfer Agent hereunder.
5.03 At any time the Transfer Agent may apply to any authorized officer of
the Fund for instructions, and may consult with the Fund's legal
counsel, at the expense of the Fund, with respect to any matter arising
in connection with the services to be performed by the Transfer Agent
under this Agreement, and the Transfer Agent shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it
in good faith in reasonable reliance upon such instructions or upon the
opinion of such counsel. The Transfer Agent shall be protected and
indemnified in acting upon any paper or document reasonably believed
4
<PAGE> 5
by the Transfer Agent to be genuine and to have been signed by the
proper person or persons and shall not be held to have notice of any
change of authority of any person, until receipt of written notice
thereof from the Fund. The Transfer Agent shall also be protected and
indemnified in recognizing stock certificates which the Transfer Agent
reasonably believes to bear the proper manual or facsimile signatures
of the officers of the Fund, and the proper countersignature of any
former transfer agent or registrar, or of a co-transfer agent or
coregistrar.
5.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment
or transmission failure or damage, or other causes reasonably beyond
its control, such party shall not be liable for damages to the other
for any damages resulting from such failure to perform or otherwise
from such causes.
5.05 In no event and under no circumstances shall either party to this
Agreement be liable to the other party for consequential damages under
any provision of this Agreement or for any act or failure to act
hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either
party may be required to indemnify the other, the party seeking
indemnification shall promptly notify the other party of such
assertion, and shall keep the other party advised with respect to all
developments concerning such claim. The party who may be required to
indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to
indemnify it except with the other party's prior written consent.
Article 6. Covenants of the Fund and the Transfer Agent.
6.01 The Fund shall promptly furnish to the Transfer Agent the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of the Transfer Agent and the
execution and delivery of this Agreement,
(b) A certified copy of the Agreement and Declaration of Trust and
Bylaws of the Fund and all amendments thereto.
6.02 The Transfer Agent hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting
devices, if any; and for the preparation or use and for keeping account
of, such certificates, forms and devices.
5
<PAGE> 6
6.03 The Transfer Agent shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable;
provided, however, that all accounts, books and other records of the
Fund (hereinafter referred to as "Fund Records") prepared or maintained
by the Transfer Agent hereunder shall be maintained and kept current in
compliance with Section 31 of the Investment company Act of 1940 and
the Rules thereunder (such Section and Rules being hereinafter referred
to as the ("1940 Act Requirements"). To the extent required by the
1940 Act Requirements, the Transfer Agent agrees that all Fund Records
prepared or maintained by the Transfer Agent hereunder are the property
of the Fund and shall be preserved and made available in accordance
with the 1940 Act Requirements, and shall be surrendered promptly to
the Fund on its request. The Transfer Agent agrees at such reasonable
times as may be requested by the Board of Directors of the Fund and at
least semiannually to provide (i) written confirmation to such Board
that all Fund Records are maintained and kept current in accordance
with the 1940 Act Requirements, and (ii) such other reports regarding
its performance hereunder as may be reasonably requested by such Board.
6.04 The Transfer Agent and the Fund agree that all books, records,
information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential, and shall not
be voluntarily disclosed to any other person, except as may be required
by law.
6.05 In case of any requires or demands for the inspection of the
Shareholder records of the Fund, the Transfer Agent will endeavor to
notify the Fund and to secure instructions from an authorized officer
of the Fund as to such inspection. The Transfer Agent reserves the
right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable for
the failure to exhibit the Shareholder records to such person.
Article 7. Term and Termination of Agreement.
7.01 This Agreement shall remain in effect until terminated as hereinafter
provided. This Agreement may be terminated by the Fund at any time by
giving written notice to the Transfer Agent at least 120 days prior to
the date on which such termination is to be effective; and provided,
further, that this Agreement may be terminated by the Transfer Agent
for good and reasonable cause at any time by giving written notice to
the Fund at least 120 days prior to the date on which such termination
is to be effective, Any reimbursable expenses payable to the Transfer
Agent shall be due on any such termination date. The Transfer Agent
agrees to use its best efforts to cooperate with the Fund and the
successor transfer agent in accomplishing an orderly transition.
6
<PAGE> 7
Article 8. Miscellaneous.
8.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other;
provided, however, that no consent shall be required for any merger of
the Fund with, or any sale of all or substantially all the assets of
the Fund to, another investment company.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns,
8.03 This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof, and supersedes any
prior agreement with respect thereto, whether oral or written and this
Agreement may not be modified except by written instrument executed by
both parties.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be
executed in their names and on their behalf under their seals by any through
their duly authorized officers, as of the date first above written.
THE VARIABLE ANNUITY LIFE INSURANCE
COMPANY
By: /s/ THOMAS L. WEST, JR.
--------------------------------
Thomas L. West, Jr.
ATTEST:
/s/ CYNTHIA A. TOLES
- -------------------------------------
Cynthia A. Toles
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY 3
By: /s/ JOHN A. GRAF
--------------------------------
John A. Graf
ATTEST:
/s/ CYNTHIA A. TOLES
- -------------------------------------
Cynthia A. Toles
7
<PAGE> 1
EXHIBIT 9(c)
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT, dated as of the 26th day of August, 1998, made by and between
American General Series Portfolio Company 3 (the "Company"), a business trust
operating as an open end investment company, duly organized and existing under
the laws of the State of Delaware, and The Variable Annuity Life Insurance
Company ("VALIC"), a stock insurance company duly organized and existing under
the laws of the State of Texas:
WITNESSETH THAT:
WHEREAS, The Company desires to appoint VALIC as its Administrative
Services Agent to maintain and keep current the books, accounts, records,
journals or other records of original entry relating to the business of the
Company as set forth in Section 1 of this Agreement (the "Accounts and
Records") and to perform certain daily functions in connection with such
Accounts and Records; and
WHEREAS, VALIC is authorized to contract on behalf of the Company with
service providers for the purpose of daily valuation of the Company portfolios;
and
WHEREAS, VALIC is willing to perform such functions upon the terms and
conditions set forth below; and
NOW, THEREFORE, In consideration of the premises and mutual covenants herein
contained, the parties hereto, intending to be legally bound, do hereby agree
as follows:
Section 1.
