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. 25
and
Registration Statement
Under
The Investment Company Act of 1940
Amendment No. 25
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)
Title of Securities being Registered: Shares of Beneficial Interest (no par
value)
Approximate date of proposed public offering:
It is proposed that this filing become effective on April 1, 1998, pursuant to
paragraph (a) of rule 485.
<PAGE>
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 N/A
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
</TABLE>
Signature Page
<PAGE>
- --------------------------------------------------------------------------------
American Variable
Insurance Series(R)
Class 1 Shares
Prospectus
APRIL 1, 1998
<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 ten 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 GLOBAL SMALL CAPITALIZATION FUND seeks long-term growth of capital by
investing primarily in equity securities of issuers domiciled around the world
with relatively small market capitalizations (share price times the number of
equity securities outstanding). THE FUND WILL BECOME AVAILABLE ON ,
1998; HOWEVER, IT MAY NOT BE AVAILABLE IN ALL STATES ON THAT DATE.
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, 1998, 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, 1998
<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>
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Global Growth Fund/8/
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Growth Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $15.66 $ .14 $ (.78) $ (.64) $ (.11) $ (.34) $ (.45) $14.57
1988 14.57 .33 2.85 3.18 (.28) (.61) (.89) 16.86
1989 16.86 .49 6.01 6.50 (.45) -- (.45) 22.91
1990 22.91 .54 (2.27) (1.73) (.56) (.64) (1.20) 19.98
1991 19.98 .41 4.48 4.89 (.47) (.22) (.69) 24.18
1992 24.18 .29 4.25 4.54 (.31)/3/ -- (.31) 28.41
1993 28.41 .25 4.13 4.38 (.24) (.21) (.45) 32.34
1994 32.34 .24 .69 .93 (.24) (1.09) (1.33) 31.94
1995 31.94 .33 10.63 10.96 (.29) (.80) (1.09) 41.81
1996 41.81 .24 5.17 5.41 (.29) (3.40) (3.69) 43.53
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (4.34)% $ 99 .63% .97% 7.01 cents 14.0%
1988 22.34 48 .72 1.72 7.36 7.1/2/
1989 38.87 173 .60 2.97 7.53 29.2
1990 (7.87) 304 .59 3.00 7.26 16.8
1991 24.90 700 .56 1.94 6.81 9.8
1992 18.90 1,212 .53 1.15 6.89 11.2
1993 15.59 1,737 .50 .86 6.43 20.4
1994 2.92 2,027 .49 .78 6.09 29.6
1995 35.35 3,154 .47 .92 5.91 35.47
1996 14.32 3,860 .44 .61 5.42 30.88
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
International Fund/4/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990 $10.00 $ .11 $ (.62) $ (.51) $ (.04) -- $ (.04) $ 9.45
1991 9.45 .22 .59 .81 (.24) -- (.24) 10.02
1992 10.02 .19 (.09) .10 (.21) $ (.02) (.23) 9.89
1993 9.89 .17 2.50 2.67 (.16) -- (.16) 12.40
1994 12.40 .25 1.04 1.29 (.20) (.22) (.42) 13.27
1995 13.27 .34 1.02 1.36 (.33) (.41) (.74) 13.89
1996 13.89 .28 1.96 2.24 (.31) (.29) (.60) 15.53
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1990 (5.08)% $ 66 1.03%/5/ 3.18%/5/ 3.74 cents 4.5%
1991 8.67 197 1.04 2.62 2.43 8.2
1992 .90 360 1.00 2.11 1.22 16.7
1993 27.20 840 .96 1.75 .23 17.7
1994 10.48 1,405 .80 2.03 1.01 19.7
1995 10.78 1,703 .75 2.64 .16 24.66
1996 16.66 2,370 .69 1.99 1.24 32.08
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Growth-Income Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $17.46 $ .47 $(1.87) $(1.40) $ (.46) $ (.08) $ (.54) $15.52
1988 15.52 .72 2.66 3.38 (.68) (.18) (.86) 18.04
1989 18.04 .78 3.93 4.71 (.74) (.58) (1.32) 21.43
1990 21.43 .82 (1.91) (1.09) (.86) (.25) (1.11) 19.23
1991 19.23 .75 2.63 3.38 (.79) (.10) (.89) 21.72
1992 21.72 .65 2.74 3.39 (.67) (.27) (.94) 24.17
1993 24.17 .63 2.12 2.75 (.63) (.28) (.91) 26.01
1994 26.01 .68 .14 .82 (.65) (.88) (1.53) 25.30
1995 25.30 .73 7.20 7.93 (.73) (1.03) (1.76) 31.47
1996 31.47 .71 5.55 6.26 (.74) (1.26) (2.00) 35.73
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (8.59)% $ 217 .59% 2.85% 7.04 cents 6.8%
1988 22.13 102 .67 3.59 7.60 14.3/2/
1989 27.32 305 .58 4.94 7.18 16.7
1990 (5.27) 535 .56 4.77 7.80 9.7
1991 17.83 1,022 .56 3.80 7.23 11.1
1992 15.90 1,704 .52 3.01 7.46 13.6
1993 11.63 2,436 .49 2.66 7.02 24.9
1994 3.21 2,740 .47 2.72 6.39 29.3
1995 33.14 3,953 .44 2.70 6.21 26.91
1996 21.02 5,249 .41 2.26 5.75 31.27
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Asset Allocation Fund/6/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 $10.00 $ .08 $ .10 $ .18 $ (.01) -- $ (.01) $10.17
1990 10.17 .50 (.75) (.25) (.42) -- (.42) 9.50
1991 9.50 .53 1.11 1.64 (.55) -- (.55) 10.59
1992 10.59 .48 .94 1.42 (.49) $ (.05) (.54) 11.47
1993 11.47 .51 .67 1.18 (.49) (.15) (.64) 12.01
1994 12.01 .51 (.57) (.06) (.52) (.18) (.70) 11.25
1995 11.25 .50 2.69 3.19 (.50) (.17) (.67) 13.77
1996 13.77 .53 1.89 2.42 (.53) (.48) (1.01) 15.18
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1989 1.70 % $ 33 .59%/5/ 5.78%/5/ 3.20 cents --
1990 (2.34) 106 .64 6.70 6.83 14.4%
1991 17.63 194 .59 5.56 7.42 15.1
1992 13.69 359 .57 4.73 7.12 19.7
1993 10.59 578 .55 4.66 6.85 19.0
1994 (.54) 637 .53 4.55 6.38 36.1
1995 29.45 870 .52 4.11 6.27 39.89
1996 18.65 1,141 .49 3.88 5.60 50.62
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Bond Fund/7/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $10.00 $ .40 $ .16 $ .56 $ (.25) -- $ (.25) $10.31
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 5.74 % $ 77 .52%/8/ 6.18% -- 32.83%
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
High-Yield Bond Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $13.49 $1.35 $ (.94) $ .41 $(1.36) $ (.32) $(1.68) $12.22
1988 12.22 1.26 .68 1.94 (1.33) (.17) (1.50) 12.66
1989 12.66 1.22 .10 1.32 (1.16) -- (1.16) 12.82
1990 12.82 1.33 (1.02) .31 (1.30) -- (1.30) 11.83
1991 11.83 1.17 1.78 2.95 (1.25) -- (1.25) 13.53
1992 13.53 1.10 .62 1.72 (1.08) -- (1.08) 14.17
1993 14.17 1.09 1.20 2.29 (1.10) (.19) (1.29) 15.17
1994 15.17 1.27 (2.07) (.80) (1.23) (.25) (1.48) 12.89
1995 12.89 1.32 1.10 2.42 (1.32) -- (1.32) 13.99
1996 13.99 1.28 .54 1.82 (1.30) -- (1.30) 14.51
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 2.96 % $ 70 .63% 10.89% -- 61.9%
1988 16.95 26 .77 10.62 -- 23.6/2/
1989 10.85 50 .72 12.30 -- 28.2
1990 2.49 58 .68 11.17 -- 22.7
1991 26.22 107 .63 9.81 -- 18.1
1992 13.14 197 .59 8.88 -- 47.4
1993 17.09 379 .56 8.18 -- 34.1
1994 (5.71) 390 .54 9.37 -- 38.5
1995 19.81 534 .54 10.12 -- 31.73
1996 13.75 662 .53 9.27 -- 44.81
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
U.S. Government/AAA-Rated Securities Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $11.62 $ .85 $(1.21) $ (.36) $ (.79) -- $ (.79) $10.47
1988 10.47 .93 .02 .95 (.97) -- (.97) 10.45
1989 10.45 .78 .30 1.08 (.79) -- (.79) 10.74
1990 10.74 .83 (.11) .72 (.80) -- (.80) 10.66
1991 10.66 .77 .58 1.35 (.79) -- (.79) 11.22
1992 11.22 .75 .32 1.07 (.76) -- (.76) 11.53
1993 11.53 .74 .68 1.42 (.75) $ (.05) (.80) 12.15
1994 12.15 .76 (1.30) (.54) (.74) (.07) (.81) 10.80
1995 10.80 .82 .71 1.53 (.81) -- (.81) 11.52
1996 11.52 .83 (.24) .59 (.82) -- (.82) 11.29
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (3.17)% $ 47 .67% 8.24% -- 105.6%
1988 9.50 28 .77 8.32 -- 47.5/2/
1989 10.82 78 .66 8.61 -- 14.5
1990 7.11 126 .61 8.58 -- 24.0
1991 13.24 240 .58 7.91 -- 27.1
1992 9.83 360 .57 7.08 -- 40.0
1993 12.65 505 .55 6.42 -- 21.7
1994 (4.58) 463 .54 6.69 -- 45.2
1995 14.73 542 .54 7.37 -- 30.11
1996 5.49 512 .53 7.33 -- 30.45
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Cash Management Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $10.65 $ .54 $ .08 $ .62 $ (.54) -- $ (.54) $10.73
1988 10.73 .60 .11 .71 (.56) -- (.56) 10.88
1989 10.88 .81 .12 .93 (.81) -- (.81) 11.00
1990 11.00 .71 .13 .84 (.70) -- (.70) 11.14
1991 11.14 .62 .01 .63 (.66) -- (.66) 11.11
1992 11.11 .35 .01 .36 (.43) -- (.43) 11.04
1993 11.04 .29 -- .29 (.31) -- (.31) 11.02
1994 11.02 .37 .02 .39 (.32) -- (.32) 11.09
1995 11.09 .63 (.02) .61 (.59) -- (.59) 11.11
1996 11.11 .54 .01 .55 (.54) -- (.54) 11.12
1997 (To be supplied by amendment)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------- ------------ ------------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 6.01 % $ 57 .68% 5.90% -- --
1988 6.88 31 .76 6.75 -- --
1989 8.90 58 .68 8.26 -- --
1990 7.91 143 .60 7.48 -- --
1991 5.84 163 .58 5.65 -- --
1992 3.31 197 .53 3.24 -- --
1993 2.67 206 .51 2.57 -- --
1994 3.59 221 .49 3.60 -- --
1995 5.65 193 .49 5.37 -- --
1996 5.09 240 .47 4.94 -- --
1997 (To be supplied by amendment)
</TABLE>
- ------
1. Brokerage commissions paid on 4. Commenced operations May 1, 1990.
portfolio transactions increase 5. Annualized
the cost of securities purchased 6. Commenced operations August 1,
or reduce the proceeds of 1989.
securities sold, and are not 7. Commenced operations January 2,
separately reflected in the 1996.
funds' statement of operations. 8. Commenced operations April 30,
Shares traded on a principal 1997.
basis (without commissions), 9. Based on operations for the period
such as fixed-income shown and, accordingly, not
transactions, are excluded. representative of a full year's
Generally, non-U.S. commissions operations.
are lower than U.S. commissions No information is presented for the
when expressed as cents per Global Small Capitalization Fund since
share but higher when expressed it had no investment operations as of
as a percentage of transactions April 1, 1998.
because of the lower per-share
prices of many non-U.S.
securities.
