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. 27
and
Registration Statement
Under
The Investment Company Act of 1940
Amendment No. 27
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)
Approximate date of proposed public offering:
It is proposed that this filing become effective on April 1, 1999, pursuant to
paragraph (a)(1) of rule 485.
AMERICAN VARIABLE INSURANCE SERIES(R)
Class 1 Shares
Prospectus
APRIL 1, 1999
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES. FURTHER, IT HAS NOT DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUNDS
The Series consists of 11 funds, each representing a separate fully managed
diversified portfolio of securities.
<TABLE>
<CAPTION>
<S> <C>
The 11 funds are: Global Growth Fund
Global Small Capitalization Fund
Growth Fund
International Fund
New World Fund
Growth-Income Fund
Asset Allocation Fund
Bond Fund
High-Yield Bond Fund
U.S. Government /AAA-Rated Securities Fund
Cash Management Fund.
</TABLE>
The Series offers two classes of fund shares: 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 Board of Trustees may
establish additional funds and classes in the future. The investment
objective(s) and policies of each fund are discussed below. MORE INFORMATION
ON THE FUNDS IS CONTAINED IN THE SERIES' STATEMENT OF ADDITIONAL INFORMATION.
Shares of the Series are currently offered only to separate accounts of various
insurance companies to serve as the underlying investment for both variable
annuity and variable life insurance contracts ("Contracts"). All such shares
may be purchased or redeemed by the separate accounts without any sales or
redemption charges at net asset value. Due to differences in tax treatment or
other considerations, the interest of various Contract owners participating in
a fund might at some time be in conflict. The Board of Trustees will monitor
the Series' operations for any material conflicts and determine what action, if
any, should be taken.
You may lose money by investing in the Series. The likelihood of loss is
greater if you invest for a shorter period of time. Your investment in the
Series is not a bank deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency, entity or person.
GLOBAL GROWTH FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
common stocks of companies located around the world. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss. In addition, the value of
non-U.S. securities can decline in response to various factors including
currency fluctuations, and administrative difficulties such as delays in
clearing and settling portfolio transactions.
The fund may also invest up to 10% of its assets in debt securities rated Baa
or BBB or below by Moody's Investors Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality. The value
of debt securities held by the fund may be affected by changing interest rates,
effective maturities and credit ratings. Lower quality and longer maturity
bonds will be subject to greater credit risk and price fluctuations than higher
quality and shorter maturity bonds.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
Here are the fund's results calculated on a CALENDAR YEAR basis.
[bar chart]
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ MSCI WORLD/2/ CPI/3/
ONE YEAR
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX MEASURES 22 MAJOR STOCK
MARKETS THROUGHOUT THE WORLD, INCLUDING THE U.S. THIS INDEX IS UNMANAGED AND
DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON APRIL 30, 1997.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
GLOBAL SMALLCAPITALIZATION FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
stocks of smaller companies located around the world that typically have market
capitalizations of $50 million to $1.2 billion. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events, including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth-oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss.
Smaller capitalization stocks are often more difficult to value or dispose of,
more difficult to obtain information about, and more volatile than stocks of
larger, more established companies. Furthermore, the value of non-U.S.
securities can decline in response to various factors, including currency
fluctuations, political, social and economic instability, differing securities
regulations, and administrative difficulties such as delays in clearing and
settling portfolio transactions.
GROWTH FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow by investing primarily in common
stocks of companies that appear to offer superior opportunities for growth of
capital. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss.
The fund may also invest up to 10% of its assets in equity securities of
issuers domiciled outside the U.S. and not included in the Standard & Poor's
500 Composite Index. Investments outside the U.S. may be subject to certain
risks, such as currency fluctuations or political, social and economic
instability.
In addition, the fund may invest up to 10% of its assets in lower quality debt
securities (rated Ba and BB or below by Moody's Investors Services, Inc. or
Standard & Poor's Corporation). The value of debt securities held by the fund
may be affected by factors such as changing interest rates, credit ratings, and
effective maturities. Lower quality and longer maturity bonds will be subject
to greater credit risk and price fluctuations than higher quality and shorter
maturity bonds.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ S&P500/2/ CPI/3/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON FEBRUARY 8, 1984.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
INTERNATIONAL FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment growth over time by investing primarily
in common stocks of companies located outside the United States. The fund is
designed for investors seeking capital appreciation through stocks. Investors
in the fund should have a long-term perspective and be able to tolerate
potentially wide price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss. The value of non-U.S.
securities can decline in response to currency fluctuations, political, social
and economic instability, differing securities regulations, and administrative
difficulties such as delays in clearing and settling portfolio transactions.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ MSCI EAFE INDEX/2/ CPI/3/
ONE YEAR
FIVE YEARS
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ MORGAN STANLEY CAPITAL INTERNATIONAL EAFE (EUROPE, AUSTRALIA, FAR EAST)
INDEX MEASURES ALL MAJOR STOCK MARKETS OUTSIDE NORTH AMERICA. THIS INDEX IS
UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON MAY 1, 1990.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
NEW WORLD FUND
THIS FUND WILL BECOME AVAILABLE ON JUNE 1, 1999; HOWEVER IT MAY NOT BE
AVAILABLE IN ALL STATES ON THAT DATE.
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
stocks of companies with significant exposure to countries which have
developing economies and/or markets. The fund is designed for investors
seeking capital appreciation through stocks. Investors in the fund should have
a long-term perspective and be able to tolerate potentially wide price
fluctuations. Under normal market conditions, the fund will invest at least
35% of its assets in equity securities of companies primarily based in
"qualified" countries which have developing economies and/or markets. In
determining whether a country is qualified, the fund will consider such factors
as the country's per capita gross domestic product, the percentage of the
country's economy that is industrialized, the overall regulatory environment,
the presence of government regulation limiting or banning foreign ownership,
restrictions on repatriation of initial capital, dividends, interest, and/or
capital gains, and whether the country is considered a developing country by
the World Bank, International Finance Corporation, United Nations or investment
community. The fund will maintain an eligible list of qualified countries and
securities in which the fund may invest, which will be maintained by the
investment committee of the fund's investment adviser.
The balance of the fund's assets may be invested in equity securities of any
company, regardless of where it is based, if the fund's investment adviser has
determined that a significant portion of its assets or revenues (generally 20%
or more) are attributable to qualified countries. In addition, the fund may
invest up to 25% of its assets in debt securities, including lower quality debt
securities and government securities of issuers primarily based in qualified
countries or that have a significant portion of their assets in revenues
attributable to qualified countries.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The value of debt securities held by the fund may be affected by factors such
as changing interest rates, credit ratings, and effective maturities. For
example, the value of bonds in the fund's portfolio generally will decline when
interest rates rise and vice versa. Lower quality and longer maturity bonds
will be subject to greater credit risk and price fluctuations than higher
quality bonds.
Furthermore, investing in countries with developing economies and/or markets
generally involves risks in addition to, and greater than, those generally
associated with investing in developed countries. For example, the economies
of these countries may be subject to greater social, economic, regulatory, and
political uncertainties, currency exchange rate volatility, capital controls,
and delays in settling portfolio transactions. This may make these securities
more volatile and potentially less liquid than securities issued in countries
with more developed economies or markets.
GROWTH-INCOME FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow and provide you with income over
time by investing primarily in common stocks or other securities which
demonstrate the potential for appreciation and/or dividends. The fund is
designed for investors seeking both capital appreciation and income.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The fund may also invest up to 10% of its assets in securities of issuers
domiciled outside the U.S. and not included in the Standard & Poor's 500
Composite Index. Investments outside the U.S. may be subject to certain risks,
such as currency fluctuations or political, social and economic instability.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ S&P 500/2/ CPI/3/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
YIELD/1/:
</TABLE>
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON FEBRUARY 8, 1984.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
ASSET ALLOCATION FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with high total return (including income and
capital gains) consistent with preservation of capital over the long-term by
investing in a diversified portfolio of common stocks and other equity
securities, bonds and other intermediate and long-term debt securities, and
money market instruments (debt securities maturing in one year or less). Under
normal market conditions, the fund's investment adviser expects (but is not
required) to maintain an investment mix falling within the following ranges:
40-80% in equity securities; 20-50% in debt securities; and 0-40% in money
market instruments. The fund is designed for investors seeking above average
total return.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market
declines.The value of debt securities held by the fund may be affected by
factors such as changing interest rates, credit rating, and effective
maturities. Lower quality and longer maturity bonds will be subject to greater
credit risk and price fluctuations than higher quality and shorter maturity
bonds. Money market insturments held by the fund may be affected by
unfavorable political, economic, or governmental developments that could affect
the repayment of principal or the payment of interest.
The fund may also invest up to 10% of its assets in equity securities of
issuers domiciled outside the U.S. and not included in the Standard & Poor's
500 Composite Index, and up to 5% of its assets in debt securities of non-U.S.
issuers. Investments outside the U.S. may be subject to certain risks, such as
currency fluctuations or political, social and economic instability.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
INVESTMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
FUND/1/ S&P 500/2/ BIG INDEX/3/ CPI/4/
<S> <C> <C> <C> <C>
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/5/
YIELD/1/:
(For current yield information call )
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ THSALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/4/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/5/ THE FUND BEGAN INVESTMENT OPERATIONS ON AUGUST 1, 1989.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
BOND FUND
RISK/RETURN SUMMARY
The fund seeks to maximize your level of current income and preserve your
capital by investing primarily in bonds. The fund is designed for investors
seeking income and more price stability than stocks, and capital preservation
over the long-term.
The value of debt securities held by the fund may be affected by factors such
as changing interest rates, credit ratings, and effective maturities. The fund
may invest up to 35% of its assets in lower quality bonds (rated Ba or BB or
below by Moody's Investors Service, Inc. or Standard & Poor's Corporation).
Lower quality and longer maturity bonds will be subject to greater credit risk
and price fluctuations than higher quality and shorter maturity bonds. The
value of non-U.S. securities can decline in response to currency fluctuations,
political, social and economic instability, differing securities regulations,
and administrative difficulties such as delays in clearing and settling
portfolio transactions.
The fund may also invest up to 20% of its assets in preferred stocks.
Non-convertible preferred stocks are similar to debt in that they have a stated
dividend rate akin to the coupon of a bond or note even though they are often
classified as equity securities. The prices and yield of non-convertible
preferred stocks generally move with changes in interest rates and the issuer's
credit quality.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ SALOMON SMITH BARNEY BIG CPI/3/
INDEX/2/
ONE YEAR
LIFETIME/4/
</TABLE>
YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON JANUARY 2, 1996.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
HIGH-YIELD BOND FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with a high level of current income and
secondarily capital appreciation by investing primarily in lower quality debt
securities (rated Ba or BB or below by Moody's Investors Services, Inc. or
Standard & Poor's Corporation), including those of non-U.S. issuers. The fund
may also invest in equity securities that provide an opportunity for capital
appreciation. The fund is designed for investors seeking a high level of
current income and who are able to tolerate greater credit risk and price
fluctuations than funds investing higher quality bonds.
The value of debt securities held by the fund may be affected by factors such
as changing credit ratings, interest rates, and effective maturities. For
example, the values of lower quality and longer maturity bonds will be subject
to greater credit risk and price fluctuations than higher quality and shorter
maturity bonds. In addition, values of bonds in the fund's portfolio generally
will decline when interest rates rise and vice versa. The value of non-U.S.
securities can decline in response to currency fluctuations, political, social
and economic instability, differing securities regulations, and administrative
difficulties such as delays in clearing and settling portfolio transactions.
