SEC. File Nos. 2-86838
811-3857
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
Registration Statement
Under
the Securities Act of 1933
Post-Effective Amendment No. 23
and
Registration Statement
Under
The Investment Company Act of 1940
Amendment No. 23
AMERICAN VARIABLE INSURANCE SERIES
(Exact Name of Registrant as specified in charter)
333 South Hope Street
Los Angeles, CA 90071
(Address of principal executive offices)
Registrant's telephone number, including area code:
(213) 486-9200
Chad L. Norton
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071
(name and address of agent for service)
Copies to:
Robert E. Carlson, Esq.
Paul, Hastings, Janofsky & Walker LLP
555 S. Flower Street
Los Angeles, California 90071
(Counsel for the Registrant)
The Registrant has filed a declaration pursuant to rule 24f-2
registering an indefinite number of shares under the Securities Act of 1933.
On , 1997, it filed its 24f-2 notice for fiscal
1996.
Approximate date of proposed public offering:
It is proposed that this filing become effective on April 1, 1997, pursuant to
paragraph (a) of rule 485.
AMERICAN VARIABLE INSURANCE SERIES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number of Captions in Prospectus (Part "A") (Class 1 and Class 2)
Part "A" of Form N-1A (Class 1 and Class 2)
<S> <C> <C>
2. Synopsis N/A
3. Financial Highlights Financial Highlights
4. General Description of Registrant Investment Objectives and Policies of the Funds
5. Management of the Fund Financial Highlights; Fund Organization and Management
6. Capital Stock and Other Securities Investment Objectives and Policies of the Funds; Fund
Organization and Management; Dividends, Distributions and Taxes
7. Purchase of Securities Being Offered Purchases and Redemptions of Shares
8. Redemption or Repurchase Purchases and Redemptions of Shares
9. Legal Proceedings N/A
</TABLE>
<TABLE>
<CAPTION>
Item Number of Captions in Statement of
Part "B" of Form N-1A Additional Information (Part "B")
<S> <C> <C>
10. Cover Page Cover
11. Table of Contents Table of Contents
12. General Information and History None
13. Investment Objectives and Policies Investment Objectives and Policies of the Funds (Part "A")
14. Management of the Registrant Series Trustees and Officers
15. Control Persons and Principal Holders Series Trustees and Officers
of Securities
16. Investment Advisory and Other Services Investment Advisory and Service Agreement
17. Brokerage Allocation and Other Practices Execution of Portfolio Transactions
18. Capital Stock and Other Securities None
19. Purchase, Redemption and Pricing of Purchases and Redemptions of Shares (Part "A");
Securities Being Offered
20. Tax Status Dividends, Distributions and Taxes
21. Underwriters N/A
22. Calculation of Performance Data Financial Highlights
23. Financial Statements Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Item in Part "C"
<S> <C>
24. Financial Statements and Exhibits
25. Persons Controlled by or under Common Control
26. Number of Holders of Securities
27. Indemnification
28. Business and Other Connections of Investment Adviser
29. Principal Underwriters
30. Location of Accounts and Records
31. Management Services
32. Undertakings
Signature Page
</TABLE>
<PAGE>
Prospectus
American
Variable
Insurance
Series(R)
Class 1 Shares
April 1, 1997
<PAGE>
AMERICAN VARIABLE INSURANCE SERIES
CLASS 1 SHARES
333 South Hope Street
Los Angeles, California 90071
(213) 486-9200
American Variable Insurance Series (the "Series") is a fully managed,
diversified, open-end investment company. The Series consists of nine funds,
each of which has its own investment objective(s) and policies.
Shares of the Series are offered only to insurance company separate accounts
to serve as the funding vehicle for certain variable annuity and life
insurance contracts ("Contract" or "Contracts").
THE CONTRACTS INVOLVE CERTAIN FEES AND EXPENSES NOT DESCRIBED IN THIS
PROSPECTUS AND ALSO MAY INVOLVE CERTAIN RESTRICTIONS OR LIMITATIONS ON THE
ALLOCATION OF PURCHASE PAYMENTS OR CONTRACT VALUES TO ONE OR MORE FUNDS OF THE
SERIES. IN PARTICULAR, CERTAIN FUNDS MAY NOT BE AVAILABLE IN CONNECTION WITH A
PARTICULAR CONTRACT. SEE THE APPLICABLE CONTRACT PROSPECTUS FOR INFORMATION
REGARDING FUND FEES AND EXPENSES OF THE CONTRACT AND ANY APPLICABLE
RESTRICTIONS OR LIMITATIONS. THE SERIES OFFERS TWO CLASSES OF SHARES TO
INVESTORS: CLASS 1 SHARES AND CLASS 2 SHARES. THIS PROSPECTUS OFFERS ONLY
CLASS 1 SHARES AND IS FOR USE WITH CONTRACTS THAT MAKE CLASS 1 SHARES AVAILABLE.
The GLOBAL GROWTH FUND seeks long-term growth of capital by investing
primarily in common stocks or securities with common stock characteristics of
issuers domiciled around the world. THE FUND IS NOT AVAILABLE IN ALL STATES AS
OF THE DATE OF THIS PROSPECTUS.
The GROWTH FUND seeks growth of capital by investing primarily in common
stocks or securities with common stock characteristics, such as convertible
preferred stocks, which demonstrate the potential for appreciation.
The INTERNATIONAL FUND seeks long-term growth of capital by investing
primarily in common stocks or securities with common stock characteristics of
issuers domiciled outside the United States.
The GROWTH-INCOME FUND seeks growth of capital and income by investing
primarily in common stocks or other securities which demonstrate the potential
for appreciation and/or dividends.
The ASSET ALLOCATION FUND seeks high total return (including income and
capital gains) consistent with preservation of capital over the long term
through a diversified portfolio that can include common stocks and other
equity-type securities, bonds and other intermediate and long-term fixed-
income securities and money market instruments in any combination.
The BOND FUND seeks to provide as high a level of current income as is
consistent with the preservation of capital by investing primarily in fixed-
income securities.
The HIGH-YIELD BOND FUND seeks high current income and secondarily seeks
capital appreciation by investing primarily in intermediate- and long-term
corporate obligations, with emphasis on higher yielding, higher risk, lower
rated or unrated securities. IN ADDITION TO OTHER RISKS, HIGH-YIELD, HIGH-RISK
BONDS (ALSO KNOWN AS "JUNK BONDS") ARE SUBJECT TO GREATER FLUCTUATIONS IN
VALUE AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER
THAN ARE INVESTMENTS IN LOWER YIELDING, HIGHER RATED BONDS.
The U.S. GOVERNMENT/AAA-RATED SECURITIES FUND seeks a high level of current
income consistent with prudent investment risk and preservation of capital by
investing primarily in a combination of securities guaranteed by the U.S.
Government and other debt securities rated AAA or Aaa.
The CASH MANAGEMENT FUND seeks high current yield while preserving capital
by investing in a diversified selection of high-quality money market
instruments.
This prospectus presents information you should know before investing in the
Series. You should keep it on file for future reference.
More detailed information about the Series, including the Series' financial
statements, is contained in the statement of additional information dated
April 1, 1997, which has been filed with the Securities and Exchange
Commission and is available to you without charge, by writing to the Secretary
of the Series at the above address or telephoning 800/421-0180.
YOU MAY LOSE MONEY BY INVESTING IN THE FUNDS. GENERALLY, THE LIKELIHOOD OF
LOSS IS GREATER IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR
INVESTMENT IN THE SERIES IS NOT A DEPOSIT OR OBLIGATION OF, OR
INSURED, OR GUARANTEED BY, ANY ENTITY OR PERSON INCLUDING THE U.S.
GOVERNMENT AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF THE
APPLICABLE CONTRACT. THIS PROSPECTUS AND THE APPLICABLE CONTRACT PROSPECTUS
SHOULD BE READ CAREFULLY AND THEN RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is April 1, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following condensed financial information for 1991 through 1996 has
been derived from financial statements which have been audited by Price
Waterhouse LLP, independent accountants. The information for the years prior
to 1991 was audited by other independent accountants. This information
should be read in conjunction with the financial statements and accompanying
notes which are included in the statement of additional information.
<TABLE>
<CAPTION>
Period Net asset value, Net Net realized & Total income Dividends from
ended beginning investment unrealized gain (loss) from investment net investment Distributions from
11/30 of period income on investments operations income net realized gains
- ------ ---------------- ---------- ---------------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund
1987 $15.66 $ .14 $ (.78) $ (.64) $ (.11) $ (.34)
1988 14.57 .33 2.85 3.18 (.28) (.61)
1989 16.86 .49 6.01 6.50 (.45) --
1990 22.91 .54 (2.27) (1.73) (.56) (.64)
1991 19.98 .41 4.48 4.89 (.47) (.22)
1992 24.18 .29 4.25 4.54 (.31)/2/ --
1993 28.41 .25 4.13 4.38 (.24) (.21)
1994 32.34 .24 .69 .93 (.24) (1.09)
1995 31.94 .33 10.63 10.96 (.29) (.80)
1996
- --------------------------------------------------------------------------------------------------------------
International Fund/3/
1990 $10.00 $ .11 $ (.62) $ (.51) $ (.04) --
1991 9.45 .22 .59 .81 (.24) --
1992 10.02 .19 (.09) .10 (.21) $ (.02)
1993 9.89 .17 2.50 2.67 (.16) --
1994 12.40 .25 1.04 1.29 (.20) (.22)
1995 13.27 .34 1.02 1.36 (.33) (.41)
1996
- --------------------------------------------------------------------------------------------------------------
Growth-Income Fund
1987 $17.46 $ .47 $(1.87) $(1.40) $ (.46) $ (.08)
1988 15.52 .72 2.66 3.38 (.68) (.18)
1989 18.04 .78 3.93 4.71 (.74) (.58)
1990 21.43 .82 (1.91) (1.09) (.86) (.25)
1991 19.23 .75 2.63 3.38 (.79) (.10)
1992 21.72 .65 2.74 3.39 (.67) (.27)
1993 24.17 .63 2.12 2.75 (.63) (.28)
1994 26.01 .68 .14 .82 (.65) (.88)
1995 25.30 .73 7.20 7.93 (.73) (1.03)
1996
- --------------------------------------------------------------------------------------------------------------
Asset Allocation Fund/5/
1989 $10.00 $ .08 $ .10 $ .18 $((.01) --
1990 10.17 .50 (.75) (.25) (.42) --
1991 9.50 .53 1.11 1.64 (.55) --
1992 10.59 .48 .94 1.42 (.49) $ (.05)
1993 11.47 .51 .67 1.18 (.49) (.15)
1994 12.01 .51 (.57) (.06) (.52) (.18)
1995 11.25 .50 2.69 3.19 (.50) (.17)
1996
- --------------------------------------------------------------------------------------------------------------
Bond Fund
1996 [TO BE PROVIDED BY AMENDMENT]
- --------------------------------------------------------------------------------------------------------------
High-Yield Bond Fund
1987 $13.49 $1.35 $ (.94) $ .41 $(1.36) $ (.32)
1988 12.22 1.26 .68 1.94 (1.33) (.17)
1989 12.66 1.22 .10 1.32 (1.16) --
1990 12.82 1.33 (1.02) .31 (1.30) --
1991 11.83 1.17 1.78 2.95 (1.25) --
1992 13.53 1.10 .62 1.72 (1.08) --
1993 14.17 1.09 1.20 2.29 (1.10) (.19)
1994 15.17 1.27 (2.07) (.80) (1.23) (.25)
1995 12.89 1.32 1.10 2.42 (1.32) --
1996
- --------------------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Fund/6/
1987 $11.62 $ .85 $(1.21) $ (.36) $ (.79) --
1988 10.47 .93 .02 .95 (.97) --
1989 10.45 .78 .30 1.08 (.79) --
1990 10.74 .83 (.11) .72 (.80) --
1991 10.66 .77 .58 1.35 (.79) --
1992 11.22 .75 .32 1.07 (.76) --
1993 11.53 .74 .68 1.42 (.75) $ (.05)
1994 12.15 .76 (1.30) (.54) (.74) (.07)
1995 10.80 .82 .71 1.53 (.81) --
1996
- --------------------------------------------------------------------------------------------------------------
Cash Management Fund
1987 $10.65 $ .54 $ .08 $ .62 $ (.54) --
1988 10.73 .60 .11 .71 (.56) --
1989 10.88 .81 .12 .93 (.81) --
1990 11.00 .71 .13 .84 (.70) --
1991 11.14 .62 .01 .63 (.66) --
1992 11.11 .35 .01 .36 (.43) --
1993 11.04 .29 -- .29 (.31) --
1994 11.02 .37 .02 .39 (.32) --
1995 11.09 .63 (.02) .61 (.59) --
1996
<CAPTION>
Ratio of Ratio of net
Period Net assets, expenses income to Portfolio
ended Total Net asset value, end of period to average average turnover
11/30 distributions end of period Total return (in millions) net assets net assets rate
- ------ ------------- ---------------- ------------ ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Fund
1987 $ (.45) $14.57 (4.34)% $ 99 .63% .97% 14.0%
1988 (.89) 16.86 22.34 48 .72 1.72 7.1/1/
1989 (.45) 22.91 38.87 173 .60 2.97 29.2
1990 (1.20) 19.98 (7.87) 304 .59 3.00 16.8
1991 (.69) 24.18 24.90 700 .56 1.94 9.8
1992 (.31) 28.41 18.90 1,212 .53 1.15 11.2
1993 (.45) 32.34 15.59 1,737 .50 .86 20.4
1994 (1.33) 31.94 2.92 2,027 .49 .78 29.6
1995 (1.09) 41.81 35.35 3,154 .47 .92 35.47
1996
- ----------------------------------------------------------------------------------------------------
International Fund/3/
1990 $ (.04) $ 9.45 (5.08)% $ 66 1.03%/4/ 3.18%/4/ 4.5%
1991 (.24) 10.02 8.67 197 1.04 2.62 8.2
1992 (.23) 9.89 .90 360 1.00 2.11 16.7
1993 (.16) 12.40 27.20 840 .96 1.75 17.7
1994 (.42) 13.27 10.48 1,405 .80 2.03 19.7
1995 (.74) 13.89 10.78 1,703 .75 2.64 24.66
1996
- ----------------------------------------------------------------------------------------------------
Growth-Income Fund
1987 $ (.54) $15.52 (8.59)% $ 217 .59% 2.85% 6.8%
1988 (.86) 18.04 22.13 102 .67 3.59 14.3/1/
1989 (1.32) 21.43 27.32 305 .58 4.94 16.7
1990 (1.11) 19.23 (5.27) 535 .56 4.77 9.7
1991 (.89) 21.72 17.83 1,022 .56 3.80 11.1
1992 (.94) 24.17 15.90 1,704 .52 3.01 13.6
1993 (.91) 26.01 11.63 2,436 .49 2.66 24.9
1994 (1.53) 25.30 3.21 2,740 .47 2.72 29.3
1995 (1.76) 31.47 33.14 3,953 .44 2.70 26.91
1996
- ----------------------------------------------------------------------------------------------------
Asset Allocation Fund/5/
1989 $ (.01) $10.17 1.70 % $ 33 .59%/2/ 5.78%/2/ --
1990 (.42) 9.50 (2.34) 106 .64 6.70 14.4%
1991 (.55) 10.59 17.63 194 .59 5.56 15.1
1992 (.54) 11.47 13.69 359 .57 4.73 19.7
1993 (.64) 12.01 10.59 578 .55 4.66 19.0
1994 (.70) 11.25 (.54) 637 .53 4.55 36.1
1995 (.67) 13.77 29.45 870 .52 4.11 39.89
1996
- ----------------------------------------------------------------------------------------------------
Bond Fund
1996 [TO BE PROVIDED BY AMENDMENT]
- ----------------------------------------------------------------------------------------------------
High-Yield Bond Fund
1987 $(1.68) $12.22 2.96 % $ 70 .63% 10.89% 61.9%
1988 (1.50) 12.66 16.95 26 .77 10.62 23.6/1/
1989 (1.16) 12.82 10.85 50 .72 12.30 28.2
1990 (1.30) 11.83 2.49 58 .68 11.17 22.7
1991 (1.25) 13.53 26.22 107 .63 9.81 18.1
1992 (1.08) 14.17 13.14 197 .59 8.88 47.4
1993 (1.29) 15.17 17.09 379 .56 8.18 34.1
1994 (1.48) 12.89 (5.71) 390 .54 9.37 38.5
1995 (1.32) 13.99 19.81 534 .54 10.12 31.73
1996
- ----------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Fund/6/
1987 $ (.79) $10.47 (3.17)% $ 47 .67% 8.24% 105.6%
1988 (.97) 10.45 9.50 28 .77 8.32 47.5/1/
1989 (.79) 10.74 10.82 78 .66 8.61 14.5
1990 (.80) 10.66 7.11 126 .61 8.58 24.0
1991 (.79) 11.22 13.24 240 .58 7.91 27.1
1992 (.76) 11.53 9.83 360 .57 7.08 40.0
1993 (.80) 12.15 12.65 505 .55 6.42 21.7
1994 (.81) 10.80 (4.58) 463 .54 6.69 45.2
1995 (.81) 11.52 14.73 542 .54 7.37 30.11
1996
- ----------------------------------------------------------------------------------------------------
Cash Management Fund
1987 $ (.54) $10.73 6.01 % $ 57 .68% 5.90% --
1988 (.56) 10.88 6.88 31 .76 6.75 --
1989 (.81) 11.00 8.90 58 .68 8.26 --
1990 (.70) 11.14 7.91 143 .60 7.48 --
1991 (.66) 11.11 5.84 163 .58 5.65 --
1992 (.43) 11.04 3.31 197 .53 3.24 --
1993 (.31) 11.02 2.67 206 .51 2.57 --
1994 (.32) 11.09 3.59 221 .49 3.60 --
1995 (.59) 11.11 5.65 193 .49 5.37 --
1996
</TABLE>
- ------
1. Percentages are exclusive of the redemption in kind which occurred March
29, 1988.
2. Amount includes net realized short-term gains treated as net investment
income for federal income tax purposes.
3. Commenced operations May 1, 1990.
4. Annualized
5. Commenced operations August 1, 1989.
No information is presented for the Global Growth Fund since it had no
investment operations as of April 1, 1997.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT THE FUNDS The Series consists of nine funds, each
OBJECTIVES AND representing a separate fully managed diversified
POLICIES OF THE portfolio of securities. The nine funds are the
FUNDS Global Growth Fund, the Growth Fund, the Interna-
tional Fund, the Growth-Income Fund, the Asset
The Series consists Allocation Fund, the Bond Fund, the High-Yield
of nine funds, Bond Fund, the U.S. Government/AAA-Rated Securi-
each with its own ties Fund and the Cash Management Fund. The Se-
investment ries offers two classes of fund shares: Class 1
objective(s) and shares and Class 2 shares. This prospectus offers
policies. Class 1 shares only. The Board of Trustees may
establish additional funds and classes in the fu-
ture. The investment objective(s) and policies of
each fund are discussed below. Investment policy
limits as stated below are measured at the time
of purchase. MORE INFORMATION ON THE FUNDS IS
CONTAINED IN THE SERIES' STATEMENT OF ADDITIONAL
INFORMATION.
Shares of the Series are currently offered only
to separate accounts of various insurance compa-
nies to serve as the underlying investment for
both variable annuity and variable life insurance
contracts. All such shares may be purchased or
redeemed by the separate accounts without any
sales or redemption charges at net asset value.
Due to differences in tax treatment or other
considerations, the interests of various Contract
owners participating in a fund might at some
time be in conflict. The Board of Trustees will
monitor for any material conflicts and determine
what action, if any, should be taken.
INVESTMENT RESTRICTIONS Each fund's fundamental
investment restrictions (as described in the
statement of additional information) and objec-
tive(s) may not be changed without shareholder
approval. All other investment practices may be
changed by the Series' Board of Trustees.
The Global Growth GLOBAL GROWTH FUND The investment objective of
Fund seeks to the Global Growth Fund is to achieve long-term
provide you with growth of capital by investing in securities of
long-term growth of issuers domiciled around the world.
capital generally
by investing in The fund will invest primarily in common stocks
equity securities under normal market conditions. These securities
of issuers may be denominated in various currencies.The fund
domiciled around may also invest in securities through depositary
the world. receipts which may be denominated in various cur-
rencies. For example, the fund may purchase Amer-
ican Depositary Receipts which are U.S. dollar
denominated securities designed for use in the
U.S. securities markets which represent and may
be converted to the underlying security.
When prevailing market, economic, political or
currency conditions warrant, the fund may invest
in other securities such as preferred stock, debt
securities and securities convertible into common
stock. The fund may also invest in straight debt
securities (generally rated in the top three
quality categories by Standard & Poor's Corpora-
tion or Moody's Investors Service, Inc. or unrated
but determined to be of equivalent quality by the
fund's investment adviser, Capital Research and
Management Company); however, up to 10% of the
fund's assets may be invested in lower rated
straight debt securities (including securities
commonly referred to as "junk bonds" or "high-
yield, high-risk bonds") or in unrated securities
determined to be of equivalent quality. High-
yield, high-risk bonds carry a higher degree of
investment risk than higher rated bonds and are
considered speculative. See the Appendix for a
description of the various bond ratings. See
"High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. In addi-
tion, the fund may at times hold a portion of its
assets in cash and money market instruments de-
nominated in U.S. dollars or other currencies.
See "Securities and Investment Techniques--Money
Market Instruments."
3
<PAGE>
- --------------------------------------------------------------------------------
Investments may be made from time to time in se-
curities of companies domiciled in, or govern-
ments of, developing countries. See "Securities
and Investment Techniques--Investing in Various
Countries."
The fund has the ability to purchase and sell
currencies to facilitate securities transactions
and to enter into forward currency contracts to
hedge against changes in currency exchange rates.
See "Securities and Investment Techniques--Cur-
rency Transactions."
Under normal market conditions, the fund will in-
vest in issuers domiciled in at least three coun-
tries, with no more than 40% of its assets in any
one country. (In determining the domicile of an
issuer, Capital Research and Management Company
takes into account such factors as where the com-
pany is legally organized, where it maintains
principal corporate offices and where it conducts
its principal operations.)
The Growth Fund GROWTH FUND The investment objective of the
seeks to provide Growth Fund is growth of capital. Whatever cur-
you with growth rent income is generated by the fund is likely to
of capital. be incidental to the objective of capital growth.
Ordinarily, the fund seeks to achieve this objec-
tive by investing primarily in common stocks or
securities with common stock characteristics.
When the outlook for common stocks is not consid-
ered promising, for temporary defensive purposes,
a substantial portion of the assets may be in-
vested in securities of the U.S. Government, its
agencies and instrumentalities, cash, and money
market instruments. See "Securities and Invest-
ment Techniques" below.
The fund's assets may be invested in securities
of non-U.S. issuers, which are generally denomi-
nated in currencies other than the U.S. dollar,
although there is no requirement that the fund
maintain investments in non-U.S. issuers. See
"Securities and Investment Techniques--Investing
in Various Countries" below.
Up to 10% of the fund's assets may be invested in
straight debt securities rated BB or below by
Standard & Poor's Corporation and Ba or below by
Moody's Investors Services, Inc. or in unrated
securities that are determined to be of equiva-
lent quality, provided the fund's investment ad-
viser, Capital Research and Management Company,
determines that these securities have character-
istics similar to the equity securities eligible
for purchase by the fund. These securities are
commonly referred to as "junk bonds" or "high-
yield, high-risk bonds," carry a higher degree of
investment risk than higher rated bonds and are
considered speculative. See the Appendix for a
further description of the various bond ratings.
See "High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. As of
the last day of the fund's most recent fiscal
year, the fund did not hold any bonds.
The International INTERNATIONAL FUND The investment objective of
Fund aims to the International Fund is to achieve long-term
provide you with growth of capital by investing primarily in secu-
long-term growth of rities of issuers domiciled outside the United
capital by investing States. The fund's investment approach is based
in securities of on the belief that economic and political devel-
issuers domiciled opments have helped to create new opportunities
outside the U.S. outside the U.S.
The fund may also invest in securities through
depositary receipts which may be denominated in
various currencies. For example, the fund may
purchase American Depositary Receipts which are
U.S. dollar denominated securities designed for
use in the U.S. securities markets which repre-
sent and may be converted to the underlying secu-
rity.
When prevailing market, economic, political or
currency conditions warrant, the fund may invest
in securities convertible into common stocks,
straight
4
<PAGE>
- --------------------------------------------------------------------------------
debt securities (generally rated in the top three
quality categories by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or
unrated but determined to be of equivalent quality by
Capital Research and Management Company), government
securities, or nonconvertible preferred stocks. Up
to 5% of the fund's assets may also be invested
in lower rated straight debt securities
(including securities commonly referred to as
"junk bonds" or "high-yield, high-risk bonds") or
in unrated securities that are determined to be
of equivalent quality. High-yield, high-risk
bonds carry a higher degree of investment risk
than higher rated bonds and are considered
speculative. See the Appendix for a description
of the various bond ratings. These securities may
also be issued by non-U.S. entities.
