<PAGE>
As filed with the Securities and Exchange Commission on March 31, 1997
File Nos. 333-8653
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. 2 /X/
---
Post-Effective Amendment No. / /
---
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 2 /X/
---
(Check appropriate box or boxes)
SEASONS SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
1 SunAmerica Center
Los Angeles, CA 90067-6022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 858-8850
Robert M. Zakem
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
(NAME and ADDRESS OF AGENT FOR SERVICE)
Copies to:
Susan L. Harris, Esq. Margery K. Neale, Esq.
SunAmerica Inc. Shereff, Friedman, Hoffman & Goodman, LLP
1 SunAmerica Center 919 Third Avenue
Los Angeles, CA 90067-6022 New York, NY 10022
--------------------
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of the Registration Statement
The Registrant has elected to register an indefinite amount of common stock, par
value $.01 per share, pursuant to Section 24(f) under the Investment Company Act
of 1940, as amended, and Rule 24f-2 thereunder. In accordance with Rule
24f-2(a)(3) a filing fee of $500 has previously been paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SEASONS SERIES TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
UNDER THE SECURITIES ACT OF 1933
N-1A ITEM NO.
<TABLE>
<CAPTION>
PART A
<S> <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cover Page
Item 2. Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
Item 3. Condensed Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
Item 4. General Description of Registrant. . . . . . . . . . .The Trust; Investment Objectives, Policies And
Restrictions; Investment Techniques And Risk Factors
Item 5. Management of the Fund . . . . . . . . . . . . . . . . .Management; Portfolio Turnover and Brokerage
Item 5A Management's Discussion of Fund Performance. . . . . . . . . . . . . . . . . . . . . .Not Applicable
Item 6. Capital Stock and Other Securities . . . . . .The Trust; Dividends, Distributions and Federal Taxes;
Purchases and Redemptions; Shareholder Voting Rights
Item 7. Purchase of Securities Being Offered . . . . . The Trust; Price of Shares; Purchases and Redemptions
Item 8. Redemption or Repurchase . . . . . . . . . . . . . . . . . . . . . . . . . Purchases and Redemptions
Item 9. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
PART B
Item 10. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cover Page
Item 11. Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Table of Contents
Item 12. General Information and History. . . . . . . . . . . . . . . . . . . .The Trust; General Information
Item 13. Investment Objectives and Policies . . . . . . . . . . . . . . . Investment Objectives and Policies;
Investment Restrictions; Portfolio Turnover
Item 14. Management of the Registrant . . . . . . . . . . . . . . . . . . . . . . Trust Officers and Trustees
Item 15. Control Persons and Principal Holders of Securities. . . . . . . . . . . Trust Officers and Trustees
Item 16. Investment Advisory and Other Services . . . . . . . . . . . Trust Officers and Trustees; Investment
Advisory and Management Agreement; Subadvisory Agreements;
General Information
Item 17. Brokerage Allocation . . . . . . . . . . . . . . . . . . . . . . Execution of Portfolio Transactions
Item 18. Capital Stock and Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . Price of Shares
Item 19. Purchase, Redemption and Pricing of Securities Being Offered . . . . . . . . . . . . Price of Shares
Item 20. Tax Status . . . . . . . . . . . . . . . . . . . . . . . .Dividends, Distributions and Federal Taxes
Item 21. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
Item 22. Calculation of Performance Data. . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
Item 23. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Not Applicable
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C to this Registration Statement.
<PAGE>
SEASONS SERIES TRUST
P.O. BOX 54299
LOS ANGELES, CALIFORNIA 90054-0299
Seasons Series Trust (the "Trust") is an open-end, management investment
company. The Trust consists of six separate portfolios (the "Portfolios"),
including four multi-managed portfolios (the "Multi-Managed Portfolios"). Each
of the Portfolios has its own investment objective. The Trust seeks to provide
investors with an asset allocation strategy consistent with the investment
strategy selected in the Seasons Variable Annuity Contract (the "Contract").
The following is a brief statement of the investment objective of each
Portfolio:
The MULTI-MANAGED GROWTH PORTFOLIO seeks long-term growth of capital.
The MULTI-MANAGED MODERATE GROWTH PORTFOLIO seeks long-term growth of
capital, with capital preservation as a secondary objective.
The MULTI-MANAGED INCOME/EQUITY PORTFOLIO seeks conservation of principal
while maintaining some potential for long-term growth of capital.
The MULTI-MANAGED INCOME PORTFOLIO seeks capital preservation.
The ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO seeks capital
appreciation.
The STOCK PORTFOLIO seeks long-term capital appreciation, and secondarily,
increasing dividend income through investments primarily in well-established
growth companies.
Each Multi-Managed Portfolio of the Trust, representing a different asset
allocation strategy, seeks to achieve its investment objective by investing to
varying degrees in a diverse portfolio of common stocks, securities with equity
characteristics (such as preferred stocks, warrants or fixed income securities
convertible into common stock), corporate and U.S. government fixed income
securities, money market instruments and cash or cash equivalents. The assets of
each Multi-Managed Portfolio are allocated among the same three investment
managers, but in differing percentages depending on the Portfolio's overall
investment strategy. Each of the three investment managers will manage its
respective portion or portions of the Multi-Managed Portfolios according to a
separate investment strategy or strategies as described below.
As a result of the market risk inherent in any investment, there is no
assurance that the investment objectives of any of the Portfolios will be
achieved. INVESTMENTS IN A PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY THE
U.S. GOVERNMENT OR BY ANY OTHER ENTITY OR PERSON. Shares of the Trust are not
deposits or obligations of, or guaranteed or endorsed by, any bank through which
such shares may be sold, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
Shares of the Portfolios can be issued and redeemed only in connection with
investments in and payments under the Contract and may be sold to fund other
variable annuity or variable life insurance contracts issued in the future,
subject to obtaining any required regulatory relief. The Contract involves fees
and expenses not described in this Prospectus and may also involve certain
restrictions on the allocation of purchase payments or contract values to one or
more of the Portfolios. See the Contract prospectus for information regarding
Contract fees and expenses and any restrictions or limitations.
This Prospectus sets forth concisely the information a prospective investor
ought to know before investing in the Trust. Please read it carefully and retain
it for future reference. A Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The Statement of Additional Information may be obtained upon request
and without charge by writing to the Trust at the above address or by calling
1-800-445-7862.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated April 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Trust................................................................ 1
Investment Objectives, Policies and Restrictions......................... 1
Multi-Managed Portfolios............................................... 1
Asset Allocation: Diversified Growth Portfolio......................... 4
Stock Portfolio........................................................ 5
Investment Techniques and Risk Factors................................... 5
Management............................................................... 13
Portfolio Turnover and Brokerage......................................... 15
Dividends, Distributions and Federal Taxes............................... 16
Price of Shares.......................................................... 17
Purchases and Redemptions................................................ 17
Shareholder Voting Rights................................................ 17
Independent Accountants and Legal Counsel................................ 18
Inquiries................................................................ 18
</TABLE>
<PAGE>
THE TRUST
The Trust, organized as a Massachusetts business trust on October 10, 1995, is
an open-end, management investment company. It was established to provide a
funding medium for the Contract, which is issued by Variable Annuity Account
Five (the "Account"), a separate account of Anchor National Life Insurance
Company (the "Life Company"), organized under the laws of the state of
California. All shares may be purchased or redeemed by the Account at net asset
value with no sales or redemption charge.
The Trust currently issues six separate series of shares or Portfolios, each of
which represents a separate portfolio of securities with its own investment
objective. The current Portfolios are the Multi-Managed Growth Portfolio,
Multi-Managed Moderate Growth Portfolio, Multi-Managed Income/Equity Portfolio,
Multi-Managed Income Portfolio, Asset Allocation: Diversified Growth Portfolio
and Stock Portfolio.
SunAmerica Asset Management Corp. ("SunAmerica" or the "Adviser"), an indirect,
wholly owned subsidiary of the Life Company, serves as investment adviser for
all the Portfolios of the Trust. See "Management." Janus Capital Corporation
("Janus") and Wellington Management Company, LLP ("WMC") both serve as
subadvisers for each of the Multi-Managed Portfolios. Each of Janus and WMC is
responsible for managing one particular portion of the assets (each, a "Managed
Component" or "component") of each of the Multi-Managed Portfolios, subject to
the supervision of SunAmerica. Putnam Investment Management, Inc. ("Putnam")
serves as subadviser for the Asset Allocation: Diversified Growth Portfolio and
will be responsible for managing the Portfolio, subject to the supervision of
SunAmerica. T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as
subadviser for the Stock Portfolio and will be responsible for managing the
Portfolio, subject to the supervision of SunAmerica. (Janus, WMC, Putnam and T.
Rowe Price are referred to herein individually as a "Subadviser," and
collectively as the "Subadvisers.") In addition to being responsible for overall
supervision of each Portfolio, SunAmerica manages one or more particular
components of each of the Multi-Managed Portfolios, all as more fully described
below.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
A description of each Portfolio's investment objective and a summary of the
investment policies followed by the Portfolios are set forth below. However,
please also refer to the section captioned "Investment Techniques and Risk
Factors" for a more detailed description of the characteristics and risks
associated with the Portfolios and the types of securities in which they invest.
There can be no assurance that any Portfolio's investment objective will be met
or that the net return on an investment in a Portfolio will exceed that which
could have been obtained through other investment or savings vehicles.
Each Portfolio has certain fundamental investment restrictions, which are
described in the Statement of Additional Information. A Portfolio's fundamental
investment restrictions may not be changed without a majority vote of the
outstanding voting securities of that Portfolio. See "Shareholder Voting
Rights." Except for its fundamental investment restrictions, each Portfolio's
investment objective and policies are not fundamental and may be changed without
a vote of the shareholders.
Each Multi-Managed Portfolio is organized as a "non-diversified" Portfolio of
the Trust (as such term is defined under the Investment Company Act of 1940, as
amended (the "1940 Act")), subject, however, to certain tax diversification
requirements and to diversification guidelines of the California Department of
Insurance. See "Dividends, Distributions and Federal Taxes."
Reference is made in the following sections to ratings assigned to certain types
of securities by Standard & Poor's Corporation ("S&P") , Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Service, Inc. ("Fitch"), Duff &
Phelps, Inc. ("Duff & Phelps") and Thomson BankWatch, Inc. ("BankWatch"), all of
which are recognized independent securities ratings institutions. A description
of the rating categories assigned by S&P, Moody's, Fitch, Duff & Phelps and
BankWatch is contained in the Statement of Additional Information.
MULTI-MANAGED PORTFOLIOS
The investment objective of each Multi-Managed Portfolio is as follows:
MULTI-MANAGED GROWTH PORTFOLIO -- long-term growth of capital
MULTI-MANAGED MODERATE GROWTH PORTFOLIO -- long-term growth of capital, with
capital preservation as a secondary objective
MULTI-MANAGED INCOME/EQUITY PORTFOLIO -- conservation of principal while
maintaining some potential for long-term growth of capital
1
<PAGE>
MULTI-MANAGED INCOME PORTFOLIO -- capital preservation
Each Multi-Managed Portfolio seeks to achieve its investment objective by
investing to varying degrees in a diverse portfolio of common stocks, securities
with equity characteristics (such as preferred stocks, warrants or fixed income
securities convertible into common stock), corporate and U.S. government fixed
income securities, money market instruments and cash or cash equivalents. In
order to diversify the management of their assets through different market
sectors and management styles, the assets of each Multi-Managed Portfolio have
been allocated among three or four distinct Managed Components, as shown in the
following chart.
<TABLE>
<CAPTION>
MANAGED COMPONENTS AS A PERCENTAGE
OF EACH MULTI-MANAGED PORTFOLIO
--------------------------------------------------------------------------
SunAmerica/ SunAmerica/
Aggressive Growth Janus/Growth Balanced WMC/Fixed Income
PORTFOLIO component component component component
- ------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Multi-Managed
Growth Portfolio 20% 40% 20% 20%
Multi-Managed
Moderate Growth
Portfolio 18% 28% 18% 36%
Multi-Managed
Income/Equity
Portfolio 0% 18% 28% 54%
Multi-Managed
Income Portfolio 0% 8% 17% 75%
</TABLE>
The Multi-Managed Growth and Moderate Growth Portfolios, in seeking long-term
growth of capital, include a relatively larger allocation to the
SunAmerica/aggressive growth and Janus/growth components than do the
Multi-Managed Income/Equity and Income Portfolios. In contrast, the
Multi-Managed Income/Equity and Income Portfolios, which focus on preservation
of principal or capital, include relatively larger allocations to the
SunAmerica/balanced and WMC/fixed income components than do the other two
Multi-Managed Portfolios. Neither the Multi-Managed Income/Equity Portfolio nor
the Multi-Managed Income Portfolio contains a SunAmerica/aggressive growth
component. None of the Multi-Managed Portfolios contains an "unmanaged"
component.
Investments in each Multi-Managed Portfolio (and redemption requests) will be
allocated among the Managed Components of such Portfolio as described below. The
Trust expects that differences in investment returns among the Managed
Components of a Multi-Managed Portfolio will cause the actual percentage of the
Portfolio's assets allocated to each component to vary from the target
allocation over the course of a calendar quarter. Accordingly, the assets of
each Multi-Managed Portfolio will be reallocated or "rebalanced" among the
Managed Components on a quarterly basis to restore the target allocations for
such Portfolio.
Although each Multi-Managed Portfolio has a distinct investment objective and
will be allocated in varying percentages among the Managed Components in
furtherance of that objective, each Manager intends to manage its respective
Managed Component(s) in the same general manner regardless of the objective of
the Multi-Managed Portfolio. However, as described below under
"SunAmerica/balanced component," the equity/ debt weightings of the
SunAmerica/balanced component under normal market conditions (I.E., the
"neutral" weightings) will vary depending on the objective of the Multi-Managed
Portfolio. Each Managed Component of a Multi-Managed Portfolio will be treated
as a separate investment account by the Manager; however, the assets of each
Managed Component that comprises a particular Multi-Managed Portfolio belong to
that Portfolio. Percentage limitations contained in investment policies and
restrictions of each Multi-Managed Portfolio will be applied at the time of
purchase and on a component by component basis for that Portfolio. The Adviser,
however, is ultimately responsible for overseeing compliance with respect to
percentage limitations by each Multi-Managed Portfolio as a whole, and will in
such capacity verify that in the aggregate the investments of each Multi-Managed
Portfolio comply with applicable percentage limitations. The investment policies
relating to each Managed Component are described below.