In addition, the prices of securities held by the fund may decline in response
to certain events, including those directly involving issuers of these
securities, adverse conditions affecting the general economy, or overall market
declines.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
FUND/1/ SALOMON LONG-TERM SALOMON SMITH CPI/4/
HIGH-YIELD INDEX/2/ BARNEY BIG
INDEX/3/
<S> <C> <C> <C> <C>
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/5/
YIELD/1/:
(For current yield information call )
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHER LONG-TERM HIGH-YIELD INDEX
/3/ SALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/4/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/5/ THE FUND BEGAN INVESTMENT OPERATIONS ON SEPTEMBER 1, 1983.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with a high level of current income, as well as
preserve your investment. The fund invests primarily in securities that are
guaranteed by the "full faith and credit" pledge of the U.S. Government and
securities that are rated AAA or Aaa by Moody's Investor's Services, Inc. or
Standard & Poor's Corporation or unrated but determined to be of equivalent
quality. The fund may also invest a significant portion of its assets in
securities backed by pools of mortgages.
The value of certain debt securities held by the fund may be affected by
changing interest rates and prepayment risks. For example, as with other debt
securities, the value of U.S. Government securities generally will decline when
interest rates rise and vice versa. A security backed by the U.S. Treasury or
the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. Accordingly,
the current market prices for such securities are not guaranteed and will
fluctuate. It is important to note that neither the fund nor its yield are
guaranteed by the U.S. Government.
In addition, many types of debt securities, including mortgage-related
securities are subject to prepayment risk. For example, when interest rates
fall, homeowners are more likely to refinance their mortgages and "prepay"
their principal earlier than expected. The fund must then reinvest the
unanticipated principal in new securities when interest rates on new mortgage
investments are falling, thus reducing the income of the fund.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
INVESTMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ SALOMON CPI/3/
TREASURY/GOVERNMENT-
SPONSORED MORTGAGE
INDEX/2/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHERS TREASURY/GOVERNMENT-SPONSORED MORTGAGE INDEX
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ The fund began investment operations on
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
CASH MANAGEMENT FUND
RISK/RETURN SUMMARY
The fund seeks to provide you an opportunity to earn income on your cash
reserves while preserving the value of your investment and maintaining
liquidity by investing in a diversified selection of high quality money market
instruments. The prices of money market instruments may be affected by
unfavorable political, economic, or governmental developments that could affect
the repayment of principal or the payment of interest.
Although the fund attempts to maintain a constant net asset value of $1.00 per
share, there can be no guarantee that the funds will be able to do so, and you
may lose money by investing in the fund.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C>
FUND/1/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
7-DAY YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA.
/2/ THE FUND BEGAN INVESTMENT OPERATIONS ON DECEMBER 1, 1985.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
CASH POSITION
The funds may also hold a substantial portion of their portfolios in cash and
cash equivalents, for example, in response to abnormal market conditions. The
extent of each fund's cash position will depend on market conditions, fund
purchases and redemptions, and other factors. This may detract from the
achievement of a fund's objectives over the short-term, or may protect a fund
during a market downturn.
MANAGEMENT AND ORGANIZATION
INVESTMENT ADVISER
Capital Research and Management Company, an experienced investment management
organization founded in 1931, serves as investment adviser to the Series and
other mutual funds, including those in The American Funds Group. Capital
Research Management Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los, Angeles, CA
90071. Capital Research Management Company manages the investment portfolios
and business affairs of the Series.
The total management fee paid by each fund, as a percentage of average net
assets, for the previous fiscal year amounted to the following: Global Growth
Fund - %; Global Small Capitalization 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 World Opportunities
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 investing policy that is consistent with the recommendations
contained in the May 9, 1994 report issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has been
incorporated into the Series' code of ethics.
MULTIPLE PORTFOLIO COUNSELOR SYSTEM
Capital Research and Management Company uses a system of multiple portfolio
counselors in managing mutual fund assets. Under this system the portfolio of
a fund is divided into segments which are managed by individual counselors.
Counselors decide how their respective segments will be invested (within the
limits provided by a 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 make investment decisions
with respect to a portion of the fund's portfolio. The primary portfolio
counselors for each of the funds are listed on the next page.
<TABLE>
<CAPTION>
APPROXIMATE YEARS OF EXPERIENCE
AS AN INVESTMENT PROFESSIONAL
(INCLUDING THE LAST FIVE YEARS)
PORTFOLIO PRIMARY TITLE(S) YEARS OF EXPERIENCE AS WITH CAPITAL TOTAL YEARS
COUNSELORS PORTFOLIO COUNSELOR RESEARCH AND
FOR THE (AND RESEARCH MANAGEMENT COMPANY
SERIES PROFESSIONAL, IF OR ITS AFFILIATES
APPLICABLE)
(APPROXIMATE)
<S> <C> <C> <C> <C>
James K. Senior Vice Growth-Income Fund -- 37 37
Dunton President of the 15 years (since the
Series. Senior fund began operations)
Vice President and
Director, Capital
Research and
Management Company
Abner D. Senior Vice Asset Allocation Fund 32 47
Goldstine President of the - 10 years (since the
Series. Senior fund began operations)
Vice President and Bond Fund - 3 years
Director, Capital (since the fund began
Research and operations)
Management Company High-Yield Bond Fund -
1 year
Alan N. Vice President of Growth- Income Fund -- 8 13
Berro the Series. Senior 3 years
Vice President,
Capital Research
Company*
Claudia P. Vice President of Growth-Income Fund -- 21 23
Huntington the Series. Vice 5 years (plus 5 years
President, Capital as a research
Research and professional prior to
Management Company becoming a portfolio
counselor for the
fund)
Robert W. Vice President of New World Fund - less 14 14
Lovelace the Series, Vice than one year
President, Capital Global Small
Research and Capitalization Fund -
Management Company 1 year (since the fund
began operations)
Global Growth Fund - 2
years (since the fund
began operations)
International Fund - 4
years
Donald D. Vice President of Global Growth Fund - 2 14 14
O'Neal the Series. Vice years (since the fund
President, Capital began operations)
Research and Growth Fund - 8 years
Management Company (plus 4 years as a
research professional
prior to becoming a
portfolio counselor
for the fund)
John H. Vice President of Bond Fund - 3 years 16 17
Smet the Series. Vice (since the fund began
President, Capital operations)
Research and U.S. Government Fund -
Management Company 7 years
Timothy D. Chairman and Chief Asset Allocation Fund 16 16
Armour Executive Officer, - 3 years
Capital Research
Company*
David C. Executive Vice High-Yield Bond Fund - 11 18
Barclay President and 6 years
Director, Capital
Research Company*
Martial Senior Vice Global Growth Fund - 2 27 27
Chaillet President, Capital years (since the fund
Research Company* began operations)
International Fund - 6
years
Gordon Senior Vice Global Small 28 28
Crawford President and Capitalization Fund --
Director, Capital 1 year (since the fund
Research and began operations)
Management Company Growth Fund - 5 years
(plus 5 years as a
research professional
prior to becoming a
portfolio counselor
for the fund)
Mark E. Director, Capital New World Fund - less 16 16
Denning Research and than one year
Management Company Global Small
Capitalization Fund -
1 year (since the fund
began operations)
James E. Senior Vice Growth Fund - 12 years 22 27
Drasdo President and
Director, Capital
Research and
Management Company
Alwyn Vice President, New World Fund - less 7 11
Heong Capital Research than one year
Company* International Fund - 3
years
Thomas H. Vice President - U.S. Government Fund - 9 12
Hogh Investment 1 year
Management Group,
Capital Research
and Management
Company
Robert G. Senior Vice 9 years (plus 1 year 24 27
O'Donnell President and as a research
Director, Capital professional prior to
Research and becoming a portfolio
Management Company counselor for the
fund)
Victor M. Senior Vice Asset Allocation Fund 24 27
Parachini President, Capital - 3 years
Research and
Management Company
John W, Vice Presiden -- U.S. Government Fund -- 1 year 11 11
Ressner Investment
Management Group,
Capital Research
and Management
Company
Susan M. Vice President, High-Yield Bond Fund -- 4 years (plus 3 9 11
Tolson Capital Research years as a research
Company* professional prior to
becoming a portfolio
counselor for the
fund)
Gregory W. Sernior Vice Global Small 11 11
Wendt President and Capitalization Fund --
Director, Capital Since the fund began
Research Company* operations in 1998
* Company affiliated with Capital Research and Management Company.
</TABLE>
PURCHASES AND REDEMPTIONS OF SHARES
Shares of the Series are currently offered only to insurance company separate
accounts which fund the Contracts. All such shares may be purchased or
redeemed by the separate accounts at net asset values, without any sales or
redemption charges. Such purchases and redemptions are made subsequent to
corresponding purchases and redemptions of units of the separate accounts
without delay.
SHARE PRICE
Each fund calculates its share price, also called net asset value, as of 4:00
p.m. New York time, which is the normal close of trading on the New York Stock
Exchange, every day the Exchange is open. If a market price for a particular
security is not available, a fund will determine the appropriate price for the
security.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Series' policy to distribute to the shareholders (the insurance
company separate accounts) all of its net investment income and capital gains
realized during each fiscal year.