Under normal circumstances, the fund will invest
at least 65% of its assets in equity securities
(including depositary receipts) of issuers domi-
ciled outside the U.S. including those domiciled
in developing countries. The fund may at times
hold a portion of its assets in various curren-
cies or in cash equivalents which may be denomi-
nated in U.S. dollars or other currencies (in-
cluding U.S. Government securities, certificates
of deposit, time deposits, commercial paper,
bankers' acceptances and other high-quality
short-term debt securities). See "Securities and
Investment Techniques--Investing in Various Coun-
tries." Additionally, for temporary defensive
purposes, the fund may at times maintain all or
any part of its assets in cash and cash equiva-
lents.
The Growth-Income GROWTH-INCOME FUND The investment objective of
Fund seeks to the Growth-Income Fund is growth of capital and
provide you with income. In the selection of securities for in-
capital growth and vestment, the possibilities of appreciation and
income. potential dividends are given more weight than
current yield. Ordinarily, the fund will invest
primarily in common stocks. But the fund may in-
vest in other types of securities, including
other equity-type securities (such as convertible
bonds), bonds (and other types of fixed-income
securities) and money market instruments, to the
extent consistent with its investment objective.
Up to 5% of the fund's assets may be invested in
straight debt securities rated BB or below by
Standard & Poor's Corporation and Ba or below by
Moody's Investors Services, Inc. or in unrated
securities that are determined to be of equiva-
lent quality by Capital Research and Management
Company. These securities are commonly referred
to as "junk bonds" or "high-yield, high-risk
bonds," carry a higher degree of investment risk
than higher rated bonds and are considered specu-
lative. See the Appendix for a description of the
various bond ratings.
Up to 10% of the fund's assets may be invested in
the equity securities of issuers domiciled
outside the U.S., provided those securities are
either held through depositary receipts which are
U.S. dollar denominated or are traded on the New
York Stock Exchange. Since the fund limits its
investments in non-U.S. securities as described
above, the fund has no current intention to
engage in forward currency transactions. See
"Securities and Investment Techniques--Investing
in Various Countries."
The Asset ASSET ALLOCATION FUND The investment objective of
Allocation Fund the Asset Allocation Fund is high total return
aims to provide you (including income and capital gains) consistent
with high total with preservation of capital over the long term.
return and The fund seeks to achieve its objective by in-
preservation of vesting in a diversified portfolio that can in-
capital over the clude common stocks and other equity-type securi-
long-term. ties (such as convertible bonds), bonds and other
intermediate- and long-term fixed income securi-
ties, and money market instruments (debt securi-
ties maturing in one year or less).
5
<PAGE>
- --------------------------------------------------------------------------------
Capital Research and Management Company will de-
termine the relative mix of equities, fixed-in-
come securities and money market instruments for
the fund's portfolio. The determination will be
based on its view of long-term economic and mar-
ket trends and the relative risks and opportuni-
ties for long-term total return of the different
classes of assets. Under normal conditions, Capi-
tal Research and Management Company expects (but
is not required) to maintain an investment mix
falling within the following ranges: 40% to 80%
in equities; 20% to 50% in fixed-income securi-
ties, and 0% to 40% in money market instruments.
Capital Research and Management Company does not
intend to make frequent shifts within these broad
ranges. Rather it intends in normal situations to
make any shifts in the fund's asset allocation
gradually over time based on its views of long-
term trends and conditions.
Up to 10% of the fund's assets may be invested in
the equity securities of issuers domiciled out-
side the U.S., provided those securities are ei-
ther held through depositary receipts which are
U.S. dollar denominated or are traded on the New
York Stock Exchange. Since the fund limits its
investments in non-U.S. securities as described
above, the fund has no current intention to en-
gage in forward currency transactions. See "Secu-
rities and Investment Techniques--Investing in
Various Countries."
The fund's fixed-income investments will consist
primarily of "investment grade" bonds; that is,
bonds that are rated BBB or better by Standard &
Poor's Corporation or Baa or better by Moody's
Investors Service, Inc., or that are unrated but
considered by Capital Research and Management
Company to be of equivalent credit quality. Up to
25% of the fund's fixed-income assets may be in-
vested in securities that are below investment
grade as defined above, including securities
rated as low as CC by S&P or Ca by Moody's. See
the Appendix for a further description of the
various bond ratings. See "High-Yield Bond Fund--
Risks of Investing in High-Yield, High-Risk Secu-
rities" below. The fund's investments in non-U.S.
fixed-income securities will be concentrated in
securities issued or guaranteed as to principal
and interest by foreign governments or their
agencies or instrumentalities or by multinational
agencies. During the previous fiscal year, the
approximate monthly average percentages of the
Asset Allocation Fund's fixed-income net assets
based on the higher of the Moody's or S&P rating
categories were: Aaa/AAA -- %; Aa/AA -- %;
A/A -- %; Baa/BBB -- %; Ba/BB -- %;
B/B -- %; and Caa/CCC -- %. Non-rated in-
vestments (including equity-type securities) and
cash or cash equivalents amounted to % and %,
respectively, of the fund's assets.
The Bond Fund seeks BOND FUND The investment objective of the Bond
to provide you with Fund is to provide as high a level of current in-
high current income come as is consistent with the preservation of
while preserving capital. The fund invests in a broad variety of
your capital. fixed-income securities, including marketable
corporate debt securities, loan participations,
U.S. Government securities, mortgage-related se-
curities, other asset-backed securities and cash
or money market instruments. Normally, at least
65% of the fund's assets will be invested in
bonds. (For this purpose, bonds are considered
any debt securities having initial maturities in
excess of one year.) In addition, the fund may
invest up to 20% in preferred stocks.
At least 65% of the value of the fund's assets,
measured at the time of purchase, must be in-
vested in securities that are rated Baa or better
by Moody's Investors Service, Inc. or BBB or bet-
ter by Standard & Poor's Corporation (all ratings
discussed below refer to those assigned by these
two rating agencies) or unrated but determined to
be of equivalent quality by Capital Research and
Management Company. Securities rated Baa or BBB
have speculative characteristics. See the Appen-
dix for a description of the various bond rat-
ings.
6
<PAGE>
- --------------------------------------------------------------------------------
At least 35% of the value of the fund's assets
must be invested in securities that are rated A
or better or, if not rated, determined to be of
equivalent quality.
Up to 35% of the assets of the fund may be in-
vested in debt securities rated Ba and BB or be-
low, or in unrated securities that are determined
to be of equivalent quality. These securities may
be rated as low as Ca by Moody's or CC by S&P.
Securities rated Ba and BB or below or unrated
securities that are determined to be of equiva-
lent quality (commonly known as "junk" or "high-
yield, high-risk" bonds) are subject to special
review before purchase. These bonds are consid-
ered speculative and typically are subject to
greater market fluctuations and risk of loss of
income and principal due to default by the issuer
than are investments in lower yielding, higher-
rated bonds. See "High-Yield Bond Fund--Risks of
Investing in High-Yield, High-Risk Securities"
below.
The fund may invest in fixed-income securities of
corporations or governmental entities outside the
U.S.; however, no more than 20% of the fund's as-
sets will be invested in non-U.S. dollar denomi-
nated securities including those of issuers domi-
ciled in developing countries. The fund may pur-
chase or sell various currencies on either a spot
or forward basis in connection with non-U.S. dol-
lar investments. See "Securities and Investment
Techniques--Currency Transactions" below.
The High-Yield Bond HIGH-YIELD BOND FUND The primary investment ob-
Fund seeks to jective of the High-Yield Bond Fund is high cur-
provide you with rent income and its secondary investment objec-
high current income tive is capital appreciation. Under normal market
and, secondarily, conditions the fund will be invested in fixed-in-
capital appreciation. come securities, with emphasis on higher yield-
ing, higher risk, lower rated or unrated corpo-
rate bonds.
High-yield, high-risk bonds (also known as "junk
bonds") generally include any bonds rated Ba or
below by Moody's Investors Service, Inc. and BB
or below by Standard & Poor's Corporation or
unrated but determined to be of equivalent qual-
ity by Capital Research and Management Company.
Bonds rated Ba or BB or below are considered
speculative. The High-Yield Bond Fund may invest
without limitation in bonds rated as low as Ca by
Moody's or CC by S&P (or in bonds that are
unrated but determined to be of equivalent quali-
ty). In addition, the fund may invest up to 10%
of its total assets in bonds rated C by Moody's
or D by S&P (or in bonds that are unrated but de-
termined to be of equivalent quality). See the
Appendix for a further description of the various
bond ratings. During the previous fiscal year,
the approximate monthly average percentages of
the High-Yield Bond Fund's net assets based on
the higher of the Moody's or S&P rating catego-
ries were: Aaa/AAA -- %; Baa/BBB -- %;
Ba/BB -- %; B/B -- %; and Caa/CCC -- %.
Non-rated investments (including equity-type se-
curities) and cash or cash equivalents amounted
to % and %, respectively, of the fund's as-
sets.
Up to 25% of the fund's assets may be invested in
securities of non-U.S. issuers, which are gener-
ally denominated in currencies other than the
U.S. dollar.
Under normal conditions the fund will invest pri-
marily in higher yielding obligations which may
include loan participations in addition to corpo-
rate bonds. The fund also may invest in securi-
ties of the U.S. Government, its agencies and in-
strumentalities, cash, and money market instru-
ments. See "Securities and Investment Techniques"
below.
7
<PAGE>
- --------------------------------------------------------------------------------
RISKS OF INVESTING IN HIGH-YIELD, HIGH-RISK
SECURITIES "High-yield, high risk" bonds, also
known as "junk bonds," have speculative charac-
teristics and involve greater risk of default or
price changes due to changes in the issuer's
creditworthiness, or they may already be in de-
fault. The market prices of these securities may
fluctuate more than higher-quality securities and
may decline significantly. It may be more diffi-
cult to dispose of, or to determine the value of,
high-yield, high-risk bonds.
High-yield, high-risk bonds may be very sensitive
to adverse economic changes and may be less sen-
sitive to interest rate changes. In addition, pe-
riods of economic uncertainty and changes may in-
crease volatility of market prices and yields of
high-yield, high-risk bonds and in turn, the
fund's net asset value. High-yield, high-risk
bonds may contain redemption or call provisions
which, if exercised during a period of declining
interest rates, may cause the fund to have to re-
place the security with a lower yielding securi-
ty, resulting in a decreased return for invest-
ors. Furthermore, there may be little trading in
the secondary market for particular bonds, which
may affect adversely the fund's ability to value
accurately or dispose of such bonds.
Capital Research and Management Company attempts
to reduce the risks described above through di-
versification of the portfolio and by credit
analysis of each issuer, as well as by monitoring
broad economic trends and corporate and legisla-
tive developments.
There can be, of course, no assurance that the
fund's investment objective will be realized or
that the net return on an investment in the fund
will equal or exceed that which could have been
obtained through other investment or savings ve-
hicles. Contract owners should carefully review
the investment objectives and policies of the
fund and consider their ability to assume the
risks involved before making any investment in
the fund.
The U.S. U.S. GOVERNMENT/AAA-RATED SECURITIES FUND The in-
Government/AAA- vestment objective of the U.S. Government/AAA-
Rated Securities Rated Securities Fund is a high level of current
Fund aims to income consistent with prudent investment risk
provide you with and preservation of capital. It seeks to achieve
high current income its objective by investing primarily in a combi-
while preserving nation of (i) securities guaranteed by the U.S.
your capital. Government (i.e., backed by the full faith and
credit of the United States) and (ii) other debt
securities (including corporate bonds) rated AAA
by Standard & Poor's Corporation or Aaa by
Moody's Investors Service, Inc. (or unrated but
determined to be of equivalent quality by Capital
Research and Management Company). The fund may
purchase obligations of non-U.S. corporations or
governmental entities, provided they are U.S.
dollar denominated and highly liquid. Except when
the fund is in a temporary defensive investment
position, at least 65% of its total assets will
be invested in these securities, including the
securities held subject to repurchase agreements.
The fund anticipates that it will invest in Gov-
ernment National Mortgage Association ("GNMA")
certificates, which are mortgage-backed securi-
ties representing part ownership of a pool of
mortgage loans on which timely payment of inter-
est and principal is guaranteed by the U.S. Gov-
ernment. The fund also may invest in securities
issued by U.S. Government agencies or instrumen-
talities that are not backed by the full faith
and credit of the U.S. Government; in short-term
debt securities of private issuers (including
certificates of deposit, bankers' acceptances,
and commercial paper rated A-1 by S&P or Prime-1
by Moody's); and in securities issued by finan-
cial institutions such as commercial banks, sav-
ings and loan associations, mortgage bankers and
securities broker-dealers which represent a di-
rect or indirect interest in a pool of mortgages.
See "Securities and Investment Techniques" below.
The fund may not purchase any security other than
a U.S. Government security or a short-term debt
security described above, that is not rated AAA
8
<PAGE>
- --------------------------------------------------------------------------------
by S&P or Aaa by Moody's (or that is unrated but
determined to be of equivalent quality by Capital
Research and Management Company). However, if the
rating of a security currently being held by the
fund is reduced below AAA or Aaa the fund is not
required to dispose of the security.
The Cash Management CASH MANAGEMENT FUND The investment objective of
Fund seeks to the Cash Management Fund is high current yield
provide you with while preserving capital. It seeks to achieve
high current yield this objective by investing in high quality money
while preserving market instruments that mature, or may be re-
capital. deemed or resold, in 13 months or less (25 months
or less in the case of U.S. Government securi-
ties). The fund invests only in such instruments
that are determined, in accordance with proce-
dures established by the Series' Board of Trust-
ees, to present minimal credit risks. The fund's
investments may include, but are not limited to,
commercial paper rated in the highest rating cat-
egory by Moody's Investors Service, Inc. and
Standard & Poor's Corporation, instruments is-
sued, guaranteed or insured by the U.S. Govern-
ment, its agencies or instrumentalities as to the
payment of principal and interest, and other se-
curities rated in the highest two categories by
either Moody's or S&P, provided the issuer has
commercial paper rated in the highest rating cat-
egory by Moody's or S&P. The fund also may enter
into repurchase agreements. See "Securities and
Investment Techniques" below.
Although there is no guarantee that the fund's
investment objective will be achieved, invest-
ments in the Cash Management Fund should present
the least market risk of any of the funds because
it invests only in high-quality short-term debt
obligations. However, an investment in this fund
is subject to the risks of changes in market in-
terest rates and of the economy as a whole. Note
that the return on an investment in the Cash Man-
agement Fund should not be the same as the return
on an investment in a money market fund which is
available directly to the public, even where
gross yields are equivalent, due to the fees im-
posed at the Contract level. The Cash Management
Fund yield for the seven days ended , 1997
was % on an annualized basis.
9
<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EQUITY SECURITIES Equity securities represent an
INVESTMENT ownership position in a company. These securities
TECHNIQUES include common stocks and securities with equity
conversion or purchase rights. The prices of
The nine funds of equity securities fluctuate based on changes in
the Series invest the financial condition of their issuers and on
in a wide variety market and economic conditions. The funds'
of securities which results will be related to the overall market for
are subject to these securities.
varying degrees of
risk. DEBT SECURITIES Bonds and other debt securities
are used by issuers to borrow money. Issuers pay
investors interest and must repay the amount bor-
rowed at maturity. Some debt securities, such as
zero coupon bonds, do not pay current interest
but are purchased at a discount from their face
values. The prices of debt securities fluctuate
depending on such factors as interest rates,
credit quality and maturity. In general their
prices decline when interest rates rise and vice
versa.
U.S. GOVERNMENT SECURITIES Securities guaranteed
by the U.S. Government include: (1) direct obli-
gations of the U.S. Treasury (such as Treasury
bills, notes and bonds) and (2) federal agency
obligations guaranteed as to principal and inter-
est by the U.S. Treasury.
Certain securities issued by U.S. Government in-
strumentalities and certain federal agencies are
neither direct obligations of, nor guaranteed by,
the Treasury. However, they generally involve
federal sponsorship in one way or another: some
are backed by specific types of collateral; some
are supported by the issuer's right to borrow
from the Treasury; some are supported by the dis-
cretionary authority of the Treasury to purchase
certain obligations of the issuer; and others are
supported only by the credit of the issuing gov-
ernment agency or instrumentality.
MORTGAGE-RELATED SECURITIES The funds may invest
in various types of mortgage-related securities
and the U.S. Government/AAA-Rated Securities
Fund expects to invest substantially in these se-
curities. Mortgage-related securities may be is-
sued by governmental agencies (such as GNMA or
the Federal Home Loan Mortgage Corporation
("FHLMC")), by the Federal National Mortgage As-
sociation ("FNMA"), which is a federally chart-
ered and privately-owned corporation, or by pri-
vate financial institutions such as commercial
banks, savings and loan associations, mortgage
bankers and securities broker-dealers (or sepa-
rate trusts or affiliates of such institutions
established to issue these securities).
Most mortgage-related securities, including the
securities issued by GNMA, FHLMC and FNMA, are
so-called "pass-through" securities representing
interests in a pool of underlying mortgage loans,
on which the regular interest and principal pay-
ments (including any prepayments) are passed
through to the holder of the securities. Although
the mortgage loans in a pool will have stated ma-
turities of up to 30 years, due to both normal
principal repayment and prepayments, the average
effective maturities of these securities will
vary and will tend to fall when interest rates
fall and to rise when interest rates rise. Their
value also may change due to changes in the mar-
ket's perception of the creditworthiness of the
entity that issues or guarantees them.
MONEY MARKET INSTRUMENTS These are shorter-term
debt securitiesgenerally maturing in one year or
less which include (1) commercial paper (short-
term notes (up to 9 months) issued by
corporations or governmental bodies), (2)
commercial bank obligations (certificates of
deposit (interest-bearing time deposits),
bankers' acceptances (time drafts on a commercial
bank where the bank accepts an irrevocable
obligation to pay at maturity), and documented
discount notes (corporate promissory discount
notes accompanied by a commercial bank guarantee
to pay at maturity)),
10
<PAGE>
- --------------------------------------------------------------------------------
(3) corporate bonds and notes (corporate
obligations that mature, or that may be redeemed,
in one year or less), and (4) savings association
obligations (certificates of deposit issued by
savings banks or savings and loan associations).
Although certain floating or variable rate
obligations (securities which have a coupon rate
that changes at least annually and generally more
frequently) have maturities in excess of one
year, they are also considered to be short-term
debt securities.
REPURCHASE AGREEMENTS The funds may enter into
repurchase agreements, under which they buy a se-
curity and obtain a simultaneous commitment from
the seller to repurchase a security at a speci-
fied time and price. The seller must maintain
with the Series' custodian collateral equal to at
least 100% of the repurchase price including ac-
crued interest as monitored daily by Capital Re-
search and Management Company. If the seller un-
der the repurchase agreement defaults, a fund may
incur a loss if the value of the collateral se-
curing the repurchase agreement has declined and
may incur disposition costs in connection with
liquidating the collateral. If bankruptcy pro-
ceedings are commenced with respect to the sell-
er, liquidation of the collateral by a fund may
be delayed or limited.
FORWARD COMMITMENTS The funds may enter into com-
mitments to purchase or sell securities at a fu-
ture date. When a fund agrees to purchase such
securities it assumes the risk of any decline in
value of the securities beginning on the date of
the agreement. When a fund agrees to sell such
securities, it does not participate in further
gains or losses with respect to the securities
beginning on the date of the agreement. If the
other party to such a transaction fails to de-
liver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or
could experience a loss.
The Asset Allocation Fund, the Bond Fund, the
High-Yield Bond Fund, and the U.S.
Government/AAA-Rated Securities Fund also may en-
ter into "roll" transactions, which consist of
the sale of GNMA certificates or other securities
together with a commitment to purchase similar,
but not identical, securities at a later date.
U.S. PRIVATE PLACEMENTS The Global Growth Fund,
the Growth Fund, the International Fund, the
Growth-Income Fund, the Asset Allocation Fund,
the Bond Fund and the High-Yield Bond Fund may
invest in private placements. Private placements
may be either purchased from another
institutional investor that originally acquired
the securities in a private placement or directly
from the issuers of the securities. Generally,
securities acquired in such private placements
are subject to contractual restrictions on resale
and may not be resold except pursuant to a
registration statement under the Securities Act
of 1933 or in reliance upon an exemption from the
registration requirements under the Act.
Accordingly, all such private placements will be
considered illiquid unless they have been
specifically determined to be liquid taking into
account factors such as the frequency and volume
of trading and the commitment of dealers to make
markets under procedures adopted by the Series'
Board of Trustees. Additionally, the liquidity of
any particular security will depend on such
factors as the availability of "qualified"
institutional investors and the extent of
investor interest in the security, which can
change from time to time.
INVESTING IN VARIOUS COUNTRIES The Global Growth
Fund, the Growth Fund, the International Fund,
the Asset Allocation Fund, the Bond Fund and the
High-Yield Bond Fund may invest in securities of
issuers domiciled outside the U.S. which may be
denominated in currencies other than the U.S.
dollar. Investing outside the U.S. involves spe-
cial risks, particularly in certain developing
countries, caused by, among other things; fluctu-
ating cur-
11
<PAGE>
- --------------------------------------------------------------------------------
rency values; different accounting, auditing, and
financial reporting regulations and practices in
some countries; changing local and regional eco-
nomic, political, and social conditions; greater
market volatility; differing securities market
structures; and various administrative difficul-
ties such as delays in clearing and settling
portfolio transactions or in receiving payment of
dividends. However, in the opinion of Capital Re-
search and Management Company, investing outside
the U.S. also can reduce certain portfolio risks
due to greater diversification opportunities.
Additional costs could be incurred in connection
with the funds' investment activities outside the
U.S. Brokerage commissions are generally higher
outside the U.S., and the funds will bear certain
expenses in connection with their currency
transactions. Furthermore, increased custodian
costs may be associated with the maintenance of
assets in certain jurisdictions.
The Growth-Income Fund and the Asset Allocation
Fund may invest in the equity securities of is-
suers domiciled outside the U.S., provided those
securities are either held through depositary re-
ceipts which are U.S. dollar denominated or are
traded on the New York Stock Exchange. In addi-
tion, the U.S. Government/AAA-Rated Securities
Fund may purchase obligations of non-U.S. corpo-
rations or governmental entities, provided they
are U.S. dollar denominated and highly liquid.
Accordingly, while the risks mentioned above are
still present, they are present to a lesser ex-
tent.
CURRENCY TRANSACTIONS The Global Growth Fund, the
Growth Fund, the International Fund, the Bond
Fund and the High-Yield Bond Fund may purchase
and sell currencies to facilitate securities
transactions and to enter into forward currency
contracts to hedge against changes in currency
exchange rates. While entering into forward
transactions could minimize the risk of loss due
to a decline in the value of the hedged currency,
it could also limit any potential gain which
might result from an increase in the value of the
currency. Due to the expenses involved, the funds
will not generally attempt to protect against all
potential changes in exchange rates.
12
<PAGE>
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MULTIPLE PORTFOLIO COUNSELOR SYSTEM The basic
investment philosophy of Capital Research and
Management Company is to seek fundamental values
at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund
assets. Under this system the portfolios of the
funds are divided into segments which are managed
by individual counselors. Each counselor decides
how their segment will be invested (within the
limits provided by each fund's objective(s) and
policies and by Capital Research and Management
Company's investment committee). In addition,
Capital Research and Management Company's
research professionals make investment decisions
with respect to a portion of each fund's
portfolio. The primary individual portfolio
counselors for the Series are listed below.