SUNAMERICA/AGGRESSIVE GROWTH COMPONENT
This component is intended to represent 20% and 18% of the assets in the
Multi-Managed Growth and Moderate Growth Portfolios, respectively. Neither the
Multi-Managed Income/Equity nor Income Portfolio will have a
SunAmerica/aggressive growth component. In managing this component, SunAmerica
will generally invest a significant portion of the component's total assets in
the equity securities of small, lesser known or new growth companies or
industries, such as telecommunications, media and biotechnology. Such "Small
Cap" companies will typically have market capitalizations of under $1 billion
and have achieved, or be expected to achieve, growth or earnings over various
major business cycles. SunAmerica may also invest the component's assets in the
equity securities of medium-sized companies ("Mid-Cap" companies) with market
capitalizations of $1 billion to $5 billion. The SunAmerica/aggressive growth
component may be invested in securities issued
2
<PAGE>
by well known and established domestic or foreign companies, as well as in newer
and less-seasoned companies. Such securities may be listed on an exchange or
traded over-the-counter. See "Investment Techniques and Risk Factors."
The Adviser may, under normal circumstances, invest up to 35% of the
SunAmerica/aggressive growth component's total assets in debt securities that
have the potential for capital appreciation due to anticipated market
conditions. The Adviser may invest the assets of the SunAmerica/aggressive
growth component in securities rated as low as "BBB." See "Investment Techniques
and Risk Factors" and the Statement of Additional Information.
JANUS/GROWTH COMPONENT
This component is intended to represent 40%, 28%, 18% and 8% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, Janus will invest primarily in common
stocks (of both U.S. and foreign issuers) selected for their growth potential.
The Subadviser generally takes a "bottom up" approach to building the portfolio.
In other words, the Subadviser generally seeks to identify individual companies
with earnings growth potential that may not be recognized by the market at
large. Although themes may emerge, securities are generally selected without
regard to any defined industry sector or other similarly defined selection
procedure. Realization of income is not a significant investment consideration.
Any income realized on investments will be incidental.
The Subadviser may invest the assets of the Janus/ growth component to a lesser
degree in other types of U.S. and foreign securities, including preferred stock,
warrants, convertible securities and corporate and government fixed income
securities, including up to 35% of the Janus/growth component's net assets in
high-yield/ high-risk securities rated below Baa by Moody's or BBB by S&P, or
unrated bonds determined by the Subadviser to be of comparable quality (I.E.,
"junk bonds"). See "Investment Techniques and Risk Factors." See also the
Statement of Additional Information for a description of securities ratings.
Such securities may offer growth potential because of anticipated changes in
interest rates, credit standing, currency relationships or other factors.
SUNAMERICA/BALANCED COMPONENT
This component is intended to represent 20%, 18%, 28% and 17% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, SunAmerica has the flexibility to
select among different types of investments for capital growth and income and
may alter the composition of the investment portfolio as economic and market
trends change. The Adviser considers both the opportunity for gain and the risk
of loss in making investments. The Adviser anticipates that the investment
portfolio of the SunAmerica/balanced component, over the long term, will consist
of equity investments in the form of common and preferred stocks, warrants and
other rights, as well as long-term bonds and other debt securities such as
convertible securities, short-term debt securities and U.S. government
securities. The Adviser may cause this component to invest in both U.S. and
foreign securities. See "Investment Techniques and Risk Factors."
In selecting equity investments, the Adviser typically seeks companies of medium
to large capitalizations (generally $1 billion or more) which, based on their
future prospects or opportunities, are believed to be undervalued in the
marketplace. The Adviser intends to limit investments in companies with market
capitalizations of less than $1 billion to 20% of the SunAmerica/ balanced
component's total assets. See "Investment Techniques and Risk Factors."
In selecting debt investments, the Adviser is primarily concerned with
determining the most appropriate time to buy and sell debt securities. The
Adviser seeks debt securities with longer maturities during periods of
anticipated lower interest rates and shorter-term debt securities when interest
rates are expected to rise. The Adviser generally selects long-term debt
securities from high quality bonds (rated AA or higher, or determined by the
Adviser to be of equivalent quality if unrated) that offer income and capital
gains. The Adviser may also invest in high quality, short-term debt securities
(such as commercial paper rated A-1 or Prime-1, or determined by the Adviser to
be of equivalent quality if unrated). However, the Adviser may invest up to 10%
of the value of the component's total assets (measured at the time of
investment) in securities rated as low as BBB (or determined by the Adviser to
be of equivalent quality if unrated). See "Investment Techniques and Risk
Factors." See also the Statement of Additional Information for a description of
securities ratings.
3
<PAGE>
Under normal circumstances, the "neutral" equity/debt weightings for the
SunAmerica/balanced component will be 70% / 30% for the Multi-Managed Growth and
Moderate Growth Portfolios, and 50% / 50% for the Multi-Managed Income/Equity
and Income Portfolios. This means that at least 30% of the total assets of the
SunAmerica/balanced component of the Multi-Managed Growth and Moderate Growth
Portfolios, and at least 50% of the total assets of the SunAmerica/balanced
component of the Multi-Managed Income/Equity and Income Portfolios, will
normally be invested in fixed income securities; however, such investments may
exceed such percentages when the Adviser believes such an adjustment in
portfolio mix to be necessary in order to conserve principal, such as in
anticipation of a decline in the equities market.
WMC/FIXED INCOME COMPONENT
This component is intended to represent 20%, 36%, 54% and 75% of the assets in
the Multi-Managed Growth, Moderate Growth, Income/Equity and Income Portfolios,
respectively. In managing this component, WMC will invest primarily in a
portfolio of fixed income securities of varying maturities and risk/return
characteristics. The types of fixed income securities in which the Subadviser
may invest include the following: obligations issued or guaranteed by the U.S.
government, its agencies and instrumentalities, U.S. and foreign corporate and
other debt obligations, mortgage-backed securities including CMOs, asset-backed
securities, preferred stock, convertible securities, obligations of foreign
governments or their subdivisions, agencies or instrumentalities, obligations of
supranational and quasi-governmental entities, commercial paper, certificates of
deposit, money market instruments, foreign currency exchange-related securities
and loan participations. See "Investment Techniques and Risk Factors."
The Subadviser may invest up to 20% of the WMC/fixed income component's assets
in securities rated below Baa by Moody's or BBB by S&P and no more than 10% of
the net assets of the WMC/fixed income component in bonds rated as low as C by
Moody's or D by S&P (or, in each case, if not rated, determined by the
Subadviser to be of comparable quality) (I.E., "junk bonds"). Any subsequent
change in a rating to a security which is assigned by any rating service, or
change in the percentage of assets invested in certain securities or other
instruments resulting from market fluctuations or other changes in the net
assets, will not require the Subadviser to dispose of an investment. In the
event that ratings services assign different ratings to the same securities, the
Subadviser will determine which rating it believes best reflects the security's
quality and risk at the time which may be the higher of the several assigned
ratings. See "Investment Techniques and Risk Factors." See also the Statement of
Additional Information for a description of securities ratings.
ASSET ALLOCATION: DIVERSIFIED GROWTH PORTFOLIO
The Asset Allocation: Diversified Growth Portfolio seeks to achieve its
objective of capital appreciation through a strategic allocation of
approximately 80% (with a range of 65-95%) of its assets to an "equity class" of
securities and approximately 20% (with a range of 5-35%) of its assets to a
"fixed income class" of securities. The percentage limitations are applied at
the time of purchase. The Portfolio may also select other investments that do
not fall within these two asset classes, including cash and cash equivalents. A
significant portion of both the equity class and fixed income class may consist
of foreign securities. See "Investment Techniques and Risk Factors."
The "equity class" consists of a diversified portfolio of equity securities that
Putnam believes have the potential for capital appreciation. This includes
equity securities of companies with market capitalizations of over $1 billion
that the Subadviser believes have potential for capital appreciation due to
above-average earnings growth or are undervalued at the time of purchase, equity
securities of smaller, less well-known companies and equity securities
principally traded on foreign equity markets. In selecting equity securities the
Subadviser will consider, among other things, an issuer's financial strength,
competitive position and projected future earnings and dividends. Although
common stocks are normally the main type of equity investment, the Portfolio may
also purchase preferred stocks, convertible securities, warrants and other
equity-type securities. See "Investment Techniques and Risk Factors."
The "fixed income class" consists of a diversified portfolio of fixed income
securities, including both U.S. and foreign government obligations and corporate
obligations. The Subadviser may take advantage of the entire range of fixed
income securities and may adjust the average maturity of the Portfolio's
holdings from time to time depending on its assessment of relative yields on
securities of different maturities and its expectation of future changes in
interest rates. The Portfolio may invest up to 20% of its total assets in
securities rated below Baa by Moody's and BBB by S&P including no more than 5%
of its total assets in bonds rated at the time of purchase below Caa by Moody's
and CCC by S&P (or, in each case, if not rated,
4
<PAGE>
determined by the Subadviser to be of comparable quality) (I.E., "junk bonds").
See "Investment Techniques and Risk Factors." See also the Statement of
Additional Information for a description of securities ratings.
STOCK PORTFOLIO
The Stock Portfolio seeks to achieve its investment objective of long-term
capital appreciation and, secondarily, increasing dividend income through
investment primarily in well-established growth companies. In managing this
Portfolio, T. Rowe Price will invest, under normal circumstances, at least 65%
of the Portfolio's total assets in the common stocks of a diversified group of
growth companies. The companies in which the Stock Portfolio invests normally
(but not always) pay dividends, which are generally expected to rise in future
years as earnings increase. Most of the Portfolio's assets will be invested in
U.S. common stocks; however, a significant portion of the Portfolio may be
invested in foreign securities from time to time. See "Investment Techniques and
Risk Factors."
The theory of growth stock investing, which is followed by the Subadviser in
managing this Portfolio, is based on the premise that inflation represents a
more serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. In the opinion of the Subadviser, when a company's
earnings grow faster than both inflation and the economy in general, the market
will eventually reward its long-term earnings growth with a higher stock price.
In addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that during periods of
adverse economic and market conditions, stock prices may fall despite favorable
earnings trends.
Growth stocks can be volatile for several reasons. Since the issuers usually
reinvest a high portion of earnings in their own businesses, growth stocks may
lack the comfortable dividend yield associated with value stocks that can
cushion total return in a bear market. Also, growth stocks normally carry a
higher price/earnings ratio than many other stocks. Consequently, if earnings
expectations are not met, investors often punish growth stocks inordinately.
However, the market frequently rewards growth stocks with price increases when
expectations are met or exceeded.
INVESTMENT TECHNIQUES AND RISK FACTORS
Unless otherwise specified, each Portfolio, including each Managed Component of
the Multi-Managed Portfolios, may invest in the following securities. As used
herein, the term "Manager" shall mean either the Adviser and/or a Subadviser
(including Putnam and T. Rowe Price), as the case may be. Also, the stated
percentage limitations are applied to an investment at the time of purchase
unless indicated otherwise.
CONVERTIBLE SECURITIES, PREFERRED STOCKS, WARRANTS AND RIGHTS -- Convertible
securities may be debt securities or preferred stock with a conversion feature.
Traditionally, convertible securities have paid dividends or interest at rates
higher than common stocks but lower than non-convertible securities. They
generally participate in the appreciation or depreciation of the underlying
stock into which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed which combine higher or lower current income
with options and other features. Generally, preferred stock has a specified
dividend and ranks after bonds and before common stocks in its claim on income
for dividend payments and on assets should the company be liquidated. While most
preferred stocks pay a dividend, a Portfolio may purchase preferred stock where
the issuer has omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential. Warrants are options to buy a stated number of shares of common stock
at a specified price any time during the life of the warrants (generally two or
more years). Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.
INVESTMENT IN SMALL CAP COMPANIES -- The SunAmerica/aggressive growth component
of the Multi-Managed Growth and Moderate Growth Portfolios will, and the Asset
Allocation: Diversified Growth Portfolio, Stock Portfolio and other Managed
Components of the Multi-Managed Portfolios may, invest in small companies having
market capitalizations of under $1 billion. It may be difficult to obtain
reliable information and financial data on such companies and the securities of
these small companies may not be readily marketable, making it difficult to
dispose of shares when desirable. Securities of small or emerging growth
companies may be subject to more abrupt or erratic market movements than larger,
more established companies or the market
5
<PAGE>
average in general. A risk of investing in smaller, emerging companies is that
they often are at an earlier stage of development and therefore have limited
product lines, market access for such products, financial resources and depth in
management than larger, more established companies, and their securities may be
subject to more abrupt or erratic market movements than securities of larger,
more established companies or the market averages in general. In addition,
certain smaller issuers may face difficulties in obtaining the capital necessary
to continue in operation and may go into bankruptcy, which could result in a
complete loss of an investment. Smaller companies also may be less significant
factors within their industries and may have difficulty withstanding competition
from larger companies. While smaller companies may be subject to these
additional risks, they may also realize more substantial growth than larger,
more established companies.
FOREIGN SECURITIES -- The Asset Allocation: Diversified Growth Portfolio may
invest up to 60% of its total assets, the Stock Portfolio may invest up to 30%
of its total assets, the SunAmerica/balanced component of each Multi-Managed
Portfolio may invest up to 25% of its total assets, the WMC/fixed income
component of each Multi-Managed Portfolio may invest up to 15% of its total
assets, and the Janus/growth and SunAmerica/ aggressive growth components of
each Multi-Managed Portfolio may invest without limitation, in foreign
securities.
Each Portfolio may also invest in U.S. dollar denominated securities of foreign
issuers, including American Depositary Receipts (ADRs), as well as European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other similar
securities convertible into securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities into which
they may be converted. The WMC/ fixed income component may invest in U.S. dollar
denominated foreign debt securities without limitation. Each Portfolio also may
invest in securities denominated in European Currency Units (ECUs). An ECU is a
"basket" consisting of specified amounts of currencies of certain of the twelve
member states of the European Community. In addition, the Portfolios may invest
in securities denominated in other currency "baskets." See the Statement of
Additional Information for a further discussion of these types of securities.