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.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the funds'
results for the past five years. Certain information reflects financial
results for a single fund share. The total returns in the table represent the
rate than an investor would have earned or lost on an investment in a fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
funds' financial statements, are included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
Net asset Net realized &
Year 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 year income on investments operations income realized gains distributions end of year
Global Growth Fund/1/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS 1
1997 $10.00 $.06 $ .59 $ .65 $(.03) -- $ (.03) $10.62
1998 10.62 .13 2.43 2.56 (.14) $(.02) (.16) 13.02
CLASS 2/3/
1997 $10.00 .03 .60 .63 (.02) -- (.02) 10.61
1998 $10.61 .10 2.44 2.54 (.11) (.02) (.13) 13.02
Global Small Capitalization Fund/4/
CLASS 1
1998 10.00 .06 ($.91) $(.85) $(.04) -- $(.04) $9.11
CLASS 2
1998 110.00 .04 (.91) (.87) (.03) -- (.03) 9.10
Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 43.53 .27 9.61 9.88 (.27) (3.02) (3.29) 50.12
1998 50.12 .19 10.91 11.10 (.17) (6.14) (6.19) 54.88
CLASS 2/3/
1997 40.59 .11 9.51 9.62 (.12) -- (.12) 50.09
1998 50.09 .08 10.90 10.98 (.15) (6.14) (6.19) 54.88
International Fund/6/
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 15.53 .25 1.18 1.43 (.27) (.62) (.89) 16.07
1998 16.07 .22 2.21 2.43 (.28) (1.65) (1.93) 16.57
CLASS 2/3/
1997 15.86 .13 .23 .36 (.16) -- (.16) 16.06
1998 16.06 .20 2.19 2.39 (.24) (1.65) (1.89) 16.56
Growth-Income Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 35.73 .73 6.78 7.51 (.72) (2.55) (3.27) 39.97
1998 39.97 .67 4.60 5.27 (.68) (3.83) (4.51) 40.73
CLASS 2/3/
1997 34.10 .37 5.82 6.19 (.35) -- (.35) 39.94
1998 39.94 .58 4.690 5.18 (.59) (3.83) (4.42) 40.70
Asset Allocation Fund/8/
- ------------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 15.18 .55 1.94 2.49 (.54) (.97) (1.51) 16.16
1998 16.16 .58 1.27 1.85 (.57) (.87) (1.44) 16.57
CLASS 2/3/
1997 14.43 .29 1.69 1.98 (.26) -- (.26) 16.15
1998 16.15 .53 1.28 1.81 (.53) (.87) (1.40) 16.56
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of Ratio of net
Year Net assets, expenses income to Portfolio
ended end of year to average average turnover
11/30 Total return (in millions) net assets net assets rate
Global Growth Fund/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS 1
1997 6.45%/2/ $ 80 .44%/2/ .80%/2/ 13.22%/2/
1998 24.26 132 .75 .80%/3/ 25.26
CLASS 2/3/
1997 6.28/2/ 46 .57/2/ .56/2/ 13.22/2/
1998 24.06 124 1.00 .87 25.56
Global Small Capitalization Fund/4/
CLASS 1
1998 (8.31)%/2/ $ 55 .51%/2/ .86%/2/ 28.20%/2/
CLASS 2
1998 (8.40)/2/ 17 .64%/2/ .63 28.20/2/
Growth Fund
- ---------------------------------------------------------------------------------
CLASS 1
1994 2.92 2,027 .49 .78 29.58
1995 35.35 3,154 .47 .92 35.47
1996 14.32 3,860 .44 .61 30.88
1997 24.57 4,671 .42 .59 45.14
1998 25.27 5,313 .41 .38 49.91
CLASS 2/3/
1997 23.73/2/ 75 .37/2/ .08/2/ 45.14
1998 24.97 310 .66 .15 49.91
International Fund/6/
- ---------------------------------------------------------------------------------
CLASS 1
1994 10.48 1,405 .80 2.03 19.66
1995 10.78 1,703 .75 2.64 24.66
1996 16.66 2,370 .69 1.99 32.08
1997 9.52 2,162 .67 1.56 50.12
1998 16.94 2,593 .66 1.36 34.08
CLASS 2/3/
1997 2.20/2/ 48 .53/2/ .34/2/ 50.12
1998 16.63 126 .91 1.56 34.08
Growth-Income Fund
- ---------------------------------------------------------------------------------
CLASS 1
1994 3.21 2,740 .47 2.72 29.26
1995 33.14 3,953 .44 2.70 26.91
1996 21.02 5,249 .41 2.26 31.27
1997 22.92 6,430 .38 2.01 37.55
1998 14.77 6,704 .36 1.74 42.72
CLASS 2/3/
1997 18.18/2/ 157 .35/2/ .93/2/ 37.55
1998 14.49 564 .61 1.02 42.72
Asset Allocation Fund/8/
- ---------------------------------------------------------------------------------
CLASS 1
1994 (.54) 637 .53 4.55 36.13
1995 29.45 870 .52 4.11 39.89
1996 18.65 1,141 .49 3.88 50.62
1997 17.90 1,393 .47 3.63 34.14
1998 12.32 1,497 .45 3.63 27.97
CLASS 2/3/
1997 13.80/2/ 42 .40/2/ 1.81/2/ 34.14
1998 12.05 173 .70 3.39 27.97
- ---------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Net asset Net realized &
Year 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 year income on investments operations income realized gains distributions end of year
Bond Fund/9/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS 1
1996 $10.00 $ .40 $ .16 $ .56 $ (.25) -- $ (.25) $10.31
1997 10.31 .63 .30 .93 (.62) -- (.62) 10.62
1998 10.62 .67 (.15) .52 (.65) $(.12) (.77) 10.37
CLASS 2/3/
1997 10.11 .35 .46 .81 (.31) -- (.31) 10.61
1998 10.61 .65 (.15) .50 (.63) (.12) (.75) 10.36
High-Yield Bond Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 14.51 1.29 .43 1.72 (1.27) -- (1.27) 14.96
1998 14.96 1.26 (1.04) .22 (1.25) (.16) (1.41) 13.77
CLASS 2/3/
1997 14.28 .69 .61 1.30 (.63) -- (.63) 14.95
1998 14.95 1.23 (1.04) .19 (1.22) (.16) (1.38) 13.76
U.S. Government/AAA-Rated Securities Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 11.29 .76 (.07) .69 (.80) -- (.80) 11.18
1998 11.18 .68 .26 .94 (.69) -- (.69) 11.43
CLASS 2/3/
1997 11.07 .28 .03 .31 (.26) -- (.26) 11.12
1998 11.17 .68 .24 .92 (.67) -- (.67) 11.42
- -------------------------------------------------------------------------------------------------------------------------
CASH MANAGEMENT FUND
CLASS 1
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 11.12 .57 (.01) .56 (.55) -- (.55) 11.13
1998 11.13 .57 (.01) .56 (.56) -- (.56) 11.13
CLASS 2/3/
1997 11.07 .28 .03 .31 (.26) -- (.26) 11.12
1998 11.12 .55 (.02) .53 (.53) -- (.53) 11.12
<CAPTION>
Ratio of Ratio of net
Year Net assets, expenses income to Portfolio
ended end of year to average average turnover
11/30 Total return (in millions) net assets net assets rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BOND FUND/9/
Class 1
1996 5.74 %/2/ $ 77 .52%/2/ 6.18%/2/ 32.83%/2/
1997 9.36 132 .55 6.63 52.93
1998 5.12 186 .54 6.89 61.54
Class 2/3/
1997 8.09/2/ 12 .44/2/ 3.50/2/ 52.93
1998 4.85 45 .78 6.62 61.50
High-Yield Bond Fund
- ----------------------------------------------------------------------------------
Class 1
1994 (5.71) 390 .54 9.37 38.46
1995 19.81 534 .54 10.12 31.73
1996 13.75 662 .53 9.27 44.81
1997 12.45 765 .51 8.92 50.22
1998 1.44 715 .51 8.66 65.80
Class 2/3/
1997 9.20/2/ 21 .43/2/ 4.92/2/ 50.22
1998 1.18 68 .76 8.60 65.80
U.S. Government/AAA-Rated Securities Fund
- ----------------------------------------------------------------------------------
Class 1
1994 (4.58) 463 .54 6.69 45.21
1995 14.73 542 .54 7.37 30.11
1996 5.49 512 .53 7.33 30.45
1997 6.49 471 .52 6.73 53.80
1998 8.72 537 .51 6.11 89.25
Class 2/3/
1997 6.65/2/ 7 .44/2/ 3.45/2/ 53.80
1998 8.46 32 .75 5.68 89.25
Cash Management Fund
- ----------------------------------------------------------------------------------
Class 1
1994 3.59 221 .49 3.60 --
1995 5.65 193 .49 5.37 --
1996 5.09 240 .47 4.94 --
1997 5.21 226 .47 4.99 --
1998 5.17 250 .46 5.07 --
CLASS 2/3/
1997 2.87/2/ 14 .41/2/ 2.80/2/ --
1998 4.92 34 .70 4.75 --
- ------------
</TABLE>
/1/ Commenced operations April 30, 1997.
/2/ Based on operations for the period shown and, accordingly, not
representative of a full year's operations.
/3/ Shares offered for sale commencing April 30, 1997.
/4/ Commenced operations on April 30, 1998.
/5/ Amount includes net realized short-term gains treated as net investment
income for federal income tax purposes.
/6/ Commenced operations May 1, 1990.
/7/ Annualized
/8/ Commenced operations August 1, 1989.
/9/ Commenced operations January 2, 1996.
No information is presented for the New World Fund since it had no investment
operations as of April 1, 1999.
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT SHAREHOLDERS
Contains additional information about the Series including financial
statements, investment results, portfolio holdings, a statement from portfolio
management discussing market conditions and the Series' investment strategies,
and the independent accountants' report (in the annual report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more detailed information on all aspects of the Series, including the
Series financial statements.
A current SAI has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this prospectus. The SAI and
other related materials about the Series are available for review or to be
copied at the SEC Public Reference Room (1-800-SEC-0330) or on the SEC's
Internet Web site at http://www.sec.gov.
CODE OF ETHICS
Includes a description of the Series personal investing policy.
To request a free copy of any of the documents above, write to:
Secretary of the Series
333 South Hope Street
Los Angeles, CA 90071
AMERICAN VARIABLE INSURANCE SERIES(R)
Class 2 Shares
Prospectus
APRIL 1, 1999
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES. FURTHER, IT HAS NOT DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FUNDS
The Series consists of 11 funds, each representing a separate fully managed
diversified portfolio of securities.
<TABLE>
<CAPTION>
<S> <C>
The 11 funds are: Global Growth Fund
Global Small Capitalization Fund
Growth Fund
International Fund
New World Fund
Growth-Income Fund
Asset Allocation Fund
Bond Fund
High-Yield Bond Fund
U.S. Government /AAA-Rated Securities Fund
Cash Management Fund.
</TABLE>
The Series offers two classes of fund shares: 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 Board of Trustees may
establish additional funds and classes in the future. The investment
objective(s) and policies of each fund are discussed below. MORE INFORMATION
ON THE FUNDS IS CONTAINED IN THE SERIES' STATEMENT OF ADDITIONAL INFORMATION.
Shares of the Series are currently offered only to separate accounts of various
insurance companies to serve as the underlying investment for both variable
annuity and variable life insurance contracts ("Contracts"). All such shares
may be purchased or redeemed by the separate accounts without any sales or
redemption charges at net asset value. Due to differences in tax treatment or
other considerations, the interest of various Contract owners participating in
a fund might at some time be in conflict. The Board of Trustees will monitor
the Series' operations for any material conflicts and determine what action, if
any, should be taken.
You may lose money by investing in the Series. The likelihood of loss is
greater if you invest for a shorter period of time. Your investment in the
Series is not a bank deposit and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency, entity or person.
GLOBAL GROWTH FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
common stocks of companies located around the world. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss. In addition, the value of
non-U.S. securities can decline in response to various factors including
currency fluctuations, and administrative difficulties such as delays in
clearing and settling portfolio transactions.
The fund may also invest up to 10% of its assets in debt securities rated Baa
or BBB or below by Moody's Investors Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality. The value
of debt securities held by the fund may be affected by changing interest rates,
effective maturities and credit ratings. Lower quality and longer maturity
bonds will be subject to greater credit risk and price fluctuations than higher
quality and shorter maturity bonds.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ MSCI WORLD/2/ CPI/3/
ONE YEAR
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX MEASURES 22 MAJOR STOCK
MARKETS THROUGHOUT THE WORLD, INCLUDING THE U.S. THIS INDEX IS UNMANAGED AND
DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON APRIL 30, 1997.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
GLOBAL SMALLCAPITALIZATION FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
stocks of smaller companies located around the world that typically have market
capitalizations of $50 million to $1.2 billion. The fund is designed for
investors seeking capital appreciation through stocks. Investors in the fund
should have a long-term perspective and be able to tolerate potentially wide
price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events, including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth-oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss.
Smaller capitalization stocks are often more difficult to value or dispose of,
more difficult to obtain information about, and more volatile than stocks of
larger, more established companies. Furthermore, the value of non-U.S.
securities can decline in response to various factors, including currency
fluctuations, political, social and economic instability, differing securities
regulations, and administrative difficulties such as delays in clearing and
settling portfolio transactions.
GROWTH FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow by investing primarily in common
stocks of companies that appear to offer superior opportunities for growth of
capital. The fund is designed for investors seeking capital appreciation
through stocks. Investors in the fund should have a long-term perspective and
be able to tolerate potentially wide price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss.
The fund may also invest up to 10% of its assets in equity securities of
issuers domiciled outside the U.S. and not included in the Standard & Poor's
500 Composite Index. Investments outside the U.S. may be subject to certain
risks, such as currency fluctuations or political, social and economic
instability.