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
PORTFOLIO COUNSELOR (AND RESEARCH
PROFESSIONAL, IF
PORTFOLIO APPLICABLE) FOR THE FUNDS
COUNSELORS INDICATED
FOR THE SERIES PRIMARY TITLE(S) (APPROXIMATE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James K. Dunton Senior Vice President of the Series. Growth-Income Fund--since the fund
Senior Vice President and Director, began operations in 1984
Capital Research and Management
Company
- -------------------------------------------------------------------------------------------------------------
Abner D. Goldstine Senior Vice President of the Series. Asset Allocation Fund--since the fund
Senior Vice President and Director, began operations in 1989;
Capital Research and Management Bond Fund--since the fund began
Company operations in 1996;
U.S. Government Fund--since the fund
began operations in 1985
- -------------------------------------------------------------------------------------------------------------
Claudia P. Huntington Vice President of the Series. Growth-Income Fund--3 years (plus 5 years
Senior Vice President, as a research professional prior to becoming
Capital Research Company* a portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
John H. Smet Vice President of the Series. Bond Fund--since the fund began
Vice President, Capital Research and operations in 1996;
Management Company U.S. Government Fund--5 years
- -------------------------------------------------------------------------------------------------------------
Timothy D. Armour Executive Vice President, Asset Allocation Fund--less than one year
Capital Research Company*
- -------------------------------------------------------------------------------------------------------------
David C. Barclay Executive Vice President, Capital High-Yield Bond Fund--4 years
Research Company*
- -------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--4 years
- -------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice President and Director, Growth Fund--3 years (plus 5 years as a
Capital Research and Management research professional prior to becoming a
Company portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice President and Director, Growth Fund--10 years;
Capital Research and Management Growth-Income Fund--3 years
Company
- -------------------------------------------------------------------------------------------------------------
Alwyn Heong Vice President, Capital International Fund--less than one year
Research Company*
- -------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Executive Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--3 years
- -------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice President and Director, Growth-Income Fund--7 years (plus
Capital Research and Management 1 year as a research professional prior to
Company becoming a portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
Donald D. O'Neal Vice President, Capital Research and Growth Fund--6 years (plus 4 years as a
Management Company research professional prior to becoming a
portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
Victor M. Parachini Senior Vice President, Capital Asset Allocation Fund--less than one year
Research and Management Company
- -------------------------------------------------------------------------------------------------------------
Richard T. Schotte Senior Vice President, Capital Bond Fund--since the fund began
Research and Management Company operations in 1996;
High-Yield Bond Fund--9 years
- -------------------------------------------------------------------------------------------------------------
Susan M. Tolson Vice President, Capital Research High-Yield Bond Fund--2 years
Company* (plus 2 years as a research professional prior
to becoming a portfolio counselor for the fund)
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR TOTAL
FOR THE SERIES ITS AFFILIATES YEARS
- ----------------------------------------------------
<S> <C> <C>
James K. Dunton 34 34
- ----------------------------------------------------
Abner D. Goldstine 29 45
- ----------------------------------------------------
Claudia P. Huntington 19 21
- ----------------------------------------------------
John H. Smet 13 15
- ----------------------------------------------------
Timothy D. Armour 13 13
- ----------------------------------------------------
David C. Barclay 9 16
- ----------------------------------------------------
Martial Chaillet 25 25
- ----------------------------------------------------
Gordon Crawford 26 26
- ----------------------------------------------------
James E. Drasdo 20 25
- ----------------------------------------------------
Alwyn Heong 4 4
- ----------------------------------------------------
Robert W. Lovelace 12 12
- ----------------------------------------------------
Robert G. O'Donnell 21 25
- ----------------------------------------------------
Donald D. O'Neal 11 11
- ----------------------------------------------------
Victor M. Parachini 21 34
- ----------------------------------------------------
Richard T. Schotte 19 30
- ----------------------------------------------------
Susan M. Tolson 7 8
</TABLE>
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
13
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, It is the Series' policy to distribute to the
DISTRIBUTIONS AND shareholders (the insurance company separate ac-
TAXES counts) all of its net investment income and cap-
ital gains realized during each fiscal year.
The Series Each fund of the Series is subject to asset di-
distributes to versification regulation prescribed by the U.S.
shareholders all Treasury Department under the Internal Revenue
its income and Code (the "Code"). These regulations generally
capital gains provide that, as of the end of each calendar
realized during quarter or within 30 days thereafter, no more
each fiscal year. than 55% of the total assets of the fund may be
represented by any one investment, no more than
70% by any two investments, no more than 80% by
any three investments, and no more than 90% by
any four investments. For this purpose, all secu-
rities of the same issuer are considered a single
investment. Furthermore, each U.S. Government
agency or instrumentality is treated as a sepa-
rate issuer. There are also alternative diversi-
fication tests which may be satisfied by the
funds under the regulations. The Series intends
to comply with the diversification regulations.
If a fund should fail to comply with these regu-
lations, Contracts invested in that fund would
not be treated as annuity, endowment or life in-
surance contracts under the Code.
See the applicable Contract prospectus for infor-
mation regarding the federal income tax treatment
of the Contracts and distributions to the sepa-
rate accounts.
FEDERAL TAXES Each fund of the Series intends to
operate as a "regulated investment company" under
the Internal Revenue Code. In any fiscal year in
which a fund so qualifies and distributes to
shareholders its net investment income and real-
ized capital gains, the fund itself is relieved
of federal income tax.
SERIES SERIES ORGANIZATION The Series, an open-end in-
ORGANIZATION AND vestment company, was organized as a Massachu-
MANAGEMENT setts business trust in 1983. The Series' Board
of Trustees supervises Series operations and per-
forms duties required by applicable state and
federal law. Members of the board who are not em-
ployed by Capital Research and Management Company
or its affiliates are paid for services rendered
to the Series as described in the statement of
additional information. They may elect to defer
all or a portion of these fees through a deferred
compensation plan in effect for the Series. The
Board of Trustees has approved the retention of
the companies listed below to provide certain
services to the Series.
INVESTMENT ADVISER Capital Research and Manage-
ment Company, a large and experienced investment
management organization founded in 1931, is the
investment adviser to the Series and other mutual
funds, including those in The American Funds
Group. Capital Research and Management Com- pany,
a wholly-owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South
Hope Street, Los Angeles, CA 90071. Capital Re-
search and Management Company manages the invest-
ment portfolios and business affairs of the Se-
ries.
The compensation paid to the Investment Adviser
for the most recent fiscal year as a percentage
of average net assets amounted to the following:
Growth Fund -- %; International Fund -- %;
Growth-Income Fund -- %; Asset Allocation
Fund -- %; Bond Fund -- %; High-Yield Bond
Fund -- %; U.S. Government/AAA-Rated Securi-
ties Fund -- %; and Cash Management Fund --
%. Capital Research and Management Company
has received no compensation for the Global
Growth Fund because the Global Growth Fund had
not commenced operations as of the date of this
prospectus.
Capital Research and Management Company and its
affiliated companies have adopted a personal in-
vesting policy that is consistent with the recom-
mendations contained in the report dated May 9,
1994 issued by the Investment Company Institute's
Advisory Group on Personal Investing. (See the
14
<PAGE>
- --------------------------------------------------------------------------------
statement of additional information.) This policy
has been incorporated into the Series' "code of
ethics" which is available from the Series' Sec-
retary upon request.
PORTFOLIO TRANSACTIONS Orders for the Series'
portfolio securities transac- tions are placed by
Capital Research and Management Company which
strives to obtain the best available prices,
taking into account the costs and quality of
executions. There is no agreement or commitment
to place orders with any broker-dealer. Fixed-
income securities are generally traded on a "net"
basis with a dealer acting as principal for its
own account without a stated commission, although
the price of the security usually includes a
profit to the dealer. In underwritten offerings,
securities are usually purchased at a fixed price
which includes an amount of compensation to the
underwriter, generally referred to as the
underwriter's concession or discount. On
occasion, securities may be purchased directly
from an issuer, in which case no commissions or
discounts are paid.
Subject to the above policy, when two or more
brokers are in a position to offer comparable
prices and executions, preference may be given to
brokers that have sold Contracts or have provided
investment research, statistical and other re-
lated services for the benefit of the Series
and/or of other funds served by Capital Research
and Management Company.
SHAREHOLDER VOTING RIGHTS All shares of the Se-
ries have equal voting rights and are entitled to
one vote per share with proportional voting for
fractional shares; however, only shareholders of
Class 2 shares will be entitled to vote on mat-
ters solely relating to Class 2 shares. There
will not usually be a shareholder meeting in any
year, except, for example, when the election of
the board is required to be acted upon by share-
holders under the Investment Company Act of 1940.
In matters which only affect a particular fund,
the matter shall have been effectively acted upon
by a majority vote of that fund even though: (1)
the matter has not been approved by a majority
vote of any other fund; or (2) the matter has not
been approved by a majority vote of the Series.
The insurance company separate accounts, as the
shareholders of the Series, have the right to
vote Series shares at any meeting of sharehold-
ers. However, the Contracts provide that the sep-
arate accounts will vote Series shares in accor-
dance with instructions received from owners of
the Contracts. See the applicable Contract pro-
spectus for information regarding Contract own-
ers' voting rights. Since the funds use a com-
bined prospectus, each fund may be liable for
misstatements, inaccuracies, or incomplete dis-
closure concerning any other fund contained in
this prospectus.
PURCHASES AND Shares of the Series are currently offered only
REDEMPTIONS to insurance company separate accounts which fund
OF SHARES the Contracts. All such shares may be purchased
or redeemed by the separate accounts at net asset
value, without any sales or redemption charges.
Such purchases and redemptions are made subse-
quent to corresponding purchases and redemptions
of units of the separate accounts without delay.
Except in extraordinary circumstances and as per-
missible under the Investment Company Act of
1940, the redemption proceeds will be paid on or
before the seventh day following the request for
redemption.
PRICE OF SHARES The net asset value per share is
calculated once daily at the close of trading
(currently 4:00 p.m., New York time) on each day
the New York Stock Exchange is open. The current
value of each fund's total assets, less all lia-
bilities, is divided by the total number of
shares outstanding (excluding treasury shares),
and the result, rounded to the nearer cent, is
the net asset value per share.
15
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc. rates the long-term debt securities issued
by various entities in categories ranging from "Aaa" to "C," according to
quality as described below.
"AAA -- Best quality. These securities 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 -- High quality by all standards. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may
be other elements present which make the long-term risks appear somewhat
greater."
"A -- Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future."
"BAA -- Medium grade obligations. 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 -- Generally lack characteristics of the desirable investment; assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small."
"CAA -- Of poor standing. Issues may be in default or there may be present
elements of danger with respect to principal or interest."
"CA -- Speculative in a high degree; often in default or have other marked
shortcomings."
"C -- Lowest rated class of bonds; can be regarded as having extremely poor
prospects of ever attaining any real investment standing."
Standard & Poor's Corporation rates the long-term debt securities issued by
various entities in categories ranging from "AAA" to "D," according to quality
as described below.
"AAA -- Highest rating. Capacity to pay interest and repay principal is
extremely strong."
"AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree."
"A -- Have a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions, than debt in higher rated categories."
"BBB -- Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal than for debt in
higher rated categories."
"BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions."
"C1 -- Reserved for income bonds on which no interest is being paid."
"D -- In default and payment of interest and/or repayment of principal is in
arrears."
[LOGO OF This prospectus has been printed on recycled
RECYCLED paper that meets the guidelines of the United
PAPER] States Environmental Protection Agency
16
<PAGE>
LL24183-14 26-101-496
<PAGE>
Prospectus
American
Variable
Insurance
Series(R)
Class 2 Shares
April 1, 1997
<PAGE>
AMERICAN VARIABLE INSURANCE SERIES
CLASS 2 SHARES
333 South Hope Street
Los Angeles, California 90071
(213) 486-9200
American Variable Insurance Series (the "Series") is a fully managed,
diversified, open-end investment company. The Series consists of nine funds,
each of which has its own investment objective(s) and policies.
Shares of the Series are offered only to insurance company separate accounts
to serve as the funding vehicle for certain variable annuity and life
insurance contracts ("Contract" or "Contracts").
THE CONTRACTS INVOLVE CERTAIN FEES AND EXPENSES NOT DESCRIBED IN THIS
PROSPECTUS AND ALSO MAY INVOLVE CERTAIN RESTRICTIONS OR LIMITATIONS ON THE
ALLOCATION OF PURCHASE PAYMENTS OR CONTRACT VALUES TO ONE OR MORE FUNDS OF THE
SERIES. IN PARTICULAR, CERTAIN FUNDS MAY NOT BE AVAILABLE IN CONNECTION WITH A
PARTICULAR CONTRACT. SEE THE APPLICABLE CONTRACT PROSPECTUS FOR INFORMATION
REGARDING FUND FEES AND EXPENSES OF THE CONTRACT AND ANY APPLICABLE
RESTRICTIONS OR LIMITATIONS. THE SERIES OFFERS TWO CLASSES OF SHARES TO
INVESTORS: CLASS 1 SHARES AND CLASS 2 SHARES. THIS PROSPECTUS OFFERS ONLY
CLASS 2 SHARES, WHICH FIRST BECAME AVAILABLE APRIL 1, 1997, AND IS FOR USE
WITH CONTRACTS THAT MAKE CLASS 2 SHARES AVAILABLE.
The GLOBAL GROWTH FUND seeks long-term growth of capital by investing
primarily in common stocks or securities with common stock characteristics of
issuers domiciled around the world. THE FUND IS NOT AVAILABLE IN ALL STATES AS
OF THE DATE OF THIS PROSPECTUS.
The GROWTH FUND seeks growth of capital by investing primarily in common
stocks or securities with common stock characteristics, such as convertible
preferred stocks, which demonstrate the potential for appreciation.
The INTERNATIONAL FUND seeks long-term growth of capital by investing
primarily in common stocks or securities with common stock characteristics of
issuers domiciled outside the United States.
The GROWTH-INCOME FUND seeks growth of capital and income by investing
primarily in common stocks or other securities which demonstrate the potential
for appreciation and/or dividends.
The ASSET ALLOCATION FUND seeks high total return (including income and
capital gains) consistent with preservation of capital over the long term
through a diversified portfolio that can include common stocks and other
equity-type securities, bonds and other intermediate and long-term fixed-
income securities and money market instruments in any combination.
The BOND FUND seeks to provide as high a level of current income as is
consistent with the preservation of capital by investing primarily in fixed-
income securities.
The HIGH-YIELD BOND FUND seeks high current income and secondarily seeks
capital appreciation by investing primarily in intermediate- and long-term
corporate obligations, with emphasis on higher yielding, higher risk, lower
rated or unrated securities. IN ADDITION TO OTHER RISKS, HIGH-YIELD, HIGH-RISK
BONDS (ALSO KNOWN AS "JUNK BONDS") ARE SUBJECT TO GREATER FLUCTUATIONS IN
VALUE AND RISK OF LOSS OF INCOME AND PRINCIPAL DUE TO DEFAULT BY THE ISSUER
THAN ARE INVESTMENTS IN LOWER YIELDING, HIGHER RATED BONDS.
The U.S. GOVERNMENT/AAA-RATED SECURITIES FUND seeks a high level of current
income consistent with prudent investment risk and preservation of capital by
investing primarily in a combination of securities guaranteed by the U.S.
Government and other debt securities rated AAA or Aaa.
The CASH MANAGEMENT FUND seeks high current yield while preserving capital
by investing in a diversified selection of high-quality money market
instruments.
This prospectus presents information you should know before investing in the
Series. You should keep it on file for future reference.
More detailed information about the Series, including the Series' financial
statements, is contained in the statement of additional information dated
April 1, 1997, which has been filed with the Securities and Exchange
Commission and is available to you without charge, by writing to the Secretary
of the Series at the above address or telephoning 800/421-0180.
YOU MAY LOSE MONEY BY INVESTING IN THE FUNDS. GENERALLY, THE LIKELIHOOD OF
LOSS IS GREATER IF YOU INVEST FOR A SHORTER PERIOD OF TIME. YOUR
INVESTMENT IN THE SERIES IS NOT A DEPOSIT OR OBLIGATION OF, OR
INSURED, OR GUARANTEED BY, ANY ENTITY OR PERSON INCLUDING THE U.S.
GOVERNMENT AND THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF THE
APPLICABLE CONTRACT. THIS PROSPECTUS AND THE APPLICABLE CONTRACT PROSPECTUS
SHOULD BE READ CAREFULLY AND THEN RETAINED FOR FUTURE REFERENCE.
The date of this prospectus is April 1, 1997
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following condensed financial information for 1991 through 1996 has
been derived from financial statements which have been audited by Price
Waterhouse LLP, independent accountants. The information for the years prior
to 1991 was audited by other independent accountants. This information
should be read in conjunction with the financial statements and accompanying
notes which are included in the statement of additional information.
<TABLE>
<CAPTION>
Period Net asset value, Net Net realized & Total income Dividends from
ended beginning investment unrealized gain (loss) from investment net investment Distributions from
11/30 of period income on investments operations income net realized gains
- ------ ---------------- ---------- ---------------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund
1987 $15.66 $ .14 $ (.78) $ (.64) $ (.11) $ (.34)
1988 14.57 .33 2.85 3.18 (.28) (.61)
1989 16.86 .49 6.01 6.50 (.45) --
1990 22.91 .54 (2.27) (1.73) (.56) (.64)
1991 19.98 .41 4.48 4.89 (.47) (.22)
1992 24.18 .29 4.25 4.54 (.31)/2/ --
1993 28.41 .25 4.13 4.38 (.24) (.21)
1994 32.34 .24 .69 .93 (.24) (1.09)
1995 31.94 .33 10.63 10.96 (.29) (.80)
1996
- --------------------------------------------------------------------------------------------------------------
International Fund/3/
1990 $10.00 $ .11 $ (.62) $ (.51) $ (.04) --
1991 9.45 .22 .59 .81 (.24) --
1992 10.02 .19 (.09) .10 (.21) $ (.02)
1993 9.89 .17 2.50 2.67 (.16) --
1994 12.40 .25 1.04 1.29 (.20) (.22)
1995 13.27 .34 1.02 1.36 (.33) (.41)
1996
- --------------------------------------------------------------------------------------------------------------
Growth-Income Fund
1987 $17.46 $ .47 $(1.87) $(1.40) $ (.46) $ (.08)
1988 15.52 .72 2.66 3.38 (.68) (.18)
1989 18.04 .78 3.93 4.71 (.74) (.58)
1990 21.43 .82 (1.91) (1.09) (.86) (.25)
1991 19.23 .75 2.63 3.38 (.79) (.10)
1992 21.72 .65 2.74 3.39 (.67) (.27)
1993 24.17 .63 2.12 2.75 (.63) (.28)
1994 26.01 .68 .14 .82 (.65) (.88)
1995 25.30 .73 7.20 7.93 (.73) (1.03)
1996
- --------------------------------------------------------------------------------------------------------------
Asset Allocation Fund/5/
1989 $10.00 $ .08 $ .10 $ .18 $((.01) --
1990 10.17 .50 (.75) (.25) (.42) --
1991 9.50 .53 1.11 1.64 (.55) --
1992 10.59 .48 .94 1.42 (.49) $ (.05)
1993 11.47 .51 .67 1.18 (.49) (.15)
1994 12.01 .51 (.57) (.06) (.52) (.18)
1995 11.25 .50 2.69 3.19 (.50) (.17)
1996
- --------------------------------------------------------------------------------------------------------------
Bond Fund
1996 [TO BE PROVIDED BY AMENDMENT]
- --------------------------------------------------------------------------------------------------------------
High-Yield Bond Fund
1987 $13.49 $1.35 $ (.94) $ .41 $(1.36) $ (.32)
1988 12.22 1.26 .68 1.94 (1.33) (.17)
1989 12.66 1.22 .10 1.32 (1.16) --
1990 12.82 1.33 (1.02) .31 (1.30) --
1991 11.83 1.17 1.78 2.95 (1.25) --
1992 13.53 1.10 .62 1.72 (1.08) --
1993 14.17 1.09 1.20 2.29 (1.10) (.19)
1994 15.17 1.27 (2.07) (.80) (1.23) (.25)
1995 12.89 1.32 1.10 2.42 (1.32) --
1996
- --------------------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Fund/6/
1987 $11.62 $ .85 $(1.21) $ (.36) $ (.79) --
1988 10.47 .93 .02 .95 (.97) --
1989 10.45 .78 .30 1.08 (.79) --
1990 10.74 .83 (.11) .72 (.80) --
1991 10.66 .77 .58 1.35 (.79) --
1992 11.22 .75 .32 1.07 (.76) --
1993 11.53 .74 .68 1.42 (.75) $ (.05)
1994 12.15 .76 (1.30) (.54) (.74) (.07)
1995 10.80 .82 .71 1.53 (.81) --
1996
- --------------------------------------------------------------------------------------------------------------
Cash Management Fund
1987 $10.65 $ .54 $ .08 $ .62 $ (.54) --
1988 10.73 .60 .11 .71 (.56) --
1989 10.88 .81 .12 .93 (.81) --
1990 11.00 .71 .13 .84 (.70) --
1991 11.14 .62 .01 .63 (.66) --
1992 11.11 .35 .01 .36 (.43) --
1993 11.04 .29 -- .29 (.31) --
1994 11.02 .37 .02 .39 (.32) --
1995 11.09 .63 (.02) .61 (.59) --
1996
<CAPTION>
Ratio of Ratio of net
Period Net assets, expenses income to Portfolio
ended Total Net asset value, end of period to average average turnover
11/30 distributions end of period Total return (in millions) net assets net assets rate
- ------ ------------- ---------------- ------------ ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Growth Fund
1987 $ (.45) $14.57 (4.34)% $ 99 .63% .97% 14.0%
1988 (.89) 16.86 22.34 48 .72 1.72 7.1/1/
1989 (.45) 22.91 38.87 173 .60 2.97 29.2
1990 (1.20) 19.98 (7.87) 304 .59 3.00 16.8
1991 (.69) 24.18 24.90 700 .56 1.94 9.8
1992 (.31) 28.41 18.90 1,212 .53 1.15 11.2
1993 (.45) 32.34 15.59 1,737 .50 .86 20.4
1994 (1.33) 31.94 2.92 2,027 .49 .78 29.6
1995 (1.09) 41.81 35.35 3,154 .47 .92 35.47
1996
- ----------------------------------------------------------------------------------------------------
International Fund/3/
1990 $ (.04) $ 9.45 (5.08)% $ 66 1.03%/4/ 3.18%/4/ 4.5%
1991 (.24) 10.02 8.67 197 1.04 2.62 8.2
1992 (.23) 9.89 .90 360 1.00 2.11 16.7
1993 (.16) 12.40 27.20 840 .96 1.75 17.7
1994 (.42) 13.27 10.48 1,405 .80 2.03 19.7
1995 (.74) 13.89 10.78 1,703 .75 2.64 24.66
1996
- ----------------------------------------------------------------------------------------------------
Growth-Income Fund
1987 $ (.54) $15.52 (8.59)% $ 217 .59% 2.85% 6.8%
1988 (.86) 18.04 22.13 102 .67 3.59 14.3/1/
1989 (1.32) 21.43 27.32 305 .58 4.94 16.7
1990 (1.11) 19.23 (5.27) 535 .56 4.77 9.7
1991 (.89) 21.72 17.83 1,022 .56 3.80 11.1
1992 (.94) 24.17 15.90 1,704 .52 3.01 13.6
1993 (.91) 26.01 11.63 2,436 .49 2.66 24.9
1994 (1.53) 25.30 3.21 2,740 .47 2.72 29.3
1995 (1.76) 31.47 33.14 3,953 .44 2.70 26.91
1996
- ----------------------------------------------------------------------------------------------------
Asset Allocation Fund/5/
1989 $ (.01) $10.17 1.70 % $ 33 .59%/2/ 5.78%/2/ --
1990 (.42) 9.50 (2.34) 106 .64 6.70 14.4%
1991 (.55) 10.59 17.63 194 .59 5.56 15.1
1992 (.54) 11.47 13.69 359 .57 4.73 19.7
1993 (.64) 12.01 10.59 578 .55 4.66 19.0
1994 (.70) 11.25 (.54) 637 .53 4.55 36.1
1995 (.67) 13.77 29.45 870 .52 4.11 39.89
1996
- ----------------------------------------------------------------------------------------------------
Bond Fund
1996 [TO BE PROVIDED BY AMENDMENT]
- ----------------------------------------------------------------------------------------------------
High-Yield Bond Fund
1987 $(1.68) $12.22 2.96 % $ 70 .63% 10.89% 61.9%
1988 (1.50) 12.66 16.95 26 .77 10.62 23.6/1/
1989 (1.16) 12.82 10.85 50 .72 12.30 28.2
1990 (1.30) 11.83 2.49 58 .68 11.17 22.7
1991 (1.25) 13.53 26.22 107 .63 9.81 18.1
1992 (1.08) 14.17 13.14 197 .59 8.88 47.4
1993 (1.29) 15.17 17.09 379 .56 8.18 34.1
1994 (1.48) 12.89 (5.71) 390 .54 9.37 38.5
1995 (1.32) 13.99 19.81 534 .54 10.12 31.73
1996
- ----------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Fund/6/
1987 $ (.79) $10.47 (3.17)% $ 47 .67% 8.24% 105.6%
1988 (.97) 10.45 9.50 28 .77 8.32 47.5/1/
1989 (.79) 10.74 10.82 78 .66 8.61 14.5
1990 (.80) 10.66 7.11 126 .61 8.58 24.0
1991 (.79) 11.22 13.24 240 .58 7.91 27.1
1992 (.76) 11.53 9.83 360 .57 7.08 40.0
1993 (.80) 12.15 12.65 505 .55 6.42 21.7
1994 (.81) 10.80 (4.58) 463 .54 6.69 45.2
1995 (.81) 11.52 14.73 542 .54 7.37 30.11
1996
- ----------------------------------------------------------------------------------------------------
Cash Management Fund
1987 $ (.54) $10.73 6.01 % $ 57 .68% 5.90% --
1988 (.56) 10.88 6.88 31 .76 6.75 --
1989 (.81) 11.00 8.90 58 .68 8.26 --
1990 (.70) 11.14 7.91 143 .60 7.48 --
1991 (.66) 11.11 5.84 163 .58 5.65 --
1992 (.43) 11.04 3.31 197 .53 3.24 --
1993 (.31) 11.02 2.67 206 .51 2.57 --
1994 (.32) 11.09 3.59 221 .49 3.60 --
1995 (.59) 11.11 5.65 193 .49 5.37 --
1996
</TABLE>
- ------
1. Percentages are exclusive of the redemption in kind which occurred March
29, 1988.