2. Percentages are exclusive of the redemption in kind which occurred March
29, 1988.
3. Amount includes net realized
short-term gains treated as net
investment income for federal
income tax purposes.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT THE FUNDS The Series consists of ten funds, each
OBJECTIVES AND representing a separate fully managed diversified
POLICIES OF THE portfolio of securities. The ten funds are the
FUNDS Global Growth Fund, the Global Small Capitaliza-
tion Fund, the Growth Fund, the International
The Series consists Fund, the Growth-Income Fund, the Asset Alloca-
of ten funds, each tion Fund, the Bond Fund, the High-Yield Bond
with its own Fund, the U.S. Government/AAA-Rated Securities
investment Fund and the Cash Management Fund. The Series of-
objective(s) and fers two classes of fund shares: Class 1 shares
policies. and Class 2 shares. This prospectus offers Class
1 shares only. The Board of Trustees may estab-
lish additional funds and classes in the future.
The investment objective(s) and policies of each
fund are discussed below. Investment policy lim-
its as stated below are measured at the time of
purchase. MORE INFORMATION ON THE FUNDS IS CON-
TAINED IN THE SERIES' STATEMENT OF ADDITIONAL IN-
FORMATION.
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 con-
siderations, the interests of various Contract
owners participating in a fund might at some time
be in conflict. The Board of Trustees will moni-
tor the Series' operations for any material con-
flicts 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 other 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
Corporation or Moody's Investors Service, Inc. or
unrated but determined to be of equivalent qual-
ity by the fund's investment adviser, Capital Re-
search and Management Company). 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, and
"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."
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."
3
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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-
vested in issuers domiciled in any one country.
(In determining the domicile of an issuer, Capi-
tal Research and Management Company takes into
account such factors as where the company is le-
gally organized, where it maintains principal
corporate offices and where it conducts its prin-
cipal operations.)
The Global Small GLOBAL SMALL CAPITALIZATION FUND The investment
Capitalization Fund objective of the Global Small Capitalization Fund
seeks to provide is long-term growth of capital.
you with long-term
growth of capital The fund seeks to achieve its objective by in-
by investing in vesting primarily in equity securities of issuers
equity securities domiciled around the world with relatively small
of issuers market capitalizations (share price times the
domiciled around number of equity securities outstanding). In se-
the world with lecting investments, the fund emphasizes compa-
relatively nies that are believed by Capital Research and
small market Management Company to have the potential for
capitalizations. growth. Current income is not a consideration.
Under normal market conditions, the fund will
invest at least 65% of its total assets in equity
securities of small capitalization issuers,
typically having individual market
capitalizations of approximately $50 million to
$1.2 billion; however, the fund will not
necessarily sell stocks because they fall outside
this range due to market conditions.
The fund's assets may also be held in cash or
high-quality cash equivalents, government or cor-
porate debt securities denominated in U.S. dol-
lars or other currencies for liquidity purposes
or when, in the opinion of Capital Research and
Management Company, prevailing market conditions
indicate that it is desirable to do so; in addi-
tion, the fund may enter into repurchase agree-
ments. Under normal market conditions the fund
will invest no more than 35% of its total assets
in such securities.
When prevailing market, economic, political or
currency conditions warrant, assets may also be
invested in securities convertible into common
stocks, straight debt securities (generally rated
in the top three quality categories by any
national rating service or determined to be of
equivalent quality by Capital Research and
Management Company), government securities or
nonconvertible preferred stocks. These securities
may also be issued by entities domiciled outside
the U.S. See "Securities and Investment
Techniques--Investing in Various Countries"
below.
The Growth Fund GROWTH FUND The investment objective of the
seeks to provide you Growth Fund is growth of capital. Whatever cur-
with growth of rent income is generated by the fund is likely to
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.
4
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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,
and "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 junk 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 rities of issuers domiciled outside the United
ofcapital by States. The fund's investment approach is based
investingin on the belief that economic and political devel-
securities opments have helped to create new opportunities
ofissuers outside the U.S.
domiciledoutside
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 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.
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 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. However, the fund may
invest in other types of securities,
5
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including other equity-type securities (such as
convertible bonds), bonds (and other types of
fixed-income securities) and money market instru-
ments, to the extent consistent with its invest-
ment 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. and not included in the Standard
& Poor's 500 Composite Index (a broad measure of
the U.S. stock market), 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).
Capital Research and Management Company will determine
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 market trends and the relative risks and
opportuni-ties for long-term total return of the
different classes of assets. Under normal conditions,
Capital 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 securities, 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. equity securities as
such, the fund has no current intention to engage
in forward currency transactions. See "Securities
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. Secu-
rities rated Ba and BB or below or unrated secu-
rities that are determined to be of equivalent
quality (commonly known as "junk" or
6
<PAGE>
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"high-yield, high-risk" bonds) are subject to
special review before purchase. These bonds 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 yield-
ing, higher-rated bonds. See the Appendix for a
further description of the various bond ratings,
and "High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. 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 invest-
ments (including equity-type securities) and cash
or cash equivalents amounted to % and
%, respectively, of the fund's assets.
The fund's investments in non-U.S. fixed-income
securities will be concentrated in securities is-
sued or guaranteed as to principal and interest
by foreign governments or their agencies or in-
strumentalities or by multinational agencies. The
fund may purchase and sell currencies to facili-
tate settlement of trades; however, it does not
currently intend to enter into forward currency
contracts.
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 debt securities that are rated Baa or
better by Moody's Investors Service, Inc. or BBB
or better by Standard & Poor's Corporation or
unrated but determined to be of equivalent qual-
ity by Capital Research and Management Company.
Securities rated Baa or BBB have speculative
characteristics. See the Appendix for a descrip-
tion of the various bond ratings.
At least 35% of the value of the fund's assets
must be invested in debt 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.
See the Appendix for a further description of the
various bond ratings.
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 considered specula-
tive and typically are subject to greater market
fluctuations and risk of loss of income and prin-
cipal due to default by the issuer than are in-
vestments in lower yielding, higher-rated bonds.
See "High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. During
the previous fiscal year, the approximate monthly
average percentages of the Bond Fund's 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 --
7
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%; and B/B -- %. Non-rated investments
(including equity-type securities) and cash or
cash equivalents amounted to % and %,
respectively, of the fund's assets.
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 come securities, with emphasis on higher yield-
appreciation. 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
quality 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 quality). 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 determined 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 categories were: Aaa/AAA --
%; Baa/BBB -- %; Ba/BB -- %; B/B --
%; and Caa/CCC -- %. Non-rated
investments (including equity-type securities)
and cash or cash equivalents amounted to %
and %, respectively, of the fund's assets.
In pursuing its secondary investment objective of
capital appreciation, the Series may purchase
high-yield bonds that are expected by Capital Re-
search and Management Company to increase in
value due to improvements in their credit quality
or ratings or anticipated declines in interest
rates. In addition, the fund may invest for this
purpose up to 25% of its assets in common stocks
or other equity or equity-related securities. Eq-
uity-type securities normally will be purchased
as part of a unit with fixed-income securities or
when an unusual opportunity for capital apprecia-
tion is perceived due to an anticipated improve-
ment in the issuer's credit quality or ratings.
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.
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 than higher rated bonds, or they
may already be
8
<PAGE>
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in default. The market prices of these securities
may fluctuate more than higher-quality securities
and may decline significantly. It may be more
difficult 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
sensitive to interest rate changes. In addition,
periods of economic uncertainty and changes may
increase 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
replace the security with a lower yielding
security, resulting in a decreased return for
investors. 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 objectives 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 secu-
rities 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 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). Howev-
er, 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.
9
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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 November 30,
1997 was % on an annualized basis.
SECURITIES AND EQUITY SECURITIES Equity securities represent an
INVESTMENT ownership position in a company. These securities
TECHNIQUES include common stocks, preferred stocks, and
securities with equity conversion or purchase
The ten funds of rights. The prices of equity securities fluctuate
the Series invest based on changes in the financial condition of
in a wide variety their issuers and on market and economic
of securities which conditions. The funds' results will be related to
are subject to the overall market for 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 Government National Mortgage Association
(GNMA) certificates and the U.S. Government/AAA-
Rated Securities Fund expects to invest substan-
tially in these and
10
<PAGE>
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other mortgage-related securities. GNMA certifi-
cates are securities representing part ownership
of a pool of mortgage loans on which timely pay-
ment of interest and principal is guaranteed by
the U.S. Government. GNMA certificates differ
from typical bonds because principal is repaid
monthly over the term of the loan rather than re-
turned in a lump sum at maturity.
Although the mortgage loans in the pool will have
stated maturities of up to 30 years, the actual
average life or effective maturity of the GNMA
certificates typically will be substantially less
because the mortgages will be subject to normal
principal amortization and may be prepaid prior
to maturity. Due to the prepayment feature and
the need to reinvest prepayments of principal at
current market rates, which may occur at higher
or lower yields than the original yield, GNMA
certificates may be less effective than typical
bonds at "locking in" yields during periods of
declining interest rates.
The funds also may invest in securities repre-
senting interests in pools of conventional mort-
gage loans issued by the Federal National Mort-
gage Association (FNMA) or by the Federal Home
Loan Mortgage Corporation (FHLMC).
In addition, the funds may invest in collateral-
ized mortgage obligations (CMOs) and mortgage-
backed bonds. A CMO is made up of a series of
bonds of varying maturities that together are
fully collateralized directly or indirectly by a
pool of mortgages on which the payments of prin-
cipal and interest are dedicated to payment of
principal and interest on the bonds. Mortgage-
backed bonds are general obligations fully col-
lateralized directly or indirectly by a pool of
mortgages, but on which payments are not passed
through directly. The funds will only purchase
CMOs or mortgage-backed bonds which are fully
collateralized by securities issued by GNMA,
FNMA, or FHLMC and or mortgages insured by GNMA.