VALIC, upon receipt of necessary information and written or verbal instructions
from the Company, shall maintain and keep current the following books:
Accounts and Records, journals or other records of original entry relating to
the business of the Company, and necessary or advisable for compliance with
applicable regulations, including Rules 31(a)-1 and 31(a)-2 of the Investment
Company Act of 1940, as amended (the "1940 Act"), in such form as may be
mutually agreed to between the Company and VALIC:
(a) Cash Receipts
(b) Cash Disbursements
(c) Dividend Record
(d) Purchase and Sales of Portfolio Securities
(e) Subscription and Redemption Journals
(f) Security Ledgers
(g) Broker Ledger
<PAGE> 2
(h) General Ledger
(i) Daily Expense Accruals
(j) Securities and Monies borrowed or loaned and collateral therefor
(k) Daily Trial Balances
It shall be the responsibility of the Company to furnish or cause to be
furnished to VALIC, the declaration, record, payment dates and amounts of any
dividends or income and any other special actions required on or concerning
each of its portfolio securities.
Section 2.
Upon receipt by VALIC of written or verbal instructions, VALIC shall make the
proper accounting entries in accordance therewith and notify the Company of all
cash and securities. VALIC, as Investment Adviser, shall direct that the
broker-dealer, or other person through whom a transaction has occurred, send a
confirmation to VALIC. VALIC shall verify this confirmation against the
written or verbal instructions when received from the Company.
Section 3.
VALIC shall calculate the Company's net asset value in accordance with the
Company's currently effective Registration Statement, once daily.
VALIC shall calculate the daily dividend rate for the Money Market Fund in
accordance with the prospectus of the Money Market Fund and with resolutions of
the Company's Board of Trustees. VALIC shall prepare and maintain a daily
evaluation of securities and other investments for which market quotations are
available by VALIC's approved pricing services; all other securities or
investments shall be evaluated in accordance with the Company's written
instructions.
Section 4.
For all purposes under this Agreement, VALIC is authorized to act upon receipt
of any written or verbal instructions it receives from the Company.
Section 5.
VALIC shall supply daily and periodic reports to the Company as requested by
the Company and agreed upon by VALIC.
Section 6.
VALIC shall compile daily reports of share purchases, redemptions, and total
shares outstanding. Reports of purchases and redemptions so received shall be
deemed to be share orders to the Company and shall be deemed to be orders
accepted by the Company when so received.
<PAGE> 3
Section 7.
The accounts and records, in the agreed upon format, maintained by VALIC shall
be the property of the Company, and shall be made available to the Company
within a reasonable period of time, upon proper demand. VALIC shall assist the
Company's independent auditors, or upon approval of the Company, or upon
demand, any regulatory body, in any requested review of the Company's accounts
and records but shall be reimbursed for all expenses and employee time invested
in such review outside of routine and normal periodic reviews. Upon receipt
from the Company of the necessary information VALIC shall supply the necessary
data for the Company or accountant's completion of any necessary tax return,
questionnaires, periodic reports to shareholders and such other reports and
information requests as the Company and VALIC shall agree upon from time to
time.
Section 8.
VALIC and the Company may from time to time adopt such procedures as they agree
upon, and VALIC may conclusively assume that any procedure approved in writing
by the Company or directed in writing by the Company, does not conflict with or
violate any requirements of its prospectus, Agreement and Declaration of Trust,
Bylaws, or any rule or regulation of any body or governmental agency. The
Company shall be responsible for notifying VALIC of any changes in regulations
or rules which might necessitate changes in VALIC's procedures.
Section 9.
VALIC may rely on information reasonably believed by it to be accurate and
reliable. Except as may otherwise be required by the 1940 Act and the rules
thereunder, neither VALIC nor its shareholders, officers, directors, employees,
agents, control persons or affiliates of any thereof shall be subject to any
liability for, or any damages, expenses or losses incurred by the Company in
connection with, any error of judgment, mistake of law, any act or omission
connected with or arising out of any services rendered under or payments made
pursuant to this Agreement or any other matter to which this Agreement relates,
except by reason of willful misfeasance, bad faith or gross negligence on the
part of any of such persons in the performance of the duties of VALIC under the
Agreement or by reason of reckless disregard by any of such persons of the
obligations and duties of VALIC under this Agreement.
Section 10.
The Company agrees to pay VALIC monthly compensation for its services as set
forth in Schedule A, which is hereby attached and made a part of this
Agreement.
Section 11.
Nothing contained in this Agreement is intended to or shall require VALIC, in
any capacity hereunder, to perform any functions or duties on any holiday, day
of special observance or any other
<PAGE> 4
day on which VALIC or the New York Stock Exchange is closed. Functions or
duties normally scheduled to be performed on such days shall be performed on
the next succeeding business day on which both the New York Stock Exchange and
VALIC are open.
Section 12.
VALIC may from time to time in its sole discretion delegate some or all of its
duties hereunto to an entity designated by VALIC, which entity shall perform
such functions as the agent of VALIC. To the extent of such delegation, the
term "VALIC" in this Agreement shall be deemed to refer to both VALIC and to
such entity designated by VALIC, or to either of them, as the context may
indicate.
Section 13.
The following terms used in this Agreement, or in any amendment or supplement
hereto, shall have the meanings herein specified unless the context otherwise
requires.
VALIC: The term "VALIC" shall mean The Variable Annuity Life Insurance Company
and if used in connection with or relative to any act or omission involving an
entity designated by VALIC, the term shall refer to The Variable Annuity Life
Insurance Company and such designated entity.