RISKS OF FOREIGN SECURITIES. Foreign investments may be affected favorably or
unfavorably by changes in currency rates and exchange-control regulations and
costs will be incurred in connection with conversions between various
currencies. The value of a security may fluctuate as a result of currency
exchange rates in a manner unrelated to the underlying value of the security.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies may be less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the U.S. In addition, there is generally less governmental regulation of
stock exchanges, brokers and listed companies abroad than in the U.S.
Investments in foreign securities may also be subject to other risks, different
from those affecting U.S. investments, including local political or economic
developments, expropriation or nationalization of assets, confiscatory taxation
and imposition of withholding taxes on income from sources within such
countries.
EMERGING MARKETS. Investments may be made from time to time in issuers
domiciled in, or government securities of, developing countries or emerging
markets as well as developed 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. Historical experience indicates that the
markets of developing countries or emerging markets have been more volatile than
the markets of developed countries; however, such markets can provide higher
rates of return to investors. Investment in an emerging market country may
involve certain risks, including a less diverse and mature economic structure, a
less stable political system, an economy based on only a few industries or
dependent on international aid or development assistance, the vulnerability to
local or global trade conditions, extreme debt burdens, or volatile inflation
rates. To the extent the WMC/fixed income component of a Portfolio invests in
the debt securities of issuers domiciled in emerging market countries, these
investments will be included in the 20% limitation on high yield-bonds.
FOREIGN CURRENCY TRANSACTIONS. Each Portfolio has the ability to hold a portion
of its assets in foreign currencies and to enter into forward foreign currency
exchange contracts. It may also purchase and sell exchange-traded futures
contracts relating to foreign currency and purchase and sell put and call
options on currencies and futures contracts.
6
<PAGE>
Each Portfolio may enter into forward foreign currency exchange contracts to
reduce the risks of fluctuations in exchange rates; however, these contracts
cannot eliminate all such risks and do not eliminate fluctuations in the prices
of the Portfolio's portfolio securities.
Each Portfolio may purchase and write put and call options on currencies for the
purpose of protecting against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on currency will constitute only a partial hedge, up to
an amount of the premium received. A Portfolio could be required to purchase or
sell currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on currency may constitute an effective hedge against
exchange rate fluctuations; however, in the event of exchange rate movements
adverse to a Portfolio's position, the Portfolio may forfeit the entire amount
of the premium plus related transaction costs. As with other kinds of option
transactions, however, the writing of an option on currency will constitute only
a partial hedge, up to the amount of the premium received, and a Portfolio could
be required to purchase or sell currencies at disadvantageous exchange rates,
thereby incurring losses.
Each Portfolio may enter into forward foreign currency exchange contracts,
currency options and currency swaps for non-hedging purposes when a Manager
anticipates that a foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities or are not included in such portfolio. The Portfolio may use
currency contracts and options to cross-hedge, which involves selling or
purchasing instruments in one currency to hedge against changes in exchange
rates for a different currency with a pattern of correlation. To limit any
leverage in connection with currency contract transactions for non-hedging
purposes, a Portfolio will segregate cash or liquid securities in an amount
sufficient to meet its payment obligations in these transactions or otherwise
"cover" the obligation. Initial margin deposits made in connection with currency
futures transactions or premiums paid for currency options traded
over-the-counter or on a commodities exchange may each not exceed 5% of a
Portfolio's total assets in the case of non-bona fide hedging transactions.
Each Portfolio may enter into currency swaps. Currency swaps involve the
exchange by a Portfolio with another party of their respective rights to make or
receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Portfolio will maintain in a
segregated account with the its custodian cash or liquid securities equal to the
net amount, if any, of the excess of the Portfolio's obligations over its
entitlements with respect to swap transactions. To the extent that the net
amount of a swap is held in a segregated account consisting of cash or liquid
securities, the Trust believes that swaps do not constitute senior securities
under the 1940 Act and, accordingly, they will not be treated as being subject
to the Portfolio's borrowing restrictions. The use of currency swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If a
Manager is incorrect in its forecasts of market values and currency exchange
rates, the investment performance of a Portfolio would be less favorable than it
would have been if this investment technique were not used.
FIXED INCOME SECURITIES -- Fixed income securities are broadly characterized as
those that provide for periodic payments to the holder of the security at a
stated rate. Most fixed income securities, such as bonds, represent indebtedness
of the issuer and provide for repayment of principal at a stated time in the
future. Others do not provide for repayment of a principal amount, although they
may represent a priority over common stockholders in the event of the issuer's
liquidation. Many fixed income securities are subject to scheduled retirement,
or may be retired or "called" by the issuer prior to their maturity dates. The
interest rate on certain fixed income securities, known as "variable rate
obligations," is determined by reference to or is a percentage of an objective
standard, such as a bank's prime rate, the 90-day Treasury bill rate, or the
rate of return on commercial paper or bank certificates of deposit, and is
periodically adjusted. Certain variable rate obligations may have a demand
feature entitling the holder to resell the securities at a predetermined amount.
The interest rate on certain fixed income securities, called "floating rate
instruments," changes whenever there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely with the
level of interest rates -- when interest rates rise, their values will tend to
decline; when interest rates decline, their values generally will tend to rise.
The potential for capital appreciation with
7
<PAGE>
respect to variable rate obligations or floating rate instruments will be less
than with respect to fixed-rate obligations. Long-term instruments are generally
more sensitive to these changes than short-term instruments. The market value of
fixed income securities and therefore their yield are also affected by the
perceived ability of the issuer to make timely payments of principal and
interest.
U.S. GOVERNMENT SECURITIES -- Securities guaranteed by the U.S. government
include the following: (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 (such as Government National
Mortgage Association certificates and Federal Housing Administration
debentures). For these securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. government. They are of the highest
possible credit quality. These securities are subject to variations in market
value due to fluctuations in interest rates, but if held to maturity, are
guaranteed by the U.S. government to be paid in full.
Securities issued by U.S. government instrumentalities and certain federal
agencies are neither direct obligations of, nor are they guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another. For
example, 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. These agencies and instrumentalities include, but are
not limited to, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan
Banks.
CORPORATE DEBT INSTRUMENTS -- These instruments, such as bonds, represent the
obligation of the issuer to repay a principal amount of indebtedness at a stated
time in the future and, in the usual case, to make periodic interim payments of
interest at a stated rate.
Investment Grade -- A designation applied to intermediate and long-term
corporate debt securities rated within the highest four rating categories
assigned by a nationally recognized statistical rating organization such as,
for example, S&P (AAA, AA, A or BBB) or by Moody's (Aaa, Aa, A or Baa), or,
if unrated, considered by the Manager to be of comparable quality. The
ability of the issuer of an investment grade debt security to pay interest
and to repay principal is considered to vary from extremely strong (for the
highest ratings) through adequate (for the lowest ratings given above),
although the lower-rated investment grade securities may be viewed as having
speculative elements as well.
Lower Grade -- A designation applied to intermediate and long-term corporate
debt securities that are not investment grade; commonly referred to as "junk
bonds". These include bonds rated below BBB by S&P, and Baa by Moody's, or
which are unrated but considered by the Subadviser to be of equivalent
quality. These securities are considered speculative. See the Statement of
Additional Information for a complete description of bond ratings. The Stock
Portfolio and the SunAmerica/aggressive growth and SunAmerica/balanced
components of the Multi-Managed Portfolios will not invest in these types of
securities.
RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS -- High-yield, high-risk
bonds are subject to greater fluctuations in value than are higher rated bonds
because the values of high-yield bonds tend to reflect short-term corporate,
economic and market developments and investor perceptions of the issuer's credit
quality to a greater extent. Although under normal market conditions longer-term
securities yield more than shorter-term securities, they are subject to greater
price fluctuations. Fluctuations in the value of a Portfolio's investments will
be reflected in its net asset value per share. The growth of the high-yield bond
market paralleled a long economic expansion, followed by an economic downturn
which severely disrupted the market for high-yield bonds and adversely affected
the value of outstanding bonds and the ability of the issuers to repay principal
and interest. The economy may affect the market for high-yield bonds in a
similar fashion in the future including an increased incidence of defaults on
such bonds. From time to time, legislation may be enacted which could have a
negative effect on the market for high-yield bonds.
High-yield bonds present the following risks:
Sensitivity to Interest Rate and Economic Changes -- High-yield, high-risk bonds
are very sensitive to adverse economic changes and corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience
8
<PAGE>
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 Portfolio 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 therefore yields) of high-
yield bonds and the Portfolio'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 Manager would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors.
Conversely, a high-yield bond's value will decrease in a rising interest rate
market, as will the value of the Portfolio's assets. If the Portfolio
experiences unexpected net redemptions, this may force it to sell high-yield
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing the Portfolio's
rate of return.
Liquidity and Valuation -- There may be little trading in the secondary market
for particular bonds, which may affect adversely a Portfolio's ability to value
accurately or dispose of such bonds. Under such circumstances, the task of
accurate valuation becomes more difficult and judgment would play a greater role
due to the relative lack of reliable and objective data. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of high-yield bonds, especially in a thin market. The
Managers attempt to reduce these risks through diversification of the assets
under its control and by credit analysis of each issuer, as well as by
monitoring broad economic trends and corporate and legislative developments. If
a high-yield bond previously acquired by a component is downgraded, the
Managers, as appropriate, will evaluate the security and determine whether to
retain or dispose of it.
Credit Ratings -- Cedit ratings evaluate the safety of principal and interest
payments and not the risk of fluctuations in market value of high-yield,
high-risk bonds. The success of a Portfolio's investment in such bonds may be
more dependent on the credit analysis of the Adviser or Subadviser than is the
case for higher quality bonds.
ASSET-BACKED SECURITIES -- These securities represent an interest in a pool of
consumer or other types of loans ("asset-backed securities"). Payments of
principal and interest on the underlying loans are passed through to the holders
of asset-backed securities over the life of the securities. See the Statement of
Additional Information. Janus will not cause the Janus/growth component of any
Multi-Managed Portfolio to invest more than 25% of its total assets in
mortgage-and asset-backed securities.
ZERO COUPON BONDS, STEP-COUPON BONDS, DEFERRED INTEREST BONDS AND PIK
BONDS. Fixed income securities in which a Portfolio may invest also include
zero coupon bonds, step-coupon bonds, deferred interest bonds and bonds on which
the interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued or purchased at a significant
discount from face value. A step-coupon bond is one in which a change in
interest rate is fixed contractually in advance. PIK bonds are debt obligations
which provide that the issuer thereof may, at its option, pay interest on such
bonds in cash or in the form of additional debt obligations. Such investments
may experience greater volatility in market value due to changes in interest
rates and other factors than debt obligations which make regular payments of
interest. A Portfolio will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities under disadvantageous circumstances to
satisfy the Portfolio's distribution obligations. Janus will not cause the
Janus/growth component of any Multi-Managed Portfolio to invest more than 10% of
its total assets in zero coupon bonds, step-coupon bonds, deferred interest
bonds and PIK bonds.
SHORT-TERM AND TEMPORARY DEFENSIVE INVESTMENTS -- In addition to their primary
investments, each Portfolio may also invest up to 25% of its total assets in
both U.S. and non-U.S. dollar denominated money market instruments for reasons
which may include (a) liquidity purposes (to meet redemptions and expenses) or
(b) to generate a return on idle cash held by a Portfolio during periods when a
Manager is unable to locate favorable investment opportunities. In order to
facilitate quarterly rebalancing of the Portfolios as described above and to
adjust for the flow of investments into and out of the Portfolios, each
Portfolio may hold a greater percentage of its assets in cash or cash
equivalents at the end of each quarter than might otherwise be the case. For
temporary defensive purposes, each Portfolio may invest up to 100% of its total
9
<PAGE>
assets in cash and short term fixed income securities, including corporate debt
obligations and money market instruments rated in one of the two highest
categories by a nationally recognized statistical rating organization (or
determined by the Manager to be of equivalent quality). Money market instruments
may include, for all Portfolios, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, repurchase agreements, commercial
paper, bankers' acceptances, time deposits and certificates of deposit. In
addition, Janus may invest idle cash of the Janus/growth component of each
Multi-Managed Portfolio in money market mutual funds that it manages. Such an
investment may entail additional fees for the Multi-Managed Portfolios. See the
Statement of Additional Information for a description of short-term debt
securities and the Appendix to the Statement of Additional Information for a
description of securities ratings.
REPURCHASE AGREEMENTS -- Under these types of agreements, a Portfolio buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain appropriate
collateral with the Trust's custodian (or at an appropriate sub-custodian in the
case of tri-or quad-party repurchase agreements). A Portfolio will only enter
into repurchase agreements involving securities in which it could otherwise
invest and with selected banks and securities dealers whose financial condition
is monitored by the Manager, subject to the guidance of the Board of Trustees.
If the seller under the repurchase agreement defaults, the Portfolio 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,
realization of the collateral by the Portfolio may be delayed or limited.
HEDGING AND INCOME ENHANCEMENT STRATEGIES -- Each Portfolio may write covered
calls to enhance income. After writing such a covered call up to 10% of a
Portfolio's total assets may be subject to calls. All such calls written by a
Portfolio must be "covered" while the call is outstanding (I.E., the Portfolio
must own the securities subject to the call or other securities acceptable for
applicable escrow requirements). For hedging purposes or income enhancement,
each Portfolio may use interest rate futures, and stock and bond index futures,
including futures on U.S. government securities (together, "Futures"); forward
contracts on foreign currencies; and call and put options on equity and debt
securities, Futures, stock and bond indices and foreign currencies (all of the
foregoing are referred to as "Hedging Instruments"). In addition, the Asset
Allocation: Diversified Growth Portfolio may use Futures in order to adjust its
exposure to various equity or fixed income markets or as a substitute for
investment in underlying cash markets. All puts and calls on securities,
interest rate futures or stock and bond index futures or options on such Futures
purchased or sold by a Portfolio will normally either (1) be listed on a
national securities or commodities exchange or (2) on over-the-counter markets.