MONEY MARKET INSTRUMENTS The funds invest in
various high-quality money market instruments
that mature, or may be redeemed or resold, in 13
months or less (25 months in the case of U.S.
government securities). These include (1)
commercial paper (short-term notes 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)), (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.
11
<PAGE>
- --------------------------------------------------------------------------------
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, a 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.
The funds assume the rights and risks of owner-
ship, including the risk of price and yield fluc-
tuations as of the time of the agreement.
U.S. PRIVATE PLACEMENTS The Global Growth Fund,
the Global Small Capitalization 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 (for example, private
placements sold pursuant to Rule 144A).
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, investing in
private placement securities could have the
effect of increasing the level of illiquidity of
a fund's portfolio to the extent that "qualified"
institutional investors become, for a period of
time, uninterested in purchasing these
securities.
INVESTING IN VARIOUS COUNTRIES The Global Growth
Fund, the Global Small Capitalization 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 denomi-
nated in currencies other than the U.S. dollar.
Investing outside the U.S. can involve special
risks, particularly in certain developing coun-
tries, caused by, among other things; fluctuating
currency values; different accounting, auditing,
and financial reporting regulations and practices
in some countries; changing local and regional
economic, political, and social conditions;
greater market volatility; differing securities
market structures; and various administrative
difficulties such as delays in clearing and set-
tling portfolio transactions or in receiving pay-
ment of dividends. However, in the opinion of
Capital Research and Management Company, invest-
ing 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
issuers domiciled outside the U.S., provided
those
12
<PAGE>
- --------------------------------------------------------------------------------
securities are either held through depositary re-
ceipts which are U.S. dollar denominated or are
traded on the New York Stock Exchange, and the
Asset Allocation Fund may invest in non-U.S.
fixed-income securities denominated in currencies
other than the U.S. dollar. In addition, the U.S.
Government/AAA-Rated Securities Fund may purchase
obligations of non-U.S. corporations or govern-
mental 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 extent.
CURRENCY TRANSACTIONS The Global Growth Fund, the
Global Small Capitalization 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.
The Asset Allocation Fund may purchase and sell
currencies to facilitate settlements of fixed-
income securities transactions but has no current
intention of entering into forward currency
contracts. 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. The funds generally will not attempt to
protect against all potential changes in exchange
rates.
13
<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 may, from time to time,
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
PORTFOLIO PROFESSIONAL, IF 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;
High-Yield Bond Fund--less than one year
- ------------------------------------------------------------------------------------------------------------
Claudia P. Huntington Vice President of the Series. Growth-Income Fund--4 years (plus 5 years
Senior Vice President, as a research professional prior to becoming
Capital Research and a portfolio counselor for the fund)
Management Company
- ------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Vice President of the Series. Global Small Capitalization Fund--
Executive Vice President and Director, since the fund began operations in 1998
Capital Research Company* Global Growth Fund--since
the fund began operations in 1997;
International Fund--4 years
- ------------------------------------------------------------------------------------------------------------
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--6 years
- ------------------------------------------------------------------------------------------------------------
Timothy D. Armour Chairman and Chief Executive Officer, Asset Allocation Fund--2 years
Capital Research Company*
- ------------------------------------------------------------------------------------------------------------
David C. Barclay Executive Vice President and Director, High-Yield Bond Fund--5 years
Capital Research Company*
- ------------------------------------------------------------------------------------------------------------
Alan N. Berro Senior Vice President, Capital Growth-Income Fund--2 years
Research Company*
- ------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--5 years
- ------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice President and Director, Global Small Capitalization Fund--
Capital Research and Management since the fund began operations in 1998
Company Growth Fund--4 years (plus
5 years as a research professional
prior to becoming a
portfolio counselor for the fund)
- ------------------------------------------------------------------------------------------------------------
Mark E. Denning Director, Capital Research and Global Small Capitalization Fund--
Management Company Since the fund began
operations in 1998
- ------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice President and Director, Growth Fund--11 years
Capital Research and Management
Company
- ------------------------------------------------------------------------------------------------------------
Alwyn Heong Vice President, Capital International Fund--2 years
Research Company*
- ------------------------------------------------------------------------------------------------------------
Thomas H. Hough Vice President--Investment U.S. Government Fund--less than
Management Group, Capital one year
Research and Management
Company
- ------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice President and Director, Growth-Income Fund--8 years (plus
Capital Research and Management 1 year as a research professional prior to
Company becoming a portfolio counselor for the fund)
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS OF EXPERIENCE
AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR ITS TOTAL
FOR THE SERIES AFFILIATES YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James K. Dunton 36 36
- ------------------------------------------------------------------------------------------------------------
Abner D. Goldstine 31 46
- ------------------------------------------------------------------------------------------------------------
Claudia P. Huntington 20 22
- ------------------------------------------------------------------------------------------------------------
Robert W. Lovelace 13 13
- ------------------------------------------------------------------------------------------------------------
John H. Smet 15 16
- ------------------------------------------------------------------------------------------------------------
Timothy D. Armour 15 15
- ------------------------------------------------------------------------------------------------------------
David C. Barclay 10 17
- ------------------------------------------------------------------------------------------------------------
Alan N. Berro 7 12
- ------------------------------------------------------------------------------------------------------------
Martial Chaillet 26 26
- ------------------------------------------------------------------------------------------------------------
Gordon Crawford 27 27
- ------------------------------------------------------------------------------------------------------------
Mark E. Denning 15 15
- ------------------------------------------------------------------------------------------------------------
James E. Drasdo 21 26
- ------------------------------------------------------------------------------------------------------------
Alwyn Heong 6 6
- ------------------------------------------------------------------------------------------------------------
Thomas H. Hough 8 11
- ------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell 23 26
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
14
<PAGE>
<TABLE>
<CAPTION>
YEARS OF EXPERIENCE AS
PORTFOLIO COUNSELOR (AND RESEARCH PROFESSIONAL,
PORTFOLIO IF APPLICABLE) FOR THE FUNDS
COUNSELORS INDICATED
FOR THE SERIES PRIMARY TITLE(S) (APPROXIMATE)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donald D. O'Neal Vice President, Capital Research and Global Growth Fund--since the fund
Management Company began operations in 1997;
Growth Fund--7 years (plus 4 years as a
research professional prior to becoming a
portfolio counselor for the fund)
- -----------------------------------------------------------------------------------------------------------
Victor M. Parachini Senior Vice President, Capital Asset Allocation Fund--2 years
Research and Management Company
- -----------------------------------------------------------------------------------------------------------
John W. Ressner Vice President--Investment U.S. Government Fund--less than
Management Group, Capital one year
Research and Management Company
- -----------------------------------------------------------------------------------------------------------
Susan M. Tolson Vice President, Capital Research High-Yield Bond Fund--3 years
Company* (plus 3 years as a research professional prior
to becoming a portfolio counselor for the fund)
- -----------------------------------------------------------------------------------------------------------
Gregory W. Wendt Senior Vice President and Director, Global Small Capitalization Fund--
Capital Research Company* Since the fund began operations in 1998
YEARS OF EXPERIENCE
AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR ITS TOTAL
FOR THE SERIES AFFILIATES YEARS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donald D. O'Neal 13 13
- -----------------------------------------------------------------------------------------------------------
Victor M. Parachini 21 36
- -----------------------------------------------------------------------------------------------------------
John W. Ressner 10 10
- -----------------------------------------------------------------------------------------------------------
Susan M. Tolson 8 10
- -----------------------------------------------------------------------------------------------------------
Gregory W. Wendt 10 10
</TABLE>
- --------------------------------------------------------------------------------
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
15
<PAGE>
- --------------------------------------------------------------------------------
It is the Series' policy to distribute to the
DIVIDENDS, shareholders (the insurance company separate ac-
DISTRIBUTIONS AND counts) all of its net investment income and cap-
TAXES 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.
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.
See the applicable Contract prospectus for infor-
mation regarding the federal income tax treatment
of the Contracts and distributions to the sepa-
rate accounts.
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:
Global Growth Fund -- . %; Growth Fund -- . %;
International Fund -- . %; Growth-Income Fund
-- . %; Asset Allocation Fund -- . %; Bond
Fund -- . %; High-Yield Bond Fund -- . %;
U.S. Government/AAA-Rated Securities Fund --
. %; and Cash Management Fund -- . %.
Capital Research and Management Company has
received no compensation for the Global Small
Capitalization Fund because it had not
commenced operations during the most recent
fiscal year.
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
16
<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 either to Class 1 or 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 shareholders 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, redemption proceeds will be paid on or be-
fore the seventh day following the request for
redemption.
PRICE OF SHARES The net asset value per share is
calculated once daily at 4:00 p.m., New York time
each day the New York Stock Exchange is open. For
example, if the Exchange closes at 1:00 p.m. on
one day and at 4:00 p.m. on the next, the fund's
share price would be determined as of 4:00 p.m.
New York time on both days. The current value of
each fund's total assets, less all liabilities,
is divided by the total number of shares out-
standing (excluding treasury shares), and the re-
sult, rounded to the nearer cent, is the net as-
set value per share.
17
<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
18
<PAGE>
No person has been authorized to give any
information or to make any representations other
than those contained in this Prospectus, the
Prospectus of American Variable Insurance Series,
and any authorized sales literature in connection
with the offer contained in this Prospectus and,
if given or made, such information or
representations must not be relied upon as having
been authorized. This Prospectus does not
constitute an offer of, or solicitation of an
offer to acquire, any interest or participation in
the variable annuity contracts offered by this
Prospectus in any jurisdiction to anyone to whom
it is unlawful to make such an offer or
solicitation in such jurisdiction.
LL24183-14 26-101-498
<PAGE>
LL24183-14 26-101-498
<PAGE>
- --------------------------------------------------------------------------------
American Variable
Insurance Series(R)
Class 2 Shares
Prospectus
APRIL 1, 1998
<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 ten 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 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 GLOBAL SMALL CAPITALIZATION FUND seeks long-term growth of capital by
investing primarily in equity securities of issuers domiciled around the world
with relatively small market capitalizations (share price times the number of
equity securities outstanding). THE FUND WILL BECOME AVAILABLE ON ,
1998; HOWEVER, IT MAY NOT BE AVAILABLE IN ALL STATES ON THAT DATE.