Verbal Instruction: The term "verbal instruction" shall mean an authorization,
instruction, approval, item or set of data, or information of any kind
transmitted to VALIC in person or by facsimile, telephone, telegram, telecopy,
or other mechanical, electronic or documentary means lacking original
signature, by a person or persons believed in good faith by VALIC to be a
person or persons authorized by a resolution of the Board of Trustees of the
Company to give verbal instructions on behalf of the Company.
Shares: The term "shares" shall mean the issued and outstanding shares of
common stock of the Company.
Written Instruction: The term "written instruction" shall mean an
authorization, instruction, approval, item or set of data, or information of
any kind transmitted to VALIC in original writing containing original
signatures believed in good faith by VALIC to be the signature of a person
authorized by a resolution of the Board of Trustees of the Company to give
written instructions on behalf of the Company.
Section 14.
The Company shall from time to time file with VALIC a certified copy of each
resolution of its Board of Trustees authorizing the transmittal of verbal
instructions and specifying the person or persons authorized to give verbal
instructions in accordance with the Agreement. If the certifying officer is
authorized to give verbal instructions, the certification also shall be signed
by a second officer of the Company. Upon transmitting any verbal instruction,
the Company shall promptly
<PAGE> 5
forward to VALIC a written instruction confirming the authorization,
instruction or approval transmitted by such verbal instruction.
Section 15.
Either the Company or VALIC may give written notice to the other of the
termination of this Agreement, such termination to take effect at the time
specified in the notice not less than sixty (60) days after the giving of the
notice.
Section 16.
This Agreement shall be governed by the laws of the State of Texas.
Section 17.
The execution of this Agreement has been authorized by the Company's Trustees
and by the sole shareholder. This Agreement is executed on behalf of the
Company or the Trustees of the Company as Trustees and not individually and
that the obligations of this Agreement are not binding upon any of the
Trustees, officers or shareholders of the Company individually, but are binding
only upon the assets and property of the Company. A Certificate of Trust in
respect of the Company is on file with the Secretary of the State of Delaware.
IN WITNESS WHEREOF, The parties hereto have caused this Agreement to be signed
by their duly authorized officers and their corporate seals hereunto duly
affixed and attested, as of the day of year first above written.
AMERICAN GENERAL SERIES
PORTFOLIO COMPANY 3
By: /s/ CRAIG RODBY
----------------------------
Title: Vice Chairman
Witness: /s/ CYNTHIA TOLES
-------------------------
THE VARIABLE ANNUITY
LIFE INSURANCE COMPANY
By: /s/ THOMAS L. WEST, JR.
----------------------------
Title: Chairman
Witness: /s/ CYNTHIA TOLES
-------------------------
<PAGE> 6
SCHEDULE A
Accounting Services Compensation Schedule
(Effective August 26, 1998)
The Accounting Services Fee of 3 basis points is an annual fee payable monthly
based on average daily net assets.
<PAGE> 1
EXHIBIT 9(d)
ADMINISTRATIVE SERVICE AGREEMENT
This Agreement is entered into as of the 26th day of August, 1998, by
and among The Variable Annuity Life Insurance Company, ("VALIC"), a life
insurance company organized under the laws of the State of Texas, and American
General Series Portfolio Company 3 ("Trust"), a Delaware business trust, both
of which have their principal offices at 2929 Allen Parkway, Houston, Texas
77019.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, a Certificate of Trust is on file with the Secretary of the
State of Delaware; and
WHEREAS, the Trust offers shares of beneficial interest ("Shares") in
several series or funds, each with its own investment objective and investment
policies ("Funds") to the registered and unregistered separate accounts of
VALIC and its affiliates to fund variable annuity contracts and variable life
insurance policies, and to employee thrift plans maintained by VALIC or
American General Corporation ("Contracts") ; and
WHEREAS, VALIC and affiliates of VALIC will provide subcustodian,
record keeping, account maintenance and other administrative and shareholder
services for Contract owners and participants; and
WHEREAS, VALIC and the Trust desire that the purchase and redemption
of Shares be facilitated through one or more omnibus accounts that has or have
been established in the name of VALIC; and
WHEREAS, the Trust desires that VALIC provide services with respect to
the Contract owners and participants, and that VALIC desires to provide such
services; and
WHEREAS, this Agreement is executed on behalf of the Trust or the
Trustees of the Trust as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Trust individually, but are binding only upon
the assets and property of the Trust. A Certificate of Trust in respect of the
Trust is on file with the Secretary of the State of Delaware.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
<PAGE> 2
1. TERMS OF APPOINTMENT; DUTIES OF THE PARTIES
1.1. VALIC. VALIC shall perform the services described herein, with
respect to the Funds identified in Schedule A hereto, in
accordance with procedures established from time to time by
agreement of the Trust and VALIC, and between VALIC and the
Contract owners and participants, in each case subject to
terms and conditions set forth in the Trust's current
prospectus. Except as specifically provided herein, VALIC
shall not be nor be held out to be an agent of the Trust or
any Fund.
(a) According to Contract provisions and various other
agreements entered into between VALIC and Contract
owners and participants, VALIC shall receive from
these Contract owners and participants, or their
authorized sponsors, committees, or trustees, by the
close of regular trading on the New York Stock
Exchange (the "Close of Trading") each business day
that the New York Stock Exchange is open for business
("Business Day") instructions for the purchase,
redemption and exchange of Shares (together,
"Instructions");
(b) Based on Instructions received each Business Day,
VALIC shall compute net purchase requests and/or net
redemption requests ("Requests") for Shares of each
Fund for each the Instructions received various
Contract owners and participants;
(c) VALIC shall maintain records as required by
applicable law related to, and advise the Trust as
to, the foregoing, as instructed by the Trust. VALIC
agrees that such records maintained by it in
connection with its activities under this Agreement
will be preserved, maintained and made available in
accordance with applicable law and regulations, and
copies or, if required, originals will be surrendered
promptly to the Trust on and in accordance with its
request. Records surrendered hereunder shall be in
machine readable form, except to the extent that
VALIC has maintained such records only in paper form.