2. Amount includes net realized short-term gains treated as net investment
income for federal income tax purposes.
3. Commenced operations May 1, 1990.
4. Annualized
5. Commenced operations August 1, 1989.
No information is presented for the Global Growth Fund since it had no
investment operations as of April 1, 1997.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT THE FUNDS The Series consists of nine funds, each
OBJECTIVES AND representing a separate fully managed diversified
POLICIES OF THE portfolio of securities. The nine funds are the
FUNDS Global Growth Fund, the Growth Fund, the Interna-
tional Fund, the Growth-Income Fund, the Asset
The Series consists Allocation Fund, the Bond Fund, the High-Yield
of nine funds, Bond Fund, the U.S. Government/AAA-Rated Securi-
each with its own ties Fund and the Cash Management Fund. The Se-
investment ries offers two classes of fund shares: Class 1
objective(s) and shares and Class 2 shares. This prospectus offers
policies. Class 2 shares only. The Board of Trustees may
establish additional funds and classes in the fu-
ture. The investment objective(s) and policies of
each fund are discussed below. Investment policy
limits as stated below are measured at the time
of purchase. MORE INFORMATION ON THE FUNDS IS
CONTAINED IN THE SERIES' STATEMENT OF ADDITIONAL
INFORMATION.
Shares of the Series are currently offered only
to separate accounts of various insurance compa-
nies to serve as the underlying investment for
both variable annuity and variable life insurance
contracts. All such shares may be purchased or
redeemed by the separate accounts without any
sales or redemption charges at net asset value.
Class 2 shares pay 0.25% of average daily net as-
sets annually, pursuant to a plan of distribution
or "12b-1 plan." All amounts paid under the plan
of distribution are used to compensate sellers of
Contracts that make Class 2 shares available for
providing certain services to owners of such Con-
tracts. Class 2 shares pay only their proportion-
ate share of Series expenses plus plan of distri-
bution expenses. Due to differences in tax treat-
ment or other considerations, the interests of
various Contract owners participating in a fund
might at some time be in conflict. The Board of
Trustees will monitor for any material conflicts
and determine what action, if any, should be tak-
en.
INVESTMENT RESTRICTIONS Each fund's fundamental
investment restrictions (as described in the
statement of additional information) and objec-
tive(s) may not be changed without shareholder
approval. All other investment practices may be
changed by the Series' Board of Trustees.
The Global Growth GLOBAL GROWTH FUND The investment objective of
Fund seeks to the Global Growth Fund is to achieve long-term
provide you with growth of capital by investing in securities of
long-term growth of issuers domiciled around the world.
capital generally
by investing in The fund will invest primarily in common stocks
equity securities under normal market conditions. These securities
of issuers may be denominated in various currencies.The fund
domiciled around may also invest in securities through depositary
the world. receipts which may be denominated in various cur-
rencies. For example, the fund may purchase Amer-
ican Depositary Receipts which are U.S. dollar
denominated securities designed for use in the
U.S. securities markets which represent and may
be converted to the underlying security.
When prevailing market, economic, political or
currency conditions warrant, the fund may invest
in other securities such as preferred stock, debt
securities and securities convertible into common
stock. The fund may also invest in straight debt
securities (generally rated in the top three
quality categories by Standard & Poor's Corpora-
tion or Moody's Investors Service, Inc. or unrated
but determined to be of equivalent quality by the
fund's investment adviser, Capital Research and
Management Company); however, up to 10% of the
fund's assets may be invested in lower rated
straight debt securities (including securities
commonly referred to as "junk bonds" or "high-
yield, high-risk bonds") or in unrated securities
determined to be of equivalent quality. High-
yield, high-risk bonds carry a higher degree of
investment risk than higher rated bonds and are
considered speculative. See the Appendix for a
description of the various bond ratings. See
"High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. In addi-
tion, the fund may at times hold a portion of its
assets in cash and money market instruments de-
nominated in U.S. dollars or other currencies.
See "Securities and Investment Techniques--Money
Market Instruments."
3
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Investments may be made from time to time in se-
curities of companies domiciled in, or govern-
ments of, developing countries. See "Securities
and Investment Techniques--Investing in Various
Countries."
The fund has the ability to purchase and sell
currencies to facilitate securities transactions
and to enter into forward currency contracts to
hedge against changes in currency exchange rates.
See "Securities and Investment Techniques--Cur-
rency Transactions."
Under normal market conditions, the fund will in-
vest in issuers domiciled in at least three coun-
tries, with no more than 40% of its assets in any
one country. (In determining the domicile of an
issuer, Capital Research and Management Company
takes into account such factors as where the com-
pany is legally organized, where it maintains
principal corporate offices and where it conducts
its principal operations.)
The Growth Fund GROWTH FUND The investment objective of the
seeks to provide Growth Fund is growth of capital. Whatever cur-
you with growth rent income is generated by the fund is likely to
of capital. be incidental to the objective of capital growth.
Ordinarily, the fund seeks to achieve this objec-
tive by investing primarily in common stocks or
securities with common stock characteristics.
When the outlook for common stocks is not consid-
ered promising, for temporary defensive purposes,
a substantial portion of the assets may be in-
vested in securities of the U.S. Government, its
agencies and instrumentalities, cash, and money
market instruments. See "Securities and Invest-
ment Techniques" below.
The fund's assets may be invested in securities
of non-U.S. issuers, which are generally denomi-
nated in currencies other than the U.S. dollar,
although there is no requirement that the fund
maintain investments in non-U.S. issuers. See
"Securities and Investment Techniques--Investing
in Various Countries" below.
Up to 10% of the fund's assets may be invested in
straight debt securities rated BB or below by
Standard & Poor's Corporation and Ba or below by
Moody's Investors Services, Inc. or in unrated
securities that are determined to be of equiva-
lent quality, provided the fund's investment ad-
viser, Capital Research and Management Company,
determines that these securities have character-
istics similar to the equity securities eligible
for purchase by the fund. These securities are
commonly referred to as "junk bonds" or "high-
yield, high-risk bonds," carry a higher degree of
investment risk than higher rated bonds and are
considered speculative. See the Appendix for a
further description of the various bond ratings.
See "High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. As of
the last day of the fund's most recent fiscal
year, the fund did not hold any bonds.
The International INTERNATIONAL FUND The investment objective of
Fund aims to the International Fund is to achieve long-term
provide you with growth of capital by investing primarily in secu-
long-term growth of rities of issuers domiciled outside the United
capital by investing States. The fund's investment approach is based
in securities of on the belief that economic and political devel-
issuers domiciled opments have helped to create new opportunities
outside the U.S. outside the U.S.
The fund may also invest in securities through
depositary receipts which may be denominated in
various currencies. For example, the fund may
purchase American Depositary Receipts which are
U.S. dollar denominated securities designed for
use in the U.S. securities markets which repre-
sent and may be converted to the underlying secu-
rity.
When prevailing market, economic, political or
currency conditions warrant, the fund may invest
in securities convertible into common stocks,
straight
4
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debt securities (generally rated in the top three
quality categories by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or
unrated but determined to be of equivalent quality by
Capital Research and Management Company), government
securities, or nonconvertible preferred stocks. Up
to 5% of the fund's assets may also be invested
in lower rated straight debt securities
(including securities commonly referred to as
"junk bonds" or "high-yield, high-risk bonds") or
in unrated securities that are determined to be
of equivalent quality. High-yield, high-risk
bonds carry a higher degree of investment risk
than higher rated bonds and are considered
speculative. See the Appendix for a description
of the various bond ratings. These securities may
also be issued by non-U.S. entities.
Under normal circumstances, the fund will invest
at least 65% of its assets in equity securities
(including depositary receipts) of issuers domi-
ciled outside the U.S. including those domiciled
in developing countries. The fund may at times
hold a portion of its assets in various curren-
cies or in cash equivalents which may be denomi-
nated in U.S. dollars or other currencies (in-
cluding U.S. Government securities, certificates
of deposit, time deposits, commercial paper,
bankers' acceptances and other high-quality
short-term debt securities). See "Securities and
Investment Techniques--Investing in Various Coun-
tries." Additionally, for temporary defensive
purposes, the fund may at times maintain all or
any part of its assets in cash and cash equiva-
lents.
The Growth-Income GROWTH-INCOME FUND The investment objective of
Fund seeks to the Growth-Income Fund is growth of capital and
provide you with income. In the selection of securities for in-
capital growth and vestment, the possibilities of appreciation and
income. potential dividends are given more weight than
current yield. Ordinarily, the fund will invest
primarily in common stocks. But the fund may in-
vest in other types of securities, including
other equity-type securities (such as convertible
bonds), bonds (and other types of fixed-income
securities) and money market instruments, to the
extent consistent with its investment objective.
Up to 5% of the fund's assets may be invested in
straight debt securities rated BB or below by
Standard & Poor's Corporation and Ba or below by
Moody's Investors Services, Inc. or in unrated
securities that are determined to be of equiva-
lent quality by Capital Research and Management
Company. These securities are commonly referred
to as "junk bonds" or "high-yield, high-risk
bonds," carry a higher degree of investment risk
than higher rated bonds and are considered specu-
lative. See the Appendix for a description of the
various bond ratings.
Up to 10% of the fund's assets may be invested in
the equity securities of issuers domiciled
outside the U.S., provided those securities are
either held through depositary receipts which are
U.S. dollar denominated or are traded on the New
York Stock Exchange. Since the fund limits its
investments in non-U.S. securities as described
above, the fund has no current intention to
engage in forward currency transactions. See
"Securities and Investment Techniques--Investing
in Various Countries."
The Asset ASSET ALLOCATION FUND The investment objective of
Allocation Fund the Asset Allocation Fund is high total return
aims to provide you (including income and capital gains) consistent
with high total with preservation of capital over the long term.
return and The fund seeks to achieve its objective by in-
preservation of vesting in a diversified portfolio that can in-
capital over the clude common stocks and other equity-type securi-
long-term. ties (such as convertible bonds), bonds and other
intermediate- and long-term fixed income securi-
ties, and money market instruments (debt securi-
ties maturing in one year or less).
5
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Capital Research and Management Company will de-
termine the relative mix of equities, fixed-in-
come securities and money market instruments for
the fund's portfolio. The determination will be
based on its view of long-term economic and mar-
ket trends and the relative risks and opportuni-
ties for long-term total return of the different
classes of assets. Under normal conditions, Capi-
tal Research and Management Company expects (but
is not required) to maintain an investment mix
falling within the following ranges: 40% to 80%
in equities; 20% to 50% in fixed-income securi-
ties, and 0% to 40% in money market instruments.
Capital Research and Management Company does not
intend to make frequent shifts within these broad
ranges. Rather it intends in normal situations to
make any shifts in the fund's asset allocation
gradually over time based on its views of long-
term trends and conditions.
Up to 10% of the fund's assets may be invested in
the equity securities of issuers domiciled out-
side the U.S., provided those securities are ei-
ther held through depositary receipts which are
U.S. dollar denominated or are traded on the New
York Stock Exchange. Since the fund limits its
investments in non-U.S. securities as described
above, the fund has no current intention to en-
gage in forward currency transactions. See "Secu-
rities and Investment Techniques--Investing in
Various Countries."
The fund's fixed-income investments will consist
primarily of "investment grade" bonds; that is,
bonds that are rated BBB or better by Standard &
Poor's Corporation or Baa or better by Moody's
Investors Service, Inc., or that are unrated but
considered by Capital Research and Management
Company to be of equivalent credit quality. Up to
25% of the fund's fixed-income assets may be in-
vested in securities that are below investment
grade as defined above, including securities
rated as low as CC by S&P or Ca by Moody's. See
the Appendix for a further description of the
various bond ratings. See "High-Yield Bond Fund--
Risks of Investing in High-Yield, High-Risk Secu-
rities" below. The fund's investments in non-U.S.
fixed-income securities will be concentrated in
securities issued or guaranteed as to principal
and interest by foreign governments or their
agencies or instrumentalities or by multinational
agencies. During the previous fiscal year, the
approximate monthly average percentages of the
Asset Allocation Fund's fixed-income net assets
based on the higher of the Moody's or S&P rating
categories were: Aaa/AAA -- %; Aa/AA -- %;
A/A -- %; Baa/BBB -- %; Ba/BB -- %;
B/B -- %; and Caa/CCC -- %. Non-rated in-
vestments (including equity-type securities) and
cash or cash equivalents amounted to % and %,
respectively, of the fund's assets.
The Bond Fund seeks BOND FUND The investment objective of the Bond
to provide you with Fund is to provide as high a level of current in-
high current income come as is consistent with the preservation of
while preserving capital. The fund invests in a broad variety of
your capital. fixed-income securities, including marketable
corporate debt securities, loan participations,
U.S. Government securities, mortgage-related se-
curities, other asset-backed securities and cash
or money market instruments. Normally, at least
65% of the fund's assets will be invested in
bonds. (For this purpose, bonds are considered
any debt securities having initial maturities in
excess of one year.) In addition, the fund may
invest up to 20% in preferred stocks.
At least 65% of the value of the fund's assets,
measured at the time of purchase, must be in-
vested in securities that are rated Baa or better
by Moody's Investors Service, Inc. or BBB or bet-
ter by Standard & Poor's Corporation (all ratings
discussed below refer to those assigned by these
two rating agencies) or unrated but determined to
be of equivalent quality by Capital Research and
Management Company. Securities rated Baa or BBB
have speculative characteristics. See the Appen-
dix for a description of the various bond rat-
ings.
6
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At least 35% of the value of the fund's assets
must be invested in securities that are rated A
or better or, if not rated, determined to be of
equivalent quality.
Up to 35% of the assets of the fund may be in-
vested in debt securities rated Ba and BB or be-
low, or in unrated securities that are determined
to be of equivalent quality. These securities may
be rated as low as Ca by Moody's or CC by S&P.
Securities rated Ba and BB or below or unrated
securities that are determined to be of equiva-
lent quality (commonly known as "junk" or "high-
yield, high-risk" bonds) are subject to special
review before purchase. These bonds are consid-
ered speculative and typically are subject to
greater market fluctuations and risk of loss of
income and principal due to default by the issuer
than are investments in lower yielding, higher-
rated bonds. See "High-Yield Bond Fund--Risks of
Investing in High-Yield, High-Risk Securities"
below.
The fund may invest in fixed-income securities of
corporations or governmental entities outside the
U.S.; however, no more than 20% of the fund's as-
sets will be invested in non-U.S. dollar denomi-
nated securities including those of issuers domi-
ciled in developing countries. The fund may pur-
chase or sell various currencies on either a spot
or forward basis in connection with non-U.S. dol-
lar investments. See "Securities and Investment
Techniques--Currency Transactions" below.
The High-Yield Bond HIGH-YIELD BOND FUND The primary investment ob-
Fund seeks to jective of the High-Yield Bond Fund is high cur-
provide you with rent income and its secondary investment objec-
high current income tive is capital appreciation. Under normal market
and, secondarily, conditions the fund will be invested in fixed-in-
capital appreciation. come securities, with emphasis on higher yield-
ing, higher risk, lower rated or unrated corpo-
rate bonds.
High-yield, high-risk bonds (also known as "junk
bonds") generally include any bonds rated Ba or
below by Moody's Investors Service, Inc. and BB
or below by Standard & Poor's Corporation or
unrated but determined to be of equivalent qual-
ity by Capital Research and Management Company.
Bonds rated Ba or BB or below are considered
speculative. The High-Yield Bond Fund may invest
without limitation in bonds rated as low as Ca by
Moody's or CC by S&P (or in bonds that are
unrated but determined to be of equivalent quali-
ty). In addition, the fund may invest up to 10%
of its total assets in bonds rated C by Moody's
or D by S&P (or in bonds that are unrated but de-
termined to be of equivalent quality). See the
Appendix for a further description of the various
bond ratings. During the previous fiscal year,
the approximate monthly average percentages of
the High-Yield Bond Fund's net assets based on
the higher of the Moody's or S&P rating catego-
ries were: Aaa/AAA -- %; Baa/BBB -- %;
Ba/BB -- %; B/B -- %; and Caa/CCC -- %.
Non-rated investments (including equity-type se-
curities) and cash or cash equivalents amounted
to % and %, respectively, of the fund's as-
sets.
Up to 25% of the fund's assets may be invested in
securities of non-U.S. issuers, which are gener-
ally denominated in currencies other than the
U.S. dollar.
Under normal conditions the fund will invest pri-
marily in higher yielding obligations which may
include loan participations in addition to corpo-
rate bonds. The fund also may invest in securi-
ties of the U.S. Government, its agencies and in-
strumentalities, cash, and money market instru-
ments. See "Securities and Investment Techniques"
below.
7
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RISKS OF INVESTING IN HIGH-YIELD, HIGH-RISK
SECURITIES "High-yield, high risk" bonds, also
known as "junk bonds," have speculative charac-
teristics and involve greater risk of default or
price changes due to changes in the issuer's
creditworthiness, or they may already be in de-
fault. The market prices of these securities may
fluctuate more than higher-quality securities and
may decline significantly. It may be more diffi-
cult to dispose of, or to determine the value of,
high-yield, high-risk bonds.
High-yield, high-risk bonds may be very sensitive
to adverse economic changes and may be less sen-
sitive to interest rate changes. In addition, pe-
riods of economic uncertainty and changes may in-
crease volatility of market prices and yields of
high-yield, high-risk bonds and in turn, the
fund's net asset value. High-yield, high-risk
bonds may contain redemption or call provisions
which, if exercised during a period of declining
interest rates, may cause the fund to have to re-
place the security with a lower yielding securi-
ty, resulting in a decreased return for invest-
ors. Furthermore, there may be little trading in
the secondary market for particular bonds, which
may affect adversely the fund's ability to value
accurately or dispose of such bonds.
Capital Research and Management Company attempts
to reduce the risks described above through di-
versification of the portfolio and by credit
analysis of each issuer, as well as by monitoring
broad economic trends and corporate and legisla-
tive developments.
There can be, of course, no assurance that the
fund's investment objective will be realized or
that the net return on an investment in the fund
will equal or exceed that which could have been
obtained through other investment or savings ve-
hicles. Contract owners should carefully review
the investment objectives and policies of the
fund and consider their ability to assume the
risks involved before making any investment in
the fund.
The U.S. U.S. GOVERNMENT/AAA-RATED SECURITIES FUND The in-
Government/AAA- vestment objective of the U.S. Government/AAA-
Rated Securities Rated Securities Fund is a high level of current
Fund aims to income consistent with prudent investment risk
provide you with and preservation of capital. It seeks to achieve
high current income its objective by investing primarily in a combi-
while preserving nation of (i) securities guaranteed by the U.S.
your capital. Government (i.e., backed by the full faith and
credit of the United States) and (ii) other debt
securities (including corporate bonds) rated AAA
by Standard & Poor's Corporation or Aaa by
Moody's Investors Service, Inc. (or unrated but
determined to be of equivalent quality by Capital
Research and Management Company). The fund may
purchase obligations of non-U.S. corporations or
governmental entities, provided they are U.S.
dollar denominated and highly liquid. Except when
the fund is in a temporary defensive investment
position, at least 65% of its total assets will
be invested in these securities, including the
securities held subject to repurchase agreements.
The fund anticipates that it will invest in Gov-
ernment National Mortgage Association ("GNMA")
certificates, which are mortgage-backed securi-
ties representing part ownership of a pool of
mortgage loans on which timely payment of inter-
est and principal is guaranteed by the U.S. Gov-
ernment. The fund also may invest in securities
issued by U.S. Government agencies or instrumen-
talities that are not backed by the full faith
and credit of the U.S. Government; in short-term
debt securities of private issuers (including
certificates of deposit, bankers' acceptances,
and commercial paper rated A-1 by S&P or Prime-1
by Moody's); and in securities issued by finan-
cial institutions such as commercial banks, sav-
ings and loan associations, mortgage bankers and
securities broker-dealers which represent a di-
rect or indirect interest in a pool of mortgages.
See "Securities and Investment Techniques" below.
The fund may not purchase any security other than
a U.S. Government security or a short-term debt
security described above, that is not rated AAA
8
<PAGE>
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by S&P or Aaa by Moody's (or that is unrated but
determined to be of equivalent quality by Capital
Research and Management Company). However, if the
rating of a security currently being held by the
fund is reduced below AAA or Aaa the fund is not
required to dispose of the security.
The Cash Management CASH MANAGEMENT FUND The investment objective of
Fund seeks to the Cash Management Fund is high current yield
provide you with while preserving capital. It seeks to achieve
high current yield this objective by investing in high quality money
while preserving market instruments that mature, or may be re-
capital. deemed or resold, in 13 months or less (25 months
or less in the case of U.S. Government securi-
ties). The fund invests only in such instruments
that are determined, in accordance with proce-
dures established by the Series' Board of Trust-
ees, to present minimal credit risks. The fund's
investments may include, but are not limited to,
commercial paper rated in the highest rating cat-
egory by Moody's Investors Service, Inc. and
Standard & Poor's Corporation, instruments is-
sued, guaranteed or insured by the U.S. Govern-
ment, its agencies or instrumentalities as to the
payment of principal and interest, and other se-
curities rated in the highest two categories by
either Moody's or S&P, provided the issuer has
commercial paper rated in the highest rating cat-
egory by Moody's or S&P. The fund also may enter
into repurchase agreements. See "Securities and
Investment Techniques" below.
Although there is no guarantee that the fund's
investment objective will be achieved, invest-
ments in the Cash Management Fund should present
the least market risk of any of the funds because
it invests only in high-quality short-term debt
obligations. However, an investment in this fund
is subject to the risks of changes in market in-
terest rates and of the economy as a whole. Note
that the return on an investment in the Cash Man-
agement Fund should not be the same as the return
on an investment in a money market fund which is
available directly to the public, even where
gross yields are equivalent, due to the fees im-
posed at the Contract level. The Cash Management
Fund yield for the seven days ended , 1997
was % on an annualized basis.
9
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SECURITIES AND EQUITY SECURITIES Equity securities represent an
INVESTMENT ownership position in a company. These securities
TECHNIQUES include common stocks and securities with equity
conversion or purchase rights. The prices of
The nine funds of equity securities fluctuate based on changes in
the Series invest the financial condition of their issuers and on
in a wide variety market and economic conditions. The funds'
of securities which results will be related to the overall market for
are subject to these securities.
varying degrees of
risk. DEBT SECURITIES Bonds and other debt securities
are used by issuers to borrow money. Issuers pay
investors interest and must repay the amount bor-
rowed at maturity. Some debt securities, such as
zero coupon bonds, do not pay current interest
but are purchased at a discount from their face
values. The prices of debt securities fluctuate
depending on such factors as interest rates,
credit quality and maturity. In general their
prices decline when interest rates rise and vice
versa.
U.S. GOVERNMENT SECURITIES Securities guaranteed
by the U.S. Government include: (1) direct obli-
gations of the U.S. Treasury (such as Treasury
bills, notes and bonds) and (2) federal agency
obligations guaranteed as to principal and inter-
est by the U.S. Treasury.
Certain securities issued by U.S. Government in-
strumentalities and certain federal agencies are
neither direct obligations of, nor guaranteed by,
the Treasury. However, they generally involve
federal sponsorship in one way or another: some
are backed by specific types of collateral; some
are supported by the issuer's right to borrow
from the Treasury; some are supported by the dis-
cretionary authority of the Treasury to purchase
certain obligations of the issuer; and others are
supported only by the credit of the issuing gov-
ernment agency or instrumentality.
MORTGAGE-RELATED SECURITIES The funds may invest
in various types of mortgage-related securities
and the U.S. Government/AAA-Rated Securities
Fund expects to invest substantially in these se-
curities. Mortgage-related securities may be is-
sued by governmental agencies (such as GNMA or
the Federal Home Loan Mortgage Corporation
("FHLMC")), by the Federal National Mortgage As-
sociation ("FNMA"), which is a federally chart-
ered and privately-owned corporation, or by pri-
vate financial institutions such as commercial
banks, savings and loan associations, mortgage
bankers and securities broker-dealers (or sepa-
rate trusts or affiliates of such institutions
established to issue these securities).
Most mortgage-related securities, including the
securities issued by GNMA, FHLMC and FNMA, are
so-called "pass-through" securities representing
interests in a pool of underlying mortgage loans,
on which the regular interest and principal pay-
ments (including any prepayments) are passed
through to the holder of the securities. Although
the mortgage loans in a pool will have stated ma-
turities of up to 30 years, due to both normal
principal repayment and prepayments, the average
effective maturities of these securities will
vary and will tend to fall when interest rates
fall and to rise when interest rates rise. Their
value also may change due to changes in the mar-
ket's perception of the creditworthiness of the
entity that issues or guarantees them.