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, 1998, 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, 1998
<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>
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Global Growth Fund/8/
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Growth Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $15.66 $ .14 $ (.78) $ (.64) $ (.11) $ (.34) $ (.45) $14.57
1988 14.57 .33 2.85 3.18 (.28) (.61) (.89) 16.86
1989 16.86 .49 6.01 6.50 (.45) -- (.45) 22.91
1990 22.91 .54 (2.27) (1.73) (.56) (.64) (1.20) 19.98
1991 19.98 .41 4.48 4.89 (.47) (.22) (.69) 24.18
1992 24.18 .29 4.25 4.54 (.31)/3/ -- (.31) 28.41
1993 28.41 .25 4.13 4.38 (.24) (.21) (.45) 32.34
1994 32.34 .24 .69 .93 (.24) (1.09) (1.33) 31.94
1995 31.94 .33 10.63 10.96 (.29) (.80) (1.09) 41.81
1996 41.81 .24 5.17 5.41 (.29) (3.40) (3.69) 43.53
1997 (To be supplied by amendment)
- --------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (4.34)% $ 99 .63% .97% 7.01 cents 14.0%
1988 22.34 48 .72 1.72 7.36 7.1/2/
1989 38.87 173 .60 2.97 7.53 29.2
1990 (7.87) 304 .59 3.00 7.26 16.8
1991 24.90 700 .56 1.94 6.81 9.8
1992 18.90 1,212 .53 1.15 6.89 11.2
1993 15.59 1,737 .50 .86 6.43 20.4
1994 2.92 2,027 .49 .78 6.09 29.6
1995 35.35 3,154 .47 .92 5.91 35.47
1996 14.32 3,860 .44 .61 5.42 30.88
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
International Fund/4/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990 $10.00 $ .11 $ (.62) $ (.51) $ (.04) -- $ (.04) $ 9.45
1991 9.45 .22 .59 .81 (.24) -- (.24) 10.02
1992 10.02 .19 (.09) .10 (.21) $ (.02) (.23) 9.89
1993 9.89 .17 2.50 2.67 (.16) -- (.16) 12.40
1994 12.40 .25 1.04 1.29 (.20) (.22) (.42) 13.27
1995 13.27 .34 1.02 1.36 (.33) (.41) (.74) 13.89
1996 13.89 .28 1.96 2.24 (.31) (.29) (.60) 15.53
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1990 (5.08)% $ 66 1.03%/5/ 3.18%/5/ 3.74 cents 4.5%
1991 8.67 197 1.04 2.62 2.43 8.2
1992 .90 360 1.00 2.11 1.22 16.7
1993 27.20 840 .96 1.75 .23 17.7
1994 10.48 1,405 .80 2.03 1.01 19.7
1995 10.78 1,703 .75 2.64 .16 24.66
1996 16.66 2,370 .69 1.99 1.24 32.08
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Growth-Income Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $17.46 $ .47 $(1.87) $(1.40) $ (.46) $ (.08) $ (.54) $15.52
1988 15.52 .72 2.66 3.38 (.68) (.18) (.86) 18.04
1989 18.04 .78 3.93 4.71 (.74) (.58) (1.32) 21.43
1990 21.43 .82 (1.91) (1.09) (.86) (.25) (1.11) 19.23
1991 19.23 .75 2.63 3.38 (.79) (.10) (.89) 21.72
1992 21.72 .65 2.74 3.39 (.67) (.27) (.94) 24.17
1993 24.17 .63 2.12 2.75 (.63) (.28) (.91) 26.01
1994 26.01 .68 .14 .82 (.65) (.88) (1.53) 25.30
1995 25.30 .73 7.20 7.93 (.73) (1.03) (1.76) 31.47
1996 31.47 .71 5.55 6.26 (.74) (1.26) (2.00) 35.73
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (8.59)% $ 217 .59% 2.85% 7.04 cents 6.8%
1988 22.13 102 .67 3.59 7.60 14.3/2/
1989 27.32 305 .58 4.94 7.18 16.7
1990 (5.27) 535 .56 4.77 7.80 9.7
1991 17.83 1,022 .56 3.80 7.23 11.1
1992 15.90 1,704 .52 3.01 7.46 13.6
1993 11.63 2,436 .49 2.66 7.02 24.9
1994 3.21 2,740 .47 2.72 6.39 29.3
1995 33.14 3,953 .44 2.70 6.21 26.91
1996 21.02 5,249 .41 2.26 5.75 31.27
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Asset Allocation Fund/6/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989 $10.00 $ .08 $ .10 $ .18 $ (.01) -- $ (.01) $10.17
1990 10.17 .50 (.75) (.25) (.42) -- (.42) 9.50
1991 9.50 .53 1.11 1.64 (.55) -- (.55) 10.59
1992 10.59 .48 .94 1.42 (.49) $ (.05) (.54) 11.47
1993 11.47 .51 .67 1.18 (.49) (.15) (.64) 12.01
1994 12.01 .51 (.57) (.06) (.52) (.18) (.70) 11.25
1995 11.25 .50 2.69 3.19 (.50) (.17) (.67) 13.77
1996 13.77 .53 1.89 2.42 (.53) (.48) (1.01) 15.18
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1989 1.70 % $ 33 .59%/5/ 5.78%/5/ 3.20 cents --
1990 (2.34) 106 .64 6.70 6.83 14.4%
1991 17.63 194 .59 5.56 7.42 15.1
1992 13.69 359 .57 4.73 7.12 19.7
1993 10.59 578 .55 4.66 6.85 19.0
1994 (.54) 637 .53 4.55 6.38 36.1
1995 29.45 870 .52 4.11 6.27 39.89
1996 18.65 1,141 .49 3.88 5.60 50.62
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- ------ --------- ---------- --------------- --------------- --------------- -------------- ------------- ----------------
Bond Fund/7/
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $10.00 $ .40 $ .16 $ .56 $ (.25) -- $ (.25) $10.31
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996 5.74 % $ 77 .52%/8/ 6.18% -- 32.83%
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- -------------------------------------------------------------------------------------------------------------------------
High-Yield Bond Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $13.49 $1.35 $ (.94) $ .41 $(1.36) $ (.32) $(1.68) $12.22
1988 12.22 1.26 .68 1.94 (1.33) (.17) (1.50) 12.66
1989 12.66 1.22 .10 1.32 (1.16) -- (1.16) 12.82
1990 12.82 1.33 (1.02) .31 (1.30) -- (1.30) 11.83
1991 11.83 1.17 1.78 2.95 (1.25) -- (1.25) 13.53
1992 13.53 1.10 .62 1.72 (1.08) -- (1.08) 14.17
1993 14.17 1.09 1.20 2.29 (1.10) (.19) (1.29) 15.17
1994 15.17 1.27 (2.07) (.80) (1.23) (.25) (1.48) 12.89
1995 12.89 1.32 1.10 2.42 (1.32) -- (1.32) 13.99
1996 13.99 1.28 .54 1.82 (1.30) -- (1.30) 14.51
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 2.96 % $ 70 .63% 10.89% -- 61.9%
1988 16.95 26 .77 10.62 -- 23.6/2/
1989 10.85 50 .72 12.30 -- 28.2
1990 2.49 58 .68 11.17 -- 22.7
1991 26.22 107 .63 9.81 -- 18.1
1992 13.14 197 .59 8.88 -- 47.4
1993 17.09 379 .56 8.18 -- 34.1
1994 (5.71) 390 .54 9.37 -- 38.5
1995 19.81 534 .54 10.12 -- 31.73
1996 13.75 662 .53 9.27 -- 44.81
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- -------------------------------------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $11.62 $ .85 $(1.21) $ (.36) $ (.79) -- $ (.79) $10.47
1988 10.47 .93 .02 .95 (.97) -- (.97) 10.45
1989 10.45 .78 .30 1.08 (.79) -- (.79) 10.74
1990 10.74 .83 (.11) .72 (.80) -- (.80) 10.66
1991 10.66 .77 .58 1.35 (.79) -- (.79) 11.22
1992 11.22 .75 .32 1.07 (.76) -- (.76) 11.53
1993 11.53 .74 .68 1.42 (.75) $ (.05) (.80) 12.15
1994 12.15 .76 (1.30) (.54) (.74) (.07) (.81) 10.80
1995 10.80 .82 .71 1.53 (.81) -- (.81) 11.52
1996 11.52 .83 (.24) .59 (.82) -- (.82) 11.29
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 (3.17)% $ 47 .67% 8.24% -- 105.6%
1988 9.50 28 .77 8.32 -- 47.5/2/
1989 10.82 78 .66 8.61 -- 14.5
1990 7.11 126 .61 8.58 -- 24.0
1991 13.24 240 .58 7.91 -- 27.1
1992 9.83 360 .57 7.08 -- 40.0
1993 12.65 505 .55 6.42 -- 21.7
1994 (4.58) 463 .54 6.69 -- 45.2
1995 14.73 542 .54 7.37 -- 30.11
1996 5.49 512 .53 7.33 -- 30.45
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Net asset Net realized &
Period value, Net unrealized Total income Dividends from Distributions
ended beginning investment gain (loss) from investment net investment from net Total Net asset value,
11/30 of period income on investments operations income realized gains distributions end of period
- -------------------------------------------------------------------------------------------------------------------------
Cash Management Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $10.65 $ .54 $ .08 $ .62 $ (.54) -- $ (.54) $10.73
1988 10.73 .60 .11 .71 (.56) -- (.56) 10.88
1989 10.88 .81 .12 .93 (.81) -- (.81) 11.00
1990 11.00 .71 .13 .84 (.70) -- (.70) 11.14
1991 11.14 .62 .01 .63 (.66) -- (.66) 11.11
1992 11.11 .35 .01 .36 (.43) -- (.43) 11.04
1993 11.04 .29 -- .29 (.31) -- (.31) 11.02
1994 11.02 .37 .02 .39 (.32) -- (.32) 11.09
1995 11.09 .63 (.02) .61 (.59) -- (.59) 11.11
1996 11.11 .54 .01 .55 (.54) -- (.54) 11.12
1997 (To be supplied by amendment)
- -------------------------------------------------------------------------------------------------------------------------
Ratio of Ratio of net Average
Period Net assets, expenses income to commissions Portfolio
ended end of period to average average paid per turnover
11/30 Total return (in millions) net assets net assets share/1/ rate
- ------ ----------- ----------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1987 6.01 % $ 57 .68% 5.90% -- --
1988 6.88 31 .76 6.75 -- --
1989 8.90 58 .68 8.26 -- --
1990 7.91 143 .60 7.48 -- --
1991 5.84 163 .58 5.65 -- --
1992 3.31 197 .53 3.24 -- --
1993 2.67 206 .51 2.57 -- --
1994 3.59 221 .49 3.60 -- --
1995 5.65 193 .49 5.37 -- --
1996 5.09 240 .47 4.94 -- --
1997 (To be supplied by amendment)
</TABLE>
- ------
1. Brokerage commissions paid on 4. Commenced operations May 1, 1990.
portfolio transactions increase 5. Annualized
the cost of securities purchased 6. Commenced operations August 1,
or reduce the proceeds of 1989.
securities sold, and are not 7. Commenced operations January 2,
separately reflected in the 1996.
funds' statement of operations. 8. Commenced operations April 30,
Shares traded on a principal 1997.
basis (without commissions), 9. Based on operations for the period
such as fixed-income shown and, accordingly, not
transactions, are excluded. representative of a full year's
Generally, non-U.S. commissions operations.
are lower than U.S. commissions No information is presented for the
when expressed as cents per Global Small Capitalization Fund since
share but higher when expressed it had no investment operations as of
as a percentage of transactions April 1, 1998.
because of the lower per-share
prices of many non-U.S.
securities.