This provision shall survive the termination of this
Agreement;
(d) VALIC shall transmit Requests to the Trust or its
agent by the Close of Trading each Business Day.
Such Requests shall be based solely on Instructions
received in proper form by VALIC from the Contract
owners and participants, and/or their authorized
sponsors, committees, or trustees, according to
Contract provisions and various other agreements with
the Contract owners and participants. Instructions
received by VALIC after the Close of Trading on any
Business Day shall be treated as though received on
the next Business Day. VALIC shall maintain internal
controls reasonably designed to prevent Instructions
received after the Close of Trading on any Business
Day from being aggregated with any Request
transmitted or
2
<PAGE> 3
otherwise communicated to the Trust as if it were
received prior to the Close of Trading;
(e) VALIC shall transmit Requests in proper form to the
Trust or its agent by no later than 9:00 AM Eastern
Time on the next following Business Day. The
Business Day on which instructions are received in
proper form by VALIC prior to the Close of Trading
will be the Business Day as of which Requests will be
deemed received by the Trust or its agent. For
purposes of Section 1.01(d) and this Section 1.01(e),
proper form shall that amounts to be invested or
redeemed are identified on VALIC's computer system by
Contract, Contract owners and participants, and
Fund; and
(f) VALIC shall promptly deliver, or instruct the
authorized sponsor, committee, or trustees of the
Contracts, to deliver to the Trust or its agent,
appropriate documentation and in the case of
Requests, payment therefor.
1.2. Equipment. VALIC shall maintain adequate offices, personnel,
computers and other equipment necessary to perform the
services contemplated by this Agreement. VALIC shall notify
the Trust or its agent promptly in the event that VALIC
becomes unable for any reason to perform the services
contemplated by, or any other of its obligations under, this
Agreement. VALIC shall maintain or cause the maintenance of
back- up files of the records required to be maintained
hereunder and shall store such back-up files in a secure
off-premises location, so that, in the event of a power
failure or other interruption of whatever cause at the
location of the records, VALIC's records are maintained intact
and transactions can be processed at another location.
1.3. Disclosure to Contract Owners and Participants. VALIC shall
take all steps necessary to ensure that the arrangements
provided for in this Agreement are properly disclosed to the
Contract owners and participants.
1.4. Transmission of Information to VALIC. In accordance with
procedures established from time to time by agreement of the
Trust and VALIC, the Trust or its agent shall transmit to
VALIC the following information for each Fund as received by
the Trust or its agent: (a) net asset value information as of
the Close of Trading each Business Day; (b) dividend and
capital gains distribution information, as it arises; and (c)
daily accrual for dividend rate factor (mil rate) information
with respect to Funds which declare dividends daily. The
Trust or its agent shall transmit to VALIC such information,
using its best efforts by 6:30 PM Eastern Time, on each
Business Day that such information is available.
3
<PAGE> 4
1.06. Representations Regarding Shares. Any representation made by
VALIC regarding any Shares of a Fund shall be in its capacity
as agent for the Contracts and not in its capacity as agent of
the Trust or any of the Funds. Furthermore, any
representation made by the VALIC regarding any Shares of a
Fund shall be in its capacity as agent for the trustee or
custodian of a Contract, or as agent of a Contract owner or
participant. VALIC shall not make any representation in any
capacity regarding any Shares of a Fund that is not set forth
in the Trust's current prospectus, statement of additional
information or current sales literature as furnished by the
Trust or its agent. To the extent that VALIC shall create
sales literature identifying the Trust or a Fund, all such
sales literature shall be submitted for approval to the Trust
within ten (10) days in advance of the earlier of (i) its
intended use or (ii) its filing with the National Association
of Securities Dealers, Inc. ("NASD"). VALIC shall be
responsible for the expense and filing of any sales literature
that it, with the approval of the Trust, creates.
1.07. Confidentiality of Information. The parties hereto agree that
all books, records, information, computer programs and data
pertaining to the business of any other party which are
exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall be kept confidential and
shall not be voluntarily disclosed to any other person, except
as may be permitted hereunder or may be required by law. This
provision shall not apply to information lawfully in the
possession of a party prior to the term hereof that has been
lawfully obtained from other sources or independently
developed by a party without reference to or reliance on
information obtained from any other party hereto. This
provision shall survive the termination of this Agreement.
1.08. Compliance with Law. All of the parties shall at all times
comply with all applicable federal and state laws and
regulations thereunder, including the rules of any
self-regulatory organization, in connection with the
performance of each of the parties' responsibilities under
this Agreement.
1.09. Administrative Services. VALIC or an agent of VALIC shall
perform the administrative, record keeping, and shareholder
services (the "Administrative Services") described in Schedule
B hereto, as such Schedule B may be amended from time to time
with the mutual consent of the parties hereto, with respect to
Shares purchased, held or redeemed by a Contract. Except as
provided specifically in Section 1.01(b) hereof, VALIC shall
perform the Administrative Services as independent contractor
and not as employee or agent of the Trust or any Fund. VALIC
shall perform the Administrative Services in accordance with
procedures established from time to time by the agreement of
the Trust, and VALIC, and subject to terms and conditions set
forth in the Trust's current prospectus.
4
<PAGE> 5
1.10. No Impairment of Trust's Authority. No provision of this
Agreement shall limit in any way the authority of the Trust to
take such action as it deems appropriate in connection with
matters relating to the operation of the Funds and the sale of
Shares.
1.12. Authority of VALIC. VALIC acknowledges that it is not
authorized by the Trust or any Fund to register the transfer
of Shares or to transfer record ownership of Shares, and that
only the Trust or its agent is authorized to perform such
activities.
2. COMPENSATION
2.1. VALIC's Expenses. VALIC shall bear all expenses incident to
performance of the Administrative Services and of the
performance of its functions described herein. VALIC shall not
receive (nor shall any agent of VALIC receive) from the Trust
or any Fund (or from any affiliate of the Trust) any monetary
compensation or reimbursement for such expenses.