MONEY MARKET INSTRUMENTS These are shorter-term
debt securitiesgenerally maturing in one year or
less which include (1) commercial paper (short-
term notes (up to 9 months) issued by
corporations or governmental bodies), (2)
commercial bank obligations (certificates of
deposit (interest-bearing time deposits),
bankers' acceptances (time drafts on a commercial
bank where the bank accepts an irrevocable
obligation to pay at maturity), and documented
discount notes (corporate promissory discount
notes accompanied by a commercial bank guarantee
to pay at maturity)),
10
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(3) corporate bonds and notes (corporate
obligations that mature, or that may be redeemed,
in one year or less), and (4) savings association
obligations (certificates of deposit issued by
savings banks or savings and loan associations).
Although certain floating or variable rate
obligations (securities which have a coupon rate
that changes at least annually and generally more
frequently) have maturities in excess of one
year, they are also considered to be short-term
debt securities.
REPURCHASE AGREEMENTS The funds may enter into
repurchase agreements, under which they buy a se-
curity and obtain a simultaneous commitment from
the seller to repurchase a security at a speci-
fied time and price. The seller must maintain
with the Series' custodian collateral equal to at
least 100% of the repurchase price including ac-
crued interest as monitored daily by Capital Re-
search and Management Company. If the seller un-
der the repurchase agreement defaults, a fund may
incur a loss if the value of the collateral se-
curing the repurchase agreement has declined and
may incur disposition costs in connection with
liquidating the collateral. If bankruptcy pro-
ceedings are commenced with respect to the sell-
er, liquidation of the collateral by a fund may
be delayed or limited.
FORWARD COMMITMENTS The funds may enter into com-
mitments to purchase or sell securities at a fu-
ture date. When a fund agrees to purchase such
securities it assumes the risk of any decline in
value of the securities beginning on the date of
the agreement. When a fund agrees to sell such
securities, it does not participate in further
gains or losses with respect to the securities
beginning on the date of the agreement. If the
other party to such a transaction fails to de-
liver or pay for the securities, the fund could
miss a favorable price or yield opportunity, or
could experience a loss.
The Asset Allocation Fund, the Bond Fund, the
High-Yield Bond Fund, and the U.S.
Government/AAA-Rated Securities Fund also may en-
ter into "roll" transactions, which consist of
the sale of GNMA certificates or other securities
together with a commitment to purchase similar,
but not identical, securities at a later date.
U.S. PRIVATE PLACEMENTS The Global Growth Fund,
the Growth Fund, the International Fund, the
Growth-Income Fund, the Asset Allocation Fund,
the Bond Fund and the High-Yield Bond Fund may
invest in private placements. Private placements
may be either purchased from another
institutional investor that originally acquired
the securities in a private placement or directly
from the issuers of the securities. Generally,
securities acquired in such private placements
are subject to contractual restrictions on resale
and may not be resold except pursuant to a
registration statement under the Securities Act
of 1933 or in reliance upon an exemption from the
registration requirements under the Act.
Accordingly, all such private placements will be
considered illiquid unless they have been
specifically determined to be liquid taking into
account factors such as the frequency and volume
of trading and the commitment of dealers to make
markets under procedures adopted by the Series'
Board of Trustees. Additionally, the liquidity of
any particular security will depend on such
factors as the availability of "qualified"
institutional investors and the extent of
investor interest in the security, which can
change from time to time.
INVESTING IN VARIOUS COUNTRIES The Global Growth
Fund, the Growth Fund, the International Fund,
the Asset Allocation Fund, the Bond Fund and the
High-Yield Bond Fund may invest in securities of
issuers domiciled outside the U.S. which may be
denominated in currencies other than the U.S.
dollar. Investing outside the U.S. involves spe-
cial risks, particularly in certain developing
countries, caused by, among other things; fluctu-
ating cur-
11
<PAGE>
- --------------------------------------------------------------------------------
rency values; different accounting, auditing, and
financial reporting regulations and practices in
some countries; changing local and regional eco-
nomic, political, and social conditions; greater
market volatility; differing securities market
structures; and various administrative difficul-
ties such as delays in clearing and settling
portfolio transactions or in receiving payment of
dividends. However, in the opinion of Capital Re-
search and Management Company, investing outside
the U.S. also can reduce certain portfolio risks
due to greater diversification opportunities.
Additional costs could be incurred in connection
with the funds' investment activities outside the
U.S. Brokerage commissions are generally higher
outside the U.S., and the funds will bear certain
expenses in connection with their currency
transactions. Furthermore, increased custodian
costs may be associated with the maintenance of
assets in certain jurisdictions.
The Growth-Income Fund and the Asset Allocation
Fund may invest in the equity securities of is-
suers domiciled outside the U.S., provided those
securities are either held through depositary re-
ceipts which are U.S. dollar denominated or are
traded on the New York Stock Exchange. In addi-
tion, the U.S. Government/AAA-Rated Securities
Fund may purchase obligations of non-U.S. corpo-
rations or governmental entities, provided they
are U.S. dollar denominated and highly liquid.
Accordingly, while the risks mentioned above are
still present, they are present to a lesser ex-
tent.
CURRENCY TRANSACTIONS The Global Growth Fund, the
Growth Fund, the International Fund, the Bond
Fund and the High-Yield Bond Fund may purchase
and sell currencies to facilitate securities
transactions and to enter into forward currency
contracts to hedge against changes in currency
exchange rates. While entering into forward
transactions could minimize the risk of loss due
to a decline in the value of the hedged currency,
it could also limit any potential gain which
might result from an increase in the value of the
currency. Due to the expenses involved, the funds
will not generally attempt to protect against all
potential changes in exchange rates.
12
<PAGE>
- --------------------------------------------------------------------------------
MULTIPLE PORTFOLIO COUNSELOR SYSTEM The basic
investment philosophy of Capital Research and
Management Company is to seek fundamental values
at reasonable prices, using a system of multiple
portfolio counselors in managing mutual fund
assets. Under this system the portfolios of the
funds are divided into segments which are managed
by individual counselors. Each counselor decides
how their segment will be invested (within the
limits provided by each fund's objective(s) and
policies and by Capital Research and Management
Company's investment committee). In addition,
Capital Research and Management Company's
research professionals make investment decisions
with respect to a portion of each fund's
portfolio. The primary individual portfolio
counselors for the Series are listed below.
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
PORTFOLIO COUNSELOR (AND RESEARCH
PROFESSIONAL, IF
PORTFOLIO APPLICABLE) FOR THE FUNDS
COUNSELORS INDICATED
FOR THE SERIES PRIMARY TITLE(S) (APPROXIMATE)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James K. Dunton Senior Vice President of the Series. Growth-Income Fund--since the fund
Senior Vice President and Director, began operations in 1984
Capital Research and Management
Company
- -------------------------------------------------------------------------------------------------------------
Abner D. Goldstine Senior Vice President of the Series. Asset Allocation Fund--since the fund
Senior Vice President and Director, began operations in 1989;
Capital Research and Management Bond Fund--since the fund began
Company operations in 1996;
U.S. Government Fund--since the fund
began operations in 1985
- -------------------------------------------------------------------------------------------------------------
Claudia P. Huntington Vice President of the Series. Growth-Income Fund--3 years (plus 5 years
Senior Vice President, as a research professional prior to becoming
Capital Research Company* a portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
John H. Smet Vice President of the Series. Bond Fund--since the fund began
Vice President, Capital Research and operations in 1996;
Management Company U.S. Government Fund--5 years
- -------------------------------------------------------------------------------------------------------------
Timothy D. Armour Executive Vice President, Asset Allocation Fund--less than one year
Capital Research Company*
- -------------------------------------------------------------------------------------------------------------
David C. Barclay Executive Vice President, Capital High-Yield Bond Fund--4 years
Research Company*
- -------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--4 years
- -------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice President and Director, Growth Fund--3 years (plus 5 years as a
Capital Research and Management research professional prior to becoming a
Company portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice President and Director, Growth Fund--10 years;
Capital Research and Management Growth-Income Fund--3 years
Company
- -------------------------------------------------------------------------------------------------------------
Alwyn Heong Vice President, Capital International Fund--less than one year
Research Company*
- -------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Executive Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--3 years
- -------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice President and Director, Growth-Income Fund--7 years (plus
Capital Research and Management 1 year as a research professional prior to
Company becoming a portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
Donald D. O'Neal Vice President, Capital Research and Growth Fund--6 years (plus 4 years as a
Management Company research professional prior to becoming a
portfolio counselor for the fund)
- -------------------------------------------------------------------------------------------------------------
Victor M. Parachini Senior Vice President, Capital Asset Allocation Fund--less than one year
Research and Management Company
- -------------------------------------------------------------------------------------------------------------
Richard T. Schotte Senior Vice President, Capital Bond Fund--since the fund began
Research and Management Company operations in 1996;
High-Yield Bond Fund--9 years
- -------------------------------------------------------------------------------------------------------------
Susan M. Tolson Vice President, Capital Research High-Yield Bond Fund--2 years
Company* (plus 2 years as a research professional prior
to becoming a portfolio counselor for the fund)
<CAPTION>
YEARS OF EXPERIENCE AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR TOTAL
FOR THE SERIES ITS AFFILIATES YEARS
- ----------------------------------------------------
<S> <C> <C>
James K. Dunton 34 34
- ----------------------------------------------------
Abner D. Goldstine 29 45
- ----------------------------------------------------
Claudia P. Huntington 19 21
- ----------------------------------------------------
John H. Smet 13 15
- ----------------------------------------------------
Timothy D. Armour 13 13
- ----------------------------------------------------
David C. Barclay 9 16
- ----------------------------------------------------
Martial Chaillet 25 25
- ----------------------------------------------------
Gordon Crawford 26 26
- ----------------------------------------------------
James E. Drasdo 20 25
- ----------------------------------------------------
Alwyn Heong 4 4
- ----------------------------------------------------
Robert W. Lovelace 12 12
- ----------------------------------------------------
Robert G. O'Donnell 21 25
- ----------------------------------------------------
Donald D. O'Neal 11 11
- ----------------------------------------------------
Victor M. Parachini 21 34
- ----------------------------------------------------
Richard T. Schotte 19 30
- ----------------------------------------------------
Susan M. Tolson 7 8
</TABLE>
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
13
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, It is the Series' policy to distribute to the
DISTRIBUTIONS AND shareholders (the insurance company separate ac-
TAXES counts) all of its net investment income and cap-
ital gains realized during each fiscal year.
The Series Each fund of the Series is subject to asset di-
distributes to versification regulation prescribed by the U.S.
shareholders all Treasury Department under the Internal Revenue
its income and Code (the "Code"). These regulations generally
capital gains provide that, as of the end of each calendar
realized during quarter or within 30 days thereafter, no more
each fiscal year. than 55% of the total assets of the fund may be
represented by any one investment, no more than
70% by any two investments, no more than 80% by
any three investments, and no more than 90% by
any four investments. For this purpose, all secu-
rities of the same issuer are considered a single
investment. Furthermore, each U.S. Government
agency or instrumentality is treated as a sepa-
rate issuer. There are also alternative diversi-
fication tests which may be satisfied by the
funds under the regulations. The Series intends
to comply with the diversification regulations.
If a fund should fail to comply with these regu-
lations, Contracts invested in that fund would
not be treated as annuity, endowment or life in-
surance contracts under the Code.
See the applicable Contract prospectus for infor-
mation regarding the federal income tax treatment
of the Contracts and distributions to the sepa-
rate accounts.
FEDERAL TAXES Each fund of the Series intends to
operate as a "regulated investment company" under
the Internal Revenue Code. In any fiscal year in
which a fund so qualifies and distributes to
shareholders its net investment income and real-
ized capital gains, the fund itself is relieved
of federal income tax.
SERIES SERIES ORGANIZATION The Series, an open-end in-
ORGANIZATION AND vestment company, was organized as a Massachu-
MANAGEMENT setts business trust in 1983. The Series' Board
of Trustees supervises Series operations and per-
forms duties required by applicable state and
federal law. Members of the board who are not em-
ployed by Capital Research and Management Company
or its affiliates are paid for services rendered
to the Series as described in the statement of
additional information. They may elect to defer
all or a portion of these fees through a deferred
compensation plan in effect for the Series. The
Board of Trustees has approved the retention of
the companies listed below to provide certain
services to the Series.
INVESTMENT ADVISER Capital Research and Manage-
ment Company, a large and experienced investment
management organization founded in 1931, is the
investment adviser to the Series and other mutual
funds, including those in The American Funds
Group. Capital Research and Management Com- pany,
a wholly-owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South
Hope Street, Los Angeles, CA 90071. Capital Re-
search and Management Company manages the invest-
ment portfolios and business affairs of the Se-
ries.
The compensation paid to the Investment Adviser
for the most recent fiscal year as a percentage
of average net assets amounted to the following:
Growth Fund -- %; International Fund -- %;
Growth-Income Fund -- %; Asset Allocation
Fund -- %; Bond Fund -- %; High-Yield Bond
Fund -- %; U.S. Government/AAA-Rated Securi-
ties Fund -- %; and Cash Management Fund --
%. Capital Research and Management Company
has received no compensation for the Global
Growth Fund because the Global Growth Fund had
not commenced operations as of the date of this
prospectus.
Capital Research and Management Company and its
affiliated companies have adopted a personal in-
vesting policy that is consistent with the recom-
mendations contained in the report dated May 9,
1994 issued by the Investment Company Institute's
Advisory Group on Personal Investing. (See the
14
<PAGE>
- --------------------------------------------------------------------------------
statement of additional information.) This policy
has been incorporated into the Series' "code of
ethics" which is available from the Series' Sec-
retary upon request.
PORTFOLIO TRANSACTIONS Orders for the Series'
portfolio securities transac- tions are placed by
Capital Research and Management Company which
strives to obtain the best available prices,
taking into account the costs and quality of
executions. There is no agreement or commitment
to place orders with any broker-dealer. Fixed-
income securities are generally traded on a "net"
basis with a dealer acting as principal for its
own account without a stated commission, although
the price of the security usually includes a
profit to the dealer. In underwritten offerings,
securities are usually purchased at a fixed price
which includes an amount of compensation to the
underwriter, generally referred to as the
underwriter's concession or discount. On
occasion, securities may be purchased directly
from an issuer, in which case no commissions or
discounts are paid.
Subject to the above policy, when two or more
brokers are in a position to offer comparable
prices and executions, preference may be given to
brokers that have sold Contracts or have provided
investment research, statistical and other re-
lated services for the benefit of the Series
and/or of other funds served by Capital Research
and Management Company.
SHAREHOLDER VOTING RIGHTS All shares of the Se-
ries have equal voting rights and are entitled to
one vote per share with proportional voting for
fractional shares; however, only shareholders of
Class 2 shares will be entitled to vote on mat-
ters relating solely to Class 2 shares; for exam-
ple, the plan of distribution. There will not
usually be a shareholder meeting in any year, ex-
cept, for example, when the election of the board
is required to be acted upon by shareholders un-
der the Investment Company Act of 1940.
In matters which only affect a particular fund,
the matter shall have been effectively acted upon
by a majority vote of that fund even though: (1)
the matter has not been approved by a majority
vote of any other fund; or (2) the matter has not
been approved by a majority vote of the Series.
The insurance company separate accounts, as the
shareholders of the Series, have the right to
vote Series shares at any meeting of sharehold-
ers. However, the Contracts provide that the sep-
arate accounts will vote Series shares in accor-
dance with instructions received from owners of
the Contracts. See the applicable Contract pro-
spectus for information regarding Contract own-
ers' voting rights. Since the funds use a com-
bined prospectus, each fund may be liable for
misstatements, inaccuracies, or incomplete dis-
closure concerning any other fund contained in
this prospectus.
PURCHASES AND Shares of the Series are currently offered only
REDEMPTIONS to insurance company separate accounts which fund
OF SHARES the Contracts. All such shares may be purchased
or redeemed by the separate accounts at net asset
value, without any sales or redemption charges.
Such purchases and redemptions are made subse-
quent to corresponding purchases and redemptions
of units of the separate accounts without delay.
Except in extraordinary circumstances and as per-
missible under the Investment Company Act of
1940, the redemption proceeds will be paid on or
before the seventh day following the request for
redemption.
PRICE OF SHARES The net asset value per share is
calculated once daily at the close of trading
(currently 4:00 p.m., New York time) on each day
the New York Stock Exchange is open. The current
value of each fund's total assets, less all lia-
bilities, is divided by the total number of
shares outstanding (excluding treasury shares),
and the result, rounded to the nearer cent, is
the net asset value per share.
15
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Moody's Investors Service, Inc. rates the long-term debt securities issued
by various entities in categories ranging from "Aaa" to "C," according to
quality as described below.
"AAA -- Best quality. These securities 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 -- High quality by all standards. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there may
be other elements present which make the long-term risks appear somewhat
greater."
"A -- Upper medium grade obligations. These bonds possess many favorable
investment attributes. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future."
"BAA -- Medium grade obligations. 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 -- Generally lack characteristics of the desirable investment; assurance
of interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small."
"CAA -- Of poor standing. Issues may be in default or there may be present
elements of danger with respect to principal or interest."
"CA -- Speculative in a high degree; often in default or have other marked
shortcomings."
"C -- Lowest rated class of bonds; can be regarded as having extremely poor
prospects of ever attaining any real investment standing."
Standard & Poor's Corporation rates the long-term debt securities issued by
various entities in categories ranging from "AAA" to "D," according to quality
as described below.
"AAA -- Highest rating. Capacity to pay interest and repay principal is
extremely strong."
"AA -- High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree."
"A -- Have a strong capacity to pay interest and repay principal, although
they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions, than debt in higher rated categories."
"BBB -- Regarded as having adequate capacity to pay interest and repay
principal. These bonds normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal than for debt in
higher rated categories."
"BB, B, CCC, CC, C -- Regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions."
"C1 -- Reserved for income bonds on which no interest is being paid."
"D -- In default and payment of interest and/or repayment of principal is in
arrears."
[LOGO OF This prospectus has been printed on recycled
RECYCLED paper that meets the guidelines of the United
PAPER] States Environmental Protection Agency
16
<PAGE>
LL24183-14 26-101-496
AMERICAN VARIABLE INSURANCE SERIES
PART B
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1997
This document is not a prospectus but should be read in conjunction with the
current prospectus of American Variable Insurance Series (the "Series") dated
April 1, 1997. The prospectus may be obtained from your investment dealer or
financial planner or by writing to the series at the following address:
AMERICAN VARIABLE INSURANCE SERIES
Attention: Secretary
333 South Hope Street
Los Angeles, CA 90071
(213) 486-9200
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE NO.
<S> <C>
INVESTMENT POLICIES 1
INVESTMENT RESTRICTIONS 8
SERIES OFFICERS AND TRUSTEES 13
TRUSTEE COMPENSATION 13
MANAGEMENT 17
PRICE OF SHARES 19
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES 20
EXECUTION OF PORTFOLIO TRANSACTIONS 21
GENERAL INFORMATION 22
APPENDIX 24
FINANCIAL STATEMENTS [TO BE PROVIDED BY AMENDMENT]
</TABLE>
INVESTMENT POLICIES
With respect to all funds, portfolio changes will be made without regard to
the length of time a particular investment may have been held. Under certain
market conditions, the investment polices of the Asset Allocation Fund the Bond
Fund, the High-Yield bond Fund, and the U.S. Government/AAA-Rated Securities
Fund may result in higher portfolio turnover than those of the other funds,
although no fund's annual portfolio turnover rate is expected to exceed 100%.
A 100% annual portfolio turnover rate would occur, for example, if all the
investments in a fund's portfolio (exclusive of securities with less than one
year to maturity) were replaced in a period of one year. High portfolio
turnover involves correspondingly greater brokerage commissions, to the extent
such commissions are payable, and other transaction costs, which will be borne
directly by the fund involved.
GLOBAL GROWTH FUND, GROWTH FUND, GROWTH-INCOME FUND, ASSET ALLOCATION FUND,
BOND FUND AND HIGH-YIELD BOND FUND
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK SECURITIES:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield, high-risk
securities can be sensitive to adverse economic changes and corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress that
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay
interest or principal or entered into bankruptcy proceedings, each fund may
incur losses or expenses in seeking recovery of amounts owed to it. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices and yields of high-yield, high-risk
bonds and each fund's net asset value.
PAYMENT EXPECTATIONS - High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining
interest rate market, each fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
a high-yield, high-risk bond's value will decrease in a rising interest rate
market, as will the value of each fund's assets. If a fund experiences
unexpected net redemptions, this may force it to sell high-yield, high-risk
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing each fund's rate
of return.
LIQUIDITY AND VALUATION - There may be little trading in the secondary market
for particular bonds, which may affect adversely each fund's ability to value
accurately or dispose of such bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
GLOBAL GROWTH FUND, GROWTH FUND, INTERNATIONAL FUND, BOND FUND AND HIGH-YIELD
BOND FUND
CURRENCY TRANSACTIONS -- The Global Growth Fund, Growth Fund, the International
Fund, the Bond Fund and the High-Yield Bond Fund have the ability to purchase
and sell currencies to facilitate securities transactions and to enter into
forward currency contracts to hedge against changes in currency exchange rates.
The funds purchase or sell currencies in connection with settling transactions
involving securities denominated in currencies other than the U.S. dollar. A
forward currency contract is an obligation to purchase or sell a specific
currency at a future date and price, both of which are set at the time of the
contract. For example, the funds might sell a currency on a forward basis to
hedge against an anticipated decline in the currency in which a portfolio
security is denominated. Although this strategy could minimize the risk of
loss due to a decline in the value of the hedged currency, it could also limit
any potential gain which might result from an increase in the value of the
currency.
The Growth Fund does not currently intend to engage in any transactions other
than purchasing and selling currencies and foreign exchange contracts which
will be used to facilitate settlement of trades.
The Bond Fund and the High-Yield Bond Fund may enter into the transactions
described above and may also enter into exchange-traded futures contracts
relating to foreign currencies ("currency contracts") in connection with
investments in securities of foreign issuers in anticipation of, or to protect
against, fluctuations in exchange rates. In addition, forward currency
contracts may be used by these funds to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. An
exchange-traded futures contract relating to foreign currency is similar to a
forward foreign currency contract but has a standardized size and exchange
date. Although currency contracts typically will involve the purchase and sale
of a currency against the U.S. dollar, these funds also may enter into currency
contracts not involving the U.S. dollar. In connection with these futures
transactions, the Series has filed a notice of eligibility with the Commodities
Futures Trading Association ("CFTC") that exempts the Series from CFTC
registration as a "commodity pool operator" as defined under the Commodities
Exchange Act. Pursuant to this notice, these funds will observe certain CFTC
guidelines with respect to its futures transactions that, among other things,
require these funds to use futures for bona fide "hedging" purposes only (as
defined by CFTC rules) and to limit initial margin deposits to no more than 5%
of its net assets.
The Bond Fund and the High-Yield Bond Fund may attempt to accomplish
objectives similar to those involved in their use of currency contracts by
purchasing put or call options on currencies. A put option gives the funds, as
purchasers, the right (but not the obligation) to sell a specified amount of
currency at the exercise price until the expiration of the option. A call
option gives the funds, as purchasers, the right (but not the obligation) to
purchase a specified amount of currency at the exercise price until its
expiration. The funds might purchase a currency put option, for example, to
protect themselves during the contract period against a decline in the U.S.
dollar value of a currency in which they hold or anticipate holding securities.
If the currency's value should decline against the U.S. dollar, the loss in
currency value should be offset, in whole or in part, by an increase in the
value of the put. If the value of the currency instead should rise against the
U.S. dollar, any gain to the funds would be reduced by the premium they had
paid for the put option. A currency call option might be purchased, for
example, in anticipation of, or to protect against, a rise in the value against
the U.S. dollar of a currency in which the funds anticipate purchasing
securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(I.E., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation) and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated
strike prices and expiration dates. The High-Yield Bond Fund and Bond Fund
will not purchase an OTC option unless it is believed that daily valuations for
such options are readily obtainable. OTC options differ from exchange-traded
options in that OTC options are transacted with dealers directly and not
through a clearing corporation which guarantees performance. Consequently,
there is a risk of non-performance by the dealer. Since no exchange is
involved, OTC options are valued on the basis of a quote provided by the
dealer. In the case of OTC options, there can be no assurance that a liquid
secondary market will exist for any particular option at any specific time.
To avoid having an amount greater than its net assets subject to market risk
in connection with currency contract transactions, each fund will segregate
cash, cash equivalents, or high quality debt instruments in an amount equal to
the value of the currency it has committed to purchase.
ASSET ALLOCATION FUND, BOND FUND AND U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
GNMA CERTIFICATES, FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS, OTHER
MORTGAGE-RELATED SECURITIES -- The funds may purchase certificates issued by
the Government National Mortgage Association ("GNMA") and the U.S.
Government/AAA-Rated Securities Fund expects to invest in these securities.