However, the Asset Allocation: Diversified Growth Portfolio and the Janus/growth
component of each Multi-Managed Portfolio may buy and sell options and Futures
on foreign equity indexes and foreign fixed income securities. Because the
markets for these instruments are relatively new and still developing, the
ability of the Asset Allocation: Diversified Growth Portfolio and the
Janus/growth component of each Multi-Managed Portfolio to engage in such
transactions may be limited.
Each Portfolio may use spread transactions for any lawful purpose consistent
with the Portfolio's investment objective such as hedging or managing risk, but
not for speculation. A Portfolio may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Portfolio the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the
Portfolio does not own, but which is used as a benchmark. The risk to a
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect a Portfolio against adverse changes in
prevailing credit quality spreads, I.E., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
SPECIAL RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES. Participation in
the options or Futures markets and in currency exchange transactions involves
investment risks and transaction costs to which a Portfolio would not be subject
absent the use of these strategies. If the Manager's predictions of movements in
the direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to a Portfolio may leave the Portfolio in a
worse position than if such strategies were not used. Risks inherent in the use
of options, foreign currency and Futures contracts and options on Futures
contracts include (1) dependence on the Manager's ability to
10
<PAGE>
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and Futures contracts and options thereon and movements in the prices of
the securities or currencies being hedged; (3) the fact that skills needed to
use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Portfolio to purchase or sell a portfolio security at a time
that otherwise would be favorable for it to do so, or the possible need for the
Portfolio to sell a portfolio security at a disadvantageous time, due to the
need for the Portfolio to maintain "cover" or to segregate securities in
connection with hedging transactions. A transaction is "covered" when the
Portfolio owns the security subject to the option on such security, or some
other security acceptable for applicable escrow requirements. See the Statement
of Additional Information for further information concerning income enhancement
and hedging strategies and the regulation requirements relating thereto.
ILLIQUID AND RESTRICTED SECURITIES -- No more than 15% of the value of a
Portfolio's net assets may be invested in securities which are illiquid,
including repurchase agreements that have a maturity of longer than seven days,
interest rate swaps, currency swaps, caps, floors and collars. For this purpose,
not all securities which are restricted are deemed to be illiquid. For example,
restricted securities which the Board of Trustees, or the Manager pursuant to
guidelines established by the Board of Trustees, has determined to be
marketable, such as securities eligible for sale under Rule 144A promulgated
under the Securities Act of 1933, as amended, or certain private placements of
commercial paper issued in reliance on an exemption from such Act pursuant to
Section 4(2) thereof, may be deemed to be liquid for purposes of this
restriction. This investment practice could have the effect of increasing the
level of illiquidity in the Portfolio to the extent that qualified institutional
buyers (as defined in Rule 144A) become for a time uninterested in purchasing
these restricted securities. In addition, a repurchase agreement which by its
terms can be liquidated before its nominal fixed-term on seven days or less
notice is regarded as a liquid instrument. Subject to the applicable limitation
on illiquid securities investments, a Portfolio may acquire securities issued by
the U.S. government, its agencies or instrumentalities in a private placement.
See "Illiquid Securities" in the Statement of Additional Information for a
further discussion of investments in such securities.
HYBRID INSTRUMENTS -- These instruments, including indexed or structured
securities, can combine the characteristics of equity or debt securities,
futures, and options. For example, the principal amount, redemption, or
conversion terms of a security could be related to the market price of some
commodity, currency, or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under certain
conditions, the redemption (or sale) value of such an investment could be zero.
See the Statement of Additional Information for a further discussion of these
types of securities.
BORROWING -- As a matter of fundamental policy each Portfolio is authorized to
borrow up to 33 1/3% of its total assets from banks for temporary or emergency
purposes. Notwithstanding the foregoing, pursuant to California Department of
Insurance borrowing guidelines, each Portfolio may only borrow up to 25% of its
net assets for temporary or emergency purposes.
In seeking to enhance investment performance, each of the Multi-Managed Growth
and Moderate Growth Portfolios, through its SunAmerica/aggressive growth
component, may borrow money for investment purposes and may pledge assets to
secure such borrowings. This is the speculative factor known as leverage. This
practice may help increase the net asset value of the assets allocated to this
Managed Component in an amount greater than would otherwise be the case when the
market values of the securities purchased through borrowing increase. In the
event the return on an investment of borrowed monies does not fully recover the
costs of such borrowing, the value of the component's assets would be reduced by
a greater amount than would otherwise be the case. The effect of leverage will
therefore tend to magnify the gains or losses to the component as a result of
investing the borrowed monies. During periods of substantial borrowings, the
value of the component's assets would be reduced due to the added expense of
interest on borrowed monies. Each of the Multi-Managed Growth and Moderate
Growth Portfolios is authorized to borrow, and to pledge assets to secure such
borrowings, up to the maximum extent permissible under the 1940 Act (I.E.,
presently 50% of net assets); provided, that such limitation will be calculated
with respect to the net assets allocated to the SunAmerica/aggressive growth
component of such Multi-Managed Portfolio. The time and extent to which the
SunAmerica/aggressive growth
11
<PAGE>
component may employ leverage will be determined by the Adviser in light of
changing facts and circumstances, including general economic and market
conditions, and will be subject to applicable lending regulations of the Board
of Governors of the Federal Reserve Board.
SECURITIES LENDING -- Each Portfolio may lend portfolio securities in amounts up
to 10% of its respective total assets to brokers, dealers and other financial
institutions, provided such loans are callable at any time by the Portfolio and
are at all times secured by cash or equivalent collateral. By lending its
portfolio securities, a Portfolio will receive income while retaining the
securities' potential for capital appreciation. As with any extensions of
credit, there are risks of delay in recovery and, in some cases, even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Manager to be creditworthy. The proceeds of such loans will be invested
in high-quality short-term debt securities, including repurchase agreements.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD TRANSACTIONS -- These generally
involve the purchase of a security with payment and delivery at some time in the
future -- I.E., beyond normal settlement. A Portfolio does not earn interest on
such securities until settlement and bears the risk of market value fluctuations
in between the purchase and settlement dates. New issues of stocks and bonds,
private placements and U.S. government securities may be sold in this manner.
One form of when-issued or delayed delivery security that the Asset Allocation:
Diversified Growth Portfolio and the WMC/fixed income component of each Multi-
Managed Portfolio may purchase is a "to be announced" or "TBA" mortgage-backed
security. A TBA mortgage-backed security transaction arises when a
mortgage-backed security is purchased or sold with the specific pools to be
announced on a future settlement date.
SHORT SALES -- Each of the Multi-Managed Growth and Moderate Growth Portfolios,
through its SunAmerica/ aggressive growth component, may sell a security it does
not own in anticipation of a decline in the market value of that security (short
sales). To complete such a transaction, a Multi-Managed Portfolio must borrow
the security to make delivery to the buyer. The Multi-Managed Portfolio then is
obligated to replace the security borrowed by purchasing it at market price at
the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Multi-Managed Portfolio. Until the
security is replaced, the Multi-Managed Portfolio is required to pay to the
lender any dividends or interest which accrue during the period of the loan. To
borrow the security, the Multi-Managed Portfolio also may be required to pay a
premium, which would increase the cost of the security sold. The proceeds of the
short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. Until the
Multi-Managed Portfolio replaces a borrowed security, the Multi-Managed
Portfolio will maintain daily a segregated account, containing cash or liquid
securities, at such a level that (i) the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current value
of the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time it was sold short. A
Multi-Managed Portfolio will incur a loss as a result of the short sale if the
price of the security increases between the date of the short sale and the date
on which the Multi-Managed Portfolio replaces the borrowed security. A
Multi-Managed Portfolio will realize a gain if the security declines in price
between those dates. This result is the opposite of what one would expect from a
cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Multi-Managed Portfolio may be required to pay in
connection with a short sale.
Each Portfolio may make "short sales against the box." A short sale is against
the box to the extent that the Portfolio contemporaneously owns, or has the
right to obtain without payment, the same securities or securities substantially
similar to those sold short. A Portfolio may not enter into a short sale,
including a short sale against the box, if, as a result, more than 25% of its
net assets would be subject to such short sales.
SPECIAL SITUATIONS -- A "special situation" arises when, in the opinion of the
Manager, the securities of a particular issuer will be recognized and appreciate
in value due to a specific development with respect to that issuer. Developments
creating a special situation might include, among others, a new product or
process, a technological breakthrough, a management change or other
extraordinary corporate event, or differences in market supply of and demand for
the security. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
12
<PAGE>
FUTURE DEVELOPMENTS -- Each Portfolio may invest in securities and other
instruments which do not presently exist but may be developed in the future,
provided that each such investment is consistent with the Portfolio's investment
objectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Prospectus will be amended or supplemented as
appropriate to discuss any such new investments.
See the Statement of Additional Information for further information concerning
these and other types of securities and investment techniques in which the
Portfolios may from time to time invest, including dollar rolls, standby
commitments and reverse repurchase agreements.
MANAGEMENT
TRUSTEES -- The Trust's Board of Trustees is responsible for the overall
supervision of the operations of the Trust and performs various duties imposed
on trustees of investment companies by the 1940 Act. The Board has retained
others to provide certain services to the Trust.
INVESTMENT ADVISER -- The Trust, on behalf of each Portfolio, entered into an
Investment Advisory and Management Agreement (the "Management Agreement") with
SunAmerica to handle the Trust's day-to-day affairs, to provide investment
advisory services, office space, and other facilities for the management of the
affairs of the Trust, and to pay the compensation of certain officers of the
Trust who are affiliated persons of SunAmerica. The Management Agreement
authorizes SunAmerica to retain one or more Subadvisers to make the investment
decisions for the Portfolios, and to place the purchase and sale orders for
portfolio transactions. SunAmerica has hired the Subadvisers described below to
manage the Asset Allocation: Diversified Growth Portfolio, the Stock Portfolio
and two of the Managed Components of each of the Multi-Managed Portfolios.
SunAmerica, in consultation with one or more SunAmerica affiliates, monitors the
activities of the Subadvisers, and from time to time will recommend the
replacement of a Subadviser on the basis of investment performance or other
considerations.
SunAmerica may terminate any Subadvisory Agreement without shareholder approval.
Moreover, SunAmerica has obtained an exemptive order from the Securities and
Exchange Commission which would permit SunAmerica, subject to certain
conditions, to enter into Subadvisory Agreements relating to the Trust with
Subadvisers approved by the Board without obtaining shareholder approval. The
exemptive order would also permit SunAmerica, subject to the approval of the
Board but without shareholder approval, to employ new Subadvisers for new or
existing Portfolios, change the terms of particular Subadvisory Agreements or
continue the employment of existing Subadvisers after events that would
otherwise cause an automatic termination of a Subadvisory Agreement.
Shareholders of a Portfolio have the right to terminate such agreements for such
Portfolio at any time by a vote of the majority of the outstanding voting
securities of such Portfolio. Shareholders will be notified when SunAmerica
intends to commence relying on the exemptive order, and would be notified of any
Subadviser changes effected thereafter.
SunAmerica, located at The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204, is a corporation organized in 1982 under the laws of the State
of Delaware. SunAmerica is an indirect, wholly owned subsidiary of the Life
Company, which is an indirect subsidiary of SunAmerica Inc., an investment-grade
financial services company. SunAmerica is engaged in providing investment advice
and management services to the Trust, other mutual funds and pension funds. In
addition to serving as adviser to the Trust, the Adviser and its affiliates
serve as adviser, manager and/ or administrator for Anchor Pathway Fund, Anchor
Series Trust, Style Select Series, Inc., SunAmerica Equity Funds, SunAmerica
Income Funds, SunAmerica Money Market Funds, Inc. and SunAmerica Series Trust.
The Adviser and its affiliates managed, advised and/or administered assets in
excess of $8.5 billion as of December 31, 1996 for investment companies,
individuals, pension accounts, and corporate and trust accounts.
Pursuant to the Management Agreement entered into between the Adviser and the
Trust, on behalf of each Portfolio, each Portfolio pays the Adviser a fee,
payable monthly, computed daily at the annual rates of .89% of Assets for the
Multi-Managed Growth Portfolio, .85% of Assets for the Multi-Managed Moderate
Growth Portfolio, .81% of Assets for the Multi-Managed Income/Equity Portfolio,
.77% of Assets for the Multi-Managed Income Portfolio, .85% of Assets for the
Asset Allocation: Diversified Growth Portfolio and .85% of Assets for the Stock
Portfolio.
The Adviser has voluntarily agreed to waive fees or reimburse expenses, if
necessary, to keep annual operating expenses at or below the following
percentages of each of the following Portfolio's average net assets:
Multi-Managed Growth Portfolio 1.29%, Multi-Managed Moderate Growth Portfolio
1.21%, Multi-Managed Income/Equity Portfolio 1.14%, Multi-Managed Income
Portfolio 1.06%, Asset Allocation: Diversified Growth
13
<PAGE>
Portfolio 1.21% and Stock Portfolio 1.21%. The Adviser also may voluntarily
waive or reimburse additional amounts to increase the investment return to a
Portfolio's investors. The Adviser may terminate all such waivers and/or
reimbursements at any time. Further, any waivers or reimbursements made by the
Adviser with respect to a Portfolio are subject to recoupment from that
Portfolio within the following two years, provided that the Portfolio is able to
effect such payment to the Adviser and remain in compliance with the foregoing
expense limitations.
The term "Assets" means the average daily net assets of each Portfolio.
SUBADVISERS -- The organizations described below serve as subadvisers to the
Portfolios pursuant to Subadvisory Agreements with SunAmerica. Under the
Subadvisory Agreements, Putnam manages the investment and reinvestment of the
assets of the Asset Allocation: Diversified Growth Portfolio, T. Rowe Price
manages the investment and reinvestment of the assets of the Stock Portfolio,
and the other Subadvisers manage the investment and reinvestment of the assets
of the respective Managed Component of each Multi-Managed Portfolio for which
they are responsible. Each of the Subadvisers is independent of SunAmerica and
discharges its responsibilities subject to the policies of the Trustees and the
oversight and supervision of SunAmerica, which pays the Subadvisers' fees. All
subadvisory fees are payable by the Adviser to the respective Subadviser and do
not increase Portfolio expenses.