2.2. Transfer Agent's and Fund Expenses. The Trust shall bear the
expenses of the Funds hereunder and shall not receive (nor
shall any agent of the Trust receive) from VALIC any monetary
compensation or reimbursement for such expenses.
2.03. Administrative Fees. In consideration of VALIC's performance
of the Administrative Services, the Trust shall pay to VALIC
the fees (the "Administrative Fees") described in Schedule C
hereto, as such Schedule C may be amended from time to time
with the mutual consent of VALIC and the Trust. VALIC must
notify the Trust immediately upon the opening of any new
account that such account is subject to this Agreement. VALIC
will not be entitled to receive Administrative Fees with
respect to such new account until the Trust is so notified and
such Fees wil begin to accrue only at the point of
notification.
2.04. Calculation and Payment of Fees. The Administrative Fees
shall be calculated in the manner described in Schedule C
hereto and shall be due each calendar month from the Trust on
behalf of each Fund for which VALIC performs Administrative
Services pursuant to this Agreement. The Trust shall make a
payment for Administrative Fees for a calendar month within
thirty (30) days after the last day of such month. VALIC shall
have sixty (60) days following receipt of the payment to
verify the amount of the payment and after such time the
amount will be considered final.
3. REPRESENTATIONS AND WARRANTIES
3.1. VALIC's Representations. VALIC represents and warrants to the
Trust that:
(a) it is an insurance company duly organized and in good
standing under applicable law and that it is legally
and validly authorized to set up one or
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<PAGE> 6
more omnibus accounts in its (VALIC's) own name,
including, but not limited to, a segregated asset
account under Texas law and has registered said
segregated asset account as a unit investment trust
under the 1940 Act;
(b) the Contracts are registered under the 1933 Act, and
said Contracts will be issued in compliance in all
material respects with all applicable federal and
state laws;
(c) it has full power and authority under applicable law
to carry on its business, and is registered or
licensed as required, in each jurisdiction where it
conducts its business and the performance of its
obligations hereunder does not and will not violate
or conflict with any governing document or agreement
of VALIC or any applicable law, including but not
limited to, the Employee Retirement Income Security
Act of 1974, as amended;
(d) it maintains and knows of no reason why it cannot or
will not during the term hereof maintain adequate
offices, personnel, computers and other equipment
necessary to perform the services contemplated by
this Agreement; and
(e) VALIC's internal control structure over the
processing and transmission of Instructions is
suitably designed to (i) prevent Instructions
received after the Close of Trading from being
aggregated and communicated to the Trust with
Instructions received before the Close of Trading
and (ii) minimize errors that could result in the
late transmission of such Instructions.
3.02. Trust Representations. The Trust, on its own behalf and on
behalf of the Funds, represents and warrants to VALIC:
(a) the Trust is duly registered as an investment company
under the 1940 Act;
(b) Shares of the Funds sold pursuant to this Agreement:
(i) shall be registered under the Securities Act of
1933, as amended (the "Securities Act"); (ii) duly
authorized for issuance; and (iii) sold in compliance
with the laws of the state of Delaware, and all
applicable federal and state securities laws;
(c) it shall amend the Registration Statement for the
Shares on Form N-1A under the Securities Act and the
1940 Act from time to time in order to effect the
continuous offering of the Shares;
(d) it shall register and qualify the Shares for sale in
accordance with the laws of the various states only
if and to the extent deemed advisable by the Trust or
VALIC;
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<PAGE> 7
(e) each Fund is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal
Revenue Code of 1986, as amended ("the Code") and the
Trust will make every effort to maintain such
qualification (under Subchapter M or any successor or
similar provision) and will notify VALIC immediately
upon having a reasonable basis for believing that a
Fund has ceased to qualify or might not so qualify in
the future; and
(f) the entering into and performing of this Agreement by
the Trust are duly authorized and will not violate
any provision of applicable law, regulation or order
of any court, governmental or regulatory body, or any
agreement or instrument by which the Trust and the
Funds are bound.
4. INDEMNIFICATION
4.1. By the Trust. The Trust, on behalf of each Fund, shall
indemnify and hold VALIC, (including any affiliate of the
foregoing), and the directors, trustees, officers and
employees of VALIC, harmless from and against any and all
losses, damages, costs, charges, reasonable counsel fees,
payments, expenses and liabilities ("Losses") arising out of
or attributable to:
(a) the Trust's, its agent's or any Fund's refusal or
failure to comply with the provisions of this
Agreement or applicable law;
(b) the bad faith, negligence or willful misconduct of
the Trust, its agent or any Fund; or
(c) the breach of any representation or warranty of the
Trust, its agent or of any Fund hereunder, in each
case except to the extent such Losses arise out of or
are attributable to another party's breach of any
provision of this Agreement or the bad faith,
negligence or willful misconduct of another party in
performing its obligations hereunder.
4.2. By VALIC. VALIC shall indemnify and hold the Trust, each
affiliate of the Trust, each Fund and the trustees, officers
and employees of the Trust harmless from and against any and
all Losses arising out of or attributable to:
(a) VALIC's or its agent's refusal or failure to comply
with the provisions of this Agreement or applicable
law or with instructions properly given hereunder,
whether it is performing functions on behalf of the
Contracts, or providing Administrative Services;
(b) VALIC's or its agent's performance of or failure to
perform the Administrative Services;
7
<PAGE> 8
(c) the bad faith, negligence or willful misconduct of
VALIC or its agent, whether it is performing
functions on behalf of the Contracts, or providing
Administrative Services;
(d) VALIC's or its agent's furnishing to any Contract,
Contract owner or participant, authorized Contract
committee or Contract trustee any materially
inaccurate, misleading or untimely information
regarding any Fund or the Shares through no fault of
the Trust or any Fund; or
(e) the breach of any representation or warranty of VALIC
hereunder, in each case except to the extent such
Losses arise out of or are attributable to another
party's breach of any provision of this Agreement or
the bad faith, negligence or willful misconduct of
another party in performing its obligations
hereunder.