GNMA certificates are mortgage-backed securities representing part ownership of
a pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. A pool of
these mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. GNMA certificates differ from typical
bonds because principal is repaid monthly over the term of the loan rather than
returned in a lump sum at maturity. Because both interest and principal
payments (including prepayments) on the underlying mortgage loans are passed
through to the holder of the certificate, GNMA certificates are called
"pass-through" securities.
The Federal National Mortgage Association ("FNMA"), a federally chartered and
privately-owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the timely
payment of principal and interest, but this guarantee is not backed by the full
faith and credit of the U.S. Government. The Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the U.S. Government,
issues participation certificates which represent an interest in a pool of
conventional mortgage loans. FHLMC guarantees the timely payment of interest
and the ultimate collection of principal and maintains reserves to protect
holders against losses due to default, but the certificates are not backed by
the full faith and credit of the U.S. Government. As is the case with GNMA
certificates, the actual maturity of and realized yield on particular FNMA and
FHLMC pass-through securities will vary based on the prepayment experience of
the underlying pool of mortgages.
The funds may invest in mortgage-related securities issued by financial
institutions such as commercial banks, savings and loan associations, mortgage
bankers and securities broker-dealers (or separate trusts or affiliates of such
institutions established to issue the securities) including collateralized
mortgage obligations ("CMO's") and mortgage-backed bonds. CMO's (including
real estate mortgage investment conduits as authorized under the Internal
Revenue Code of 1986, as amended) are issued in series that are made up of a
group of bonds that together are fully collateralized directly or indirectly by
a pool of mortgages on which the payments of principal and interest are
dedicated to payment of principal and interest on the bonds in the series.
Each class of bonds in the series may have a different maturity than the other
classes of bonds in the series, bear a different coupon and have a different
priority in receiving payments. The different maturities come from the fact
that all principal payments, both regular principal payments as well as any
prepayment of principal, are passed through first to the holders of the class
with the shortest maturity until it is completely retired. Thereafter,
principal payments are passed through to the next class of bonds in the series,
until all the classes have been paid off. As a result, an acceleration in the
rate of prepayments that may be associated with declining interest rates
shortens the expected life of each class, with the greatest impact on those
classes with the shortest maturities. Similarly, should the rate of
prepayments slow down, as may happen in times of rising interest rates, the
expected life of each class lengthens, again with the greatest impact on those
classes with the shortest maturities. In the case of some CMO series, each
class may receive a differing proportion of the monthly interest and principal
repayments on the underlying collateral. In these series the classes having
proportionally greater interests in principal repayments generally would be
more affected by an acceleration (or slowing) in the rate of prepayments.
Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMO's). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds can provide that they are callable by the issuer prior to
maturity).
BOND FUND AND U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
REVERSE REPURCHASE AGREEMENTS -- Although the Bond Fund and the U.S.
Government/AAA-Rated Securities Fund have no current intention of doing so
during the next 12 months, each fund is authorized to enter into reverse
repurchase agreements. A reverse repurchase agreement is the sale of a
security by a fund and its agreement to repurchase the security at a specified
time and price. Each fund will maintain in a segregated account with its
custodian cash, cash equivalents or U.S. Government securities in an amount
sufficient to cover its obligations under reverse repurchase agreements with
broker-dealers (but no collateral is required on reverse repurchase agreements
with banks). Under the Investment Company Act of 1940 (the "1940 Act"),
reverse repurchase agreements may be considered borrowings by a fund. The use
of reverse repurchase agreements by each fund creates leverage which increases
the funds' investment risk. As the funds' aggregate commitments under these
reverse repurchase agreements increase, the opportunity for leverage similarly
increases. If the income and gains on securities purchased with the proceeds
of reverse repurchase agreements exceed the costs of the agreements, the funds'
earnings or net asset value will increase faster than otherwise would be the
case; conversely, if the income and gains fail to exceed the costs, earnings or
net asset value would decline faster than otherwise would be the case.
ASSET ALLOCATION FUND, BOND FUND, HIGH-YIELD BOND FUND, AND U.S.
GOVERNMENT/AAA-RATED SECURITIES FUND
LOANS OF PORTFOLIO SECURITIES -- Although the Asset Allocation Fund, the Bond
Fund, the High-Yield Bond Fund and the U.S. Government/AAA-Rated Securities
Fund have no current intention of doing so during the next 12 months, these
funds are authorized to lend portfolio securities to selected securities
dealers or other institutional investors whose financial condition is monitored
by Capital Research and Management Company (the "Investment Adviser"). The
borrower must maintain with the Series' custodian collateral consisting of
cash, cash equivalents or U.S. Government securities equal to at least 100% of
the value of the borrowed securities, plus any accrued interest. The
Investment Adviser will monitor the adequacy of the collateral on a daily
basis. Each fund may at any time call a loan of its portfolio securities and
obtain the return of the loaned securities. Each fund will receive any
interest paid on the loaned securities and a fee or a portion of the interest
earned on the collateral. Each fund will limit its loans of portfolio
securities to an aggregate of 10% of the value of its total assets, determined
at the time any such loan is made.
PORTFOLIO TRADING OF FIXED-INCOME SECURITIES -- The funds intend to engage in
portfolio trading of fixed-income securities when it is believed that the sale
of a fixed-income security owned and the purchase of another security of better
value can enhance principal and/or increase income. A security may be sold to
avoid any prospective decline in market value in light of what is evaluated as
an expected rise in prevailing yields, or a security may be purchased in
anticipation of a market rise (a decline in prevailing yields). A security
also may be sold and a comparable security purchased coincidentally in order to
take advantage of what is believed to be a disparity in the normal yield and
price relationship between the two securities.
"ROLL" TRANSACTIONS -- Although the Asset Allocation Fund, the High-Yield Bond
Fund, the Bond Fund and the U.S. Government/AAA-Rated Securities Fund have no
current intention of doing so during the next 12 months, these funds may engage
in "roll" transactions. A "roll" transaction is the sale of securities
together with a commitment (for which a fund may receive a fee) to purchase
similar, but not identical, securities at a future date. The funds intend to
treat "roll" transactions as two separate transactions; one involving the
purchase of a security and a separate transaction involving the sale of a
security. Since the funds do not intend to enter into "roll" transactions for
for financing purposes, they may treat these transaction as not falling within
the definition of "borrowing" set forth in Section 2(a)(23) of the 1940 Act.
As the fund's aggregate commitments under these transactions increase, the
opportunity for leverage similarly may increase; however, it is not the intent
of the fund to engage in these transactions for leveraging purposes. In
addition, the fund may enter into other purchase and sale transactions
involving securities which are not settled in the ordinary course of business
and under various terms when to do so is in the best interest of the fund.
The fund will segregate liquid assets such as cash, U.S. Government securities
or other appropriate high-grade debt obligations in an amount sufficient to
meet its payment obligations in these transactions. Although these transactions
will not be entered into for leveraging purposes, to the extent the fund's
aggregate commitments under these transactions exceed its holdings of cash and
securities that do not fluctuate in value (such as short-term money market
instruments), the fund temporarily will be in a leveraged position (i.e., it
will have an amount greater than its net assets subject to market risk). Should
market values of the fund's portfolio securities decline while the fund is in a
leveraged position, greater depreciation of its net assets would likely occur
than were it not in such a position. The fund will not borrow money to settle
these transactions and, therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.
BOND FUND AND HIGH-YIELD BOND FUND
LOAN PARTICIPATIONS The High-Yield Bond Fund and the Bond Fund may each invest
up to 10% of their assets in loan participations. These participations, which
can also include loan assignments, typically involve loans made by a syndicate
of banks to U.S. and non-U.S. corporate or governmental borrowers for a variety
of purposes which may be secured or unsecured, and will vary in term and legal
structure. Typically, price quotations with respect to loan participations are
available from the originating bank (the bank that makes the underlying loan).
The originating bank also serves as the market maker for the resale of loan
participations. When purchasing such instruments, a fund may assume the credit
risks associated with the original bank lender as well as the credit risks
associated with the borrower. In addition, if the loan is foreclosed, a fund
could be part owner of any collateral, and could bear the costs and liabilities
of owning and disposing of the collateral. Loan participations generally are
not rated by major rating agencies and may not be protected by the securities
laws. Also, loan participations may be liquid or illiquid. To the extent
these instruments are illiquid, each fund may have difficulty determining their
value or selling the instruments as generally there is no secondary market.
Each fund will purchase these instruments only to the extent that such a
purchase would be consistent with each fund's investment policies regarding
debt securities and/or illiquid securities.
In determining whether to purchase a particular loan participation, the
Investment Adviser will take into account all relevant factors including the
instrument's potential volatility, liquidity and risks (including whether the
fund could be put in an undesirable position as lender and/or owner of
collateral).
CASH MANAGEMENT FUND
The Cash Management Fund seeks to achieve its investment objective by
investing in a diversified selection of money market instruments, and the other
funds generally will invest a portion of their assets in money market
instruments. These money market instruments include the following:
1. Commercial Paper: Short-term notes (up to nine months) issued by companies
or governmental bodies. The Cash Management Fund may only purchase commercial
paper judged by the Investment Adviser to be of suitable investment quality.
This includes (a) commercial paper that is rated in the two highest categories
by Standard & Poor's Corporation and by Moody's Investors Service, Inc. or (b)
other commercial paper deemed on the basis of the issuer's creditworthiness to
be of a quality appropriate for the Cash Management Fund. (No more than 5% of
the Cash Management Fund's assets may be invested in commercial paper rated in
the second highest rating category by either Moody's or Standard & Poor's; no
more than the greater of 1% of the Cash Management Fund's assets or $1 million
may be invested in such securities of any one issuer.) See the Appendix for a
description of the ratings. The commercial paper in which the Cash Management
Fund may invest includes variable amount master demand notes. Variable amount
master demand notes permit the Cash Management Fund to invest varying amounts
at fluctuating rates of interest pursuant to the agreement in the master note.
These are direct lending obligations between the lender and borrower, they are
generally not traded, and there is no secondary market. Such instruments are
payable with accrued interest in whole or in part on demand. The amounts of
the instruments are subject to daily fluctuations as the participants increase
or decrease the extent of their participations. Investments in these
instruments are limited to those that have a demand feature enabling the Cash
Management Fund unconditionally to receive the amount invested from the issuer
upon seven or fewer days' notice. (Generally, the Cash Management Fund
attempts to invest in instruments having a one-day notice provision). In
connection with master demand note arrangements, the Investment Adviser,
subject to the direction of the Trustees, monitors on an ongoing basis, the
earning power, cash flow, and other liquidity ratios of the borrower and its
ability to pay principal and interest on demand. The Investment Adviser also
considers the extent to which the variable amount master demand notes are
backed by bank letters of credit. These notes generally are not rated by
Moody's or Standard & Poor's. The Cash Management Fund may invest in them only
if it is deemed that at the time of investment the notes are of comparable
quality to the other commercial paper in which the Cash Management Fund may
invest. Master demand notes are considered to have a maturity equal to the
repayment notice period unless the Investment Adviser has reason to believe
that the borrower could not make timely repayment upon demand.
2. Commercial Bank Obligations: Certificates of deposit (interest-bearing
time deposits), bankers acceptances (time drafts drawn on a commercial bank
where the bank accepts an irrevocable obligation to pay at maturity)
representing direct or contingent obligations of commercial banks with assets
in excess of $1 billion, based on latest published reports or obligations
issued by commercial banks with assets of less than $1 billion if the principal
amount of such obligation is fully insured by the U.S. Government.
3. Corporate Bonds and Notes: The Cash Management Fund may purchase corporate
obligations that mature or that may be redeemed in one year or less. These
obligations originally may have been issued with maturities in excess of one
year. The Cash Management Fund may invest only in corporate bonds or notes of
issuers having outstanding short-term securities rated as described above in
"Commercial Paper."
4. Savings Association Obligations: Certificates of deposit (interest-bearing
time deposits) issued by savings banks or savings and loan associations that
have assets in excess of $1 billion, based on latest published reports, or
obligations issued by institutions with assets of less than $1 billion if the
principal amount of such obligation is fully insured by the U.S. Government.
5. Floating Rate Obligations: These securities have a coupon rate that
changes at least annually and generally more frequently. The coupon rate is
set in relation to money market rates. The obligations, issued primarily by
banks, other corporations, governments and semi-governmental bodies, may have a
maturity in excess of one year. In some cases, the coupon rate may vary with
changes in the yield on Treasury bills or notes or with changes in LIBOR
(London Interbank Offering Rate). The Investment Adviser considers floating
rate obligations to be liquid investments because a number of U.S. and non-U.S.
securities dealers make active markets in these securities.
INVESTMENT RESTRICTIONS
The Series has adopted certain investment restrictions for each fund which are
fundamental policies and cannot be changed without approval by a majority of
its outstanding shares. Such majority is defined by the 1940 Act as the vote
of the lesser of (i) 67% or more of the outstanding shares present at a
meeting, if the holders of more than 50% of the outstanding voting securities
are present in person or by proxy, or (ii) more than 50% of the outstanding
voting securities. All percentage limitations expressed in the following
investment restrictions are measured immediately after the relevant transaction
is made.
INVESTMENT RESTRICTIONS OF THE GLOBAL GROWTH FUND, GROWTH FUND, INTERNATIONAL
FUND, GROWTH-INCOME FUND, ASSET ALLOCATION FUND, BOND FUND AND HIGH-YIELD
BOND
The Global Growth Fund, Growth Fund, International Fund, Growth-Income Fund,
Asset Allocation Fund, Bond Fund and High-Yield Bond Fund may not:
1. Invest more than 5% of the value of the total assets of the fund in the
securities of any one issuer, provided that this limitation shall apply only to
75% of the value of the fund's total assets and, provided further, that the
limitation shall not apply to obligations of the government of the U.S. under a
general Act of Congress. The short-term obligations of commercial banks are
excluded from this 5% limitation with respect to 25% of the fund's total
assets.
2. As to 75% of its total assets, purchase more than 10% of the outstanding
voting securities of an issuer.
3. Invest more than 25% of the fund's total assets in the securities of
issuers in the same industry. Obligations of the U.S. Government, its agencies
and instrumentalities, are not subject to this 25% limitation on industry
concentration. In addition, the fund may, if deemed advisable, invest more
than 25% of its assets in the obligations of domestic commercial banks.
4. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 10% of the
fund's total assets would be so invested.
5. Invest in real estate (including limited partnership interests, but
excluding securities of companies, such as real estate investment trusts, which
deal in real estate or interests therein).
6. Purchase commodities or commodity contracts; except that the International
Fund, Asset Allocation Fund, High-Yield Bond Fund and Bond Fund may engage in
transactions involving currencies (including forward or futures contracts and
put and call options).
7. Invest in companies for the purpose of exercising control or management.
8. Make loans to others except for (a) the purchase of debt securities; (b)
entering into repurchase agreements; (c) the loaning of its portfolio
securities; and (d) entering into loan participations.
9. Borrow money, except from banks for temporary purposes, and then in an
amount not in excess of 5% of the value of the fund's total assets. Moreover,
in the event that the asset coverage for such borrowings falls below 300%, the
fund will reduce, within three days, the amount of its borrowings in order to
provide for 300% asset coverage.
10. Purchase securities on margin.
11. Pledge or hypothecate the fund's assets.
12. Sell securities short, except to the extent that the fund
contemporaneously owns, or has the right to acquire at no additional cost,
securities identical to those sold short.
13. Invest in puts, calls, straddles, spreads or any combination thereof;
except as described above in Investment Restriction number 6.
14. Purchase or sell securities of other investment companies (except in
connection with a merger, consolidation, acquisition or reorganization).
15. Engage in underwriting of securities issued by others, except to the
extent it may be deemed to be acting as an underwriter in the purchase or
resale of portfolio securities.
Notwithstanding investment restriction number 14, the funds may invest in
securities of other managed investment companies if deemed advisable by its
officers in connection with the administration of a deferred compensation plan
adopted by Trustees pursuant to an exemptive order granted by the Securities
and Exchange Commission.
Notwithstanding investment restriction number 15, the funds may not engage in
the business of underwriting securities of other issuers, except to the extent
that the disposal of an investment position may technically constitute the fund
an underwriter as that term is defined under the Securities Act of 1933.
The Global Growth Fund, International Fund and High-Yield Bond Fund may not
invest more than 10% of the value of their total assets in securities which are
restricted as to resale; the Growth Fund, Growth-Income Fund and Asset
Allocation Fund may not invest more than 5% of the value of their total assets
in securities which are restricted as to resale. (Rule 144A securities and
Section 4(2) commerical paper, as defined in the Securities Act of 1933, are
excluded from these investment limits.) As a condition to the acquisition of
the type of securities mentioned herein, the funds will ordinarily require that
the issuer of such securities shall agree to bear the expenses of registration
under the Securities Act of 1933, if and when the funds desire to sell such
securities. The need to effect such registration could result in a delay in
disposing of such securities. These policies of the Series are not deemed
fundamental policies and therefore may be changed without shareholder approval.
To the extent a fund invests in non-U.S. securities, the Series has undertaken
to the California Department of Insurance (which regulates certain contracts
that use the Series as an underlying investment) to adhere to the following
guidelines with respect to such investments:
1. The fund will have no more than 20% of its net asset value invested in
securities of issuers located in any one country. An additional 15% of the
fund's assets may be invested in securities of issuers located in any one of
the following countries: Australia, Canada, France, Japan, the United Kingdom
or the former West Germany.
2. The fund will be invested in a minimum of five different non-U.S. countries
at all times. However, this minimum is reduced to four countries when non-U.S.
investments comprise less than 80% of the fund's net asset value; to three
countries when less than 60%; to two countries when less than 40% and to one
country when less than 20%.
INVESTMENT RESTRICTIONS OF THE U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
The U.S. Government/AAA-Rated Securities Fund may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
securities")) if, immediately after and as a result of such investment, more
than 5% of the value of the fund's total assets would be invested in securities
of the issuer.
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry,
except that this limitation shall not apply to U.S. Government securities or
other securities to the extent they are backed by or represent interests in
U.S. Government securities or U.S. Government-guaranteed mortgages.
3. Invest in companies for the purpose of exercising control or management.
4. Knowingly purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition, or reorganization.
5. Buy or sell real estate or commodities or commodity contracts in the
ordinary course of its business; however, the fund may purchase or sell readily
marketable debt securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein, including
real estate investment trusts.
6. Acquire securities subject to restrictions on disposition imposed by the
Securities Act of 1933, if, immediately after and as a result of such
acquisition, the value of such restricted securities and all other illiquid
securities held by the fund would exceed 10% of the value of the fund's total
assets.
7. Engage in the business of underwriting securities of other issuers, except
to the extent that the disposal of an investment position may technically cause
it to be considered an underwriter as that term is defined under the Securities
Act of 1933.
8. Make loans, except that the fund may: (a) purchase readily marketable debt
securities; (b) invest in repurchase agreements; (c) make loans of portfolio
securities; and (d) enter into loan participations. The fund will not invest
in repurchase agreements maturing in more than seven days if any such
investment, together with any illiquid securities (including securities which
are subject to legal or contractual restrictions on resale) held by the fund,
exceeds 10% of the value of its total assets.
9. Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short.
10. Purchase securities on margin, except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities.
11. Borrow money, except from banks for temporary or emergency purposes not in
excess of 5% of the value of the fund's total assets, except that the fund may
enter into reverse repurchase agreements.
12. Mortgage, pledge, or hypothecate any of its assets, provided that this
restriction shall not apply to the sale of securities pursuant to a reverse
repurchase agreement.
13. Write, purchase or sell puts, calls or combinations thereof.
Notwithstanding investment restriction number 4, the fund may invest in
securities of other managed investment companies if deemed advisable by its
officers in connection with the administration of a deferred compensation plan
adopted by Trustees pursuant to an exemptive order granted by the Securities
and Exchange Commission.
INVESTMENT RESTRICTIONS OF THE CASH MANAGEMENT FUND
The Cash Management Fund may not:
1. Invest more than 5% of the value of the total assets of the fund in the
securities of any one issuer, provided that this limitation shall apply only to
75% of the value of the fund's total assets and, provided further, that the
limitation shall not apply to obligations of the government of the U.S. under a
general Act of Congress. The short-term obligations of commercial banks are
excluded from this 5% limitation with respect to 25% of fund's total assets.
2. As to 75% of its total assets, purchase more than 10% of the outstanding
voting class of securities of an issuer.
3. Invest more than 25% of the fund's total assets in the securities of
issuers in the same industry. Obligations of the U.S. Government, its agencies
and instrumentalities, are not subject to this 25% limitation on industry
concentration. In addition, the fund may, if deemed advisable, invest more
than 25% of its assets in the obligations of domestic commercial banks.
4. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 10% of the
fund's total assets would be so invested.
5. Make loans to others except for the purchase of the debt securities listed
above. The fund may enter into repurchase agreements as described above.
6. Borrow money, except from banks for temporary purposes, and then in an
amount not in excess of 5% of the value of the fund's total assets. Moreover,
in the event that the asset coverage for such borrowings falls below 300%, the
fund will reduce within three days the amount of its borrowings in order to
provide for 300% asset coverage.
7. Pledge or hypothecate the fund's assets.
8. Sell securities short except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost, securities identical to
those sold short.
9. Invest in puts, calls, straddles, spreads or any combination thereof.
10. Purchase or sell securities of other investment companies (except in
connection with a merger, consolidation, acquisition or reorganization), real
estate or commodities.
11. Act as underwriter of securities issued by others, engage in distribution
of securities for others, or make investments in other companies for the
purpose of exercising control or management.
Notwithstanding investment restriction number 10, the fund may invest in
securities of other investment companies if deemed advisable by its officers in
connection with the administration of a deferred compensation plan adopted by
Trustees pursuant to an exemptive order granted by the Securities and Exchange
Commission.
Notwithstanding investment restriction number 1 above, in order to comply with
Rule 2a-7 under the 1940 Act, the Cash Management Fund has adopted a
non-fundamental policy (that may be changed by the Board of Trustees without
shareholder approval) of investing no more than 5% of its assets (measured at
the time of purchase) in the securities of any one issuer (other than the U.S.
Government); provided however, that the Cash Management Fund may invest, as to
25% of its assets, more than 5% of its assets in certain high-quality
securities (as defined in the Rule) of a single issuer for a period of up to
three business days. Investment restriction number 9 above does not prevent
the purchase by the Cash Management Fund of securities that have "put" or
"stand-by" commitment features.
To the extent that any fund is used with a variable life insurance contract
sold in the state of California, it will limit its borrowing activities to (1)
10% of net asset value when borrowing for any general purpose and (2) 25% of
net asset value when borrowing as a temporary measure to facilitate
redemptions. For this purpose, reverse repurchase agreements shall constitute
borrowing. This policy is not deemed a fundamental policy and therefore may be
changed without shareholder approval.
SERIES TRUSTEES AND OFFICERS
TRUSTEES AND TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH PRINCIPAL OCCUPATION(S) AGGREGATE TOTAL COMPENSATION TOTAL
REGISTRANT DURING PAST 5 YEARS COMPENSATION (INCLUDING VOLUNTARILY NUMBER OF
(POSITIONS WITHIN THE (INCLUDING DEFERRED FUND BOARDS
ORGANIZATIONS LISTED MAY HAVE VOLUNTARILY DEFERRED COMPENSATION/1/) ON WHICH
CHANGED DURING THIS PERIOD) COMPENSATION/1/) FROM FROM ALL FUNDS TRUSTEE
SERIES DURING FISCAL MANAGED BY CAPITAL SERVES/2/
YEAR ENDED 11/30/96 RESEARCH AND
MANAGEMENT
COMPANY
<S> <C> <C> <C> <C> <C>
Charles H. Black Trustee Private investor and consultant; $XX,XXX/3/ $XX,XXX 4
525 Alma Real Drive Former Executive Vice President
Pacific Palisades, CA 90272 and Director, Kaiser Steel
Age: 70 Corporation
+ H. Frederick Christie Trustee Private Investor; Former President $XX,XXX/3/ $XX,XXX 18
P. O. Box 144 and Chief Executive Officer, The
Palos Verdes, CA 90274 Mission Group (non-utility holding
Age: 63 Company, subsidiary of Southern
California Edison Company)
Joe E. Davis Trustee Private Investor; Former Chairman, $XX,XXX $XX,XXX 1
3436 Caribeth Drive Linear Corporation; former
Encino, CA 91436 President and Chief Executive
Age: 62 Officer, National Health
Enterprises, Inc.
Martin Fenton, Jr. Trustee Chairman, Senior Resource Group $XX,XXX $XXX,XXX 16
4350 Executive Drive (management of senior living
Suite 101 centers)
San Diego, CA 92123
Age: 61
++ Richard H. M. Holmes Trustee Retired. Former Vice President, $XX,XXX $XX,XXX 4
580 Laurent Road Capital Research and Management
Hillsborough, CA 94010 Company
Age: 71
Mary Myers Kauppila Trustee Founder and President, Energy $XX,XXX/3/ $XX,XXX 4
286 Congress Street Investment, Inc.
Boston, MA 02110
Age: 42
Kirk P. Pendleton Trustee President, Cairnwood, Inc. none $XX,XXX
Cairnwood, Inc. 3
75 James Way
Southampton, PA 18966
Age: 57
@ James F. Rothenberg President and President and Director, Capital none/4/ none/4/ 1
333 South Hope Street Trustee Research and Management
Los Angeles, CA 90071 Company
Age: 50
@ Thomas E. Terry Chairman of Retired. Former Vice President and none/4/ none/4/ 3
6034 S. Highlands Avenue the Board Secretary, Capital Research and
Madison, WI 53705 Management Company
Age: 59
</TABLE>
+ May be deemed an "interested person" within the meaning of the Investment
Company Act of 1940 (the "1940 Act") due to membership on the board of
directors of the parent company of a registered broker-dealer.