Each Subadviser is paid monthly by SunAmerica a fee equal to a percentage of the
Assets of the Portfolio allocated to the Subadviser. Assuming a level of Assets
of $100 million for each Multi-Managed Portfolio and assuming the target
percentage allocations to the Managed Components specified in the chart under
"Investment Objectives, Policies and Restrictions -- Multi-Managed Portfolios"
above, it is estimated that the aggregate annual rates of the fees payable by
SunAmerica to the Subadvisers for each Multi-Managed Portfolio with respect to
the first year of operation will be the following, expressed as a percentage of
the Assets of each Multi-Managed Portfolio: Multi-Managed Growth Portfolio,
.28%; Multi-Managed Moderate Growth Portfolio, .23%; Multi-Managed Income/Equity
Portfolio, .21%, and Multi-Managed Income Portfolio, .18%. There can be no
assurance that a Portfolio will achieve a level of Assets in the amount
estimated. In addition, SunAmerica has agreed to pay each of Putnam and T. Rowe
Price a fee at the following annual rate, expressed as a percentage of the
Assets of the respective Portfolio: Asset Allocation: Diversified Growth
Portfolio, .50% on the first $150 million, .45% on the next $150 million, and
.40% on assets over $300 million; and Stock Portfolio, .50% on the first $40
million, and .45% on assets over $40 million.
Janus is a Colorado corporation with principal offices at 100 Fillmore Street,
Denver, Colorado 80206-4923. Janus serves as investment adviser to all of the
Janus funds, as well as adviser or subadviser to other mutual funds and
individual, corporate, charitable and retirement accounts, and, as of December
31, 1996, had assets under management of approximately $46 billion. Kansas City
Southern Industries, Inc. ("KCSI") owns approximately 83% of the outstanding
voting stock of Janus. KCSI is a publicly traded holding company whose primary
subsidiaries are engaged in transportation and financial services. Thomas H.
Bailey, President and Chairman of the Board of Janus, owns approximately 12% of
its voting stock and, by Agreement with KCSI, selects a majority of Janus'
Board.
Putnam is a Massachusetts corporation with principal offices at One Post Office
Square, Boston, Massachusetts. Putnam has been managing mutual funds since 1937
and serves as investment adviser to the funds in the Putnam Family. Putnam and
its affiliates managed assets of approximately $173 billion as of December 31,
1996. Putnam is a subsidiary of Putnam Investments, Inc., which is wholly owned
by Marsh & McLennan Companies, Inc., a publicly-owned holding company whose
principal businesses are international insurance and reinsurance brokerage,
employee benefit consulting and investment management.
T. Rowe Price is a Maryland corporation with principal offices at 100 East Pratt
Street, Baltimore, Maryland 21202. Founded in 1937 by the late Thomas Rowe
Price, Jr., T. Rowe Price and its affiliates managed approximately $97 billion
as of December 31, 1996. T. Rowe Price is a publicly traded company.
WMC is a Massachusetts limited liability partnership of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland, and John R.
Ryan. The principal offices of WMC are located at 75 State Street, Boston,
Massachusetts 02109. WMC is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of December
31, 1996, WMC had discretionary management authority with respect to
approximately $133.2 billion of assets.
14
<PAGE>
PORTFOLIO MANAGEMENT
Audrey L. Snell serves as the portfolio manager for the SunAmerica/aggressive
growth component of the Multi-Managed Growth and Moderate Growth Portfolios. Ms.
Snell is a Senior Vice President of SunAmerica and has been a portfolio manager
with the firm since 1991.
Warren B. Lammert serves as the portfolio manager for the Janus/growth component
of each Multi-Managed Portfolio. Mr. Lammert first joined Janus in 1987 and has
been a portfolio manager with the firm since 1993. He served as a Securities
Analyst at Janus from January 1987 to May 1988, and rejoined Janus as a Senior
Analyst in January 1990. He is a Chartered Financial Analyst.
P. Christopher Leary serves as co-portfolio manager of the SunAmerica/balanced
component of each Multi-Managed Portfolio and is responsible for the fixed
income portion thereof. Mr. Leary has served as portfolio manager for certain
SunAmerica income funds, and has served as assistant portfolio manager of the
SunAmerica Balanced Assets Fund since June 1991. Mr. Leary is a Senior Vice
President and Director of Fixed Income of the Adviser and has been a portfolio
manager with the firm since 1990. Previously, Mr. Leary was an investment
manager with Equitable Capital Management.
Gerald P. Sullivan serves as co-portfolio manager of the SunAmerica/balanced
component of each Multi-Managed Portfolio and is responsible for the equity
portion thereof. Mr. Sullivan has been the portfolio manager of the SunAmerica
Growth and Income Fund since July, 1996. Mr. Sullivan has been an equity analyst
for the Adviser since February 1995. Prior to joining the Adviser, Mr. Sullivan
spent two years as a portfolio manager for Texas Commerce Investment Management.
Prior to his time at Texas Commerce, he spent four years as a director for the
Southmore Foundation, Inc. and as an adjunct professor at Rice University in
Houston, Texas.
Thomas L. Pappas serves as the portfolio manager of the WMC/fixed income
component of each Multi-Managed Portfolio. Mr. Pappas is a Senior Vice President
of WMC and joined the company in 1987.
Putnam's Global Asset Allocation Committee has primary responsibility for the
day-to-day management of the Asset Allocation: Diversified Growth Portfolio.
The Stock Portfolio is managed by Robert W. Smith. Bob Smith is a Vice President
and Equity Portfolio Manager for T. Rowe Price and Rowe Price-Fleming
International. Bob is the manager of the T. Rowe Price Growth Stock Fund. He is
also co-manager of the T. Rowe Price Global Stock Fund, responsible for North
American securities. In addition to his work with the Global Stock Fund, Bob
manages the North American component of several other Rowe Price-Fleming global
accounts. Additionally, Bob has been on the Investment Advisory Committee for
the T. Rowe Price Growth Stock Fund since 1994. He has previously served on the
Investment Advisory Committee for the T. Rowe Price Blue Chip Growth Fund and
the T. Rowe Price Value Fund.
Prior to joining the firm in 1992, Bob was employed as an Investment Analyst for
Massachusetts Financial Services. He earned a BS (finance and economics) from
the University of Delaware and an MBA (finance) from the Darden Graduate School
of Business Administration, University of Virginia.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT -- State Street Bank and
Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts
02110, is the Trust's custodian, transfer agent and dividend paying agent.
EXPENSES OF THE TRUST -- In addition to the investment advisory fee, the Trust
incurs expenses, including legal, auditing and accounting expenses, Trustees'
fees and expenses, insurance premiums, brokers' commissions, taxes and
governmental fees, expenses of issue or redemption of shares, expenses of
registering or qualifying shares for sale, reports and notices to shareholders,
and fees and disbursements of custodians, transfer agents, registrars,
shareholder servicing agents and dividend disbursing agents, and certain
expenses with respect to membership fees of industry associations.
PORTFOLIO TURNOVER AND BROKERAGE
All Portfolios effect portfolio transactions without regard to the length of
time particular investments have been held. Under certain market conditions, the
investment policies of the Portfolios may result in high portfolio turnover,
I.E., over 100%. The quarterly rebalancing of the Portfolios as described under
"Investment Objectives, Policies and Restrictions -- Multi-Managed Portfolios"
above may also result in relatively higher portfolio turnover. Because each
Managed Component of each Multi-Managed Portfolio will be managed independently
of each other, it is possible that the same security may be purchased and sold
on the same day by two separate
15
<PAGE>
Managed Components of the same Multi-Managed Portfolio, resulting in higher
brokerage commissions for the Portfolio. Notwithstanding the foregoing, however,
the portfolio turnover rates for the Portfolios are not expected to exceed 200%.
High portfolio turnover involves correspondingly greater brokerage commissions,
to the extent such commissions are payable, and other transaction costs that are
borne directly by the Portfolio involved. Higher turnover rates reflect an
increased rate of realization of gains and losses by the Portfolio, which would
normally affect the taxable income of the Portfolio's shareholders. Where the
shareholder is an insurance company separate account funding variable annuity
contracts, qualified as such under the Internal Revenue Code of 1986, as amended
("Code"), however, the contract owners are not currently charged with such
income or losses except to the extent provided under the Code (normally when
distributions under the contracts are made). Corporate bonds and U.S. government
securities are generally traded on a net basis and usually neither brokerage
commissions nor transfer taxes are involved.
Broker-dealers involved in the execution of portfolio transactions on behalf of
the Trust are selected on the basis of their professional capability and the
value and quality of their services. In selecting such broker-dealers, the
Adviser and Subadvisers will consider various relevant factors, including, but
not limited to, the size and type of the transaction; the nature and character
of the markets in which the security can be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the broker-dealer;
the broker-dealer's execution services rendered on a continuing basis; and the
reasonableness of any commissions. The Adviser or a Subadviser also may select
broker-dealers which provide it with research services and may cause a Portfolio
to pay such broker-dealers commissions which exceed those which other broker-
dealers may have charged, if in the Adviser's or Subadviser's view the
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by the broker-dealer. Further, the Adviser or a
Subadviser may effect portfolio transactions through broker-dealer affiliates of
the Trust, Adviser or Subadvisers.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Under the Code each Portfolio is treated as a separate regulated investment
company provided qualification requirements are met. To qualify as a regulated
investment company, a Portfolio must, among other things, (a) derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks, securities
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stocks, securities or currencies; (b) derive less than 30% of
its gross income from the sale or other disposition of stocks or securities or
certain foreign currencies (or options, futures or forward contracts thereon)
held less than three months ("short-short gains") (foreign currency gains,
including those derived from options, futures and forward contracts, will not,
in any event, be characterized as short-short gains if they are directly related
to the registered investment company's investments in stocks, options or futures
thereon), (c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Portfolio's assets is represented by
cash, government securities and other securities limited in respect of any one
issuer to 5% of the Portfolio's assets and to not more than 10% of the 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 government
securities), and (d) distribute to shareholders at least 90% of its investment
company taxable income (which does not include net long-term capital gains, if
any, of the Portfolio). So long as the Portfolio qualifies as a regulated
investment company, such Portfolio will not be subject to federal income tax on
the net investment company taxable income or net capital gains distributed to
shareholders as ordinary income dividend or capital gains dividends. Each
Portfolio is intended to meet these qualification requirements.
It is the policy of each Portfolio to distribute to its shareholders
substantially all of its ordinary income and net long-term capital gains
realized during each fiscal year. All distributions are reinvested in shares of
the Portfolio at net asset value unless the transfer agent is instructed
otherwise.
Each Portfolio of the Trust is also subject to variable contract asset
diversification regulations prescribed by the U.S. Treasury Department under the
Code. These regulations generally provide that, as of the end of each calendar
quarter or within 30 days thereafter, no more than 55% of the total assets of
the Portfolio 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, each Contract generally will be
treated as invested in the underlying assets of the applicable Portfolios, and
all securities of the same issuer are considered a single investment, but each
U.S.
16
<PAGE>
agency or instrumentality is treated as a separate issuer. If a Portfolio fails
to comply with these regulations, the contracts invested in that Portfolio may
not be treated as annuity, endowment or life insurance contracts for tax
purposes.
See the Contract prospectus for information regarding the federal income tax
treatment of the contracts and distributions to the separate accounts.
PRICE OF SHARES
Shares of each Portfolio of the Trust are sold at the net asset value per share
calculated once daily at the close of regular trading on each day the New York
Stock Exchange is open. The current value of the Portfolio's total assets, less
liabilities, is divided by the total number of shares outstanding, and the
result is the net asset value per share. Assets are generally valued at their
market value, where available, except that short-term securities with 60 days or
less to maturity are valued on an amortized cost basis. For a complete
description of the procedures involved in valuing various Trust assets, see the
Statement of Additional Information.
PURCHASES AND REDEMPTIONS
Shares of the Trust currently are offered only to the Account, a separate
account of the Life Company. At present, Trust shares are only used as the
investment vehicle for the Contract, an annuity contract. The Life Company may
issue variable life contracts that also will use the Trust as the underlying
investment. The offering of Trust shares to variable annuity and variable life
separate accounts is referred to as "mixed funding." It may be disadvantageous
for variable annuity separate accounts and variable life separate accounts to
invest in the Trust simultaneously. Although neither the Life Company nor the
Trust currently foresees such disadvantages either to variable annuity or
variable life contract owners, the Board of Trustees of the Trust would monitor
events in order to identify any material conflicts to determine what action, if
any, should be taken in response thereto. Shares of the Trust may be offered to
separate accounts of other life insurance companies which are affiliates of the
Life Company.
All shares may be purchased or redeemed by the separate account without any
sales or redemption charge at the next computed net asset value. Purchases and
redemptions are made subsequent to corresponding purchases and redemptions of
units of the separate account without delay.
Except in extraordinary circumstances and as permissible under the 1940 Act, the
redemption proceeds are paid on or before the seventh day following the request
for redemption.
SHAREHOLDER VOTING RIGHTS
All shares of the Trust have equal voting rights and may be voted in the
election of Trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing Trustees unless and until
such time as fewer than a majority of the Trustees holding office have been
elected by shareholders. At that time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. The Trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
Trustee when requested to do so by the record holders of 10% of the outstanding
shares of the Trust. A Trustee may be removed after the holders of record of not
less than two-thirds of the outstanding shares have declared that the Trustee be
removed either by declaration in writing or by votes cast in person or by proxy.
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees, provided that immediately after the appointment of
any successor Trustee, at least two-thirds of the Trustees have been elected by
the shareholders. Shares do not have cumulative voting rights. Thus, holders of
a majority of the shares voting for the election of Trustees can elect all the
Trustees. No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust, except
that amendments to conform the Declaration to the requirements of applicable
federal laws or regulations or the regulated investment company provisions of
the Code may be made by the Trustees without the vote or consent of
shareholders. If not terminated by the vote or written consent of a majority of
its outstanding shares, the Trust will continue indefinitely.
In matters affecting only a particular Portfolio, the matter shall have been
effectively acted upon by a majority vote of that Portfolio even though: (1) the
matter has not been approved by a majority vote of any other Portfolio; or (2)
the matter has not been approved by a majority vote of the Trust.