2. Percentages are exclusive of the
redemption in kind which occurred
March 29, 1988.
3. Amount includes net realized
short-term gains treated as net
investment income for federal
income tax purposes.
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT THE FUNDS The Series consists of ten funds, each
OBJECTIVES AND representing a separate fully managed diversified
POLICIES OF THE portfolio of securities. The ten funds are the
FUNDS Global Growth Fund, the Global Small Capitaliza-
tion Fund, the Growth Fund, the International
Fund, the Growth-Income Fund, the Asset Alloca-
tion Fund, the Bond Fund, the High-Yield Bond
Fund, the U.S. Government/AAA-Rated Securities
Fund and the Cash Management Fund. The Series of-
fers two classes of fund shares: Class 1 shares
and Class 2 shares. This prospectus offers Class
2 shares only. The Board of Trustees may estab-
lish additional funds and classes in the future.
The investment objective(s) and policies of each
fund are discussed below. Investment policy lim-
its as stated below are measured at the time of
purchase. MORE INFORMATION ON THE FUNDS IS CON-
TAINED IN THE SERIES' STATEMENT OF ADDITIONAL IN-
FORMATION.
The Series consists Shares of the Series are currently offered only
of ten funds, each to separate accounts of various insurance compa-
with its own nies to serve as the underlying investment for
investment both variable annuity and variable life insurance
objective(s) and contracts. All such shares may be purchased or
policies. redeemed by the separate accounts without any
sales or redemption charges at net asset value.
Due to differences in tax treatment or other con-
siderations, the interests of various Contract
owners participating in a fund might at some time
be in conflict. The Board of Trustees will moni-
tor the Series' operations for any material con-
flicts and determine what action, if any, should
be taken.
PLAN OF DISTRIBUTION Class 2 shares pay 0.25% of
average net assets annually, pursuant to a plan
of distribution or "12b-1 Plan." Currently,
Class 2 shares are available only through Ameri-
can Legacy III, a variable annuity contract is-
sued by Lincoln National Life Insurance Company
("Lincoln National"). Amounts paid under the 12b-
1 Plan are used by Lincoln National to cover the
expense of certain Contract owner services ren-
dered by Lincoln National and investment dealers.
Class 2 shares pay only their proportionate share
of Series expenses plus plan of distribution ex-
penses.
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 other 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
Corporation or Moody's Investors Service, Inc. or
unrated but determined to be of equivalent qual-
ity by the fund's investment adviser, Capital Re-
search and Management Company). 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, and
"High-Yield Bond Fund--Risks of Investing in
High-Yield, High-Risk Securities" below. In addi-
tion, the
3
<PAGE>
- --------------------------------------------------------------------------------
fund may at times hold a portion of its assets in
cash and money market instruments denominated in
U.S. dollars or other currencies. See "Securities
and Investment Techniques--Money Market Instru-
ments."
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-
vested in issuers domiciled in any one country.
(In determining the domicile of an issuer, Capi-
tal Research and Management Company takes into
account such factors as where the company is le-
gally organized, where it maintains principal
corporate offices and where it conducts its prin-
cipal operations.)
The Global Small GLOBAL SMALL CAPITALIZATION FUND The investment
Capitalization Fund objective of the Global Small Capitalization Fund
seeks to provide is long-term growth of capital.
you with long-term
growth of capital The fund seeks to achieve its objective by in-
by investing in vesting primarily in equity securities of issuers
equity securities domiciled around the world with relatively small
of issuers market capitalizations (share price times the
domiciled around number of equity securities outstanding). In se-
the world with lecting investments, the fund emphasizes compa-
relatively nies that are believed by Capital Research and
small market Management Company to have the potential for
capitalizations. growth. Current income is not a consideration.
Under normal market conditions, the fund will
invest at least 65% of its total assets in equity
securities of small capitalization issuers,
typically having individual market
capitalizations of approximately $50 million to
$1.2 billion; however, the fund will not
necessarily sell stocks because they fall outside
this range due to market conditions.
The fund's assets may also be held in cash or
high-quality cash equivalents, government or cor-
porate debt securities denominated in U.S. dol-
lars or other currencies for liquidity purposes
or when, in the opinion of Capital Research and
Management Company, prevailing market conditions
indicate that it is desirable to do so; in addi-
tion, the fund may enter into repurchase agree-
ments. Under normal market conditions the fund
will invest no more than 35% of its total assets
in such securities.
When prevailing market, economic, political or
currency conditions warrant, assets may also be
invested in securities convertible into common
stocks, straight debt securities (generally rated
in the top three quality categories by any
national rating service or determined to be of
equivalent quality by Capital Research and
Management Company), government securities or
nonconvertible preferred stocks. These securities
may also be issued by entities domiciled outside
the U.S. See "Securities and Investment
Techniques--Investing in Various Countries"
below.
The Growth Fund GROWTH FUND The investment objective of the
seeks to provide you Growth Fund is growth of capital. Whatever cur-
with growth of rent income is generated by the fund is likely to
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.
4
<PAGE>
- --------------------------------------------------------------------------------
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,
and "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 junk 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 rities of issuers domiciled outside the United
of capital by States. The fund's investment approach is based
investing in on the belief that economic and political devel-
securities opments have helped to create new opportunities
of issuers outside the U.S.
domiciledoutside
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 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.
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 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.
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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. However, the fund may
invest 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. and not included in the Standard
& Poor's 500 Composite Index (a broad measure of
the U.S. stock market), 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).
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. equity securities as
such, the fund has no current intention to engage
in forward currency transactions. See "Securities
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
6
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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 invested 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. Securities rated
Ba and BB or below or unrated securities that are
determined to be of equivalent quality (commonly
known as "junk" or "high-yield, high-risk" bonds)
are subject to special review before purchase.
These bonds 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 the Appendix for a further description
of the various bond ratings, and "High-Yield Bond
Fund--Risks of Investing in High-Yield, High-Risk
Securities" below. 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 investments (including equity-
type securities) and cash or cash equivalents
amounted to % and %, respectively, of
the fund's assets.
The fund's investments in non-U.S. fixed-income
securities will be concentrated in securities is-
sued or guaranteed as to principal and interest
by foreign governments or their agencies or in-
strumentalities or by multinational agencies. The
fund may purchase and sell currencies to facili-
tate settlement of trades; however, it does not
currently intend to enter into forward currency
contracts.
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 debt securities that are rated Baa or
better by Moody's Investors Service, Inc. or BBB
or better by Standard & Poor's Corporation or
unrated but determined to be of equivalent qual-
ity by Capital Research and Management Company.
Securities rated Baa or BBB have speculative
characteristics. See the Appendix for a descrip-
tion of the various bond ratings.
At least 35% of the value of the fund's assets
must be invested in debt 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.
See the Appendix for a further description of the
various bond ratings.
Securities rated Ba and BB or below or unrated
securities that are determined to be of
equivalent quality (commonly known as "junk" or
"high-yield, high-risk" bonds) are considered
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
7
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bonds. See "High-Yield Bond Fund--Risks of
Investing in High-Yield, High-Risk Securities"
below. During the previous fiscal year, the
approximate monthly average percentages of the
Bond Fund's 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 -- %; and B/B --
%. Non-rated investments (including equity-
type securities) and cash or cash equivalents
amounted to % and %, respectively, of
the fund's assets.
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 come securities, with emphasis on higher yield-
appreciation. 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 securities) and cash or cash equivalents
amounted to % and %, respectively, of the
fund's assets.
In pursuing its secondary investment objective of
capital appreciation, the Series may purchase
high-yield bonds that are expected by Capital Re-
search and Management Company to increase in
value due to improvements in their credit quality
or ratings or anticipated declines in interest
rates. In addition, the fund may invest for this
purpose up to 25% of its assets in common stocks
or other equity or equity-related securities. Eq-
uity-type securities normally will be purchased
as part of a unit with fixed-income securities or
when an unusual opportunity for capital apprecia-
tion is perceived due to an anticipated improve-
ment in the issuer's credit quality or ratings.
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.
8
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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 than higher rated bonds, or they
may already be in default. The market prices of
these securities may fluctuate more than higher-
quality securities and may decline significantly.
It may be more difficult to dispose of, or to de-
termine 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 objectives 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 secu-
rities 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
9
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AAA 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). Howev-
er, 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 November 30,
1997 was % on an annualized basis.
SECURITIES AND EQUITY SECURITIES Equity securities represent an
INVESTMENT ownership position in a company. These securities
TECHNIQUES include common stocks, preferred stocks, and
securities with equity conversion or purchase
rights. The prices of equity securities fluctuate
based on changes in the financial condition of
their issuers and on market and economic
conditions. The funds' results will be related to
The ten funds of the overall market for these securities.
the Series invest
in a wide variety DEBT SECURITIES Bonds and other debt securities
of securities which are used by issuers to borrow money. Issuers pay
are subject to investors interest and must repay the amount bor-
varying degrees of rowed at maturity. Some debt securities, such as
risk. 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.
10
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MORTGAGE-RELATED SECURITIES The funds may invest
in Government National Mortgage Association
(GNMA) certificates and the U.S. Government/AAA-
Rated Securities Fund expects to invest
substantially in these and other mortgage-related
securities. GNMA certificates are securities
representing part ownership of a pool of mortgage
loans on which timely payment of interest and
principal is guaranteed by the U.S. Government.
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.
Although the mortgage loans in the pool will have
stated maturities of up to 30 years, the actual
average life or effective maturity of the GNMA
certificates typically will be substantially less
because the mortgages will be subject to normal
principal amortization and may be repaid prior to
maturity. Due to the prepayment feature and the
need to reinvest prepayments of principal at cur-
rent market rates, which may occur at higher or
lower yields than the original yield, GNMA cer-
tificates may be less effective than typical
bonds at "locking in" yields during periods of
declining interest rates.
The funds also may invest in securities repre-
senting interests in pools of conventional mort-
gage loans issued by the Federal National Mort-
gage Association (FNMA) or by the Federal Home
Loan Mortgage Corporation (FHLMC).