In addition, the fund may invest up to 10% of its assets in lower quality debt
securities (rated Ba and BB or below by Moody's Investors Services, Inc. or
Standard & Poor's Corporation). The value of debt securities held by the fund
may be affected by factors such as changing interest rates, credit ratings, and
effective maturities. Lower quality and longer maturity bonds will be subject
to greater credit risk and price fluctuations than higher quality and shorter
maturity bonds.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ S&P500/2/ CPI/3/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON FEBRUARY 8, 1984.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
INTERNATIONAL FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment growth over time by investing primarily
in common stocks of companies located outside the United States. The fund is
designed for investors seeking capital appreciation through stocks. Investors
in the fund should have a long-term perspective and be able to tolerate
potentially wide price fluctuations.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The growth oriented, equity-type securities generally purchased by the fund may
involve large price swings and potential for loss. The value of non-U.S.
securities can decline in response to currency fluctuations, political, social
and economic instability, differing securities regulations, and administrative
difficulties such as delays in clearing and settling portfolio transactions.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ MSCI EAFE INDEX/2/ CPI/3/
ONE YEAR
FIVE YEARS
LIFETIME/4/
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ MORGAN STANLEY CAPITAL INTERNATIONAL EAFE (EUROPE, AUSTRALIA, FAR EAST)
INDEX MEASURES ALL MAJOR STOCK MARKETS OUTSIDE NORTH AMERICA. THIS INDEX IS
UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON MAY 1, 1990.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
NEW WORLD FUND
THIS FUND WILL BECOME AVAILABLE ON JUNE 1, 1999; HOWEVER IT MAY NOT BE
AVAILABLE IN ALL STATES ON THAT DATE.
RISK/RETURN SUMMARY
The fund seeks to make your investment grow over time by investing primarily in
stocks of companies with significant exposure to countries which have
developing economies and/or markets. The fund is designed for investors
seeking capital appreciation through stocks. Investors in the fund should have
a long-term perspective and be able to tolerate potentially wide price
fluctuations. Under normal market conditions, the fund will invest at least
35% of its assets in equity securities of companies primarily based in
"qualified" countries which have developing economies and/or markets. In
determining whether a country is qualified, the fund will consider such factors
as the country's per capita gross domestic product, the percentage of the
country's economy that is industrialized, the overall regulatory environment,
the presence of government regulation limiting or banning foreign ownership,
restrictions on repatriation of initial capital, dividends, interest, and/or
capital gains, and whether the country is considered a developing country by
the World Bank, International Finance Corporation, United Nations or investment
community. The fund will maintain an eligible list of qualified countries and
securities in which the fund may invest, which will be maintained by the
investment committee of the fund's investment adviser.
The balance of the fund's assets may be invested in equity securities of any
company, regardless of where it is based, if the fund's investment adviser has
determined that a significant portion of its assets or revenues (generally 20%
or more) are attributable to qualified countries. In addition, the fund may
invest up to 25% of its assets in debt securities, including lower quality debt
securities and government securities of issuers primarily based in qualified
countries or that have a significant portion of their assets in revenues
attributable to qualified countries.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The value of debt securities held by the fund may be affected by factors such
as changing interest rates, credit ratings, and effective maturities. For
example, the value of bonds in the fund's portfolio generally will decline when
interest rates rise and vice versa. Lower quality and longer maturity bonds
will be subject to greater credit risk and price fluctuations than higher
quality bonds.
Furthermore, investing in countries with developing economies and/or markets
generally involves risks in addition to, and greater than, those generally
associated with investing in developed countries. For example, the economies
of these countries may be subject to greater social, economic, regulatory, and
political uncertainties, currency exchange rate volatility, capital controls,
and delays in settling portfolio transactions. This may make these securities
more volatile and potentially less liquid than securities issued in countries
with more developed economies or markets.
GROWTH-INCOME FUND
RISK/RETURN SUMMARY
The fund seeks to make your investment grow and provide you with income over
time by investing primarily in common stocks or other securities which
demonstrate the potential for appreciation and/or dividends. The fund is
designed for investors seeking both capital appreciation and income.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines.
The fund may also invest up to 10% of its assets in securities of issuers
domiciled outside the U.S. and not included in the Standard & Poor's 500
Composite Index. Investments outside the U.S. may be subject to certain risks,
such as currency fluctuations or political, social and economic instability.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ S&P 500/2/ CPI/3/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
YIELD/1/:
</TABLE>
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON FEBRUARY 8, 1984.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
ASSET ALLOCATION FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with high total return (including income and
capital gains) consistent with preservation of capital over the long-term by
investing in a diversified portfolio of common stocks and other equity
securities, bonds and other intermediate and long-term debt securities, and
money market instruments (debt securities maturing in one year or less). Under
normal market conditions, the fund's investment adviser expects (but is not
required) to maintain an investment mix falling within the following ranges:
40-80% in equity securities; 20-50% in debt securities; and 0-40% in money
market instruments. The fund is designed for investors seeking above average
total return.
The prices of equity securities held by the fund may decline in response to
certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market
declines.The value of debt securities held by the fund may be affected by
factors such as changing interest rates, credit rating, and effective
maturities. Lower quality and longer maturity bonds will be subject to greater
credit risk and price fluctuations than higher quality and shorter maturity
bonds. Money market insturments held by the fund may be affected by
unfavorable political, economic, or governmental developments that could affect
the repayment of principal or the payment of interest.
The fund may also invest up to 10% of its assets in equity securities of
issuers domiciled outside the U.S. and not included in the Standard & Poor's
500 Composite Index, and up to 5% of its assets in debt securities of non-U.S.
issuers. Investments outside the U.S. may be subject to certain risks, such as
currency fluctuations or political, social and economic instability.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
INVESTMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
FUND/1/ S&P 500/2/ BIG INDEX/3/ CPI/4/
<S> <C> <C> <C> <C>
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/5/
YIELD/1/:
(For current yield information call )
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ THE STANDARD & POOR'S 500 COMPOSITE INDEX REPRESENTS STOCKS. THIS INDEX
IS UNMANAGED AND DOES NOT REFLECT SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ THSALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/4/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/5/ THE FUND BEGAN INVESTMENT OPERATIONS ON AUGUST 1, 1989.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
BOND FUND
RISK/RETURN SUMMARY
The fund seeks to maximize your level of current income and preserve your
capital by investing primarily in bonds. The fund is designed for investors
seeking income and more price stability than stocks, and capital preservation
over the long-term.
The value of debt securities held by the fund may be affected by factors such
as changing interest rates, credit ratings, and effective maturities. The fund
may invest up to 35% of its assets in lower quality bonds (rated Ba or BB or
below by Moody's Investors Service, Inc. or Standard & Poor's Corporation).
Lower quality and longer maturity bonds will be subject to greater credit risk
and price fluctuations than higher quality and shorter maturity bonds. The
value of non-U.S. securities can decline in response to currency fluctuations,
political, social and economic instability, differing securities regulations,
and administrative difficulties such as delays in clearing and settling
portfolio transactions.
The fund may also invest up to 20% of its assets in preferred stocks.
Non-convertible preferred stocks are similar to debt in that they have a stated
dividend rate akin to the coupon of a bond or note even though they are often
classified as equity securities. The prices and yield of non-convertible
preferred stocks generally move with changes in interest rates and the issuer's
credit quality.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ SALOMON SMITH BARNEY BIG CPI/3/
INDEX/2/
ONE YEAR
LIFETIME/4/
</TABLE>
YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ THE FUND BEGAN INVESTMENT OPERATIONS ON JANUARY 2, 1996.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
HIGH-YIELD BOND FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with a high level of current income and
secondarily capital appreciation by investing primarily in lower quality debt
securities (rated Ba or BB or below by Moody's Investors Services, Inc. or
Standard & Poor's Corporation), including those of non-U.S. issuers. The fund
may also invest in equity securities that provide an opportunity for capital
appreciation. The fund is designed for investors seeking a high level of
current income and who are able to tolerate greater credit risk and price
fluctuations than funds investing higher quality bonds.
The value of debt securities held by the fund may be affected by factors such
as changing credit ratings, interest rates, and effective maturities. For
example, the values of lower quality and longer maturity bonds will be subject
to greater credit risk and price fluctuations than higher quality and shorter
maturity bonds. In addition, values of bonds in the fund's portfolio generally
will decline when interest rates rise and vice versa. The value of non-U.S.
securities can decline in response to currency fluctuations, political, social
and economic instability, differing securities regulations, and administrative
difficulties such as delays in clearing and settling portfolio transactions.
In addition, the prices of securities held by the fund may decline in response
to certain events, including those directly involving issuers of these
securities, adverse conditions affecting the general economy, or overall market
declines.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
FUND/1/ SALOMON LONG-TERM SALOMON SMITH CPI/4/
HIGH-YIELD INDEX/2/ BARNEY BIG
INDEX/3/
<S> <C> <C> <C> <C>
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/5/
YIELD/1/:
(For current yield information call )
</TABLE>
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHER LONG-TERM HIGH-YIELD INDEX
/3/ SALOMON BROTHER BROAD INVESTMENT GRADE BOND INDEX REPRESENTS A MARKET
CAPITALIZATION-WEIGHTED INDEX THAT INCLUDES TREASURY, GOVERNMENT-SPONSORED,
MORTGAGE, AND INVESTMENT GRADE FIXED-RATE CORPORATE BONDS (BBB-/BAA/3/) WITH A
MATURITY OF ONE YEAR OR LONGER. THIS INDEX IS UNMANAGED AND DOES NOT REFLECT
SALES CHARGES, COMMISSIONS OR EXPENSES.
/4/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/5/ THE FUND BEGAN INVESTMENT OPERATIONS ON SEPTEMBER 1, 1983.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
RISK/RETURN SUMMARY
The fund seeks to provide you with a high level of current income, as well as
preserve your investment. The fund invests primarily in securities that are
guaranteed by the "full faith and credit" pledge of the U.S. Government and
securities that are rated AAA or Aaa by Moody's Investor's Services, Inc. or
Standard & Poor's Corporation or unrated but determined to be of equivalent
quality. The fund may also invest a significant portion of its assets in
securities backed by pools of mortgages.
The value of certain debt securities held by the fund may be affected by
changing interest rates and prepayment risks. For example, as with other debt
securities, the value of U.S. Government securities generally will decline when
interest rates rise and vice versa. A security backed by the U.S. Treasury or
the full faith and credit of the United States is guaranteed only as to the
timely payment of interest and principal when held to maturity. Accordingly,
the current market prices for such securities are not guaranteed and will
fluctuate. It is important to note that neither the fund nor its yield are
guaranteed by the U.S. Government.
In addition, many types of debt securities, including mortgage-related
securities are subject to prepayment risk. For example, when interest rates
fall, homeowners are more likely to refinance their mortgages and "prepay"
their principal earlier than expected. The fund must then reinvest the
unanticipated principal in new securities when interest rates on new mortgage
investments are falling, thus reducing the income of the fund.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar chart]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
INVESTMENT RESULTS (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C> <C> <C>
FUND/1/ SALOMON CPI/3/
TREASURY/GOVERNMENT-
SPONSORED MORTGAGE
INDEX/2/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA
REQUIRED FOR ALL STOCK AND BOND FUNDS.
/2/ SALOMON BROTHERS TREASURY/GOVERNMENT-SPONSORED MORTGAGE INDEX
/3/ CONSUMER PRICE INDEX IS A MEASURE OF INFLATION AND IS COMPUTED FROM DATA
SUPPLIED BY THE U.S. DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS.
/4/ The fund began investment operations on
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
CASH MANAGEMENT FUND
RISK/RETURN SUMMARY
The fund seeks to provide you an opportunity to earn income on your cash
reserves while preserving the value of your investment and maintaining
liquidity by investing in a diversified selection of high quality money market
instruments. The prices of money market instruments may be affected by
unfavorable political, economic, or governmental developments that could affect
the repayment of principal or the payment of interest.