Shareholders of a Massachusetts business trust may, under certain circumstances,
be held personally liable as partners for the obligations of the Trust. The risk
of a
17
<PAGE>
shareholder incurring any financial loss on account of shareholder liability is
limited to circumstances in which the Trust 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 Trust and provides that
notice of the disclaimer must be given in each agreement, obligation or
instrument entered into or executed by the Trust or Trustees. The Declaration of
Trust provides for indemnification of any shareholder held personally liable for
the obligations of the Trust and also provides for the Trust to reimburse the
shareholder for all legal and other expenses reasonably incurred in connection
with any such claim or liability.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL
Price Waterhouse LLP has been selected as independent accountants for the Trust.
The firms of Shereff, Friedman, Hoffman & Goodman, LLP and Blazzard, Grodd &
Hasenauer, P.C. have been selected to provide legal counsel to the Trust.
INQUIRIES
Contract owner inquiries should be directed to Anchor National Life Insurance
Company, Service Center, P.O. Box 54299, Los Angeles, California 90054-0299,
telephone number (800) 445-7862.
18
<PAGE>
Statement of Additional Information
SEASONS SERIES TRUST
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the current Prospectus of Seasons Series Trust
("Trust"). The Prospectus may be obtained by writing to the
Trust at the following address:
P.O. Box 54299
Los Angeles, California 90054-0299
April 1, 1997
<PAGE>
TABLE OF CONTENTS
TOPIC PAGE
- ----- ----
THE TRUST....................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES...........................................B-3
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS............................B-31
PORTFOLIO TURNOVER..........................................................B-34
INVESTMENT RESTRICTIONS.....................................................B-35
TRUST OFFICERS AND TRUSTEES.................................................B-37
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT................................B-39
SUBADVISORY AGREEMENTS......................................................B-40
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES..................................B-41
PRICE OF SHARES.............................................................B-41
EXECUTION OF PORTFOLIO TRANSACTIONS.........................................B-42
GENERAL INFORMATION.........................................................B-44
Custodian..............................................................B-44
Independent Accountants and Legal Counsel..............................B-44
Reports to Shareholders................................................B-44
Shareholder and Trustee Responsibility.................................B-45
Registration Statement.................................................B-45
B-2
<PAGE>
THE TRUST
The Trust, organized as a Massachusetts business trust on October 10, 1995,
is an open-end management investment company. Shares of the Trust are issued
and redeemed only in connection with investments in and payments under variable
annuity contracts, and may be sold to fund variable life contracts in the
future. The Trust currently consists of six separate series or portfolios
(each, a "Portfolio" and collectively the "Portfolios"), including four
multi-managed Portfolios (each, a "Multi-Managed Portfolio," and collectively,
the "Multi-Managed Portfolios"), the Asset Allocation: Diversified Growth
Portfolio and the Stock Portfolio, as described in the Prospectus.
Shares of the Trust are held by Variable Annuity Account Five, a separate
account of Anchor National Life Insurance Company ("Life Company"), a California
life insurance company. The Life Company is a wholly owned subsidiary of Sun
Life Insurance Company of America, a Maryland corporation wholly owned by
SunAmerica Inc., a Maryland corporation.
SunAmerica Asset Management Corp. ("SAAMCo" or the "Adviser"), an indirect,
wholly owned subsidiary of the Life Company, serves as investment adviser for
each Portfolio. As described in the Prospectus, SAAMCo may retain subadvisers
(each a "Subadviser" and collectively the "Subadvisers") to assist in management
of one or more Portfolios. The Adviser and Subadvisers are sometimes referred
to herein as the "Managers" or individually as a "Manager."
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Portfolios are
described in the Trust's Prospectus. Certain types of securities in which the
Portfolios may invest and certain investment practices which the Portfolios may
employ, which are described under "Investment Techniques and Risk Factors" in
the Prospectus, are discussed more fully below.
WARRANTS. A Portfolio may invest in warrants which give the holder of the
warrant a right to purchase a given number of shares of a particular issue at a
specified price until expiration. Such investments generally can provide a
greater potential for profit or loss than investments of equivalent amounts in
the underlying common stock. The prices of warrants do not necessarily move
with the prices of the underlying securities. If the holder does not sell the
warrant, he risks the loss of his entire investment if the market price of the
underlying stock does not, before the expiration date, exceed the exercise price
of the warrant plus the cost thereof. Investment in warrants is a speculative
activity. Warrants pay no dividends and confer no rights (other than the right
to purchase the underlying stock) with respect to the assets of the issuer.
INVESTMENT IN SMALL, UNSEASONED COMPANIES. As described in the
Prospectus, each Portfolio may invest in the securities of small companies
having market capitalizations under $1 billion. These securities may have a
limited trading market, which may adversely affect their disposition and can
result in their being priced lower than might otherwise be the case. If other
investment companies and investors who invest in such issuers trade the same
B-3
<PAGE>
securities when a Portfolio attempts to dispose of its holdings, the Portfolio
may receive lower prices than might otherwise be obtained.
Companies with market capitalization of $1 billion to $5 billion ("Mid-Cap
Companies") may also suffer more significant losses as well as realize more
substantial growth than larger, more established issuers. Thus, investments in
such companies tend to be more volatile and somewhat speculative.
FOREIGN SECURITIES. Investments in foreign securities offer potential
benefits not available from investments solely in securities of domestic issuers
by offering the opportunity to invest in foreign issuers that appear to offer
growth potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio
value by taking advantage of foreign stock markets that do not move in a manner
parallel to U.S. markets.
Each Portfolio may invest in securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other similar securities convertible into
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution, that evidence ownership interests in a security or a pool
of securities issued by a foreign issuer and deposited with the depository. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository
which has an exclusive relationship with the issuer of the underlying security.
An unsponsored ADR may be issued by any number of U.S. depositories. Holders of
unsponsored ADRs generally bear all the costs associated with establishing the
unsponsored ADR. The depository of an unsponsored ADR is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored ADR voting rights with respect to
the deposited securities or pool of securities. A Portfolio may invest in
either type of ADR. Although the U.S. investor holds a substitute receipt of
ownership rather than direct stock certificates, the use of the depository
receipts in the United States can reduce costs and delays as well as potential
currency exchange and other difficulties. The Portfolio may purchase securities
in local markets and direct delivery of these ordinary shares to the local
depository of an ADR agent bank in the foreign country. Simultaneously, the ADR
agents create a certificate which settles at the Trust's custodian in three
days. The Portfolio may also execute trades on the U.S. markets using existing
ADRs. A foreign issuer of the security underlying an ADR is generally not
subject to the same reporting requirements in the United States as a domestic
issuer. Accordingly the information available to a U.S. investor will be
limited to the information the foreign issuer is required to disclose in its own
country and the market value of an ADR may not reflect undisclosed material
information concerning the issuer of the underlying security. For purposes of a
Portfolio's investment policies, the Portfolio's investments in these types of
securities will be deemed to be investments in the underlying securities.
Generally ADRs, in registered form, are dollar-denominated securities designed
for use in the U.S. securities markets, which represent and may be converted
into the underlying foreign security. EDRs, in bearer form, are designed for
use in the European securities markets.
Investments in foreign securities, including securities of developing
countries, present special additional investment risks and considerations not
typically associated with investments in domestic securities, including
reduction of income by foreign taxes; fluctuation in value of foreign portfolio
B-4
<PAGE>
investments due to changes in currency rates and control regulations (e.g.,
currency blockage); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers; less volume on foreign exchanges than on U.S. exchanges; greater
volatility and less liquidity on foreign markets than in the U.S.; less
regulation of foreign issuers, stock exchanges and brokers than the U.S.;
greater difficulties in commencing lawsuits; higher brokerage commission rates
than the U.S.; increased possibilities in some countries of expropriation,
confiscatory taxation, political, financial or social instability or adverse
diplomatic developments; and differences (which may be favorable or unfavorable)
between the U.S. economy and foreign economies.
PASSIVE FOREIGN INVESTMENT COMPANIES ("PFICs") -- The Asset Allocation:
Diversified Growth Portfolio may invest, and Janus Capital Corporation may
invest the assets of the Janus/growth component of each Multi-Managed Portfolio,
in PFICs, which are any foreign corporations which generate certain amounts of
passive income or hold certain amounts of assets for the production of passive
income. Passive income includes dividends, interest, royalties, rents and
annuities. To the extent that a Portfolio invests in PFICs, income tax
regulations may require the Portfolio to recognize income associated with the
PFIC prior to the actual receipt of any such income.
U.S. GOVERNMENT SECURITIES. A Portfolio may invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances. A Portfolio may also invest in
securities issued by agencies of the U.S. government or instrumentalities of the
U.S. government. These obligations, including those which are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. Obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the
Export-Import Bank are backed by the full faith and credit of the United States.
In the case of securities not backed by the full faith and credit of the United
States, a component must look principally to the agency issuing or guaranteeing
the obligation for ultimate repayment and may not be able to assert a claim
against the United States if the agency or instrumentality does not meet its
commitments.
MORTGAGE-RELATED SECURITIES. A Portfolio may also invest in
mortgage-related securities, including certain U.S. government securities
such as GNMA, FNMA or FHLMC certificates (as defined below), and private
mortgage-related securities, which represent an undivided ownership interest
in a pool of mortgages. The mortgages backing these securities include
conventional thirty-year fixed-rate mortgages, fifteen-year fixed-rate
mortgages, graduated payment mortgages and adjustable rate mortgages. These
certificates are in most cases pass-through instruments, through which the
holder receives a share of all interest and principal payments, including
prepayments, on the mortgages underlying the certificate, net of certain
fees.
The yield on mortgage-backed securities is based on the average expected
life of the underlying pool of mortgage loans. The actual life of any
particular pool will be shortened by any unscheduled or early payments of
principal and interest. Principal prepayments generally
B-5
<PAGE>
result from the sale of the underlying property or the refinancing or
foreclosure of underlying mortgages. The occurrence of prepayments is affected
by a wide range of economic, demographic and social factors and, accordingly, it
is not possible to predict accurately the average life of a particular pool.
Yield on such pools is usually computed by using the historical record of
prepayments for that pool, or, in the case of newly-issued mortgages, the
prepayment history of similar pools. The actual prepayment experience of a pool
of mortgage loans may cause the yield realized by the Portfolio to differ from
the yield calculated on the basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as does the value of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a comparable basis with other debt securities because of the
prepayment feature of pass-through securities. The reinvestment of scheduled
principal payments and unscheduled prepayments that the Portfolio receives may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Portfolio. Monthly interest payments received by the Portfolio
have a compounding effect which may increase the yield to shareholders more than
debt obligations that pay interest semi-annually. Because of those factors,
mortgage-backed securities may be less effective than U.S. Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Accelerated prepayments adversely affect yields for pass-through
securities purchased at a premium (i.e., at a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not have been fully amortized at the time the obligation is repaid. The
opposite is true for pass-through securities purchased at a discount. A
Portfolio may purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates, the
most widely available mortgage-backed securities:
GNMA CERTIFICATES. GNMA certificates ("GNMA Certificates") are
mortgage-backed securities which evidence an undivided interest in a pool or
pools of mortgages. GNMA Certificates that a Portfolio may purchase are the
modified pass-through type, which entitle the holder to receive timely payment
of all interest and principal payments due on the mortgage pool, net of fees
paid to the issuer and GNMA, regardless of whether or not the mortgagor actually
makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
("FHA") or the Farmers' Home Administration ("FMHA"), or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is authorized by the
National Housing Act and is backed by the full faith and credit of the United
States. The GNMA is also empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
B-6
<PAGE>
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Portfolio
has purchased the certificates at a premium in the secondary market.
FHLMC CERTIFICATES. The Federal Home Loan Mortgage Corporation ("FHLMC")
issues two types of mortgage pass-through securities: mortgage participation
certificates ("PCS") and guaranteed mortgage certificates ("GMCs")
(collectively, "FHLMC Certificates"). PCS resemble GNMA Certificates in that
each PC represents a pro rata share of all interest and principal payments made
and owed on the underlying pool. The FHLMC guarantees timely monthly payment of
interest (and, under certain circumstances, principal) of PCS and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith
and credit of the U.S. Government.
FNMA CERTIFICATES. The Federal National Mortgage Association ("FNMA")
issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates represent a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment
of interest and principal on FNMA Certificates. The FNMA guarantee is not
backed by the full faith and credit of the U.S. Government.
Conventional mortgage pass-through securities ("Conventional Mortgage
Pass-Throughs") represent participation interests in pools of mortgage loans
that are issued by trusts formed by originators of the institutional investors
in mortgage loans (or represent custodial arrangements administered by such
institutions). These originators and institutions include commercial banks,
savings and loans associations, credit unions, savings banks, insurance
companies, investment banks or special purpose subsidiaries of the foregoing.
For federal income tax purposes, such trusts are generally treated as grantor
trusts or REMICs and, in either case, are generally not subject to any
significant amount of federal income tax at the entity level.
The mortgage pools underlying Conventional Mortgage Pass-Throughs consist
of conventional mortgage loans evidenced by promissory notes secured by first
mortgages or first deeds of trust or other similar security instruments creating
a first lien on residential or mixed residential and commercial properties.
Conventional Mortgage Pass-Throughs (whether fixed or adjustable rate) provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees or other amount paid to any
guarantor, administrator and/or servicer of the underlying mortgage loans. A
trust fund with
B-7
<PAGE>
respect to which a REMIC election has been made may include regular interests in
other REMICs which in turn will ultimately evidence interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of interest than
government and government-related pools because of the absence of any direct or
indirect government or agency payment guarantees. However, timely payment of
interest and principal of mortgage loans in these pools may be supported by
various forms of insurance or guarantees, including individual loans, title,
pool and hazard insurance and letters of credit. The insurance and guarantees
may be issued by private insurers and mortgage poolers. Although the market for
such securities is becoming increasingly liquid, mortgage-related securities
issued by private organizations may not be readily marketable.