4.03. Acts of God. In the event that any party is unable to perform
its obligations under the terms of this Agreement because of
acts of God, strikes, equipment or transmission failure or
damage beyond its reasonable control, or other causes beyond
its reasonable control, such party shall not be liable to any
other party for any damages resulting from such failure to
perform or otherwise from such causes.
4.04. No Consequential Damages. No party to this Agreement shall be
liable to any other party for consequential damages under any
provision of this Agreement.
4.05. Claim Procedure. In order that the indemnification provisions
contained herein shall apply, upon the assertion of a claim or
loss for which any party (the "Indemnitor") may be required to
indemnify another party (the "Indemnitee"), the Indemnitee
shall promptly notify the Indemnitor of such assertion or
loss, and shall keep the Indemnitor advised with respect to
all developments concerning any such claim. The Indemnitor
shall have the option to participate at its expense with the
Indemnitee in the defense of any such claim. In the event
that there is more than one Indemnitor with respect to any
such claim, the Indemnitors shall agree as to their exercise
of this option. The Indemnitee shall in no case confess any
claim or make any compromise in any case in which the
Indemnitor may be required to indemnify it except with the
Indemnitor's prior written consent. The obligations of the
Trust and VALIC under this Section 4 shall survive the
termination of this Agreement.
5. ACKNOWLEDGMENTS
5.1. Fees Solely for Administrative Services. The parties hereto
acknowledge that the Administrative Fees are for
administrative and recordkeeping services only and do not
constitute payment in any manner for investment advisory or
distribution services or services of an underwriter or
principal underwriter within the meaning of the Securities Act
or the 1940 Act. The parties acknowledge that VALIC has been
8
<PAGE> 9
providing and will continue to provide certain services to the
Contract owners and participants as agent of the Contracts,
which, may involve, among other things, preparing
informational or promotional materials relating to their
services that may refer to the Funds and responding to
telephone inquiries from Contract owners and participants.
The parties acknowledge that the provision of such services
and any other actions of VALIC related to the Funds and not
specifically authorized herein are outside the scope of this
Agreement.
5.2. VALIC Acting as Agent for the Contracts; Supervision. The
parties acknowledge that VALIC has been selected as a provider
of administrative and recordkeeping services by the Contracts,
and that, except as provided specifically in Section 1.01(b)
hereof, VALIC will perform the Administrative Services
hereunder as an independent contractor and not as an employee
or agent of the Trust or any Fund. The parties acknowledge,
further, that neither the Trust nor any Fund undertakes to
supervise VALIC in the performance of the Administrative
Services; that neither the Trust nor any Fund shall be
responsible for the performance of the Administrative Services
by VALIC; that neither the Trust nor any Fund shall be
responsible for the accuracy of the records maintained by
VALIC for the Contracts; and that neither the Trust nor any
Fund shall be responsible for the performance of other
functions by VALIC for the Contracts and the Contracts owners
and participants. This Agreement does not entitle VALIC to
purchase any Shares for its own account.
5.3. Laws Applicable to Funds. VALIC acknowledges that the Trust is
a registered investment company under the 1940 Act, is subject
to the provisions of the 1940 Act and regulations thereunder,
and that the offer and sale of Shares of the Funds are subject
to the provisions of federal and state laws and regulations
applicable to the offer and sale of securities. The Trust
acknowledges that VALIC is not responsible for the Trust's or
any Fund's compliance with such laws and regulations. If the
Trust or any Fund notifies VALIC that a procedure or other
activity of the VALIC related to the discharge of either of
its obligations hereunder has or may have the effect of
causing the Trust or any Fund to violate any of such laws or
regulations,VALIC and the Trust, on behalf of the Funds, shall
develop a mutually agreeable alternative procedure or activity
which does not have such effect.
5.4. Agents of VALIC and the Trust. Each party shall notify the
other parties to this Agreement prior to the use of any agent.
To the extent agents perform services under this Agreement
that are the responsibility of VALIC, as the case may be,
VALIC shall be responsible for, and assume all liability for
(including any obligation for indemnification as provided in
Sections 4.02 or 4.03 hereof, as applicable), the actions and
inactions of such agents as if such services had been provided
by VALIC. Similarly, to the extent agents of the Trust
perform services under this Agreement that are the
responsibility of the Trust, the Trust shall be responsible
for, and assume all liability for (including any obligation
for indemnification as provided in Section
9
<PAGE> 10
4.01 hereof), the actions and inactions of such agents as if
such services had been provided by the Trust.
6. DIVERSIFICATION
The Funds will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Internal Revenue Code and the regulations thereunder. Without
limiting the scope of the foregoing, the Funds will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment or life insurance
contracts and any amendments or other modifications to such Section or
Regulation.
7. AMENDMENT AND TERMINATION OF AGREEMENT
7.01. Amendment. Except as otherwise provided herein, this
Agreement may be amended or modified only by a written
instrument executed by all the parties affected thereby;
provided that an amendment solely to add or remove any Fund
may be made, and shall be valid and binding, by the addition
or removal of the relevant Fund's listing on Schedule A and
its signature below without requiring the other parties'
signatures and shall be effective as of the date of execution,
unless any other party objects in writing within thirty (30)
days after receiving notice of such amendment.
7.02. Termination Without Cause. This Agreement may be terminated
by any party upon ninety (90) days written notice to each
other party.
7.03. Termination by the Trust For Cause. This Agreement may be
terminated by the Trust as to any Fund immediately upon notice
to each other party in the event that (a)VALIC becomes unable
for any reason to perform the services contemplated by this
Agreement, or (b) the performance by VALIC of the services
contemplated by this Agreement becomes in the Trust's
reasonable judgment unlawful or ceases to satisfy the Trust's
reasonable standards and so becomes unacceptable to the
terminating party.