In addition, the funds may invest in collateral-
ized mortgage obligations (CMOs) and mortgage-
backed bonds. A CMO is made up of a series of
bonds of varying maturities that together are
fully collateralized directly or indirectly by a
pool of mortgages on which the payments of prin-
cipal and interest are dedicated to payment of
principal and interest on the bonds. Mortgage-
backed bonds are general obligations fully col-
lateralized directly or indirectly by a pool of
mortgages, but on which payments are not passed
through directly. The funds will only purchase
CMOs or mortgage-backed bonds which are fully
collateralized by securities issued by GNMA,
FNMA, or FHLMC and or mortgages insured by GNMA.
MONEY MARKET INSTRUMENTS The funds invest in
various high-quality money market instruments
that mature, or may be redeemed or resold, in
13 months or less (25 months in the case of U.S.
government securities). These include (1)
commercial paper (short-term notes 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)), (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
11
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disposition costs in connection with liquidating
the collateral. If bankruptcy proceedings are
commenced with respect to the seller, 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, a 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.
The funds assume the rights and risks of owner-
ship, including the risk of price and yield fluc-
tuations as of the time of the agreement.
U.S. PRIVATE PLACEMENTS The Global Growth Fund,
the Global Small Capitalization 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 (for example, private
placements sold pursuant to Rule 144A).
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, investing in
private placement securities could have the
effect of increasing the level of illiquidity of
a fund's portfolio to the extent that "qualified"
institutional investors become, for a period of
time, uninterested in purchasing these
securities.
INVESTING IN VARIOUS COUNTRIES The Global Growth
Fund, the Global Small Capitalization 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. can involve
special risks, particularly in certain developing
countries, caused by, among other things;
fluctuating currency values; different
accounting, auditing, and financial reporting
regulations and practices in some countries;
changing local and regional economic, political,
and social conditions; greater market volatility;
differing securities market structures; and
various administrative difficulties such as
delays in clearing and settling portfolio
transactions or in receiving payment of
dividends. However, in the opinion of Capital
Research 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
12
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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, and the
Asset Allocation Fund may invest in non-U.S.
fixed-income securities denominated in currencies
other than the U.S. dollar. In addition, the U.S.
Government/AAA-Rated Securities Fund may purchase
obligations of non-U.S. corporations or govern-
mental 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 extent.
CURRENCY TRANSACTIONS The Global Growth Fund, the
Global Small Capitalization 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.
The Asset Allocation Fund may purchase and sell
currencies to facilitate settlements of fixed-
income securities transactions but has no current
intention of entering into forward currency
contracts. 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. The funds generally will not attempt to
protect against all potential changes in exchange
rates.
13
<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 may, from time to time,
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
PORTFOLIO PROFESSIONAL, IF 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;
High-Yield Bond Fund--less than one year
- ------------------------------------------------------------------------------------------------------------
Claudia P. Huntington Vice President of the Series. Growth-Income Fund--4 years (plus 5 years
Senior Vice President, as a research professional prior to becoming
Capital Research and a portfolio counselor for the fund)
Management Company
- ------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Vice President of the Series. Global Small Capitalization Fund--
Executive Vice President and Director, since the fund began operations in 1998
CapitalResearch Company* Global Growth Fund--since
the fund began operations in 1997;
International Fund--4 years
- ------------------------------------------------------------------------------------------------------------
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--6 years
- ------------------------------------------------------------------------------------------------------------
Timothy D. Armour Chairman and Chief Executive Officer, Asset Allocation Fund--2 years
Capital Research Company*
- ------------------------------------------------------------------------------------------------------------
David C. Barclay Executive Vice President and Director, High-Yield Bond Fund--5 years
Capital Research Company*
- ------------------------------------------------------------------------------------------------------------
Alan N. Berro Senior Vice President, Capital Growth-Income Fund--2 years
Research Company*
- ------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice President, Capital Global Growth Fund--since the fund
Research Company* began operations in 1997;
International Fund--5 years
- ------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice President and Director, Global Small Capitalization Fund--
Capital Research and Management since the fund began operations in 1998
Company Growth Fund--4 years (plus
5 years as a research professional
prior to becoming a
portfolio counselor for the fund)
- ------------------------------------------------------------------------------------------------------------
Mark E. Denning Director, Capital Research and Global Small Capitalization Fund--
Management Company Since the fund began
operations in 1998
- ------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice President and Director, Growth Fund--11 years
Capital Research and Management
Company
- ------------------------------------------------------------------------------------------------------------
Alwyn Heong Vice President, Capital International Fund--2 years
Research Company*
- ------------------------------------------------------------------------------------------------------------
Thomas H. Hough Vice President--Investment U.S. Government Fund--less than
Management Group, Capital one year
Research and Management
Company
- ------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice President and Director, Growth-Income Fund--8 years (plus
Capital Research and Management 1 year as a research professional prior to
Company becoming a portfolio counselor for the fund)
- ------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE
AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR ITS TOTAL
FOR THE SERIES AFFILIATES YEARS
- ----------------------------------------------------
<S> <C> <C>
James K. Dunton 36 36
- ------------------------------------------------------------------------------------------------------------
Abner D. Goldstine 31 46
- ------------------------------------------------------------------------------------------------------------
Claudia P. Huntington 20 22
- ------------------------------------------------------------------------------------------------------------
Robert W. Lovelace 13 13
- ------------------------------------------------------------------------------------------------------------
John H. Smet 15 16
- ------------------------------------------------------------------------------------------------------------
Timothy D. Armour 15 15
- ------------------------------------------------------------------------------------------------------------
David C. Barclay 10 17
- ------------------------------------------------------------------------------------------------------------
Alan N. Berro 7 12
- ------------------------------------------------------------------------------------------------------------
Martial Chaillet 26 26
- ------------------------------------------------------------------------------------------------------------
Gordon Crawford 27 27
- ------------------------------------------------------------------------------------------------------------
Mark E. Denning 15 15
- ------------------------------------------------------------------------------------------------------------
James E. Drasdo 21 26
- ------------------------------------------------------------------------------------------------------------
Alwyn Heong 6 6
- ------------------------------------------------------------------------------------------------------------
Thomas H. Hough 8 11
- ------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell 23 26
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
14
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE AS
PORTFOLIO COUNSELOR (AND RESEARCH PROFESSIONAL,
PORTFOLIO IF APPLICABLE) FOR THE FUNDS
COUNSELORS INDICATED
FOR THE SERIES PRIMARY TITLE(S) (APPROXIMATE)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Donald D. O'Neal Vice President, Capital Research and Global Growth Fund--since the fund
Management Company began operations in 1997;
Growth Fund--7 years (plus 4 years as a
research professional prior to becoming a
portfolio counselor for the fund)
- -----------------------------------------------------------------------------------------------------------
Victor M. Parachini Senior Vice President, Capital Asset Allocation Fund--2 years
Research and Management Company
- -----------------------------------------------------------------------------------------------------------
John W. Ressner Vice President--Investment U.S. Government Fund--less than
Management Group, Capital one year
Research and Management Company
- -----------------------------------------------------------------------------------------------------------
Susan M. Tolson Vice President, Capital Research High-Yield Bond Fund--3 years
Company* (plus 3 years as a research professional prior
to becoming a portfolio counselor for the fund)
- -----------------------------------------------------------------------------------------------------------
Gregory W. Wendt Senior Vice President and Director, Global Small Capitalization Fund--
Capital Research Company* Since the fund began operations in 1998
YEARS OF EXPERIENCE
AS
INVESTMENT PROFESSIONAL
(APPROXIMATE)
WITH CAPITAL
RESEARCH AND
PORTFOLIO MANAGEMENT
COUNSELORS COMPANY OR ITS TOTAL
FOR THE SERIES AFFILIATES YEARS
---------------------------------------------
<S> <C> <C>
Donald D. O'Neal 13 13
- -----------------------------------------------------------------------------------------------------------
Victor M. Parachini 21 36
- -----------------------------------------------------------------------------------------------------------
John W. Ressner 10 10
- -----------------------------------------------------------------------------------------------------------
Susan M. Tolson 8 10
- -----------------------------------------------------------------------------------------------------------
Gregory W. Wendt 10 10
</TABLE>
- --------------------------------------------------------------------------------
* COMPANY AFFILIATED WITH CAPITAL RESEARCH AND MANAGEMENT COMPANY.
15
<PAGE>
- --------------------------------------------------------------------------------
It is the Series' policy to distribute to the
DIVIDENDS, shareholders (the insurance company separate ac-
DISTRIBUTIONS AND counts) all of its net investment income and cap-
TAXES 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.
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
realized capital gains, the fund itself is
relieved of federal income tax.
See the applicable Contract prospectus for
information regarding the federal income tax
treatment of the Contracts and distributions to
the separate accounts.
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:
Global Growth Fund -- . %; Growth Fund -- . %;
International Fund -- . %; Growth-Income Fund
-- . %; Asset Allocation Fund -- . %; Bond
Fund -- . %; High-Yield Bond Fund -- . %;
U.S. Government/AAA-Rated Securities Fund --
. %; and Cash Management Fund -- . %.
Capital Research and Management Company
has received no compensation for the Global
Small Capitalization Fund because it had not
commenced operations during the most recent
fiscal year.
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
16
<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 transactions 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 12b-1 Plan. There will not usually be a
shareholder meeting in any year, except, for ex-
ample, when the election of the board is required
to be acted upon by shareholders under the In-
vestment 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, redemption proceeds will be paid on or be-
fore the seventh day following the request for
redemption.
PRICE OF SHARES The net asset value per share is
calculated once daily at 4:00 p.m., New York time
each day the New York Stock Exchange is open. For
example, if the Exchange closes at 1:00 p.m. on
one day and at 4:00 p.m. on the next, the fund's
share price would be determined as of 4:00 p.m.
New York time on both days. The current value of
each fund's total assets, less all liabilities,
is divided by the total number of shares out-
standing (excluding treasury shares), and the re-
sult, rounded to the nearer cent, is the net as-
set value per share.
17
<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
18
<PAGE>
No person has been authorized to give any
information or to make any representations other
than those contained in this Prospectus, the
Prospectus of American Variable Insurance Series,
and any authorized sales literature in connection
with the offer contained in this Prospectus and,
if given or made, such information or
representations must not be relied upon as having
been authorized. This Prospectus does not
constitute an offer of, or solicitation of an
offer to acquire, any interest or participation in
the variable annuity contracts offered by this
Prospectus in any jurisdiction to anyone to whom
it is unlawful to make such an offer or
solicitation in such jurisdiction.