Another type of mortgage-backed security in which the Asset Allocation:
Diversified Growth Portfolio and the SunAmerica/balanced and WMC/fixed income
components of the Multi-Managed Portfolios may invest is a collateralized
mortgage obligation ("CMO"). CMOs are fully collateralized bonds which are the
general obligations of the issuer thereof (e.g., the U.S. government, a U.S.
government instrumentality, or a private issuer). Such bonds generally are
secured by an assignment to a trustee (under the indenture pursuant to which the
bonds are issued) of collateral consisting of a pool of mortgages. Payments
with respect to the underlying mortgages generally are made to the Trustee under
the indenture. Payments of principal and interest on the underlying mortgages
are not passed through to the holders of the CMOs as such (i.e., the character
of payments of principal and interest is not passed through, and therefore
payments to holders of CMOs attributable to interest paid and principal repaid
on the underlying mortgages do not necessarily constitute income and return of
capital, respectively, to such holders), but such payments are dedicated to
payment of interest on and repayment of principal of the CMOs.
Principal and interest on the underlying mortgage assets may be allocated
among the several classes of CMOs in various ways. In certain structures (known
as "sequential pay" CMOs), payments of principal, including any principal
prepayments, on the mortgage assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs include, among others, "parallel pay" CMOs.
Parallel pay CMOs are those which are structured to apply principal payments and
prepayments of the mortgage assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of CMOs may be issued in the parallel pay or sequential pay
structures. These securities include accrual certificates (also known as
"Z-Bonds"), which only accrue interest at a specified rate until all other
certificates having an earlier final distribution date have been retired and are
converted thereafter to an interest-paying security, and planned amortization
class ("PAC") certificates, which are parallel pay CMOs which generally require
that specified amounts of principal be applied on each payment date to one or
more classes of
B-8
<PAGE>
CMOs (the "PAC Certificates"), even though all other principal payments and
prepayments of the mortgage assets are then required to be applied to one or
more other classes of the certificates. The scheduled principal payments for
the PAC Certificates generally have the highest priority on each payment date
after interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount payable on the next
payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to
create PAC tranches, one or more tranches generally must be created to absorb
most of the volatility in the underlying mortgage assets. These tranches tend
to have market prices and yields which are much more volatile than the PAC
classes.
The Asset Allocation: Diversified Growth Portfolio and the
SunAmerica/balanced and WMC/fixed income components of the Multi-Managed
Portfolios may also invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities are often structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. Stripped mortgage-backed securities have greater market
volatility than other types of U.S. Government securities in which a component
invests. A common type of stripped mortgage-backed security has one class
receiving some of the interest and all or most of the principal (the "principal
only" class) from the mortgage pool, while the other class will receive all or
most of the interest (the "interest only" class). The yield to maturity on an
interest only class is extremely sensitive not only to changes in prevailing
interest rates, but also to the rate of principal payments, including principal
prepayments, on the underlying pool of mortgage assets, and a rapid rate of
principal payment may have a material adverse effect on a Portfolio's yield.
While interest-only and principal-only securities are generally regarded as
being illiquid, such securities may be deemed to be liquid if they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of a Portfolio's net asset value per
share. Only government interest only and principal only securities backed by
fixed-rate mortgages and determined to be liquid under guidelines and standards
established by the Trustees may be considered liquid securities not subject to a
Portfolio's limitation on investments in illiquid securities.
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD BONDS. The WMC/fixed income
and Janus/growth components of the Multi-Managed Portfolios and the Asset
Allocation: Diversified Growth Portfolio may invest in high-yield bonds. These
bonds present certain risks which are discussed below:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - High-yield
bonds are very 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 defaults on its obligations to pay interest or principal or
enters into bankruptcy proceedings, a Portfolio may incur losses or
expenses in seeking recovery of amounts owed to it. In addition,
periods of economic uncertainty
B-9
<PAGE>
and changes can be expected to result in increased volatility of market
prices of high-yield bonds and the Portfolio's net asset value.
PAYMENT EXPECTATIONS - High-yield bonds may contain redemption or
call provisions. If an issuer exercises these provisions in a
declining interest rate market, a Portfolio would have to replace the
security with a lower yielding security, resulting in a decreased
return for investors. Conversely, a high-yield bond's value will
decrease in a rising interest rate market, as will the value of the
Portfolio's assets. If the Portfolio experiences unexpected net
redemptions, this may force it to sell high-yield bonds without regard
to their investment merits, thereby decreasing the asset base upon
which expenses can be spread and possibly reducing the Portfolio's
rate of return.
LIQUIDITY AND VALUATION - There may be little trading in the
secondary market for particular bonds, which may affect adversely a
Portfolio'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 bonds, especially in a thin market.
ASSET-BACKED SECURITIES. Each Portfolio may invest in asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Asset-backed securities present certain risks. For instance, in the case
of credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors to make payments on underlying assets, the securities may
contain elements of credit support which fall into two categories: (i)
liquidity protection and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against
B-10
<PAGE>
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. A Portfolio will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
investment in such a security.
SHORT-TERM DEBT SECURITIES. In addition to their primary investments, a
Portfolio may also invest in the following types of money market and
fixed-income securities:
MONEY MARKET SECURITIES - Money Market securities may include
securities issued or guaranteed by the U.S. government, its agencies
or instrumentalities, repurchase agreements, commercial paper,
bankers' acceptances, time deposits and certificates of deposit.
COMMERCIAL BANK OBLIGATIONS - Certificates of deposit
(interest-bearing time deposits), bankers' acceptances (time drafts
drawn on a commercial bank where the bank accepts an irrevocable
obligation to pay at maturity) and documented discount notes
(corporate promissory discount notes accompanied by a commercial bank
guarantee to pay at maturity) representing direct or contingent
obligations of commercial banks.
SAVINGS ASSOCIATION OBLIGATIONS - Certificates of deposit
(interest-bearing time deposits) issued by mutual savings banks or
savings and loan associations.
COMMERCIAL PAPER - Short-term notes (up to 12 months) issued by
corporations or governmental bodies, including variable amount master
demand notes. Variable amount master demand notes permit a Portfolio 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 participation. In connection with master
demand note arrangements, the Manager, 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 Manager 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 Investors
Service ("Moody's") or Standard & Poor's Corporation ("Standard &
Poor's") and a Portfolio may invest in them only if it is determined
that at the time of investment the notes are of comparable quality to
the other commercial paper in which the Portfolio may invest. Master
demand notes are considered to have a maturity equal to
B-11
<PAGE>
the repayment notice period unless the Manager has reason to believe that
the borrower could not make timely repayment upon demand.
CORPORATE BONDS AND NOTES - A Portfolio 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.
GOVERNMENT SECURITIES - Debt securities maturing within one year of
the date of purchase include adjustable-rate mortgage securities backed by
GNMA, FNMA, FHLMC and other non-agency issuers. Although certain floating
or variable rate obligations (securities whose coupon rate changes at least
annually and generally more frequently) have maturities in excess of one
year, they are also considered short-term debt securities. See "U.S.
Government Securities".
REPURCHASE AGREEMENTS. A Portfolio may enter into repurchase agreements
with banks, brokers or securities dealers. In such agreements, the seller
agrees to repurchase the security at a mutually agreed-upon time and price. The
period of maturity is usually quite short, either overnight or a few days,
although it may extend over a number of months. The repurchase price is in
excess of the purchase price by an amount which reflects an agreed-upon rate of
return effective for the period of time a Portfolio's money is invested in the
security. Whenever a Portfolio enters into a repurchase agreement, it obtains
appropriate collateral. The instruments held as collateral are valued daily and
if the value of the instruments declines, the Portfolio will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreements declines, the Portfolio may incur a loss. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Portfolio may be delayed or limited. The
Trustees have established guidelines to be used by the Managers in connection
with transactions in repurchase agreements and will regularly monitor each
Portfolio's use of repurchase agreements. A Portfolio will not invest in
repurchase agreements maturing in more than seven days if the aggregate of such
investments along with other illiquid securities exceeds 15% of the value of its
net assets. However, there is no limit on the amount of a Portfolio's net
assets that may be subject to repurchase agreements having a maturity of seven
days or less for temporary defensive purposes.
HEDGING AND INCOME ENHANCEMENT STRATEGIES. Each Portfolio may write (I.E.,
sell) call options ("calls") on securities that are traded on U.S. and foreign
securities exchanges and over-the-counter markets to enhance income through the
receipt of premiums from expired calls and any net profits from closing purchase
transactions. After any such sale up to 25% of a Portfolio's total assets may
be subject to calls. All such calls written by a Portfolio must be "covered"
while the call is outstanding (I.E., the Portfolio must own the securities
subject to the call or other securities acceptable for applicable escrow
requirements). Calls on Futures (defined below) used to enhance income must be
covered by deliverable securities or by liquid assets segregated to satisfy the
Futures contract. If a call written by the Portfolio is exercised, the
Portfolio forgoes any profit from any increase in the market price above the
call price of the underlying investment on which the call was written.
B-12
<PAGE>
Primarily for hedging purposes, and from time to time for income
enhancement, each Portfolio may use interest rate futures contracts, foreign
currency futures contracts and stock and bond index futures contracts, including
futures on U.S. government securities (together, "Futures"); forward contracts
on foreign currencies ("Forward Contracts"); and call and put options on equity
and debt securities, Futures, stock and bond indices and foreign currencies; and
each Multi-Managed Portfolio may, through its WMC/fixed income component, invest
in yield curve options (up to 5% of total assets allocated to the WMC/fixed
income component) (all the foregoing referred to as "Hedging Instruments"). In
addition, the Asset Allocation: Diversified Growth Portfolio may use Futures in
order to adjust its exposure to various equity or fixed income markets or as a
substitute for investment in underlying cash markets.
Hedging Instruments may be used to attempt to: (i) protect against possible
declines in the market value of a Portfolio's portfolio resulting from downward
trends in the equity and debt securities markets (generally due to a rise in
interest rates); (ii) protect a Portfolio's unrealized gains in the value of its
equity and debt securities which have appreciated; (iii) facilitate selling
securities for investment reasons; (iv) establish a position in the equity and
debt securities markets as a temporary substitute for purchasing particular
equity and debt securities; or (v) reduce the risk of adverse currency
fluctuations.
A Portfolio's strategy of hedging with Futures and options on Futures will
be incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in the market value of the portfolio, to
permit a Portfolio to retain unrealized gains in the value of portfolio
securities which have appreciated, or to facilitate selling securities for
investment reasons, a Portfolio could: (i) sell Futures; (ii) purchase puts on
such Futures or securities; or (iii) write calls on securities held by it or on
Futures. When hedging to attempt to protect against the possibility that
portfolio securities are not fully included in a rise in value of the debt
securities market, a Portfolio could: (i) purchase Futures, or (ii) purchase
calls on such Futures or on securities. When hedging to protect against
declines in the dollar value of a foreign currency-denominated security, a
Portfolio could: (i) purchase puts on that foreign currency and on foreign
currency Futures; (ii) write calls on that currency or on such Futures; or (iii)
enter into Forward Contracts at a lower rate than the spot ("cash") rate.
Additional information about the Hedging Instruments the Portfolios may use is
provided below.
OPTIONS
OPTIONS ON SECURITIES. As noted above, each Portfolio may write and
purchase call and put options (including, in the case of the Multi-Managed
Portfolios, yield curve options) on equity and debt securities.
When a Portfolio writes a call on a security it receives a premium and
agrees to sell the underlying security to a purchaser of a corresponding call on
the same security during the call period (usually not more than 9 months) at a
fixed price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. A Portfolio has
retained the risk of loss should the price of the underlying security decline
during the call period, which may be offset to some extent by the premium.
To terminate its obligation on a call it has written, a Portfolio may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether
B-13
<PAGE>
the net of the amount of the option transaction costs and the premium received
on the call written was more or less than the price of the call subsequently
purchased. A profit may also be realized if the call expires unexercised,
because a Portfolio retains the underlying security and the premium received.
If a Portfolio could not effect a closing purchase transaction due to lack of a
market, it would hold the callable securities until the call expired or was
exercised.
When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. A Portfolio benefits only if the
call is sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the call price plus the transaction
costs and the premium paid and the call is exercised. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and a Portfolio will lose its premium payment and the right to
purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying investment at the exercise price
during the option period. Writing a put covered by segregated liquid assets
equal to the exercise price of the put has the same economic effect to a
Portfolio as writing a covered call. The premium a Portfolio receives from
writing a put option represents a profit as long as the price of the underlying
investment remains above the exercise price. However, a Portfolio has also
assumed the obligation during the option period to buy the underlying investment
from the buyer of the put at the exercise price, even though the value of the
investment may fall below the exercise price. If the put expires unexercised, a
Portfolio (as the writer of the put) realizes a gain in the amount of the
premium. If the put is exercised, a Portfolio must fulfill its obligation to
purchase the underlying investment at the exercise price, which will usually
exceed the market value of the investment at that time. In that case, a
Portfolio may incur a loss, equal to the sum of the sale price of the underlying
investment and the premium received minus the sum of the exercise price and any
transaction costs incurred.
A Portfolio may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit a Portfolio to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by the Portfolio. A
Portfolio will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
writing the option.
When a Portfolio purchases a put, it pays a premium and has the right to
sell the underlying investment to a seller of a corresponding put on the same
investment during the put period at a fixed exercise price. Buying a put on an
investment a Portfolio owns enables the Portfolio to protect itself during the
put period against a decline in the value of the underlying investment below the
exercise price by selling such underlying investment at the exercise price to a
seller of a corresponding put. If the market price of the underlying investment
is equal to or above the exercise price and as a result the put is not exercised
or resold, the put will become worthless at its expiration date, and the
Portfolio will lose its premium payment and the right to sell the underlying
investment pursuant to the put. The put may, however, be sold prior to
expiration (whether or not at a profit).
B-14
<PAGE>
Buying a put on an investment a Portfolio does not own permits the
Portfolio either to resell the put or buy the underlying investment and sell it
at the exercise price. The resale price of the put will vary inversely with the
price of the underlying investment. If the market price of the underlying
investment is above the exercise price and as a result the put is not exercised,
the put will become worthless on its expiration date. In the event of a decline
in the stock market, a Portfolio could exercise or sell the put at a profit to
attempt to offset some or all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to pay for
the underlying security, a Portfolio will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the underlying securities.