Although the fund attempts to maintain a constant net asset value of $1.00 per
share, there can be no guarantee that the funds will be able to do so, and you
may lose money by investing in the fund.
INVESTMENT RESULTS
The following information illustrates how the fund's results may vary:
[bar cahrt]
Here are the fund's results calculated on a CALENDAR YEAR basis.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
The fund's highest/lowest QUARTERLY results during this time period were
- - HIGHEST % (quarter ended )
- - LOWEST % (quarter ended )
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
<S> <C>
FUND/1/
ONE YEAR
FIVE YEARS
TEN YEARS
LIFETIME/4/
</TABLE>
7-DAY YIELD/1/:
(For current yield information call )
/1/ THESE FUND RESULTS WERE CALCULATED ACCORDING TO A STANDARD FORMULA.
/2/ THE FUND BEGAN INVESTMENT OPERATIONS ON DECEMBER 1, 1985.
These results illustrate the potential fluctuations of the fund's results over
shorter periods of time. Past results are not an indication of future results.
CASH POSITION
The funds may also hold a substantial portion of their portfolios in cash and
cash equivalents, for example, in response to abnormal market conditions. The
extent of each fund's cash position will depend on market conditions, fund
purchases and redemptions, and other factors. This may detract from the
achievement of a fund's objectives over the short-term, or may protect a fund
during a market downturn.
MANAGEMENT AND ORGANIZATION
INVESTMENT ADVISER
Capital Research and Management Company, an experienced investment management
organization founded in 1931, serves as investment adviser to the Series and
other mutual funds, including those in The American Funds Group. Capital
Research Management Company, a wholly owned subsidiary of The Capital Group
Companies, Inc., is headquartered at 333 South Hope Street, Los, Angeles, CA
90071. Capital Research Management Company manages the investment portfolios
and business affairs of the Series.
The total management fee paid by each fund, as a percentage of average net
assets, for the previous fiscal year amounted to the following: Global Growth
Fund - %; Global Small Capitalization 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 World Opportunities
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 investing policy that is consistent with the recommendations
contained in the May 9, 1994 report issued by the Investment Company
Institute's Advisory Group on Personal Investing. This policy has been
incorporated into the Series' code of ethics.
MULTIPLE PORTFOLIO COUNSELOR SYSTEM
Capital Research and Management Company uses a system of multiple portfolio
counselors in managing mutual fund assets. Under this system the portfolio of
a fund is divided into segments which are managed by individual counselors.
Counselors decide how their respective segments will be invested (within the
limits provided by a 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 make investment decisions
with respect to a portion of the fund's portfolio. The primary portfolio
counselors for each of the funds are listed on the next page.
<TABLE>
<CAPTION>
APPROXIMATE YEARS OF EXPERIENCE
AS AN INVESTMENT PROFESSIONAL
(INCLUDING THE LAST FIVE YEARS)
PORTFOLIO PRIMARY TITLE(S) YEARS OF EXPERIENCE AS WITH CAPITAL TOTAL YEARS
COUNSELORS PORTFOLIO COUNSELOR RESEARCH AND
FOR THE (AND RESEARCH MANAGEMENT COMPANY
SERIES PROFESSIONAL, IF OR ITS AFFILIATES
APPLICABLE)
(APPROXIMATE)
<S> <C> <C> <C> <C>
James K. Senior Vice Growth-Income Fund -- 37 37
Dunton President of the 15 years (since the
Series. Senior fund began operations)
Vice President and
Director, Capital
Research and
Management Company
Abner D. Senior Vice Asset Allocation Fund 32 47
Goldstine President of the - 10 years (since the
Series. Senior fund began operations)
Vice President and Bond Fund - 3 years
Director, Capital (since the fund began
Research and operations)
Management Company High-Yield Bond Fund -
1 year
Alan N. Vice President of Growth- Income Fund -- 8 13
Berro the Series. Senior 3 years
Vice President,
Capital Research
Company*
Claudia P. Vice President of Growth-Income Fund -- 21 23
Huntington the Series. Vice 5 years (plus 5 years
President, Capital as a research
Research and professional prior to
Management Company becoming a portfolio
counselor for the
fund)
Robert W. Vice President of New World Fund - less 14 14
Lovelace the Series, Vice than one year
President, Capital Global Small
Research and Capitalization Fund -
Management Company 1 year (since the fund
began operations)
Global Growth Fund - 2
years (since the fund
began operations)
International Fund - 4
years
Donald D. Vice President of Global Growth Fund - 2 14 14
O'Neal the Series. Vice years (since the fund
President, Capital began operations)
Research and Growth Fund - 8 years
Management Company (plus 4 years as a
research professional
prior to becoming a
portfolio counselor
for the fund)
John H. Vice President of Bond Fund - 3 years 16 17
Smet the Series. Vice (since the fund began
President, Capital operations)
Research and U.S. Government Fund -
Management Company 7 years
Timothy D. Chairman and Chief Asset Allocation Fund 16 16
Armour Executive Officer, - 3 years
Capital Research
Company*
David C. Executive Vice High-Yield Bond Fund - 11 18
Barclay President and 6 years
Director, Capital
Research Company*
Martial Senior Vice Global Growth Fund - 2 27 27
Chaillet President, Capital years (since the fund
Research Company* began operations)
International Fund - 6
years
Gordon Senior Vice Global Small 28 28
Crawford President and Capitalization Fund --
Director, Capital 1 year (since the fund
Research and began operations)
Management Company Growth Fund - 5 years
(plus 5 years as a
research professional
prior to becoming a
portfolio counselor
for the fund)
Mark E. Director, Capital New World Fund - less 16 16
Denning Research and than one year
Management Company Global Small
Capitalization Fund -
1 year (since the fund
began operations)
James E. Senior Vice Growth Fund - 12 years 22 27
Drasdo President and
Director, Capital
Research and
Management Company
Alwyn Vice President, New World Fund - less 7 11
Heong Capital Research than one year
Company* International Fund - 3
years
Thomas H. Vice President - U.S. Government Fund - 9 12
Hogh Investment 1 year
Management Group,
Capital Research
and Management
Company
Robert G. Senior Vice 9 years (plus 1 year 24 27
O'Donnell President and as a research
Director, Capital professional prior to
Research and becoming a portfolio
Management Company counselor for the
fund)
Victor M. Senior Vice Asset Allocation Fund 24 27
Parachini President, Capital - 3 years
Research and
Management Company
John W, Vice Presiden -- U.S. Government Fund -- 1 year 11 11
Ressner Investment
Management Group,
Capital Research
and Management
Company
Susan M. Vice President, High-Yield Bond Fund -- 4 years (plus 3 9 11
Tolson Capital Research years as a research
Company* professional prior to
becoming a portfolio
counselor for the
fund)
Gregory W. Sernior Vice Global Small 11 11
Wendt President and Capitalization Fund --
Director, Capital Since the fund began
Research Company* operations in 1998
* Company affiliated with Capital Research and Management Company.
</TABLE>
PURCHASES AND REDEMPTIONS OF SHARES
Shares of the Series are currently offered only to insurance company separate
accounts which fund the Contracts. All such shares may be purchased or
redeemed by the separate accounts at net asset values, without any sales or
redemption charges. Such purchases and redemptions are made subsequent to
corresponding purchases and redemptions of units of the separate accounts
without delay.
SHARE PRICE
Each fund calculates its share price, also called net asset value, as of 4:00
p.m. New York time, which is the normal close of trading on the New York Stock
Exchange, every day the Exchange is open. If a market price for a particular
security is not available, a fund will determine the appropriate price for the
security.
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 American Legacy III, a variable annuity contract issued 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 rendered by Lincoln National and investment dealers.
Class 2 shares pay only their proportionate share of Series expenses plus plan
of distribution expenses.
DIVIDENDS, DISTRIBUTIONS AND TAXES
It is the Series' policy to distribute to the shareholders (the insurance
company separate accounts) all of its net investment income and capital gains
realized during each fiscal year.
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.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the funds'
results for the past five years. Certain information reflects financial
results for a single fund share. The total returns in the table represent the
rate than an investor would have earned or lost on an investment in a fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by PricewaterhouseCoopers LLP, whose report, along with the
funds' financial statements, are included in the statement of additional
information, which is available upon request.