Form #: 28702 26-101-498
<PAGE>
LL24183-14 26-101-498
<PAGE>
AMERICAN VARIABLE INSURANCE SERIES
PART B
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1998
This document is not a prospectus but should be read in conjunction with
the current prospectuses of American Variable Insurance Series (the "Series")
dated April 1, 1998. The prospectuses 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 TRUSTEES AND OFFICERS 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 ATTACHED
</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 policies 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.
Under normal market conditions, the Global Growth Fund will invest in issuers
domiciled in at least three countries, with no more than 40% of its assets
invested in issuers domiciled in any one country. (For clarification purposes,
the 40% limit excludes cash and cash equivalents.)
GLOBAL GROWTH FUND, GLOBAL SMALL CAPITALIZATION 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, a 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, a fund would have to replace the security with a lower
yielding security, resulting in a decreased return for investors. Conversely,
the value of high-yield, high-risk bonds held by each fund 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 a 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, GLOBAL SMALL CAPITALIZATION FUND, GROWTH FUND,
INTERNATIONAL FUND, ASSET ALLOCATION FUND, BOND FUND AND HIGH-YIELD BOND
FUND
CURRENCY TRANSACTIONS -- The Global Growth Fund, the Global Small
Capitalization Fund, the Growth Fund, the International Fund, the Bond Fund and
the High-Yield Bond Fund have the ability to enter into forward currency
contracts to protect against changes in currency exchange rates. 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. The
funds intend to enter into forward currency contracts solely to hedge into the
U.S. dollar its exposure to other currencies. The fund will segregate liquid
assets which will be marked to market daily to meet its forward contract
commitments to the extent required by the Securities and Exchange
Commission.
The Growth Fund and the Asset Allocation Fund do 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,
limit initial margin deposits in connection with the use of futures contracts
and related options for purposes other than "hedging" (as defined by CFTC
rules) to 5% of a fund's 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 a fund, as purchaser, 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 a fund,
as purchaser, 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 (exercise) 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.
Certain provisions of the Internal Revenue code may limit the extent to which
the fund may enter into forward contracts. Such transactions may also affect,
for U.S. federal tax purposes, the character and timing of income, gain or loss
recognized by the fund.
ASSET ALLOCATION FUND, BOND FUND AND U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
GNMA CERTIFICATES, FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS, AND 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 substantially 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 a fund creates leverage which increases the
fund's investment risk. As a fund's 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, a fund's
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, a fund's
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 GNMA certificates
or other securities together with a commitment 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 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 a 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, a 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.
A fund will segregate liquid assets, which will be marked to market daily, 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 a 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 funds 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 funds' portfolio
securities decline while the funds are in a leveraged position, greater
depreciation of its net assets would likely occur than were it not in such a
position. A 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 its 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, a fund may have
difficulty determining their value or selling the instruments as generally
there is no secondary market. A fund will purchase these instruments only to
the extent that such a purchase would be consistent with its 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).
ASSET ALLOCATION FUND, BOND FUND AND HIGH-YIELD BOND FUND
REINSURANCE RELATED NOTES AND BONDS -- The funds may invest in reinsurance
related notes and bonds. These instruments, which are typically issued by
special purpose reinsurance companies, transfer an element of insurance risk to
the note or bond holders. For example, the reinsurance company would not be
required to repay all or a portion of the principal value of the notes or bonds
if losses due to a catastrophic event under the policy (such as a major
hurricane) exceed certain dollar thresholds. Consequently, each fund may lose
the entire amount of its investment in such bonds or notes if such an event
occurs and losses exceed certain dollar thresholds. In this instance,
investors would have no recourse against the insurance company. These
instruments may be issued with fixed or variable interest rates and rated in a
variety of credit quality categories by the rating agencies.
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:
COMMERCIAL PAPER -- Commercial paper is 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.
COMMERCIAL BANK OBLIGATIONS -- Commercial bank obligations are 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 other 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.
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."
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.
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 the following fundamental policies and investment
restrictions for each fund which may not be changed without a majority vote of
the fund's 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 of the fund
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the fund are present in person or by proxy, or (ii) more than 50%
of the outstanding voting securities of the fund. Investment limitations
expressed in the following restrictions are considered at the time securities
are purchased and are based on the fund's net assets unless otherwise
indicated.
INVESTMENT RESTRICTIONS OF THE GLOBAL GROWTH FUND, GLOBAL SMALL CAPITALIZATION
FUND, GROWTH FUND, INTERNATIONAL FUND, GROWTH-INCOME FUND, ASSET ALLOCATION
FUND, BOND FUND AND HIGH-YIELD BOND FUND
The Global Growth Fund, Global Small Capitalization 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 respective
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 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.
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.
SERIES TRUSTEES AND OFFICERS
TRUSTEES AND TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, POSITION PRINCIPAL OCCUPATION(S) AGGREGATE TOTAL COMPENSATION TOTAL
ADDRESS WITH DURING PAST 5 YEARS COMPENSATION (INCLUDING VOLUNTARILY NUMBER OF
AND AGE REGISTRANT (POSITIONS WITHIN THE (INCLUDING VOLUNTARILY DEFERRED FUND
ORGANIZATIONS LISTED MAY HAVE DEFERRED COMPENSATION/1/) FROM BOARDS
CHANGED DURING THIS PERIOD) COMPENSATION/1/) FROM ALL FUNDS MANAGED BY ON WHICH
SERIES DURING FISCAL YEAR CAPITAL RESEARCH AND TRUSTEE
ENDED 11/30/97 MANAGEMENT SERVES/2/
COMPANY
<S> <C> <C> <C> <C> <C>
Charles H. Black Trustee Private investor and consultant; $29,500/3/ $122,900 4
525 Alma Real Drive Former Executive Vice President
Pacific Palisades, CA 90272 and Director, Kaiser Steel
Age: 71 Corporation
H. Frederick Christie Trustee Private Investor; Former $28,511 $163,900 18
P. O. Box 144 President and Chief Executive
Palos Verdes, CA 90274 Officer, The Mission Group
(non-utility holding Company,
Age: 64 subsidiary of Southern California
Edison Company)
Joe E. Davis Trustee Private Investor; Former $30,400 $30,400 1
3436 Caribeth Drive Chairman, Linear Corporation;
Encino, CA 91436 former President and Chief
Age: 63 Executive Officer, National
Health Enterprises, Inc.
Martin Fenton, Jr. Trustee Chairman, Senior Resource $29,125/3/ $133,000 16
4350 Executive Drive Group (management of senior
Suite 101 living centers)
San Diego, CA 92123
Age: 62
Mary Myers Kauppila Trustee Founder and President, Energy $27,700/3/ $89,000 4
286 Congress Street Investment, Inc.
Boston, MA 02110
Age: 43
Kirk P. Pendleton Trustee President, Cairnwood, Inc. $27,600/3/ $93,850 5
Cairnwood, Inc.
75 James Way
Southampton, PA 18966
Age: 58
+James F. Rothenberg President President and Director, Capital none/4/ none/4/ 1
333 South Hope Street and Research and Management
Los Angeles, CA 90071 Trustee Company
Age: 51
+Thomas E. Terry Chairman of Retired. Former Vice President none/4/ none/4/ 3
6048 S. Highlands Avenue the Board and Secretary, Capital Research
Madison, WI 53705 and Management Company
Age: 60
</TABLE>
+ Trustees who are considered "interested persons" of the Series as defined in
the 1940 Act on the basis of their affiliation with the Series' Investment
Adviser, Capital Research and Management Company.
/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 deferred compensation 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 ($38,127); H . Frederick
Christie ($36,851); Martin Fenton ($23,084); Mary Myers Kauppila ($129,340) and
Kirk P. Pendleton ($31,915). 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
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) WITH PRINCIPAL OCCUPATION(S)
REGISTRANT DURING PAST 5 YEARS
<S> <C> <C> <C>
Thomas E. Terry 60 Chairman of the Retired. Former Vice President and
6048 S. Highlands Avenue Board Secretary, Capital Research and
Madison, WI 53705 Management Company
James F. Rothenberg 51 President and President and Director, Capital Research
333 South Hope Street Trustee and Management Company
Los Angeles, CA 90071
James K. Dunton 52 Senior Vice Senior Vice President and Director, Capital
333 South Hope Stree President Research and Management Company
Los Angeles, CA 90071
Abner D. Goldstine 68 Senior Vice Senior Vice President and Director, Capital
11100 Santa Monica Boulevard President Research and Management Company
Los Angeles, CA 90025
Michael J. Downer 43 Vice President Vice President - Fund Business
333 South Hope Street Management Group, Capital Research and
Los Angeles, CA 90071 Management Company
Claudia P. Huntington 46 Vice President Senior Vice President, Capital Research
333 South Hope Street Company
Los Angeles, CA 90071
John H. Smet 41 Vice President Vice President, Capital Research and
11100 Santa Monica Boulevard Management Company
Los Angeles, CA 90025
Chad L. Norton 37 Secretary Vice President - Fund Business Managment
333 South Hope Street Group, Capital Research and Management
Los Angeles, CA 90071 Company
Robert P. Simmer 36 Treasurer Vice President - Fund Business Managment
5300 Robin Hood Road Group, Capital Research and Management
Norfolk, VA 23513 Company
Sheryl F. Johnson 29 Assistant Assistant Vice President - Fund Business
5300 Robin Hood Road Treasurer Management Group, Capital Research and
Norfolk, VA 23513 Management Company
</TABLE>
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 meeting 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 $175 billion of stocks,
bonds and money market instruments and serves over eight 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 - An Amended Investment Advisory and
Service Agreement (the "Agreement") between the Series and the Investment
Adviser, unless sooner terminated, will continue in effect until November 30,
1998, 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: 0.69% of net assets;
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: 0.78% on the first $600 million of net assets, plus 0.60%
on net assets from $600 million to $1.2 billion, plus 0.48% on net assets from
$1.2 billion to $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 0.285% 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, 1997, 1996 and 1995, the Investment
Adviser's total fees, respectively, amounted to the following: Growth Fund
$__________, $14,284,000 and $11,222,000; International Fund $__________,
$12,370,000 and $9,882,000; Growth-Income Fund $__________, $17,451,000 and
$13,593,000; Asset Allocation Fund $_________, $4,663,000 and $3,620,000;
High-Yield Bond Fund $_________, $2,996,000 and $2,350,000; U. S.
Government/AAA-Rated Securities Fund $_________, $2,661,000 and $2,550,000;
and Cash Management Fund $_________, $1,007,000 and $907,000. During the
fiscal years ended November 30, 1997 and 1996, the Investment Adviser's total
fees for the Bond Fund amounted to $_______ and $204,000. During the fiscal
period ended November 30, 1997, the Investment Advisers total fee for the
Global Growth Fund amounted to $_______.
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,
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.