7.04. Termination by the VALIC For Cause. This Agreement may be
terminated by VALIC immediately upon notice to the Trust in
the event that (a) the Trust becomes unable for any reason to
fulfill the obligations set forth in the Agreement or (b) the
performance by the Trust of the obligations contemplated by
this Agreement becomes, in the reasonable judgment of VALIC,
unlawful or ceases to satisfy the VALIC's reasonable standards
and so becomes unacceptable to VALIC.
7.05. Termination For Cause By Any Party. This Agreement may be
terminated by any party hereto immediately upon notice to each
other party in the event that (a) all the Funds cease to be
investment alternatives under all the Contracts, (b) the Trust
declines to accept any additional purchase or redemption
requests for Shares, (c) the
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<PAGE> 11
SEC issues any stop order suspending the effectiveness of the
registration statement or prospectus of the Trust, or the
current prospectus for the Trust is not on file with the SEC
as required by section 10 of the Securities Act or (d) any
other party materially breaches this Agreement. To the extent
that any of the events enumerated in paragraphs (a) - (d) of
this Section 7.05 occurs with respect to one or more Funds,
but not with respect to all the Funds, or that the Trust, on
behalf of one or more of the Funds, but not all the Funds,
terminates this Agreement, in lieu of termination of this
Agreement the Trust shall amend Schedule A hereto with notice
to the other parties to remove the affected Funds from such
Schedule A.
7.06. Termination Procedures. Upon termination of this Agreement,
each party shall return to each other party all copies of
confidential or proprietary materials or information received
from such other party hereunder, other than materials or
information required to be retained by such party under
applicable laws or regulations. This provision shall survive
the termination of this Agreement.
8 ASSIGNMENT AND DELEGATION
8.01. Assignment and Delegation. Except as otherwise provided
herein, neither this Agreement nor any rights, duties or
obligations hereunder may be assigned or delegated by any
party without the written consent of the other parties.
8.02. Successors. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective permitted
successors and assigns.
9. NOTICES
Notices hereunder shall be in writing, shall be signed by an
authorized officer, and shall be deemed to have been duly given if delivered
personally, sent by certified mail (return receipt requested), or sent by
facsimile machine in accordance with procedures established by agreement of the
Trust and VALIC, and if it is addressed to a party either at its address below
or at a changed address specified by it in a notice to the other parties
hereto:
Trust: AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
Service Provider: THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
2929 Allen Parkway
Houston, Texas 77019
Attention: Gregory R. Seward
cc: Cynthia A. Toles, Esq.
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<PAGE> 12
10. MISCELLANEOUS
10.01. Texas Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with
the laws of The State of Texas, without regard to conflicts of
laws principles.
10.02. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes any prior
agreement with respect to the subject matter hereof whether
oral or written. All exhibits and schedules hereto, as
amended from time to time, are incorporated herein and made a
part hereof. References herein to exhibits and schedules
refer to such exhibits and schedules as so amended. Nothing
contained in this Agreement is intended to convey rights to
any third parties.
10.03. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original document and
all of which together shall be deemed one and the same
instrument.
10.04. Limitation of Liability of the Trust, Trustees and
Shareholders. It is understood and expressly stipulated that
none of the trustees, officers, agents, or shareholders of the
Trust or any Fund shall be personally liable hereunder. It is
understood and acknowledged that all persons dealing with the
Trust or any Fund must look solely to the property of such
Fund for the enforcement of any claims against such Fund as
neither the trustees, directors, officers, agents or
shareholders assume any personal liability for obligations
entered into on behalf of any Fund. No Fund shall be liable
for the obligations or liabilities of any other Fund.
10.05. Headings. The headings contained in this Agreement are for
purposes of convenience only and shall not affect the meaning
or interpretation of this Agreement.
10.06. Severability. If any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any
reason, the remaining provisions and portions of the Agreement
shall be unaffected thereby and shall remain in full force and
effect to the fullest extent by law.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
By: /s/ CRAIG RODBY
-------------------------------------
Name: Craig Rodby
------------------------------------
Title: Vice Chairman
-----------------------------------
THE VARIABLE ANNUITY LIFE INSURANCE COMPANY
By: /s/ THOMAS WEST, JR.
-------------------------------------
Name: Thomas West, Jr.
------------------------------------
Title: Chairman
-----------------------------------
13
<PAGE> 14
SCHEDULE A
LIST OF AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
FUNDS COVERED BY THE AGREEMENT
American General International Growth Fund
American General Large Cap Growth Fund
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
<PAGE> 15
SCHEDULE B
THE ADMINISTRATIVE SERVICES
1. VALIC shall maintain adequate records for each Contract
reflecting Shares purchased and redeemed, including the date, price and number
of Shares purchased, redeemed or exchanged; dividend reinvestment dates and
amounts of dividends paid for at least the current year to date; records of
distributions and dividend payments; Share transfers; investment allocation
changes; and overall control records. Such records shall be preserved,
maintained and made available in accordance with the provisions of applicable
law and regulations, and copies or, if required, originals shall be surrendered
promptly to the Trust on and in accordance with its request. Records
surrendered hereunder shall be in machine readable form, except to the extent
that such records have been maintained only in paper form.
2. VALIC shall disburse or credit to the Contracts, and maintain
records of, all proceeds of Share redemptions and distributions not reinvested
in Shares.
3. VALIC shall cause and oversee the timely and accurate transfer
of funds in connection with Contract accounts with the Funds.
4. VALIC shall prepare and deliver periodic account statements to
the Contract owners and participants showing for each Contract the total number
of Shares held as of the statement closing date, purchases and redemptions of
Shares during the statement period, and dividends and other distributions paid
during the statement period (whether paid in cash or reinvested in Shares),
including dates and prices for all transactions.
5. Subject to the terms of the agreements with each Contract, and
to the extent required by applicable law, VALIC shall deliver or cause the
delivery of prospectuses, proxy materials (where pass-through voting is
required), periodic reports to Contract owners and participants, and other
materials provided to VALIC by the Trust on behalf of the Funds.
6. VALIC shall transmit Requests to the Trust and, in accordance
with applicable law, send to the Contract owners and participants confirmations
related to the processing of Instructions and Requests.