<TABLE>
<CAPTION>
Net asset Net realized &
Year 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 year income on investments operations income realized gains distributions end of year
Global Growth Fund/1/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS 1
1997 $10.00 $.06 $ .59 $ .65 $(.03) -- $ (.03) $10.62
1998 10.62 .13 2.43 2.56 (.14) $(.02) (.16) 13.02
CLASS 2/3/
1997 $10.00 .03 .60 .63 (.02) -- (.02) 10.61
1998 $10.61 .10 2.44 2.54 (.11) (.02) (.13) 13.02
Global Small Capitalization Fund/4/
CLASS 1
1998 10.00 .06 ($.91) $(.85) $(.04) -- $(.04) $9.11
CLASS 2
1998 110.00 .04 (.91) (.87) (.03) -- (.03) 9.10
Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 43.53 .27 9.61 9.88 (.27) (3.02) (3.29) 50.12
1998 50.12 .19 10.91 11.10 (.17) (6.14) (6.19) 54.88
CLASS 2/3/
1997 40.59 .11 9.51 9.62 (.12) -- (.12) 50.09
1998 50.09 .08 10.90 10.98 (.15) (6.14) (6.19) 54.88
International Fund/6/
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 15.53 .25 1.18 1.43 (.27) (.62) (.89) 16.07
1998 16.07 .22 2.21 2.43 (.28) (1.65) (1.93) 16.57
CLASS 2/3/
1997 15.86 .13 .23 .36 (.16) -- (.16) 16.06
1998 16.06 .20 2.19 2.39 (.24) (1.65) (1.89) 16.56
Growth-Income Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 35.73 .73 6.78 7.51 (.72) (2.55) (3.27) 39.97
1998 39.97 .67 4.60 5.27 (.68) (3.83) (4.51) 40.73
CLASS 2/3/
1997 34.10 .37 5.82 6.19 (.35) -- (.35) 39.94
1998 39.94 .58 4.690 5.18 (.59) (3.83) (4.42) 40.70
Asset Allocation Fund/8/
- ------------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 15.18 .55 1.94 2.49 (.54) (.97) (1.51) 16.16
1998 16.16 .58 1.27 1.85 (.57) (.87) (1.44) 16.57
CLASS 2/3/
1997 14.43 .29 1.69 1.98 (.26) -- (.26) 16.15
1998 16.15 .53 1.28 1.81 (.53) (.87) (1.40) 16.56
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Ratio of Ratio of net
Year Net assets, expenses income to Portfolio
ended end of year to average average turnover
11/30 Total return (in millions) net assets net assets rate
Global Growth Fund/1/
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS 1
1997 6.45%/2/ $ 80 .44%/2/ .80%/2/ 13.22%/2/
1998 24.26 132 .75 .80%/3/ 25.26
CLASS 2/3/
1997 6.28/2/ 46 .57/2/ .56/2/ 13.22/2/
1998 24.06 124 1.00 .87 25.56
Global Small Capitalization Fund/4/
CLASS 1
1998 (8.31)%/2/ $ 55 .51%/2/ .86%/2/ 28.20%/2/
CLASS 2
1998 (8.40)/2/ 17 .64%/2/ .63 28.20/2/
Growth Fund
- ---------------------------------------------------------------------------------
CLASS 1
1994 2.92 2,027 .49 .78 29.58
1995 35.35 3,154 .47 .92 35.47
1996 14.32 3,860 .44 .61 30.88
1997 24.57 4,671 .42 .59 45.14
1998 25.27 5,313 .41 .38 49.91
CLASS 2/3/
1997 23.73/2/ 75 .37/2/ .08/2/ 45.14
1998 24.97 310 .66 .15 49.91
International Fund/6/
- ---------------------------------------------------------------------------------
CLASS 1
1994 10.48 1,405 .80 2.03 19.66
1995 10.78 1,703 .75 2.64 24.66
1996 16.66 2,370 .69 1.99 32.08
1997 9.52 2,162 .67 1.56 50.12
1998 16.94 2,593 .66 1.36 34.08
CLASS 2/3/
1997 2.20/2/ 48 .53/2/ .34/2/ 50.12
1998 16.63 126 .91 1.56 34.08
Growth-Income Fund
- ---------------------------------------------------------------------------------
CLASS 1
1994 3.21 2,740 .47 2.72 29.26
1995 33.14 3,953 .44 2.70 26.91
1996 21.02 5,249 .41 2.26 31.27
1997 22.92 6,430 .38 2.01 37.55
1998 14.77 6,704 .36 1.74 42.72
CLASS 2/3/
1997 18.18/2/ 157 .35/2/ .93/2/ 37.55
1998 14.49 564 .61 1.02 42.72
Asset Allocation Fund/8/
- ---------------------------------------------------------------------------------
CLASS 1
1994 (.54) 637 .53 4.55 36.13
1995 29.45 870 .52 4.11 39.89
1996 18.65 1,141 .49 3.88 50.62
1997 17.90 1,393 .47 3.63 34.14
1998 12.32 1,497 .45 3.63 27.97
CLASS 2/3/
1997 13.80/2/ 42 .40/2/ 1.81/2/ 34.14
1998 12.05 173 .70 3.39 27.97
- ---------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Net asset Net realized &
Year 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 year income on investments operations income realized gains distributions end of year
Bond Fund/9/
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS 1
1996 $10.00 $ .40 $ .16 $ .56 $ (.25) -- $ (.25) $10.31
1997 10.31 .63 .30 .93 (.62) -- (.62) 10.62
1998 10.62 .67 (.15) .52 (.65) $(.12) (.77) 10.37
CLASS 2/3/
1997 10.11 .35 .46 .81 (.31) -- (.31) 10.61
1998 10.61 .65 (.15) .50 (.63) (.12) (.75) 10.36
High-Yield Bond Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 14.51 1.29 .43 1.72 (1.27) -- (1.27) 14.96
1998 14.96 1.26 (1.04) .22 (1.25) (.16) (1.41) 13.77
CLASS 2/3/
1997 14.28 .69 .61 1.30 (.63) -- (.63) 14.95
1998 14.95 1.23 (1.04) .19 (1.22) (.16) (1.38) 13.76
U.S. Government/AAA-Rated Securities Fund
- -------------------------------------------------------------------------------------------------------------------------
CLASS 1
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 11.29 .76 (.07) .69 (.80) -- (.80) 11.18
1998 11.18 .68 .26 .94 (.69) -- (.69) 11.43
CLASS 2/3/
1997 11.07 .28 .03 .31 (.26) -- (.26) 11.12
1998 11.17 .68 .24 .92 (.67) -- (.67) 11.42
- -------------------------------------------------------------------------------------------------------------------------
CASH MANAGEMENT FUND
CLASS 1
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 11.12 .57 (.01) .56 (.55) -- (.55) 11.13
1998 11.13 .57 (.01) .56 (.56) -- (.56) 11.13
CLASS 2/3/
1997 11.07 .28 .03 .31 (.26) -- (.26) 11.12
1998 11.12 .55 (.02) .53 (.53) -- (.53) 11.12
<CAPTION>
Ratio of Ratio of net
Year Net assets, expenses income to Portfolio
ended end of year to average average turnover
11/30 Total return (in millions) net assets net assets rate
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BOND FUND/9/
Class 1
1996 5.74 %/2/ $ 77 .52%/2/ 6.18%/2/ 32.83%/2/
1997 9.36 132 .55 6.63 52.93
1998 5.12 186 .54 6.89 61.54
Class 2/3/
1997 8.09/2/ 12 .44/2/ 3.50/2/ 52.93
1998 4.85 45 .78 6.62 61.50
High-Yield Bond Fund
- ----------------------------------------------------------------------------------
Class 1
1994 (5.71) 390 .54 9.37 38.46
1995 19.81 534 .54 10.12 31.73
1996 13.75 662 .53 9.27 44.81
1997 12.45 765 .51 8.92 50.22
1998 1.44 715 .51 8.66 65.80
Class 2/3/
1997 9.20/2/ 21 .43/2/ 4.92/2/ 50.22
1998 1.18 68 .76 8.60 65.80
U.S. Government/AAA-Rated Securities Fund
- ----------------------------------------------------------------------------------
Class 1
1994 (4.58) 463 .54 6.69 45.21
1995 14.73 542 .54 7.37 30.11
1996 5.49 512 .53 7.33 30.45
1997 6.49 471 .52 6.73 53.80
1998 8.72 537 .51 6.11 89.25
Class 2/3/
1997 6.65/2/ 7 .44/2/ 3.45/2/ 53.80
1998 8.46 32 .75 5.68 89.25
Cash Management Fund
- ----------------------------------------------------------------------------------
Class 1
1994 3.59 221 .49 3.60 --
1995 5.65 193 .49 5.37 --
1996 5.09 240 .47 4.94 --
1997 5.21 226 .47 4.99 --
1998 5.17 250 .46 5.07 --
CLASS 2/3/
1997 2.87/2/ 14 .41/2/ 2.80/2/ --
1998 4.92 34 .70 4.75 --
- ------------
</TABLE>
/1/ Commenced operations April 30, 1997.
/2/ Based on operations for the period shown and, accordingly, not
representative of a full year's operations.
/3/ Shares offered for sale commencing April 30, 1997.
/4/ Commenced operations on April 30, 1998.
/5/ Amount includes net realized short-term gains treated as net investment
income for federal income tax purposes.
/6/ Commenced operations May 1, 1990.
/7/ Annualized
/8/ Commenced operations August 1, 1989.
/9/ Commenced operations January 2, 1996.
No information is presented for the New World Fund since it had no investment
operations as of April 1, 1999.
OTHER FUND INFORMATION
ANNUAL/SEMI-ANNUAL REPORT SHAREHOLDERS
Contains additional information about the Series including financial
statements, investment results, portfolio holdings, a statement from portfolio
management discussing market conditions and the Series' investment strategies,
and the independent accountants' report (in the annual report).
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more detailed information on all aspects of the Series, including the
Series financial statements.
A current SAI has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this prospectus. The SAI and
other related materials about the Series are available for review or to be
copied at the SEC Public Reference Room (1-800-SEC-0330) or on the SEC's
Internet Web site at http://www.sec.gov.
CODE OF ETHICS
Includes a description of the Series personal investing policy.
To request a free copy of any of the documents above, write to:
Secretary of the Series
333 South Hope Street
Los Angeles, CA 90071
AMERICAN VARIABLE INSURANCE SERIES
PART B
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1999
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, 1999. 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>
CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES 1
INVESTMENT POLICIES 5
INVESTMENT RESTRICTIONS 15
SERIES TRUSTEES AND OFFICERS 20
MANAGEMENT 24
PRICE OF SHARES 26
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES 27
EXECUTION OF PORTFOLIO TRANSACTIONS 28
GENERAL INFORMATION 29
DESCRIPTION OF BOND RATINGS 31
FINANCIAL STATEMENTS ATTACHED
</TABLE>
CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES
The following limitations and guidelines are considered at the time of
purchase, under normal market conditions, and are based on a percentage of the
fund's net assets unless otherwise noted. This summary is not intended to
reflect all of the fund's investment limitations.
GLOBAL GROWTH FUND
Debt Securities
- - The fund may invest 10% of its assets in straight debt securities rated BBB
or Baa or below by S&P or Moody's (or unrated but determined to be equivalent)
Non-U.S. Securities
- - The 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.
GLOBAL SMALL CAPITALIZATION FUND
Equity Securities
- - The fund will invest at least 65% of its total assets in equity securities of
small capitalization issuers (market capitalizations of $50 million to $1.2
billion based on U.S. share prices)
Debt Securities
- - The fund may invest in straight debt securities generally rated in the top
three categories by S&P or Moody's (or unrated but determined to be equivalent)
GROWTH FUND
General
- - The fund invests primarily in common stocks or securities with common stock
characteristics.
Debt Securities
- - The fund may invest 10% of its assets on straight debt securities rated Ba or
BB or below by S&P or Moody's or unrated by determined to be of equivalent
quality.
Non-U.S. Securities
- - The fund may invest up to 10% of its assets in securities of issuers
domiciled outside the U.S. and not included in the S&P 500.
INTERNATIONAL FUND
Equity Securities
- - The fund will invest at least 65% of its assets in equity securities
(including depositary receipts) or issuers domiciled outside the U.S.
Debt Securities
- - The fund may invest up to 5% of its assets in straight debt securities rated
BBB or Baa or below by S&P or Moody's or unrated but determined to be of
equivalent quality.
NEW WORLD FUND
General
- - The fund will invest at least 35% of its assets in equity and fixed-income
securities of companies primarily based in qualified countries which have
developing economies and/or markets.
Equity Securities
- - The fund may invest the balance of its assets in equity securities of any
company regardless of where it is based, provided the adviser has determined
that a significant portion of its assetsor revenues (generally 20% or more) are
attributable to qualified countries.
Debt Securities
- - The fund may invest up to 25% of its assets in debt securities of issuers
primarily based in qualified countries which have developing economies and/or
markets, or issuers that the fund's investment adviser determines has a
significant portion of its assets or revenues (generally 20% or more)
attributable to qualified countries.
- - The fund may invest up to 25% of its assets in debt securities rated Ba and
BB or below by Moody's Investors Services, Inc. or Standard & Poor's
Corporation or unrated but determined to be of equivalent quality
GROWTH-INCOME FUND
General
- - The fund will invest primarily in common stocks and securities with common
stock characteristics, but may invest in other equity-type securities (such as
convertible bonds), bonds (and other types of fixed-income securities) and
money market instruments.
Debt Securities
- - The fund may invest up to 5% of its assets on straight debt securities rated
Ba or BB or below by S&P or Moody's or unrated but determined to be of
equivalent quality.
Non-U.S. Securities
- - The fund may invest up to 10% of its assets in equity securities of issuers
domiciled outside U.S. and not in the S&P 500.
ASSET ALLOCATION FUND
General
- - The fund will generally invest 40% to 80% of its assets in equity securities;
20% to 50% in debt securities; and 0% to 40% in money market instruments
(including cash).
Debt Securities
- - The fund may invest up to 25% of the fund's debt assets in securities rated
Ba or BB below by S&P or Moody'or unrated by determined to be of equivalent
quality.
Non-U.S.
- - The fund may invest up to 10% of its assets in equity-type securities of
issuers domiciled outside the U.S. and not in the S&P 500.
- - The fund may invest up to 5% of its assets in debt securities of issuers
domiciled outside the U.S.
BOND FUND
Debt Securities
- - The fund will invest at least 65% of its assets in bonds (debt securities
having initial maturities in excess of one year)
- - The fund will invest at least 35% its assets in debt securities rated A or
better by Moody's or S&P or unrated but determined to be of equivalent quality.
- - The fund will invest at least 65% of its assets in debt securities that are
rated BBB or Baa or better by Moody's or S&P.
- - The fund may invest up to 35% of its assets in debt securities rated Ba and
BB or below by Moody's or S&P or unrated but determined to be of eauivalent
quality..