++ Not considered an "interested person" within the meaning of the 1940 Act,
but he does not participate on the Contracts or Nominating Committees due to
his former affiliation with the Investment Adviser.
@ Trustees who are "interested persons" within the meaning of the 1940 Act on
the basis of their affiliation with the Investment Adviser.
/1/ Amounts may be deferred by eligible trustees under a non-qualified deferred
compensation plan adopted by the Series in 1993. Deferred amounts accumulate
at an earnings rate determined by the total return of one or more funds in The
American Funds Group as designated by the Trustee.
/2/ Capital Research and Management Company manages The American Funds Group
consisting of 28 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash Management
Trust of America, Capital Income Builder, Inc., Capital World Growth and Income
Fund, Inc., Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental
Investors, Inc., The Growth Fund of America, Inc., The Income Fund of America,
Inc., Intermediate Bond Fund of America, The Investment Company of America,
Limited Term Tax-Exempt Bond Fund of America, The New Economy Fund, New
Perspective Fund, Inc., SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, The U. S. Treasury Money Fund of America, U.S. Government Securities
Fund and Washington Mutual Investors Fund, Inc. Capital Research and
Management Company also manages Anchor Pathway Fund which serves as the
underlying investment vehicle for certain variable insurance contracts; and
Bond Portfolio for Endowments, Inc. and Endowments, Inc. whose shares may be
owned only by tax-exempt organizations. These amounts reflect the aggregate
compensation paid during the most recent fiscal year of the funds involved.
/3/ Since the plan's adoption, the total amount of deferred compensation
accrued by the Series (plus earnings thereon) for participating Trustees is as
follows: Charles H. Black ($XX,XXX); H . Frederick Christie ($XX,XXX); and Mary
Myers Kauppila ($XX,XXX). Amounts deferred and accumulated earnings thereon
are not funded and are general unsecured liabilities of the Series until paid
to the Trustee.
/4/ James F. Rothenberg and Thomas E. Terry are affiliated with the Investment
Adviser and, accordingly, receive no remuneration from the Series.
OFFICERS
(with their principal occupations during the past five years)#
THOMAS E. TERRY, CHAIRMAN OF THE BOARD (see above).
JAMES F. ROTHENBERG, PRESIDENT (see above).
* JAMES K. DUNTON, SENIOR VICE PRESIDENT.
Senior Vice President and Director, Capital Research and Management Company.
ABNER D. GOLDSTINE, SENIOR VICE PRESIDENT. 11100 Santa Monica Boulevard, Los
Angeles, CA 90025. Senior Vice President and Director, Capital Research and
Management Company.
* MICHAEL J. DOWNER, VICE PRESIDENT.
Senior Vice President - Fund Business Management Group, Capital Research and
Management Compnay.
* CLAUDIA P. HUNTINGTON, VICE PRESIDENT.
Senior Vice President, Capital Research Company.
STEVEN N. KEARSLEY, VICE PRESIDENT. 135 South State College Boulevard, Brea,
CA 92621.
Vice President and Treasurer, Capital Research and Management Company.
* DINA N. PERRY, VICE PRESIDENT.
Vice President, Capital Research and Management Company.
JOHN H. SMET, VICE PRESIDENT. 11100 Santa Monica Boulevard, Los Angeles, CA
90025.
Vice President, Capital Research and Management Company.
* CHAD L. NORTON, SECRETARY.
Vice President - Fund Business Management Group, Capital Research and
Management Company.
ROBERT P. SIMMER, TREASURER. 5300 Robin Hood Road, Norfolk, VA 23513.
Vice President - Fund Business Management Group, Capital Research and
Management Company.
__________________________________
# Positions within the organizations listed may have changed during this
period.
* Address is 333 South Hope Street, Los Angeles, CA 90071.
All of the Trustees and officers also are officers or employees of the
Investment Adviser or affiliated companies. No compensation is paid by the
Series to any officer or Trustee who is a director, officer or employee of the
Investment Adviser or affiliated companies. The Series pays fees of $20,000
per annum to Trustees who are not affiliated with the Investment Adviser, plus
$1,500 for each Board of Trustees meeteing attended, plus $600 for each meeting
attended as a member of a committee of the Board of Trustees. The Trustees may
elect, on a voluntary basis, to defer all or a portion of these fees through a
deferred compensation plan in effect for the Series. The Series also
reimburses certain expenses of the Trustees who are not affiliated with the
Investment Adviser.
MANAGEMENT
INVESTMENT ADVISER - The Investment Adviser, founded in 1931, maintains
research facilities in the U.S. and abroad (Los Angeles, San Francisco, New
York, Washington D.C., London, Geneva, Hong Kong, Singapore and Tokyo), with a
staff of professionals, many of whom have a number of years of investment
experience. The Investment Adviser is located at 333 South Hope Street, Los
Angeles, CA 90071, and at 135 South State College Boulevard, Brea, CA 92821.
The Investment Adviser's professionals travel several million miles a year,
making more than 5,000 research visits in more than 50 countries around the
world. The Investment Adviser believes that it is able to attract and retain
quality personnel. The Investment Adviser is a wholly owned subsidiary of The
Capital Group Companies, Inc.
An affiliate of the Investment Adviser compiles indices for major stock
markets around the world and compiles and edits the Morgan Stanley Capital
International Perspective, providing financial and market information about
more than 2,400 companies around the world.
The Investment Adviser is responsible for more than $100 billion of stocks,
bonds and money market instruments and serves over five million investors of
all types. These investors include privately owned businesses and large
corporations as well as schools, colleges, foundations and other non-profit and
tax-exempt organizations.
INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and Service
Agreement (the "Agreement") between the Series and the Investment Adviser,
unless sooner terminated, will continue in effect until November 30, 1997, and
may be renewed from year to year thereafter, provided that any such renewal has
been specifically approved at least annually by (i) the Board of Trustees, or
by the vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the Series, and (ii) the vote of a majority of Trustees
who are not parties to the Agreement or interested persons (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of voting on such approval. The Agreement provides that the Investment Adviser
has no liability to the Series for its acts or omissions in the performance of
its obligations to the Series not involving willful misconduct, bad faith,
gross negligence or reckless disregard of its obligations under the Agreement.
The Agreement also provides that either party has the right to terminate it,
without penalty, upon 60 days' written notice to the other party and that the
Agreement automatically terminates in the event of its assignment (as defined
in the 1940 Act).
As compensation for its services, the Investment Adviser receives a monthly
fee which is accrued daily, calculated at the annual rates of:
GLOBAL GROWTH FUND: [TO BE PROVIDED BY AMENDMENT];
GROWTH FUND: 0.50% of the first $600 million of net assets, plus 0.45% on net
assets greater than $600 million but not exceeding $1.2 billion, plus 0.42% on
net assets greater than $1.2 billion but not exceeding $2.0 billion, plus 0.37%
on net assets greater than $2.0 billion but not exceeding $3.2 billion, plus
0.35% on net assets in excess of $3.2 billion;
INTERNATIONAL FUND: 0.90% of the first $60 million of net assets, plus 0.78%
on net assets greater than $60 million but not exceeding $600 million, plus
0.60% on net assets greater than $600 million but not exceeding $1.2 billion,
plus 0.48% on net assets greater than $1.2 billion but not exceeding $2.0
billion, plus 0.465% on net assets in excess of $2.0 billion;
GROWTH-INCOME FUND: 0.50% of the first $600 million of net assets, plus 0.45%
on net assets greater than $600 million but not exceeding $1.5 billion, plus
0.40% on net assets greater than $1.5 billion but not exceeding $2.5 billion,
plus 0.32% on net assets greater than $2.5 billion but not exceeding $4.0
billion, plus 0.205% on net assets in excess of $4.0 billion;
ASSET ALLOCATION FUND: 0.50% of the first $600 million of net assets, plus
0.42% on net assets greater than $600 million but not exceeding $1.2 billion,
plus 0.36% on net assets in excess of $1.2 billion;
BOND FUND: 0.6% of the first $30 million of net assets, plus 0.50% on net
assets in excess of $30 million;
HIGH-YIELD BOND FUND: 0.60% of the first $30 million of net assets, plus 0.50%
on net assets greater than $30 million but not exceeding $600 million, plus
0.46% on net assets in excess of $600 million;
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND: 0.60% of the first $30 million of
net assets, plus 0.50% on net assets greater than $30 million but not exceeding
$600 million, plus 0.40% on net assets in excess of $600 million;
CASH MANAGEMENT FUND: 0.50% of the first $100 million of net assets, plus
0.42% on net assets greater than $100 million but not exceeding $400 million,
plus 0.38% on net assets in excess of $400 million.
The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of
qualified persons to perform the executive, and related administrative
functions of the Series, provides necessary office space, office equipment and
utilities, and general purpose accounting forms, supplies, and postage used at
the office of the Series relating to the services furnished by the Investment
Adviser. Subject to the expense agreement described below, the Series will pay
all expenses not expressly assumed by the Investment Adviser, including, but
not limited to, registration and filing fees with federal and state agencies;
blue sky expenses (if any); expenses of shareholders' meetings; the expense of
reports to existing shareholders; expenses of printing proxies and
prospectuses; insurance premiums; legal and auditing fees; dividend
disbursement expenses; the expense of the issuance, transfer, and redemption of
its shares; custodian fees; printing and preparation of registration
statements; taxes; compensation, fees and expenses paid to Trustees
unaffiliated with the Investment Adviser; association dues; and costs of
stationary and forms prepared exclusively for the Series.
The Agreement provides for an advisory fee reduction to the extent that each
fund's annual ordinary net operating expenses, except the International Fund's,
exceed 1 1/2% of the first $30 million of the average month-end total net
assets of the fund and 1% of the average month-end total net assets in excess
thereof. For the International Fund, the advisory fee will be reduced to the
extent that its annual ordinary net operating expenses exceed 1 1/2% of its
average month-end total net assets. Expenditures, including costs incurred in
connection with the purchase or sale of portfolio securities, which are
capitalized in accordance with generally accepted accounting principles
applicable to investment companies, are accounted for as capital items and not
as expenses.
During the fiscal years ended November 30, 1996, 1995 and 1994, the Investment
Adviser's total fees, respectively, amounted to the following: Growth Fund
$XX,XXX,000, $ 11,222,000 and $8,735,000; International Fund $X,XXX,000,
$9,882,000 and $8,330,000; Growth-Income Fund $XX,XXX,XXX, $13,593,000 and
$11,517,000; Asset Allocation Fund $X,XXX,XXX, $3,620,000 and $3,129,000;
High-Yield Bond Fund $X,XXX,XXX, $2,350,000 and $2,022,000; U. S.
Government/AAA-Rated Securities Fund $X,XXX,000, $2,550,000 and $2,459,000;
and Cash Management Fund $XXX,000, $907,000 and $905,000. During the fiscal
year ended November 30, 1996, the Investment Adviser's total fees for the Bond
Fund amounted to $X,XXX,XXX.
PLAN OF DISTRIBUTION The Series has adopted a Plan of Distribution (the
"Plan") for its Class 2 shares, pursuant to rule 12b-1 under the 1940 Act. As
required by rule 12b-1, the Plan has been approved by a majority of the entire
Board of Trustees, and separately by a majority of the Trustees who are not
"interested persons" of the Series and who have no direct or indirect financial
interest in the operation of the Plan. The officers and Trustees who are
"interested persons" of the Series may be considered to have a direct or
indirect financial interest in the operation of the Plan due to present or past
affiliations with the Investment Adviser and related companies. Potential
benefits of the Plan to the Series include improved shareholder services,
savings to the Series in advisory fees and other expenses, benefits to the
investment process from growth or stability of assets and maintenance of a
financially healthy management organization. The selection and nomination of
Trustees who are not "interested persons" of the Series is committed to the
discretion of the Trustees who are not "interested persons" during the
existence of the Plan. The Plan is reviewed quarterly and must be renewed
annually by the Board of Trustees.
PRICE OF SHARES
The price paid for shares, the net asset value price, is calculated for each
of the funds once daily at the close of trading (currently 4:00 p.m., New York
Time) each day the New York Stock Exchange is open as set forth below. The New
York Stock Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas Day. The net asset
value per share is determined as follows:
1. Stocks, and convertible bonds and debentures traded on securities exchanges
or the over-the-counter market are valued at the last reported sale price on
the day of valuation, or, lacking any sales on that day, at the last-reported
bid price.
2. Non-convertible bonds and debentures, and other long-term debt securities
and Treasury notes normally are valued at prices obtained for the day of
valuation from a bond pricing service, when such prices are available on the
day of valuation; however, in circumstances where the Investment Adviser deems
it appropriate to do so, such securities will be valued at the mean of
representative quoted bid or asked prices for such securities or, if such
prices are not available, at such prices for securities of comparable maturity,
quality and type. Securities traded on exchanges outside the U.S. are valued
at the last sale price on the day of valuation, or lacking any sales on that
day, at the last-reported bid price. Short-term securities other than Treasury
notes with original or remaining maturities in excess of 60 days are valued at
the mean of representative quoted bid and asked prices or, if such prices are
not available, at such prices for securities of comparable maturity, quality
and type. Short-term securities with 60 days or less to maturity are valued at
amortized cost, which approximates market value. Options on currencies
purchased by the fund are valued at their last sale price in the case of listed
options or at the average of the last bid prices obtained from dealers in the
case of OTC options. Futures contracts involving foreign currencies traded on
exchanges are valued at their last sale or settlement price as of the close of
such exchanges or, lacking any sales, at the mean between the last reported bid
and asked prices. Other securities are valued on the basis of last sale or bid
prices in what is, in the opinion of the Investment Adviser, the broadest and
most representative market, which may be either a securities exchange or
over-the-counter market.
3. Where quotations are not readily available, securities are valued at fair
value as determined in good faith by the Board of Trustees. The fair value of
all other assets is added to the value of securities to arrive at the
respective fund's total assets;
4. The value of any security denominated in a currency other than U.S. dollars
will be translated into U.S. dollars at the prevailing market rate as
determined by the Series' officers;
5. There are deducted from the total assets, thus determined, the liabilities
of the respective funds including proper accruals of expense items; and
6. The net assets of the respective fund so obtained is then divided by the
total number of shares outstanding (excluding treasury shares), and the result,
rounded to the nearer cent, is the fund's net asset value per share.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Each fund of the Series intends to qualify to be taxed as a "regulated
investment company" under the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify for the tax
treatment afforded a regulated investment company under the Code, a fund must
annually distribute at least 90% of its net investment income and certain
short-term capital gains and meet certain diversification of assets and other
requirements of the Code. If a fund qualifies for such tax treatment, it will
not be subject to Federal income tax on the part of its ordinary income and its
net realized capital gains which it distributes to shareholders. To meet the
requirements of the Code, a fund must (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock or securities or currencies;
(b) derive less than 30% of its gross income from the sale or other disposition
of securities held less than three months; and (c) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the market value
of the fund's assets is represented by cash, U.S. Government securities and
other securities, limited, in respect of any one issuer, to an amount not
greater than 5% of the fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or in two or more issuers which each fund controls and which are
engaged in the same or similar trades or businesses. It is the Series' policy
to distribute to the shareholders (the insurance company separate accounts) all
of its net investment income and net realized capital gains during each fiscal
year.
Under the Code, the Asset Allocation Fund's and the International Fund's
taxable income for each year will be computed without regard to any net foreign
currency loss attributable to transactions after October 31, and any such net
foreign currency loss will be treated as arising on the first day of the
following taxable year.
The amount of any realized gain or loss of the Asset Allocation Fund and the
International Fund on closing out a currency contract will generally result in
a realized capital gain or loss for tax purposes. Under Code Section 1256,
currency contracts held by each fund at the end of each fiscal year will be
required to be "marked to market" for federal income tax purposes, that is,
deemed to have been sold at market value. Sixty percent (60%) of any net gain
or loss recognized on these deemed sales and sixty percent (60%) of any net
realized gain or loss from any actual sales, will be treated as long-term
capital gain or loss, and the remainder of gain or loss from deemed and actual
sales will be treated as short-term capital gain or loss. Code Section 988
may also apply to currency contracts. Under Section 988, each foreign currency
gain or loss is generally computed separately and treated as ordinary income or
loss. In the case of overlap between Sections 1256 and 988, special provisions
determine the character and timing of any income, gain or loss. Each fund will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Each fund, except for Cash Management Fund, may be required to pay withholding
and other taxes imposed by foreign countries which would reduce investment
income. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes.
In addition to the asset diversification and other requirements for
qualification as a regulated investment company, the funds are subject to
another set of asset diversification requirements applicable to insurance
company separate accounts and their underlying funding vehicles. To satisfy
these diversification requirements, as of the end of each calendar quarter or
within 30 days thereafter, no more than 55% of the total assets of a fund may
be represented by any one investment, no more than 70% by any two investments,
no more than 80% by any three investments, and no more than 90% by any four
investments. For this purpose all securities of the same issuer are considered
a single investment, and each agency or instrumentality of the U.S. government
is treated as a separate issue of securities. The Series intends to comply
with these regulations. If a fund should fail to comply with these
regulations, Contracts invested in that fund shall not be treated as annuity,
endowment or life insurance contracts under the Code.
See the applicable Contract prospectus for information regarding the Federal
income tax treatment of the Contracts and distributions to the separate
accounts.
EXECUTION OF PORTFOLIO TRANSACTIONS
There are occasions on which portfolio transactions for the Series may be
executed as part of concurrent authorizations to purchase or sell the same
security for other funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the Series, they are effected only when the
Investment Adviser believes that to do so is in the interest of the Series.
When such concurrent authorizations occur, the objective is to allocate the
executions in an equitable manner. The Series will not pay a mark-up for
research in principal transactions.
Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings for the fiscal years ended November 30, 1996, 1995
and 1994, respectively, amounted to the following: Growth Fund $X,XXX,000,
$2,930,000, and $2,230,000; International Fund $X,XXX,000, $1,889,000, and
$2,251,000; Growth-Income Fund $X,XXX,000, $2,452,000, and $2,590,000; Asset
Allocation Fund $XXX,000, $849,000, and $628,000; High-Yield Bond Fund
$X,XXX,000, $1,456,000, and $2,760,000. Brokerage commissions were paid by the
U.S. Government/AAA-Rated Securities Fund during 1996 and 1995 only and
amounted to $XX,XXX and $73,190, respectively. Because all portfolio
transactions for the Cash Management Fund were on a "net price" basis and
involved short-term money market instruments only, that fund did not pay any
brokerage commissions during those periods.
GENERAL INFORMATION
CUSTODIAN OF ASSETS -- Securities and cash owned by the Series', including
proceeds from the sale of shares of the Series and of securities in the Series
portfolio, are held by State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, as Custodian. Non-U.S. securities may be
held by the Custodian in non-U.S. banks or securities depositories or foreign
branches of U.S. banks.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 400 South Hope Street, Los
Angeles, CA 90071, has served as the Series' independent accountants since
March 18, 1991, providing audit services, preparation of tax returns and review
of certain documents to be filed with the Securities and Exchange Commission.
The financial statements included in this Statement of Additional Information
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting. Prior to March 18, 1991, KPMG Peat Marwick, 725 South
Figueroa Street, Los Angeles, CA 90017, served as the Series' independent
public accountants. The selection of the Series' independent accountant is
reviewed and determined annually by the Board of Trustees.
REPORTS TO SHAREHOLDERS -- The Series' fiscal year ends November 30. Contract
owners are provided at least semi-annually with reports showing the investment
portfolio, financial statements and other information. The financial
statements included in the Annual Report are audited by the independent
accounting firm of Price Waterhouse LLP.
PERSONAL INVESTING POLICY - Capital Research and Management Company and its
affiliated companies have adopted a personal investing policy consistent with
Investment Company Institute guidelines. This policy includes: a ban on
acquisitions of securities pursuant to an initial public offering; restrictions
on acquisitions of private placement securities; pre-clearance and reporting
requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; disclosure of personal
holdings by certain investment personnel prior to recommendation for purchase
for the fund; blackout periods on personal investing for certain investment
personnel; ban on short-term trading profits for investment personnel;
limitations on service as a director of publicly traded companies; and
disclosure of personal securities transactions.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY -- Under the laws of certain states,
including Massachusetts, where the Series was organized, and California, where
the Series' principal office is located, shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Series. However, the risk of a shareholder
incurring any financial loss on account of shareholder liability is limited to
circumstances in which the Series itself would be unable to meet its
obligations. The Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Series and provides that
notice of the disclaimer may be given in each agreement, obligation, or
instrument which is entered into or executed by the Series or trustees. The
Declaration of Trust provides for indemnification out of Series property of any
shareholder personally liable for the obligations of the Series and also
provides for the Series to reimburse such shareholder for all legal and other
expenses reasonably incurred in connection with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not liable for
actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office. The Series
will provide indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
REGISTRATION STATEMENT -- A registration statement has been filed with the
Securities and Exchange Commission under the Securities Act of 1933 and the
1940 Act, with respect to the Series. The prospectus and this Statement of
Additional Information do not contain all information set forth in the
registration statement, its amendments and exhibits, to which reference is made
for further information concerning the Series. Statements contained in the
prospectus and this Statement of Additional Information as to the content of
the Contracts issued through the separate accounts and other legal instruments
are summaries. For a complete statement of the terms thereof, reference is
made to the registration statements of the separate accounts and Contracts as
filed with the Securities and Exchange Commission.
AUTHORIZED SHARES -- The Series was organized as a Massachusetts Business Trust
which permits each fund of the Series to issue an unlimited number of shares of
beneficial interest of a single class.
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.'s top two rating designations for commercial
paper are described as follows: issuers rated Prime-1 have a superior capacity
for repayment of short-term promissory obligations. Prime-1 repayment capacity
will normally be evidenced by the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity. Issues rated Prime-2 have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation's top two rating categories for commercial
paper are described as follows: A -- Issues assigned its highest rating are
regarded as having the greatest capacity for timely payment. Issues in this
category are delineated with numbers 1 or 2 to indicate the relative degree of
safety. A-1 -- This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation. A-2 -- Capacity for timely payments on issues with this
designation is strong. However, the relative degree of safety is not as high
as for issues designated "A-1".
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Included in Prospectus - Part A
Financial Highlights [TO BE PROVIDED BY AMENDMENT]
Included in Statement of Additional Information - Part B
Statement of Assets and Liabilities Per Share Data and Ratios
Statement of Operations Notes to Financial Statements
Statement of Changes in Net Assets Report of Independent Accountants
[TO BE PROVIDED BY AMENDMENT]
(B) EXHIBITS:
1. On file (see SEC files nos. 811-3857 and 2-86838)
2. On file (see SEC files nos. 811-3857 and 2-86838)
3. None.
4. None.
5. On file (see SEC files nos. 811-3857 and 2-86838)
6. Form of Selling Group Agreement between American Funds Distributors, Inc.
and selling dealers.
11. Consent of Independent Accountants [TO BE PROVIDED BY AMENDMENT]
12. None.
13. On file (see SEC files nos. 811-3857 and 2-86838)
14. None.
15. Form of Plan of Distribution for Class 2 shares pursuant to rule 12b-1.
16. None.
17. Financial data schedule (EDGAR) [TO BE PROVIDED BY AMENDMENT]
18. Form of Expense Allocation Plan for Class 1 and Class 2 shares pursuant to
rule 18f-3.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 30, 1996.
Number of
Title of Class Record-Holders
Beneficial Interest 9
(no par value)
ITEM 27. INDEMNIFICATION.
Registrant is a joint-insured under an Investment Adviser/Mutual Fund Errors
and Omissions Policy written by American International Surplus Lines Insurance
Company, Chubb Custom Insurance Company and ICI Mutual Insurance Company, which
insures its officers and Trustees against certain liabilities.
Article VI of the Trust's By-Laws states:
(a) The Trust shall indemnify any Trustee or officer of the Trust who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than action by or in the right of the Trust) by reason
of the fact that such person is or was such Trustee or officer or an employee
or agent of the Trust, or is or was serving at the request of the Trust as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Trust, and, with respect
to any criminal action or pro-ceeding, had no reasonable cause to believe such
person's conduct was unlawful.