7. VALIC shall maintain daily and monthly purchase summaries
(expressed in both Share and dollar amounts) for each Contract.
8. VALIC shall use its best efforts to arrange for payment for
net purchases of Shares attributable to all Requests executed prior to 4:00 PM
on a given Business Day to be wired to the Trust by 12:00 PM (noon) central
time the first Business Day following receipt of such orders. The Trust states
that it will use its best efforts to arrange for payment for net redemptions
for Shares
<PAGE> 16
attributable to all orders executed prior to 4:00 PM on a given Business Day to
be wired by 12:00 PM (noon) Eastern time the first Business Day following
receipt of such orders by the Trust.
9. VALIC shall transmit to the Trust, or to any Fund designated
by the Trust, such occasional and periodic reports as the Trust shall
reasonably request from time to time to enable it or such Fund to comply with
applicable laws and regulations.
10. VALIC shall establish a voice response system and make
customer services representatives accessible to respond to Contract owners' and
participants' inquires regarding, among other things, Share prices, account
balances, dividend amounts and dividend payment dates and information changes
concerning a Contract, or Contract owner or participant.
11. VALIC shall provide average cost basis reporting to Contract
owners and participants to assist them in preparing their income tax returns.
12. VALIC shall prepare and file with the appropriate governmental
agencies such tax-related information, returns and reports as are required
under applicable laws or regulations to be filed for reporting (a) dividends
and other distributions, (b) amounts withheld on dividends and other
distributions and payments, and (c) gross proceeds of sales transactions.
13. VALIC shall assist with the solicitation of proxies from
Contract owners and participants, as requested from time to time by the Trust.
14. VALIC shall establish Internet access for Contract owners and
participants to view account balances and perform certain limited transactions,
as determined by VALIC.
15. VALIC shall perform all testing and Contract compliance
services, including consulting on proposed Contract amendments, determining
Contract eligibility, calculating Contract service, vesting, and processing
forfeitures.
2
<PAGE> 17
SCHEDULE C
THE ADMINISTRATIVE FEES
The Trust, on behalf of the Funds, will pay VALIC a monthly fee at an
annualized rate of .25 percent (25 basis points) with respect to the Funds
listed on Schedule A, of the average daily account balance during the month for
each account for which VALIC performs Administrative Services. If VALIC begins
or ceases to perform Administrative Services during the month, such fee shall
be prorated according to the proportion which such portion of the month bears
to the full month.
<PAGE> 1
Exhibit 10
December 29, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Exhibit 10, Form N-1A
American General Series Portfolio Company 3
File Nos. 333-53589/811-08789
Ladies and Gentlemen:
As counsel to American General Fund Group, it is my opinion that the securities
being registered by this Post-Effective Amendment No. 2, will be legally issued,
fully paid and non-assessable when sold. My opinion is based on an examination
of documents related to American General Series Portfolio Company 3 (the
"Trust"), including its Declaration of Trust, its By-Laws, other original or
photostatic copies of Trust records, certificates of public officials,
documents, papers, statutes, and authorities as I deemed necessary to form the
basis of this opinion.
I therefore consent to filing this opinion of counsel with the Securities and
Exchange Commission as an Exhibit to the Trust's Post-Effective Amendment No. 2
to its Registration Statement.
Sincerely,
/s/ Katherine Stoner
Katherine Stoner
Senior Counsel
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference made to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference, in Post-Effective
Amendment No. 2 to the Registration Statement (Form N-1A No. 333-53589) and
related Prospectus of American General Series Portfolio Company 3, of those
references and of our report dated October 11, 1999 on the 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 of American General Series Portfolio Company 3.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Houston, Texas
December 28, 1999
<PAGE> 1
EXHIBIT 19(c)
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned Trustee of American
General Series Portfolio Company 3, does hereby constitute and appoint John A.
Dudley, David M. Leahy and Robert N. Hickey, or any of them, the true and lawful
agents and attorneys-in-fact of the undersigned with respect to all matters
arising in connection with the Registration Statement on Form N-1A of American
General Series Portfolio Company 3 and any and all amendments (including
post-effective amendments) thereto, with full power and authority to execute
said Registration Statement and any and all amendments for and on behalf of the
undersigned, in my name and in the capacity indicated below, and to file the
same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and any state securities
authorities. The undersigned hereby gives to said agents and attorneys-in-fact
full power and authority to act in the premises, including, but not limited to,
the power to appoint a substitute or substitutes to act hereunder with the same
power and authority as said agents and attorneys-in-fact would have if
personally acting. The undersigned hereby ratifies and confirms all that said
agents and attorneys-in-fact, or any substitute or substitutes, may do by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 27th
day of July, 1999.
/S/ KENT E. BARRETT
- ------------------------------
Kent E. Barrett
<PAGE> 2
AMERICAN GENERAL SERIES PORTFOLIO COMPANY 3
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that the undersigned Trustee of American
General Series Portfolio Company 3, does hereby constitute and appoint John A.
Dudley, David M. Leahy and Robert N. Hickey, or any of them, the true and lawful
agents and attorneys-in-fact of the undersigned with respect to all matters
arising in connection with the Registration Statement on Form N-1A of American
General Series Portfolio Company 3 and any and all amendments (including
post-effective amendments) thereto, with full power and authority to execute
said Registration Statement and any and all amendments for and on behalf of the
undersigned, in my name and in the capacity indicated below, and to file the
same, together with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and any state securities
authorities. The undersigned hereby gives to said agents and attorneys-in-fact
full power and authority to act in the premises, including, but not limited to,
the power to appoint a substitute or substitutes to act hereunder with the same
power and authority as said agents and attorneys-in-fact would have if
personally acting. The undersigned hereby ratifies and confirms all that said
agents and attorneys-in-fact, or any substitute or substitutes, may do by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents this 27th
day of July, 1999.
/S/ ALICE T. KANE
- ------------------------------
Alice T. Kane