Non-U.S. Securities
- - The fund may invest up to 20% of its assets in dollar denominated securities
(including those of issuers domiciled in developing countries).
HIGH-YIELD BOND FUND
Debt Securities
- - The fund will invest at least 65% of its assets in devt securities rated Ba
or BB or below by Moody's or S&P or unrated but determined to be of equivalent
quality.
- - The fund may invest up to 10% of total assets in bonds rated C by Moody's or
D by S&P or unrated but determined to be of equivalent quality.
Equity Securities
- - The fund may invest up to 25% of its assets in common and preferred stocks
and convertibles.
Maturity
- - The fund will invest substantially in long-term (over 10 years to maturity)
and intermediate-term (3 to 10 years to maturity) fixed-income securities.
Non-U.S. Securities
- - The fund may invest up to 25% of its assets in securities of issuers
domiciled outside the U.S.
U.S. GOVERNMENT/AAA-RATED SECURITIES FUND
General
- - The fund will invest at least 65% of its assets in securities guaranteed by
the U.S. Government or debt securities rated AAA by S&P or Aaa by Moody's or
S&P or unrated but dtermined to be of equivalent quality.
CASH MANAGEMENT FUND
General
- - The fund will invest in high quality money market instruments rated in the
two highest quality categories by either Moody's or S&P, provided the issuer
has commerical paper rated in the highest rating category by Moody's or S&P.
Maturity
- - The fund may purchase securities that mature or may be redeemed in 13 months
or less (25 months or less if U.S. Government securities), even if original
maturity is greater than 1 year.
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.
EQUITY SECURITIES -- Equity securities represent an ownership position in a
company. The prices of equity securities fluctuate based on changes in the
financial condition of their issuers and on market and economic conditions. The
funds' results will be related to the overall market for these securities.
INVESTING IN SMALLER CAPITALIZATION STOCKS -- Investing in smaller
capitalization stock can involve greater risk than is customarily associated
with investing in stocks of larger, more established companies. Transaction
costs in stocks of smaller capitalization companies may be higher than those of
larger capitalization companies. Because the Global Small Capitalization Fund
emphasizes the stocks of issuers with smaller market capitalizations (by U.S.
standards), it can be expected to have more difficulty obtaining information
about the issuers or valuing or disposing of its securities than it would if it
were to concentrate on more larger capitalization stocks. The fund determines
relative market capitalizations using U.S. standards (as described above).
Accordingly, the fund's non-U.S. investments may have large capitalizations
relative to market capitalizations of companies based outside the U.S.
DEBT SECURITIES -- Bonds and other debt securities are used by issuers to
borrow money. Issuers pay investors interest and must repay the amount borrowed
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.
INFLATION-INDEXED BONDS -- Inflation-indexed notes and bonds are issued by
governments, their agencies or instrumentalities, or corporations. The
principal value of this type of bond is periodically adjusted according to
changes in the rate of inflation. The interest rate is generally fixed at
issuance; however, interest payments are based on an inflation adjusted
principal value. For example, in a period of falling inflation, principal
value will be adjusted downward, reducing the interest payable.
Repayment of the original bond principal upon maturity (as adjusted for
inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,
even during a period of deflation. However, the current market value of the
bonds is not guaranteed, and will fluctuate. The funds may also invest in other
bonds which may or may not provide a similar guarantee. If a guarantee of
principal is not provided, the adjusted principal value of the bond repaid at
maturity may be less than the original principal.
OTHER SECURITIES -- The funds may also invest in securities that have a
combination of equity and debt characteristics such as non-convertible
preferred stocks and convertible securities. These securities may at times
resemble equity more than debt and vice versa. Non-convertible preferred
stocks are similar to debt in that they have a stated dividend rate akin to the
coupon of a bond or note even though they are often classified as equity
securities. The prices and yields of non-convertible preferred stocks generally
move with changes in interest rates and the issuer's credit quality, similar to
the factors affecting debt securities.
Bonds, preferred stocks, and other securities may sometimes be converted
into shares of common stock or other securities at a stated exchange ratio.
These securities prior to conversion pay a fixed rate of interest or a
dividend. Because convertible securities have both debt and equity
characteristics their value varies in response to many factors, including the
value of the underlying equity, general market and economic conditions,
convertible market valuations, as well as changes in interest rates, credit
spreads, and the credit quality of the issuer.
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. Government
include: (1) direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds) and (2) federal agency obligations guaranteed as to principal
and interest by the U.S. Treasury. Certain securities issued by U.S.
Government instrumentalities 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 discretionary authority of the Treasury
to purchase certain obligations of the issuer; and others are supported only by
the credit of the issuing government agency or instrumentality.
PASS-THROUGH SECURITIES -- The funds may invest in various debt obligations
backed by a pool of mortgages or other assets including loans on single family
residences, home equity loans, mortgages on commercial buildings, credit card
receivables, and leases on airplanes or other equipment. Principal and interest
payments made on the underlying asset pools backing these obligations are
typically passed through to investors. Pass-through securities may have either
fixed or adjustable coupons. These securities include those discussed
below.
"Mortgage-backed securities" are issued both by U.S. government agencies,
including the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and by private entities. The payment of interest and
principal on securities issued by U.S. Government agencies is guaranteed by the
full faith and credit of the U.S. government (in the case of GNMA securities)
or the issuer (in the case of FNMA and FHLMC securities). However, the
guarantees do not apply to the market prices and yields of these securities,
which vary with changes in interest rates.
Mortgage-backed securities issued by private entities are structured
similarly to mortgage-backed securities issued by GNMA, FNMA and FHLMC. These
securities and the underlying mortgages are not guaranteed by government
agencies. In addition, these securities generally are structured with one or
more types of credit enhancement. Mortgage-backed securities generally permit
borrowers to prepay their underlying mortgages. Prepayments can alter the
effective maturity of these instruments.
"Collateralized mortgage obligations" (CMOs) are backed by a pool of
mortgages, mortgage-backed securities or mortgage loans, which are divided into
two or more separate bond issues. CMOs issued by U.S. government agencies are
backed by agency mortgages, while privately issued CMOs may be backed by either
government agency mortgages or private mortgages. Payments of principal and
interest are passed-through to each bond at varying schedules resulting in
bonds with different coupons, effective maturities, and sensitivities to
interest rates. In fact, some CMOs may be structured in a way that when
interest rates change the impact of changing prepayment rates on these
securities' effective maturities is magnified.
"Commercial mortgage-backed securities" are backed by commercial property,
such as hotels, office buildings, retail stores, hospitals, and other
commercial buildings. These securities may have a lower prepayment risk than
other mortgage-related securities because commercial mortgage loans generally
prohibit or impose penalties on prepayments of principal. In addition,
commercial mortgage-related securities often are structured with some form of
credit enhancement to protect against potential losses on the underlying
mortgage loans. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans, including the effects of local and other economic
conditions on real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain tenants.
"Asset-backed securities" are backed by other assets such as a credit card,
automobile or consumer loan receivables, retail installment loans, or
participations in pools of leases. Credit support for these securities may be
based on the underlying assets and/or provided through credit enhancements by a
third party. The values of these securities are sensitive to changes in the
credit quality of the underlying collateral, the credit strength of the credit
enhancement, changes in interest rates, and at times the financial condition of
the issuer. Some asset-backed securities also may receive prepayments which can
change the securities' effective maturities.
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 security and obtain a simultaneous commitment from the
seller to repurchase a security at a specified time and price. The seller must
maintain with the Series' custodian collateral equal to at least 100% of the
repurchase price including accrued interest as monitored daily by Capital
Research and Management Company. If the seller under the repurchase agreement
defaults, a fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur 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 commitments to purchase or
sell securities at a future 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. If the other
party to such a transaction fails to deliver 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 enter into "roll"
transactions, which consist of the sale of mortgage-backed securities 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 ownership,
including the risk of price and yield fluctuations as of the time of the
agreement.
RESTRICTED AND ILLIQUID SECURITIES -- The funds may purchase securities
subject to restrictions on resale. All such securities whose principal trading
market is in the U.S. will be considered illiquid unless they have been
specifically determined to be liquid under procedures which have been adopted
by the Series' Board of Trustees, taking into account factors such as the
frequency and volume of trading, the commitment of dealers to make markets and
the availability of qualified investors, all of which can change from time to
time. The funds may incur certain additional costs in disposing of illiquid
securities.
INVESTING IN VARIOUS COUNTRIES -- The Global Growth Fund, the Global Small
Capitalization Fund, the Growth Fund, the International Fund, the New World
Fund the Growth-Income 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. and 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; expropriation and confiscatory taxation; 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.
The risks described above are potentially heightened in connection with
investments in less developed and developing countries. Although there is no
universally accepted definition, a developing country is generally considered
to be a country which is in the initial stages of its industrialization cycle
with a low per capita gross national product. For example, political and/or
economic structures in these countries may be in their infancy and developing
rapidly. Historically, the markets of developing countries have been more
volatile than the markets of developed countries.
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 U.S. Government/AAA-Rated Securities Fund may purchase obligations of
non-U.S. corporations or governmental entities, provided they are U.S. dollar
denominated and highly liquid. Accordingly, while the risks mentioned above are
still present, they are present to a lesser extent.
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.
GLOBAL GROWTH FUND, GLOBAL SMALL CAPITALIZATION FUND, GROWTH FUND, NEW WORLD
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, NEW WORLD
FUND, GROWTH-INCOME 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-Income 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
PASS-THROUGH 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 segregate liquid assets which will be marked to
market daily 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 mortgage-backed 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 AND ASSIGNMENTS -- The funds may invest in loan
participations or assignments, typically made by a syndicate of banks to U.S.
and non-U.S. corporate or governmental borrowers for a variety of purposes.
Loan participations are loans or other direct debt instruments which are
interests in amounts owed by a corporate, governmental or other borrower to
another party. They may represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services, or to other parties. A fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the lender selling the participation and only
upon receipt by the lender of the payments from the borrower. In connection
with purchasing participations, a fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to
loan, nor any rights of set-off against the borrower, and the fund may not
directly benefit from any collateral supporting the loan in which it has
purchased the participation. As a result, the fund will assume the credit risk
of both the borrower and the lender that is selling the participation. In the
event of the insolvency of the lender selling a participation, a fund may be
treated as a general creditor of the lender and may not benefit from any
set-off between the lender and the borrower.
When a fund purchases assignments from lenders it will acquire direct rights
against the borrower on the loan. However, because assignments are arranged
through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a fund as the purchaser of an
assignment may differ from, and be more limited than, those held by the
assigning lender. Because there is no liquid market for such securities, the
fund's anticipate that such securities could be sold only to a limited number
of institutional investors.
Investments in loan participations and assignments present the possibility that
the fund could be held liable as a co-lender under emerging legal theories of
lender liability. 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 and assignments are generally
not rated by major rating agencies, may not be protected by the securities
laws, and are generally considered to be illiquid.
HIGH-YIELD BOND FUND
REINSURANCE RELATED NOTES AND BONDS -- The High-Yield Bond Fund 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,
the 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, NEW WORLD 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 Global Small
Capitalization Fund, 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; E 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); except
that the Global Small Capitalization Fund may invest up to 5% of its total
assets in the securities of other managed investment companies. Any such
investments by the Global Small Capitalization Fund shall be limited to 3% of
the voting stock of any investment company, provided, however that investment
in the open market of a closed-end investment company where no more than
customary broker's commissions are involved shall not be prohibited by this
restriction.
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, Global Small Capitalization 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) commercial 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; 8 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 the 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 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 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 ORGANIZATION AND MANAGEMENT
The Series, an open-end investment company, was organized as a Massachusetts
business trust on September 13, 1983. The Series' Board of Trustees supervises
Series operations and performs duties required by applicable state and federal
law. Members of the board who are not employed 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.