(b) The Trust shall indemnify any Trustee or officer of the Trust who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Trust to procure a judgment
in its favor by reason of the fact that such person is or was such Trustee or
officer or an employee or agent of the Trust, or is or was serving at the
request of the Trust as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Trust, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of such person's duty to the Trust unless and
only to the extent that the court in which such action or suit was brought, or
any other court having jurisdiction in the premises, shall determine upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
(c) To the extent that a Trustee or officer of the Trust has been successful
on the merits in defense of any action, suit or proceeding referred to in
subparagraphs (a) or (b) above or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith, without the necessity for the determination as to the standard of
conduct as provided in subparagraph (d).
(d) Any indemnification under subparagraph (a) or (b) (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case upon
a determination that indemnification of the Trustee or officer is proper under
the standard of conduct set forth in subparagraph (a) or (b). Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of Trustees who were not parties to such action, suit or proceeding,
and are disinterested Trustees or (ii) if such a quorum of disinterested
Trustees so directs, by independent legal counsel in a written opinion; and any
determinations so made shall be conclusive.
(e) Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition of such
action, suit or proceeding, as authorized in the particular case, upon receipt
of an undertaking and security by or on behalf of the Trustee or officer to
repay such amount unless it shall ultimately be determined that such person is
entitled to be indemnified by the Trust as authorized herein.
(f) Agents and employees of the Trust who are not Trustees or officers of the
Trust may be indemnified under the same standards and procedures set forth
above, in the discretion of the Board.
(g) Any indemnification pursuant to this Article shall not be deemed exclusive
of any other rights to which those indemnified may be entitled and shall
continue as to a person who has ceased to be Trustee or officer and shall inure
to the benefit of the heirs, executors and administrators of such person.
(h) Nothing in the Declaration of Trust or in these By-Laws shall be deemed to
protect any Trustee, officer, distributor, investment adviser or controlling
shareholder of the Trust against any liability to the Trust or to its
shareholders to which such person would otherwise be subject by reason of
willful malfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office.
(i) The Trust shall have power to purchase and maintain insurance on behalf of
any person against any liability asserted against or incurred by such person,
whether or not the Trust would have the power to indemnify such person against
such liability under the provisions of this Article. Nevertheless, insurance
will not be purchased or maintained by the Trust if the purchase or maintenance
of such insurance would result in the indemnification or any person in
contravention of any rule or regulation of the Securities and Exchange
Commission.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer of controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer of controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
None.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Accounts, books and other records required by Rules 31a-1 and 31a-2 under the
Investment Company Act of 1940, as amended, are maintained and kept in the
offices of the Series and its investment adviser, Capital Research and
Management Company, 333 South Hope Street, Los Angeles, CA 90071. Certain
accounting records are maintained and kept in the offices of the Investment
Adviser's accounting department, 135 South State College Blvd., Brea, CA
92621.
Records covering portfolio transactions are also maintained and kept by the
custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
None.
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(a) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, and State of California, on the 15th
day of January, 1997.
AMERICAN VARIABLE INSURANCE SERIES
By /s/ James F. Rothenberg
James F. Rothenberg, President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this amendment to
Registration Statement has been signed below on January 15, 1997, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C> <C>
(1) Principal Executive Officer:
/s/ James F. Rothenberg President and Trustee
James F. Rothenberg
(2) Principal Financial Officer and
Principal Accounting Officer:
/s/ Robert P. Simmer Treasurer
Robert P. Simmer
(3) Trustees:
Charles H. Black* Trustee
H. Frederick Christie* Trustee
Joe E. Davis* Trustee
Martin Fenton, Jr.* Trustee
Richard H. M. Holmes* Trustee
Mary Myers Kauppila* Trustee
Kirk P. Pendleton* Trustee
/s/ James F. Rothenberg President and Trustee
James F. Rothenberg
Thomas E. Terry* Chairman of the Board
</TABLE>
*By /s/ Chad L. Norton
Chad L. Norton (Attorney-in-Fact)
Counsel reports that the amendment does not contain disclosures that would
make the amendment ineligible for effectiveness under the provisions of rule
485(a).
/s/ Michele Y. Yang
Michele Y. Yang
<PAGE>
AMERICAN FUNDS DISTRIBUTORS
----------------------------------------------------------------
333 South Hope Street . Los Angeles, California 90071
Telephone 800/421-9900, ext. 11
LOGO
THE AMERICAN LEGACY--SEPARATE ACCOUNT E
AMERICAN LEGACY LIFE--SEPARATE ACCOUNT F
AMERICAN LEGACY II--SEPARATE ACCOUNT H
AMERICAN LEGACY VARIABLE LIFE-- SEPARATE ACCOUNT J
THE AMERICAN LEGACY GROUP
VARIABLE ANNUITY--SEPARATE ACCOUNT 50
AMERICAN LEGACY GROUP II
VARIABLE ANNUITY--SEPARATE ACCOUNT 51
AMERICAN LEGACY RETIREMENT
INVESTMENT PLAN--SEPARATE ACCOUNT 52
OF THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SELLING GROUP AGREEMENT
Gentlemen:
We have entered into Principal Underwriting Agreements with The Lincoln
National Life Insurance Company ("LNL") and Separate Accounts E, F, H, J, 50,
51 and 52 of LNL under which we are appointed to form a selling group of duly
registered and licensed brokers or dealers to distribute Individual and Group
Flexible Premium Deferred Variable Annuity Contracts (the "Contracts") issued
by LNL through Separate Accounts E and H (individual) and 50, 51 and 52
(group); and Individual Flexible Premium Variable Life Insurance Policies (the
"Policies") issued by LNL through Separate Accounts F and J. The Contracts and
Policies are considered securities under the Securities Act of 1933. We have
also been appointed to distribute certain fixed single premium immediate
annuity Contracts issued by LNL. This Agreement is subject to all provisions
of the relevant Principal Underwriting Agreements among the parties mentioned
above. This Agreement on your part runs to us and to LNL and Separate Accounts
E, F, H, J, 50, 51 and 52 and is for the benefit of and enforceable by each
party. The terms "you" and "your" as used herein refer to the firm actually
signing this Agreement as well as the signing firm's insurance agency
subsidiaries, if any.
You are authorized to offer and sell the Contracts and Policies subject to
the following conditions:
1. You represent that you are a properly registered and licensed broker or
dealer under applicable federal and state securities laws and regulations and
a member in good standing of the NASD and agree to notify us immediately if
you cease to be so registered or licensed or a member in good standing of that
Association. (The provisions of the preceding sentence do not apply to a
broker or dealer located in a foreign country and doing business outside the
jurisdiction of the United States.)
2. You agree to abide by all rules and regulations of the NASD, including
its Rules of Fair Practice, and to comply with all applicable federal and
state laws, rules and regulations (all of which shall control and override any
provision to the contrary in this Agreement).
You are responsible for such supervision of your registered representatives
and other associated persons which will enable you to ensure that your
registered representatives and associated persons are in compliance with
applicable securities laws, rules, regulations and statements of policy
promulgated thereunder.
<PAGE>
Your authority under this Agreement extends only to the Contracts and
Policies described herein.
3. You represent that you will not sell any Contracts or Policies until you
are a properly licensed insurance agent duly appointed by LNL.
4. You will distribute the Contracts and Policies only in those
jurisdictions in which the Contracts and Policies are registered or qualified
for sale and only through your duly licensed registered representatives (in
accordance with the rules of the NASD) who are also fully licensed with LNL to
sell the Contracts or Policies in the applicable jurisdictions (in accordance
with the insurance regulations and laws of such jurisdictions).
5. All applications and initial and subsequent payments under the Contracts
or Policies collected by you will be remitted promptly by you to LNL at such
address as LNL may from time to time designate.
6. You agree to indemnify and hold LNL harmless from any liabilities (and
reasonable attorney fees and court costs) that may result from your actions or
omissions or those of your registered representatives and other associated
persons.
7. All applications are subject to acceptance or rejection by LNL at its
sole discretion. LNL will make payment of commissions directly to you with
respect to the sale of the Contracts or Policies according to the schedule set
forth below except that no commissions will be paid on Contracts that are not
initially subject to the contingent deferred sales charge.
THE AMERICAN LEGACY
VARIABLE ANNUITY COMMISSIONS TO DEALERS
4.00%
ALL INDIVIDUAL CONTRACT PURCHASE
PAYMENTS SOLD BY DEALERS
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
This compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months. This continuing commission is not paid on Contracts
that have been annuitized.
An additional annual .30% fee will be paid to dealers maintaining a sales
volume of at least $7,500,000 in each calendar year. The allowance will be
paid on all purchase payments received during the calendar year. Payments
will be made to dealers every quarter after the $7,500,000 sales level is
attained. Dealers must attain the $7,500,000 sales volume each calendar
year to qualify for additional allowance payments.
With respect to each Contract year's purchase payments, an annual .40%
persistency bonus will be paid to dealers on any "Increased Guaranteed
Minimum Death Benefit" amount as described in the Contract. The first bonus
will be payable at the time the guaranteed minimum death benefit is
adjusted, which will be on the seventh Contract anniversary of each such
purchase payment. Subsequent bonus payments will be made for the next seven
years on each applicable Contract anniversary date, provided the Contract
remains in effect. The amount of each bonus payment will remain constant
during the period unless the "Increased Guaranteed Minimum Death Benefit"
amount is reduced due to withdrawals. Withdrawals are applied to reduce the
"Increased Guaranteed Minimum Death Benefit" amount on a first-in first-out
basis, so subsequent bonus payments would be reduced accordingly. The
persistency bonus will not be paid on Contracts that have been annuitized.
After American Legacy II becomes available, with respect to The American
Legacy, purchase payments will generally be accepted only in connection
with existing Contracts.
COMMISSIONS TO DEALERS
THE AMERICAN LEGACY 4.00%
VARIABLE ANNUITY--ANNUITIZATION
ALL PURCHASE PAYMENTS HELD
FIVE YEARS AND INDIVIDUAL CONTRACT EARNINGS
WHICH ARE ANNUITIZED (CONTRACTS ISSUED BY
LNL THAT ARE ANNUITIZED SOLELY ON A FIXED BASIS
WILL RESULT IN A SEPARATE CONTRACT BEING ISSUED.)
2
<PAGE>
AMERICAN LEGACY II
VARIABLE ANNUITY COMMISSIONS TO DEALERS
INDIVIDUAL CONTRACT PURCHASE 4.70% ON ALL INDIVIDUAL
PAYMENTS SOLD BY DEALERS CONTRACT PURCHASE PAYMENTS TO
CONTRACTS WITH ANNUITANTS
UNDER AGE 81
(2.50% on all individual
Contract Purchase Payments to
Contracts with annuitants age
81 and above)
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
The compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months. This continuing commission is not paid on Contracts
that have been annuitized.
An additional annual .30% fee will be paid to dealers maintaining a sales
volume of at least $7,500,000 in each calendar year. The allowance will be
paid on all purchase payments received during the calendar year, except on
any purchase payments on which you have received commissions in excess of
4.70%. Payments will be made to dealers every quarter after the $7,500,000
sales level is attained. Dealers must attain the $7,500,000 sales volume
each calendar year to qualify for additional allowance payments. Additional
fees may be paid to dealers after attainment of certain additional sales
volume levels, provided the dealer has agreed to the terms contained in a
letter agreement that supplements this agreement.
With respect to each Contract year's purchase payments, an annual .50%
persistency bonus will be paid to dealers on any "Increased Guaranteed
Minimum Death Benefit" amount as described in the Contract. The first bonus
will be payable at the time the guaranteed minimum death benefit is
adjusted, which will be on the seventh Contract anniversary of each such
purchase payment. Subsequent bonus payments will be made for the next seven
years on each applicable Contract anniversary date, provided the Contract
remains in effect. The amount of each bonus payment will remain constant
during the period unless the "Increased Guaranteed Minimum Death Benefit"
amount is reduced due to withdrawals. Withdrawals are applied to reduce the
"Increased Guaruanteed Minimum Death Benefit" amount on a first-in first-
out basis, so subsequent bonus payments would be reduced accordingly. The
persistency bonus will not be paid on Contracts that have been annuitized.
A .25% commission is all that will be paid on transfers from The American
Legacy to American Legacy II.
AMERICAN LEGACY II
VARIABLE ANNUITY--ANNUITIZATION COMMISSIONS TO DEALERS
ALL PURCHASE PAYMENTS HELD 4.70%
FIVE YEARS AND INDIVIDUAL CONTRACT
EARNINGS WHICH ARE ANNUITIZED
(CONTRACTS ISSUED BY LNL THAT ARE
ANNUITIZED SOLELY ON A FIXED BASIS WILL
RESULT IN A SEPARATE CONTRACT BEING
ISSUED.)
THE AMERICAN LEGACY
GROUP VARIABLE ANNUITY COMMISSIONS TO DEALERS
ALL GROUP CONTRACT PURCHASE 1.00% OR 3.00%
PAYMENTS SOLD BY DEALERS
(AS SPECIFIED IN
THE CONTRACT)
3
<PAGE>
After American Legacy Group II Variable Annuity becomes available, with
respect to The American Legacy Group Variable Annuity, purchase payments
will generally be accepted only in connection with exiting Contracts.
AMERICAN LEGACY
GROUP II VARIABLE ANNUITY COMMISSIONS TO DEALERS
ALL GROUP CONTRACT PURCHASE 3.25% ON ALL CONTRACT PURCHASE
PAYMENTS SOLD BY DEALERS PAYMENTS SOLD IN CONNECTION
WITH CONTRACTS ESTABLISHED ON
OR AFTER OCTOBER 15, 1993
(3.35% on all Contract
Purchase Payments sold in
connection with Contracts
established on or after
December 1, 1991 and prior to
October 15, 1993)
(3.50% on all Contract
Purchase Payments sold in
connection with Contracts
established prior to December
1, 1991)
An annual .25% continuing commission will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
This compensation will be paid at the end of each calendar quarter and will
be calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Contracts which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the quarter ending account value less any deposits made in
the previous 15 months.
AMERICAN LEGACY
RETIREMENT INVESTMENT PLAN
Following the establishment of a Contract, a commission of 3.00% on all
Contract purchase payments made during the first twelve months will be paid
to dealers. During the second and third years following the establishment
of a Contract, a commission of 2.00% on all Contract purchase payments made
during such years will be paid to dealers. Once a Contract has been
effective for 13 full calendar quarters, an annual .40% continuing
commission will be paid to dealers on the value of all Contract purchase
payments. This compensation will be paid at the end of each calendar
quarter in an amount equal to .10% of quarter ending account value.
After the American Legacy Retirement Investment Plan becomes available,
purchase payments with respect to the American Legacy Group II Variable
Annuity will generally be accepted only in connection with existing
Contracts.
AMERICAN LEGACY LIFE COMMISSIONS TO DEALERS
ALL PREMIUMS FROM POLICIES 5.50%
SOLD BY DEALERS
An annual .25% continuing commission will be paid to dealers on the value
of all Policy premiums beginning in the second Policy year. This
compensation will be paid at the end of each calendar quarter and will be
calculated as follows: At the end of each calendar quarter, LNL will
calculate and pay for all Policies which have been in force for 15 months
or more as of the last day of the quarter, an amount equal to .0625% of an
amount equal to the excess of the Policy value over loans as of the last
day of the quarter.
An additional annual .25% fee will be paid to dealers maintaining a sales
volume of at least $2,000,000 in each calendar year. This fee will be paid
on all premiums received during the calendar year, except on any premiums
on which you have received commissions in excess of 5.50%. Payments will be
made to dealers every quarter after the $2,000,000 sales level is attained.
Dealers must attain the $2,000,000 sales volume each calendar year to
qualify for additional allowance payments.
4
<PAGE>
AMERICAN LEGACY VARIABLE LIFE COMMISSIONS TO DEALERS
ALL INDIVIDUAL POLICIES SOLD BY DEALERS FIRST YEAR:
80% of Commissionable Premium
(as specified in product rate
book for American Legacy
Variable Life) plus 3% of
excess premium.
RENEWAL (YEARS 2 THROUGH 10):
3% of premiums
SERVICE FEES (YEARS 11+):
3% of premiums
ASSET PARTICIPATION FEE:
.25% of net Policy Value (net
of policy loans starting at
the end of policy year 3 for
all years).
At the end of each calendar quarter, LNL will calculate and pay the above
mentioned Asset Participation Fee for all policies which have been in force
for 39 months or more as of the last day of the quarter, an amount equal to
.0625% of an amount equal to the excess of the Policy Value over loans as
of the last day of the quarter.
Any commission paid on a Contract or Policy that is cancelled under the
Contract's or Policy's review provisions will be repaid to LNL or charged
against your account.
8. We will use reasonable efforts to provide information and marketing
assistance to you, including providing you without charge reasonable
quantities of advertising materials, sales literature, reports, current
Prospectuses of the Contracts or Policies and of the underlying variable
funding vehicle, the American Variable Insurance Series.
9. In making all offers of the Contracts or Policies you will deliver the
applicable currently effective Prospectuses.
10. You are to offer and sell the Contracts or Policies only at the regular
public offering price currently determined by the applicable Separate Account
in the manner described in the current applicable Prospectus or Contract or
Policy and will make no representation not included in the Prospectus or
Contract or Policy or in any authorized supplement material. This Agreement is
in all respects subject to all provisions of the current applicable
Prospectuses.
11. We will deliver and you will use only sales literature and advertising
material which conforms to the requirements of federal and state laws and
regulations and which have been authorized by LNL and us.
12. The signing of this Agreement does not obligate LNL to license any
particular registered representative as a salesman of Contracts or Policies.
All licensing matters under any applicable state insurance law shall be
handled directly by you and the registered representative involved, but LNL
must be furnished all required proof of state insurance licensing before
commission payments may be made.
13. Prior to soliciting the sale of a Contract to any plan qualified under
Section 403(b) of the Internal Revenue Code it is necessary to first obtain
approval from LNL. Please contact American Funds Distributors, Inc. to begin
the approval process. American Legacy II (individual or group) is not
available with respect to plans qualified under Section 403(b) (except in
connection with transfers).
14. You understand that with respect to American Funds Distributors, Inc.
you are acting in the capacity of an independent contractor.
15. Any party to this Agreement may cancel at any time upon written notice
to all other parties, effective upon receipt.
16. All communications to us should be sent to the above address. All
communications to LNL should be sent to their address, which is listed below.
Any notice to you shall be duly given if mailed or telegraphed to you at the
address specified by you below.
17. The schedules of commissions, bonuses and allowances in this Agreement
apply to Contracts and Policies initially sold through you. Compensation on
Contracts and Policies initially sold through another dealer for which you
become the supervising dealer will be paid to you based on the original
dealer's schedule of commissions, bonuses and allowances.
5
<PAGE>
Three originals of this Agreement should be executed. Two of the originals
should be returned to us for our files. The Agreement shall be effective as of
the date of acceptance by you, but only upon receipt by us of the two
originals. This Agreement may be amended by notification from us and orders
received following such notification shall be deemed to be an acceptance of
such amendments. This Agreement shall be construed in accordance with the laws
of the State of California.
Very truly yours,
American Funds Distributors, Inc.
333 South Hope Street
Los Angeles, CA 90071
LOGO
By:________________________________________
The Lincoln National Life Insurance
Company
1300 South Clinton Street
Fort Wayne, IN 46801
LOGO
By:________________________________________
Accepted:
- ----------------------------------
Firm
By: ______________________________
Signature of Officer or Partner
- ----------------------------------
Print Name of Officer or Partner
Address: _________________________
-------------------------
Date: _________________________
6
Inform 329 8/96
FORM OF
PLAN OF DISTRIBUTION
OF
AMERICAN VARIABLE INSURANCE SERIES
CLASS 2 SHARES
WHEREAS, American Variable Insurance Series (the "Series") is a Massachusetts
Business Trust which offers shares of beneficial interest;
WHEREAS, the purpose of this Plan of Distribution (the "Plan") is to authorize
the Series to bear expenses of distribution of such shares, including
reimbursement of Lincoln National Life Insurance Co. ("Lincoln") for certain of
its distribution expenses incurred in connection with the Series;
WHEREAS, the Board of Trustees of the Series has determined that there is a
reasonable likelihood that this Plan will benefit the Series and its
shareholders:
NOW, THEREFORE, the Series adopts this Plan as follows:
1. The Series may expend pursuant to this Plan amounts not to exceed 0.25 of
1% of the average daily net assets represented by Class 2 shares of the Series
per annum.
2. Subject to the limit in paragraph 1, the Series shall pay, or reimburse
Lincoln for, amounts to finance any distribution activity which is primarily
intended to benefit the shares of the Series provided that the Board of
Trustees of the Series shall have approved categories of expenses for which
payment or reimbursement shall be made pursuant to this paragraph 2.
3. This Plan shall not take effect until it has been approved, together with
any related agreement, by votes of the majority of both (I) the Board of
Trustees of the Series and (ii) those Trustees of the Series who are not
"interested persons" of the Series (as defined in the Investment Company Act of
1940 (the "1940 Act") and have no direct or indirect financial interest in the
operation of this Plan or any agreement related to it (the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on
this Plan and/or such agreement.
4. At least quarterly, the Board of Trustees shall be provided by any person
authorized to direct the disposition of monies paid or payable by the Series
pursuant to this Plan or any related agreement, and the Board shall review a
written report of the amounts expended pursuant to the Plan and the purposes
for which such expenditures were made.
5. This Plan may be terminated as to the Series at any time by vote of a
majority of the Independent Trustees, or by vote of a majority of the
outstanding voting securities of the Class 2 shares (as defined in the 1940
Act) of the Series. Unless sooner terminated in accordance with this
provision, this Plan shall continue in effect until November 30, 1997. It may
thereafter be renewed from year to year in the manner provided for in paragraph
4 hereof.
6. Any agreement related to this Plan shall be in writing, and shall provide:
A. that such agreement may be terminated as to the Series at any time, without
payment of any penalty, by vote of a majority of the Independent Trustees or by
a vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Series, on not more than sixty (60) days' written notice to
any other party to the agreement; and
B. that such agreement shall terminate automatically in the event of its
assignment.
7. This Plan may not be amended to increase materially the maximum amount of
fee or other distribution expenses provided for in paragraph 1 hereof with
respect to the Series unless such amendment is approved by the voting
securities of the Class 2 shares of the Series in the manner provided in
paragraph 3 hereof, and no material amendment to this Plan shall be made unless
approved in the manner provided for in paragraph 3 hereof.
8. While this Plan is in effect, the selection and nomination of Trustees of
the Series who are not "interested persons" of the Series (as defined in the
1940 Act) shall be committed to the discretion of the Trustees who are not
interested persons.
9. This Plan shall apply to any additional funds added to the Series that
offer Class 2 shares unless the Series' Independent Trustees otherwise
10. The Series shall preserve copies of this Plan and any related agreement
and all reports made pursuant to paragraph 5 hereof for a period of not less
than six years from the date of this Plan, or such agreement or reports, as the
case may be, the first two years of which such records shall be stored in an
easily accessible place.
IN WITNESS WHEREOF, the Series has caused this Plan to be executed by its
officers thereunto duly authorized, as of _______________, 1997.
AMERICAN VARIABLE INSURANCE SERIES
By
James F. Rothenberg, Chairman
By
Chad L. Norton, Secretary
FORM OF
American Variable Insurance Series
(the Series)
PLAN PURSUANT TO RULE 18f-3
The Series hereby adopts this plan pursuant to rule 18f-3 under the Investment
Company Act of 1940 (the 1940 Act), setting forth the separate arrangement and
expense allocation of each class of shares. Any material amendment to this
plan is subject to prior approval of the Board of Trustees, including a
majority of the independent Trustees.
CLASS CHARACTERISTICS
CLASS 1 SHARES: Class 1 shares are not subject to either an initial or
contingent deferred sales charge nor are they subject to
any Rule 12b-1 fee.
CLASS 2 SHARES: Class 2 shares are not subject to a sales charge but are
subject to a Rule 12b-1 fee of 0.25% per annum of the
average daily net assets of the class.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses not
allocated to a particular class, will be allocated to each class on the basis
of the net asset value of that class in relation to the net asset value of the
Series.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Series to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and will
be determined in the same manner and will be in the same amount, except that
the amount of the dividends and other distributions declared and paid by a
particular class may be different from that paid by another class because of
Rule 12b-1 fees and other expenses borne exclusively by that class.
EXCHANGE AND CONVERSION PRIVILEGE
Each class of shares is generally not exchangeable or subject to conversion.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall have
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class.
B. On an ongoing basis, the Board, pursuant to their fiduciary responsibilities
under the 1940 Act and otherwise, will monitor the Series for the existence of
any material conflicts among the interests of its classes. The Board,
including a majority of the independent Trustees, shall take such action as is
reasonably necessary to eliminate any such conflicts that may develop. Capital
Research and Management Company, the Series' investment adviser, will be
responsible for reporting any potential or existing conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Series, the methodology and procedures for calculating the net asset value and
dividend/distributions of the Series' classes and the proper allocation of
income and expenses among such classes will be examined annually by the Series'
independent auditors who, in performing such examination, shall consider the
factors set forth in the relevant auditing standards adopted, from time to time
by the American Institute of Certified Public Accountants.
Dated: April 1, 1997