Under the Plan the Series shall pay Lincoln National Life Insurance ("Lincoln
National") Company 0.25% of each fund's average net assets annually (Class 2
shares only) 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 has approved the categories of expenses for which payment is being
made. During the fiscal year ended November 30, 1997, the Series paid $_______
to Lincoln National under the Plan.
PRICE OF SHARES
The price paid for shares, the net asset value price, is calculated for each of
the funds once daily at 4:00 p.m., New York Time each day the New York Stock
Exchange is open. For example, if the Exchange closes at 1:00 p.m. on one day
and at 4:00 p.m. on the next, the funds' share prices would be determined as of
4:00 p.m. on both days. The New York Stock Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Martin Luther King,
Jr. 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. Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or
the over-the-counter market. Fixed-income securities are valued at prices
obtained from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.
Securities with original maturities of one year or less having 60 days or less
to maturity are amortized to maturity based on their cost if acquired within 60
days of maturity or, if already held on the 60th day, based on the value
determined on the 61st day. Forward currency contracts are valued at the mean
of representative quoted bid and asked prices.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.
Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith under
policies approved by the fund's Board. The fair value of all other assets is
added to the value of securities to arrive at the total assets;
2. Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and
3. Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the 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 of any net gain or
loss recognized on these deemed sales and 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 the 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 will 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 for the fiscal years ended
November 30, 1997, 1996 and 1995, respectively, amounted to the following:
Growth Fund $_________, $2,358,000, and $1,928,000; International Fund
$_________, $3,813,000, and $1,301,000; Growth-Income Fund $_________,
$3,389,000, and $2,291,000; Asset Allocation Fund $_______, $557,000, and
$700,000. Brokerage commissions paid on portfolio transactions for the Global
Growth Fund amounted to $_______.
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'
portfolios, 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; blackout periods on
personal investing for certain investment personnel; a 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".
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
Included in Prospectus - Part A
Financial Highlights
Included in Statement of Additional Information - Part B
Investment Portfolio Per Share Data and Ratios
Statement of Assets and Liabilities Notes to Financial Statements
Statement of Operations Report of Independent Accountants
Statement of Changes in Net Assets
(B) EXHIBITS:
1. On file (see SEC file nos. 811-3857 and 2-86838)
2. On file (see SEC file nos. 811-3857 and 2-86838)
3. None
4. None
5. On file (see SEC file nos. 811-3857 and 2-86838)
6. Selling Group Agreement and State Addendum to Selling Group Agreement
7. None
8. On file (see SEC file nos. 811-3857 and 2-86838)
9. On file (see SEC file nos. 811-3857 and 2-86838)
10. On file (see SEC file nos. 811-3857 and 2-86838)
11. To be supplied by amendment
12. None
13. On file (see SEC file nos. 811-3857 and 2-86838)
14. None
15. On file (see SEC file nos. 811-3857 and 2-86838)
16. None
17. To be supplied by amendment
18. On file (see SEC file nos. 811-3857 and 2-86838)
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 30, 1997.
Number of
Title of Class Record-Holders
Beneficial Interest _____
(no par value)
ITEM 27. INDEMNIFICATION.
Registrant is a joint-insured under investment adviser/mutual fund errors and
omissions policies 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. However, in no
event will Registratnt maintain insurance to indemnify any such person for any
act for which Registratnt itself is not permitted to indemnify the
individual.
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.
<PAGE>
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 30th day of January,
1998.
American Variable Insurance Series
By: /s/ James F. Rothenberg
James F. Rothenberg, President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
Registration Statement has been signed below on January 30, 1998, by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE
(1) Principal Executive Officer:
/s/ James F. Rothenberg President
James F. Rothenberg
(2) Principal Financial Officer and
Principal Accounting Officer:
/s/ Robert P. Simmer Treasurer
Robert P. Simmer
(3) Directors:
Charles H. Black* Trustee
H. Frederick Christie* Trustee
Joe E. Davis* Trustee
Martin Fenton, Jr.* Trustee
Mary Myers Kauppila* Trustee
Kirk P. Pendleton* Trustee
/s/ James F. Rothenberg President and Trustee
Thomas E. Terry* Chairman of the Board
</TABLE>
*By /s/ Chad L. Norton
Chad L. Norton
(Attorney-in-Fact)
C-13
<PAGE>
[LOGO OF AMERICAN FUNDS DISTRIBUTORS(SM)]
AMERICAN FUNDS DISTRIBUTORS
----------------------------------------------------------------
333 South Hope Street . Los Angeles, California 90071
Telephone 800/421-9900, ext. 11
THE AMERICAN LEGACY--SEPARATE ACCOUNT E
AMERICAN LEGACY LIFE--SEPARATE ACCOUNT F
AMERICAN LEGACY II--SEPARATE ACCOUNT H
AMERICAN LEGACY III--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 National Association of Securities Dealers
("NASD") and agree to notify us immediately if you cease to be so registered
or licensed or a member in good standing of the NASD. (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
---------------- ----------------------
ALL INDIVIDUAL CONTRACT PURCHASE 4.00%
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.
THE AMERICAN LEGACY
VARIABLE ANNUITY--ANNUITIZATION COMMISSIONS TO DEALERS
------------------------------- ----------------------
ALL PURCHASE PAYMENTS HELD 4.00%
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 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.
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.)
3
<PAGE>
AMERICAN LEGACY III
VARIABLE ANNUITY COMMISSIONS TO DEALERS
---------------- ----------------------
INDIVIDUAL CONTRACT PURCHASE PAYMENTS 4.75% ON ALL INDIVIDUAL
CONTRACT
PURCHASE PAYMENTS MADE TO
CONTRACTS WITH OWNERS UNDER
AGE 81
(2.25% on all individual
Contract Purchase Payments to
Contracts with owners age 81
and above)
A continuing .25% annual service fee will be paid to dealers on the value
of all Contract purchase payments beginning in the second Contract year.
The service fee will be paid at the end of each calendar quarter on the
quarter ending account value less purchase payments made in the previous 15
months. For Contracts with owners under age 81 when the Contract is
established, this service fee will increase to .40% annually and will be
paid on quarter ending account value attributable to purchase payments
which have remained in the Contract for more than 84 months. A separate
compensation arrangement (as described below) applies to Contracts that
have been annuitized. Service fee payments are subject to the continuation
of the plan of distribution adopted by American Variable Insurance Series,
which serves as the investment vehicle for American Legacy III, and such
service fee payments may be varied or discontinued at any time.
An additional .25% sales volume allowance will be paid to dealers
maintaining a sales volume of at least $7,500,000 in the American Legacy
III variable annuity 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
4.75%. Payments will be made to dealers each calendar 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. The $7,500,000 qualifying threshold amount may be changed from
time to time for future calendar years. 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.
No commission will be paid on transfers from The American Legacy or
American Legacy II to American Legacy III. No commission will be paid on
transfers from the American Pathway II variable annuity to American Legacy
II or American Legacy III.
AMERICAN LEGACY III
VARIABLE ANNUITY--ANNUITIZATION
-------------------------------
Upon annuitization of American Legacy III contracts to which no surrender
charges apply, a continuing commission of .80% annually will be paid to
dealers on "statutory reserves" which have been annuitized on a variable
basis. This amount will be based on end-of-quarter reserve amounts and paid
to dealers each calendar quarter. A commission of 3% will be paid to
dealers on account values which have been annuitized on a fixed basis.
4
<PAGE>
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)
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.
5
<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 supplemental 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. You understand that with respect to American Funds Distributors, Inc.
you are acting in the capacity of an independent contractor.
14. Any party to this Agreement may cancel at any time upon written notice
to all other parties, effective upon receipt.
15. 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.
16. 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.
6
<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
By: /s/
-----------------------------------
The Lincoln National Life Insurance
Company
1300 South Clinton Street
Fort Wayne, IN 46801
By: /s/ Reed P. Miller
-----------------------------------
Accepted:
- -------------------------------------
Firm
By:
----------------------------------
Signature of Officer or Partner
- -------------------------------------
Print Name of Officer or Partner
Address:
-----------------------------
-----------------------------
Date:
--------------------------------
7
AMERICAN FUNDS DISTRIBUTORS
333 South Hope Street
Los Angeles, California 90071
Telephone 800/421-9000 ext. 11
ADDENDUM TO SELLING GROUP AGREEMENT FOR THE STATE OF __________
This Addendum to the SELLING GROUP AGREEMENT ("Agreement") among AMERICAN FUNDS
DISTRIBUTORS, INC. ("AFD"), THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
("LNL"), and the broker-dealer firm identified below ("Dealer") is effective
upon execution by all parties.
AFD, LNL and Dealer hereby agree that LNL shall pay all compensation due any
agents of the Dealer for business transacted on behalf of LNL directly to, and
in the name of a compensation manager appointed by Dealer, such compensation
manager being a duly licensed insurance agent in the state referenced above.
Dealer shall appoint its compensation manager in writing, signed by an officer
or partner of Dealer who has the authority to bind Dealer. LNL shall direct
all payments for business transacted by agents of Dealer to the named
compensation manager until such time as Dealer notifies LNL, in writing, that
another compensation manager has been appointed.
It is further agreed that Dealer shall indemnify and hold harmless LNL, AFD,
and any of their affiliates, their respective officers, directors, employees or
agents ("Indemnified Party") from any and all claims, and demands or causes of
action that arise out of the compensation manager's negligence, or failure to
properly perform the responsibilities set forth in this Addendum or the
Agreement. Dealer, at its own cost, shall defend any legal proceeding that may
be brought against an Indemnified Party on any such claim or demand in respect
to which such Indemnified Party is indemnified and held harmless hereunder, and
shall satisfy any judgment that may be rendered against such Indemnified Party
with respect to any such claim or demand. Dealer shall notify LNL and AFD
promptly upon receipt of any such claim or demand which it receives.
Dealer agrees that this Addendum constitutes written consent by Dealer to allow
LNL to pay the compensation to the compensation manager as required by Rule
3060 of the Rules of the NASD.
Any party to this Addendum may cancel this Addendum at any time upon written
notice to all other parties, effective upon receipt.
Three originals of the Addendum should be executed. Two of the originals
should be returned to AFD.
In WITNESS WHEREOF, the undersigned have executed this Addendum to the Selling
Group Agreement on the date written below.
AMERICAN FUNDS DISTRIBUTORS, INC.
133 South Hope Street
Los Angeles, CA 90071
By /s/ Mark Freeman
________________________
(Name of Broker-Dealer Firm)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
1300 South Clinton Street
Fort Wayne, IN 46801
By /s/ Kelly D. Clevenger
By _________________________
Print Name _________________
Title ______________________
Date _______________________
Please state the name and the tax identification number of the compensation
manager who is licensed in the above referenced state with The Lincoln National
Life Insurance Company.
Compensation Manager ___________________
Print Name
___________________
Signature
Social Security No. ___________________
9/96