SERIES TRUSTEES AND OFFICERS
TRUSTEES AND TRUSTEE COMPENSATION
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION PRINCIPAL AGGREGATE TOTAL TOTAL
AND AGE WITH OCCUPATION(S) COMPENSATION COMPENSATION NUMBER
REGISTRANT DURING PAST 5 (INCLUDING (INCLUDING OF
YEARS VOLUNTARILY VOLUNTARILY FUND
DEFERRED DEFERRED BOARDS
COMPENSATION/1/) COMPENSATION/1/) ON
FROM FROM ALL FUNDS WHICH
SERIES DURING MANAGED BY TRUSTEE
FISCAL CAPITAL SERVES
YEAR ENDED RESEARCH AND /3/
11/30/98 MANAGEMENT
COMPANY OR ITS
AFFILIATES/2/
FOR THE YEAR
ENDED 11/30/98
<S> <C> <C> <C> <C> <C>
Charles H. Trustee Private investor $32,200/4/ $113,600 4
Black and consultant;
525 Alma Real Former Executive
Drive Vice President
Pacific and Director,
Palisades, CA Kaiser Steel
90272 Corporation
Age: 72
H. Frederick Trustee Private Investor; $32,700 $189,650 18
Christie Former President
P. O. Box 144 and Chief
Palos Verdes, Executive
CA 90274 Officer, The
Age: 65 Mission Group
(non-utility
holding
Company,
subsidiary of
Southern
California Edison
Company)
Joe E. Davis Trustee Private Investor; $34,700 $34,700 1
3436 Caribeth Former Chairman,
Drive Linear
Encino, CA Corporation;
91436 former
Age: 63 President and
Chief Executive
Officer, National
Health
Enterprises, Inc.
Martin Fenton Trustee Chairman, Senior $32,700/4/ $126,834 16
4350 Executive Resource Group
Drive (management of
Suite 101 senior living
San Diego, CA centers)
92123
Age: 62
Mary Myers Trustee Founder and $33,100/4/ $102,450 5
Kauppila President, Energy
286 Congress Investment, Inc.
Street
Boston, MA
02110
Age: 44
Kirk P. Trustee President, $31,100/4/ $113,734 5
Pendleton Cairnwood, Inc.
Cairnwood,
Inc.
75 James Way
Southampton,
PA 18966
Age: 59
+James F. President President and none/5/ none/5/ 1
Rothenberg and Director, Capital
333 South Hope Trustee Research and
Street Management
Los Angeles, Company
CA 90071
Age: 52
+Thomas E. Chairman of Retired. Former none/5/ none/5/ 3
Terry the Board Vice President
6048 S. and Secretary,
Highlands Capital Research
Avenue and Management
Madison, WI Company
53705
Age: 61
</TABLE>
+ "Interested persons" of the Series within the meaning of the Investment
Company Act of 1940 (the "1940 Act") on the basis of their affiliation with the
Series' Investment Adviser, Capital Research and Management Company or the
parent company of the Investment Adviser, The Capital Group Companies, Inc.
/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
Endowments, whose shareholders are limited to (i) any entity exempt from
taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("501 (c)(3) organization"); (ii) any trust, the present or future
beneficiary of which is a 501(c)(3) organization; and (iii) any other entity
formed for the primary prupose of benefiting a 501(c)(3) organization.
/3/ Includes funds managed by Capital Research and Management Company
/4/ 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 ($77,559); H . Frederick
Christie ($78,363); Martin Fenton ($39,726); Mary Myers Kauppila ($180,321) and
Kirk P. Pendleton ($59,526). Amounts deferred and accumulated earnings thereon
are not funded and are general unsecured liabilities of the Series until paid
to the Trustee.
/5/ 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) PRINCIPAL
WITH OCCUPATION(S) DURING
REGISTRANT PAST 5 YEARS
<S> <C> <C> <C>
Thomas E. Terry 61 Chairman of Retired. Former Vice
6048 S. Highlands the Board President and
Avenue Secretary, Capital
Madison, WI 53705 Research and
Management Company
James F. 52 President President and
Rothenberg and Trustee Director, Capital
333 South Hope Research and
Street Management Company
Los Angeles, CA
90071
James K. Dunton 53 Senior Vice Senior Vice President
333 South Hope President and Director, Capital
Street Research and
Los Angeles, CA Management Company
90071
Abner D. Goldstine 69 Senior Vice Senior Vice President
11100 Santa Monica President and Director, Capital
Boulevard Research and
Los Angeles, CA Management Company
90025
Michael J. Downer 44 Vice Vice President - Fund
333 South Hope President Business Management
Street Group, Capital
Los Angeles, CA Research and
90071 Management Company
Claudia P. 47 Vice Senior Vice President,
Huntington President Capital Research
333 South Hope Company
Street
Los Angeles, CA
90071
John H. Smet 42 Vice Vice President,
11100 Santa Monica President Capital Research and
Boulevard Management Company
Los Angeles, CA
90025
Chad L. Norton 38 Secretary Vice President - Fund
333 South Hope Business Management
Street Group, Capital
Los Angeles, CA Research and
90071 Management Company
Robert P. Simmer 37 Treasurer Vice President - Fund
5300 Robin Hood Business Management
Road Group, Capital
Norfolk, VA 23513 Research and
Management Company
Sheryl F. Johnson 30 Assistant Assistant Vice
5300 Robin Hood Treasurer President - Fund
Road Business Management
Norfolk, VA 23513 Group, Capital
Research and
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 $22,000
per annum to Trustees who are not affiliated with the Investment Adviser, plus
$2,500 for each Board of Trustees meeting attended, plus $1,000 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 the first $600 million of net assets, plus
0.59% on net assets greater than $600 million but not exceeding $1.2 billion,
plus 0.53% on net assets in excess of $1.2 billion;
GLOBAL SMALL CAPITALIZATION FUND: .80% of the first $600 million of net
assets, plus 0.74% on net assets in excess of $600 million;
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 greater than $3.2 billion but not exceeding $5.2
billion, plus 0.33% on net assets greater than $5.2 billion but not exceeding
$8.4 billion, plus 0.135% on net assets in excess of $8,4 billion;
INTERNATIONAL FUND: 0.78% of the first $600 million of net assets, plus
0.60% on net assets greater than $600 million but not exceeding $1.2 billion,
plus 0.48% on net assets greater than $1.2 billion but not exceeding $2.0
billion, plus 0.465% on net assets in excess of $2.0 billion;
NEW WORLD FUND: __________________________.
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 greater than $4.0 billion bu not
exceeding $6.5 billion, plus 0.256% on net assets greater than $6.5 billion but
not exceeding $10.5 billion, plus 0.242% on net assets in excess of $10.5
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 greater than $1.2 billion but not exceeding $2.0
billion, plus 0.32%on net assets in excess of $2.0 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, 1998, 1997 and 1996, the Investment
Adviser's total fees, respectively, amounted to the following: Growth Fund
$20,494,000, $17,154,000 and $14,284,000; International Fund $15,732,000,
$15,477,000 and $12,370,000; Growth-Income Fund $24,542,000, $21,263,000 and
$17,451,000; Asset Allocation Fund $6,916,000, $5,806,000 and $4,663,000; Bond
Fund $952,000 $557,000 and $204,000; High-Yield Bond Fund $4,018,000,
$3,624,000 and $2,996,000; U. S. Government/AAA-Rated Securities Fund
$2,553,000, $2,444,000 and $2,661,000; and Cash Management Fund $1,164,000,
$1,113,000 and $1,007,000. During the fiscal periods ended November 30, 1998
and 1997, the Investment Adviser's total fee for the Global Growth Fund
amounted to $1,341,000 $310,000. During the fiscal period ended November 30,
1998, the Invetment Adviser's total fee for the Global Small Capitalization
Fund amounted to $240,000
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 will 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 Class 2 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 period ended November 30, 1997, the
Series paid $274,000 to Lincoln National under the Plan.
PRICE OF SHARES
The price paid for shares, the net asset value price, is determined as of 4:00
p.m., Eastern time (the normal close of trading) every 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. Certain of the funds invest in securities
listed on foreign exchanges which trade on Saturdays or other U.S. business
holidays. Since the funds typically do not calculate their net asset values on
Saturdays or other U.S. business holidays, the value of the funds' redeemable
securities may be affected on days when shareholders do not have access to the
funds. 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 8 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, a 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 by a 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
Orders for the funds' portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs
and promptness of executions. When circumstances relating to a proposed
transaction indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a
broker who has provided investment research, statistical, or other related
services to the Investment Adviser or has sold shares of the funds or other
funds served by the Investment Adviser. The funds do not consider that they
have an obligation to obtain the lowest available commission rate to the
exclusion of price, service and qualitative considerations.
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, 1998, 1997 and 1996, respectively, amounted to the following:
Growth Fund $X,XXX,000, $2,869,000, and $2,358,000; International Fund
$X,XXX,000, $5,252,000, and $3,813,000; Growth-Income Fund $X,XXX,000,
$3,955,000, and $3,389,000; Asset Allocation Fund $XXX,000, $551,000, and
$557,000. Brokerage commissions paid on portfolio transactions for the Global
Growth Fund for the periods ended November 30, 1998 and 1987 amounted to
$XXX,XXX and $194,000. Commission paid on transaction for the Global Small
Capitalization Fund for the period ended November 30, 1998 amounted to
$XXX,XXX.
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 -- PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP, whose seldction is
determined annually by the Board of Trustees.
YEAR 2000 - The Series and its shareholders depend on the proper functioning of
computer systems maintained by the Investment Adviser and its affiliates and
other key service providers. Many computer systems in use today will require
reprogramming or replacement prior to the year 2000 because of the way they
store dates and make date-related calculations. The Series understands that
these service providers are taking steps to address the "Year 2000 problem."
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on the Series. In addition, the funds' investments could be
adversely affected by the Year 2000 problem. For example, the markets for
securities in which the funds invest could experience settlement problems and
liquidity issues. Corporate and governmental data processing errors may cause
losses for individual companies and overall economic uncertainties. Earnings of
individual issuers are likely to be affected by the costs of addressing the
problem, which may be substantial and may be reported inconsistently.
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.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.'s top two rating designations for commercial
paper are described as follows: issues rated Prime-1 have a superior capacity
for repayment of short-term promissory obligations. Prime-1 repayment capacity
will normally be evidenced by the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity. Issues rated Prime-2 have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics cited above, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation's top two rating categories for commercial paper
are described as follows: A -- Issues assigned its highest rating are regarded
as having the greatest capacity for timely payment. Issues in this category
are delineated with numbers 1 or 2 to indicate the relative degree of safety.
A-1 -- This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation. A-2 -- Capacity for timely payments on issues with this
designation is strong. However, the relative degree of safety is not as high
as for issues designated "A-1".
PART C
OTHER INFORMATION
AMERICAN VARIABLE INSURANCE SERIES
ITEM 23. EXHIBITS
(a) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(b) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(c) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(d) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(e) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(f) None.
(g) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(h) None.
(i) Not applicable to this filing.
(j) Consent of Independent Auditors - to be filed by amendment.
(k) None.
(l) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(m) Previously filed (see Post-Effective Amendment No. 26 filed March 30,
1998).
(n) EX-27 Financial data schedule (EDGAR).
(o) None.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. 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 Registrant 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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
None.
ITEM 27. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 28. 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
and 5300 Robin Hood Road, Norfolk, VA 23513.
Records covering portfolio transactions are also maintained and kept by the
custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
None.
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 14th day of January,
1999.
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 14, 1999, 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)