A Portfolio therefore forgoes the opportunity of investing the segregated assets
or writing calls against those assets. As long as the obligation of a Portfolio
as the put writer continues, it may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring a Portfolio to take
delivery of the underlying security against payment of the exercise price. A
Portfolio has no control over when it may be required to purchase the underlying
security, since it may be assigned an exercise notice at any time prior to the
termination of its obligation as the writer of the put. This obligation
terminates upon expiration of the put, or such earlier time at which a Portfolio
effects a closing purchase transaction by purchasing a put of the same series as
that previously sold. Once a Portfolio has been assigned an exercise notice, it
is thereafter not allowed to effect a closing purchase transaction.
OPTIONS ON FOREIGN CURRENCIES. Each Portfolio may write and purchase puts
and calls on foreign currencies. A call written on a foreign currency by a
Portfolio is "covered" if the Portfolio owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire that
foreign currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A put option is
"covered" if the Portfolio deposits with its custodian cash or liquid securities
with a value at least equal to the exercise price of the put option. A call
written by a Portfolio on a foreign currency is for cross-hedging purposes if it
is not covered, but is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the Portfolio owns or has the right to acquire
and which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, a Portfolio collateralizes
the option by maintaining in a segregated account with the Trust's custodian,
cash or liquid securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
OPTIONS ON SECURITIES INDICES. As noted above, each Portfolio may write
and purchase call and put options on securities indices. Puts and calls on
broadly-based securities indices are similar to puts and calls on securities
except that all settlements are in cash and gain or loss depends on changes in
the index in question (and thus on price movements in the securities market
generally) rather than on price movements in individual securities or Futures.
When a Portfolio buys a call on a securities index, it pays a premium. During
the call period, upon exercise of a call by a Portfolio, a seller of a
corresponding call on the same investment will pay the Portfolio an amount of
cash to settle the call if the closing level of the securities index upon which
the call is based is greater than the exercise price of the call. That cash
payment is equal to the difference between the closing price of the index and
the exercise price of the call times a specified multiple (the "multiplier")
which determines the total dollar value for each point of difference. When a
Portfolio buys a put on a
B-15
<PAGE>
securities index, it pays a premium and has the right during the put period to
require a seller of a corresponding put, upon the Portfolio's exercise of its
put, to deliver to the Portfolio an amount of cash to settle the put if the
closing level of the securities index upon which the put is based is less than
the exercise price of the put. That cash payment is determined by the
multiplier, in the same manner as described above as to calls.
FUTURES AND OPTIONS ON FUTURES
FUTURES. Upon entering into a Futures transaction, a Portfolio will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). The initial margin will be deposited with the
Trust's custodian in an account registered in the futures broker's name; however
the futures broker can gain access to that account only under specified
conditions. As the Future is marked to market to reflect changes in its market
value, subsequent margin payments, called variation margin, will be paid to or
by the futures broker on a daily basis. Prior to expiration of the Future, if a
Portfolio elects to close out its position by taking an opposite position, a
final determination of variation margin is made, additional cash is required to
be paid by or released to the Portfolio, and any loss or gain is realized for
tax purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging purposes
to attempt to protect against the effects of interest rate changes on a
Portfolio's current or intended investments in fixed-income securities. For
example, if a Portfolio owned long-term bonds and interest rates were expected
to increase, that Portfolio might sell interest rate futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
that Portfolio's portfolio. However, since the Futures market is more liquid
than the cash market, the use of interest rate futures contracts as a hedging
technique allows a Portfolio to hedge its interest rate risk without having to
sell its portfolio securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the net asset value of that
Portfolio from declining as much as it otherwise would have. On the other hand,
if interest rates were expected to decline, interest rate futures contracts may
be purchased to hedge in anticipation of subsequent purchases of long-term bonds
at higher prices. Since the fluctuations in the value of the interest rate
futures contracts should be similar to that of long-term bonds, a Portfolio
could protect itself against the effects of the anticipated rise in the value of
long-term bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate futures
contracts could be liquidated and that Portfolio's cash reserves could then be
used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Portfolio's current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Portfolio may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of the
Portfolio's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the Futures position. When a Portfolio is not fully invested
in the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or
B-16
<PAGE>
entirely, offset increases in the cost of securities that the Portfolio intends
to purchase. As such purchases are made, the corresponding positions in stock
or bond index futures contracts will be closed out.
As noted above, each Portfolio may purchase and sell foreign currency
futures contracts for hedging or income enhancement purposes to attempt to
protect its current or intended investments from fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of portfolio
securities denominated in foreign currencies, or increase the cost of
foreign-denominated securities to be acquired, even if the value of such
securities in the currencies in which they are denominated remains constant.
Each Portfolio may sell futures contracts on a foreign currency, for example,
when it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In the event such
decline occurs, the resulting adverse effect on the value of foreign-denominated
securities may be offset, in whole or in part, by gains on the Futures
contracts. However, if the value of the foreign currency increases relative to
the dollar, the Portfolio's loss on the foreign currency futures contract may or
may not be offset by an increase in the value of the securities since a decline
in the price of the security stated in terms of the foreign currency may be
greater than the increase in value as a result of the change in exchange rates.
Conversely, each Portfolio could protect against a rise in the dollar cost
of foreign-denominated securities to be acquired by purchasing Futures contracts
on the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Portfolio purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Portfolio will sustain
losses on its futures position which could reduce or eliminate the benefits of
the reduced cost of portfolio securities to be acquired.
OPTIONS ON FUTURES. As noted above, the Portfolios may purchase and write
options on interest rate futures contracts, stock and bond index futures
contracts and foreign currency futures contracts. (Unless otherwise specified,
options on interest rate futures contracts, options on stock and bond index
futures contracts and options on foreign currency futures contracts are
collectively referred to as "Options on Futures.")
The writing of a call option on a Futures contract constitutes a partial
hedge against declining prices of the securities in the portfolio. If the
Futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the portfolio
holdings. The writing of a put option on a Futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments
required to be delivered under the terms of the Futures contract. If the
Futures price at expiration of the put option is higher than the exercise price,
a Portfolio will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option a Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the
B-17
<PAGE>
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its Options on
Futures positions, a Portfolio's losses from exercised Options on Futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
A Portfolio may purchase Options on Futures for hedging purposes, instead
of purchasing or selling the underlying Futures contract. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, a
Portfolio could, in lieu of selling a Futures contract, purchase put options
thereon. In the event that such decrease occurs, it may be offset, in whole or
part, by a profit on the option. If the market decline does not occur, the
Portfolio will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Portfolio will
increase prior to acquisition, due to a market advance or changes in interest or
exchange rates, a Portfolio could purchase call Options on Futures, rather than
purchasing the underlying Futures contract. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Portfolio will suffer a loss equal
to the price of the call but the securities which the Portfolio intends to
purchase may be less expensive.
FORWARD CONTRACTS
A Forward Contract involves bilateral obligations of one party to purchase,
and another party to sell, a specific currency at a future date (which may be
any fixed number of days from the date of the contract agreed upon by the
parties), at a price set at the time the contract is entered into. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. No price is paid
or received upon the purchase or sale of a Forward Contract.
A Portfolio may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Portfolio owns or
intends to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase.
A Portfolio may enter into Forward Contracts with respect to specific
transactions. For example, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in (or affected by fluctuations
in, in the case of ADRs) a foreign currency, or when a Portfolio anticipates
receipt of dividend payments in a foreign currency, the Portfolio may desire
to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale
of the amount of foreign currency involved in the underlying transaction. A
Portfolio will thereby be able to protect itself against a possible loss
resulting from an adverse change in the relationship
B-18
<PAGE>
between the currency exchange rates during the period between the date on which
the security is purchased or sold, or on which the payment is declared, and the
date on which such payments are made or received.
A Portfolio may also use Forward Contracts to lock in the U.S. dollar
value of portfolio positions ("position hedge"). In a position hedge, for
example, when a Portfolio believes that foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a Forward
Contract to sell an amount of that foreign currency approximating the value
of some or all of the portfolio securities denominated in (or affected by
fluctuations in, in the case of ADRs) such foreign currency, or when a
Portfolio believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a Forward Contract to buy that
foreign currency for a fixed dollar amount. In this situation a Portfolio
may, in the alternative, enter into a Forward Contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Portfolio believes
that the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of
the currency in which portfolio securities of the Portfolio are denominated
("cross-hedged"). A Portfolio may also hedge investments denominated in a
foreign currency by entering into forward currency contracts with respect to
a foreign currency that is expected to correlate to the currency in which the
investments are denominated ("proxy hedging").
The Portfolios will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency underlying
the forward contract or the currency being hedged. To the extent that a
Portfolio is not able to cover its forward currency positions with underlying
portfolio securities, the Trust's custodian will place cash or liquid securities
in a separate account of the Portfolio having a value equal to the aggregate
amount of the Portfolio's commitments under Forward Contracts entered into with
respect to position hedges and cross-hedges. If the value of the securities
placed in a separate account declines, additional cash or securities will be
placed in the account on a daily basis so that the value of the account will
equal the amount of the Portfolio's commitments with respect to such contracts.
As an alternative to maintaining all or part of the separate account, a
Portfolio may purchase a call option permitting the Portfolio to purchase the
amount of foreign currency being hedged by a forward sale contract at a price no
higher than the Forward Contract price or the Portfolio may purchase a put
option permitting the Portfolio to sell the amount of foreign currency subject
to a forward purchase contract at a price as high or higher than the Forward
Contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Portfolio to purchase additional foreign currency on the spot (I.E., cash)
market (and bear the expense of such purchase), if the market value of the
security is less than the amount of foreign currency a Portfolio is obligated to
deliver and if a decision is made to sell the security
B-19
<PAGE>
and make delivery of the foreign currency. Conversely, it may be necessary to
sell on the spot market some of the foreign currency received upon the sale of
the portfolio security if its market value exceeds the amount of foreign
currency a Portfolio is obligated to deliver. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward Contracts involve
the risk that anticipated currency movements will not be accurately predicted,
causing a Portfolio to sustain losses on these contracts and transactions costs.
At or before the maturity of a Forward Contract requiring a Portfolio to
sell a currency, the Portfolio may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Portfolio will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Portfolio may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Portfolio
would realize a gain or loss as a result of entering into such an offsetting
Forward Contract under either circumstance to the extent the exchange rate or
rates between the currencies involved moved between the execution dates of the
first contract and offsetting contract.
The cost to a Portfolio of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Portfolio must evaluate the
credit and performance risk of each particular counterparty under a Forward
Contract.
Although a Portfolio values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Portfolio may convert foreign currency from time to time,
and investors should be aware of the costs of currency conversion. Foreign
exchange dealers do not charge a fee for conversion, but they do seek to realize
a profit based on the difference between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE
The Trust's custodian, or a securities depository acting for the custodian,
will act as the Portfolio's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Portfolio has
written options or as to other acceptable escrow securities, so that no margin
will be required for such transaction. OCC will release the securities on the
expiration of the option or upon a Portfolio's entering into a closing
transaction.
B-20
<PAGE>
An option position may be closed out only on a market which provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise by a Portfolio of puts on securities will cause the sale of related
investments, increasing portfolio turnover. Although such exercise is within a
Portfolio's control, holding a put might cause the Portfolio to sell the related
investments for reasons which would not exist in the absence of the put. A
Portfolio will pay a brokerage commission each time it buys a put or call, sells
a call, or buys or sells an underlying investment in connection with the
exercise of a put or call. Such commissions may be higher than those which
would apply to direct purchases or sales of such underlying investments.
Premiums paid for options are small in relation to the market value of the
related investments, and consequently, put and call options offer large amounts
of leverage. The leverage offered by trading in options could result in a
Portfolio's net asset value being more sensitive to changes in the value of the
underlying investments.
In the future, each Portfolio may employ Hedging Instruments and strategies
that are not presently contemplated but which may be developed, to the extent
such investment methods are consistent with a Portfolio's investment objectives,
legally permissible and adequately disclosed.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
Each Portfolio must operate within certain restrictions as to its long and
short positions in Futures and options thereon under a rule (the "CFTC Rule")
adopted by the Commodity Futures Trading Commission (the "CFTC") under the
Commodity Exchange Act (the "CEA"), which excludes the Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined in the
CEA) if it complies with the CFTC Rule. In particular, the Portfolio may (i)
purchase and sell Futures and options thereon for bona fide hedging purposes, as
defined under CFTC regulations, without regard to the percentage of the
Portfolio's assets committed to margin and option premiums, and (ii) enter into
non-hedging transactions, provided that the Portfolio may not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Portfolio's existing Futures positions and option
premiums would exceed 5% of the fair value of its portfolio, after taking into
account unrealized profits and unrealized losses on any such transactions.
Margin deposits may consist of cash or securities acceptable to the broker and
the relevant contract market.
Transactions in options by a Portfolio are subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options were written or purchased on the
same or different exchanges or are held in one or more accounts or through one
or more exchanges or brokers. Thus, the number of options which a Portfolio may
write or hold may be affected by options written or held by other entities,
including other investment companies having the same or an affiliated investment
adviser. Position limits also apply to Futures. An exchange may order the
liquidation of positions found to be in violation of those limits and may impose
certain
B-21
<PAGE>
other sanctions. Due to requirements under the 1940 Act, when a Portfolio
purchases a Future, the Portfolio will maintain, in a segregated account or
accounts with its custodian bank, cash or liquid securities in an amount equal
to the market value of the securities underlying such Future, less the margin
deposit applicable to it.
TAX ASPECTS OF HEDGING INSTRUMENTS
Each Portfolio intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"). One of the tests
for such qualification is that less than 30% of its gross income must be derived
from gains realized on the sale of stock, securities and certain financial
instruments held for less than three months. This limitation may limit the
ability of a Portfolio to engage in options transactions and, in general, to
hedge investment risk or close out a hedge position.
POSSIBLE RISK FACTORS IN HEDGING
In addition to the risks discussed in the Prospectus and above, there is a
risk in using short hedging by selling Futures to attempt to protect against
decline in value of the portfolio securities (due to an increase in interest
rates) that the prices of such Futures will correlate imperfectly with the
behavior of the cash (I.E., market value) prices of the Portfolio's securities.
The ordinary spreads between prices in the cash and Futures markets are subject
to distortions due to differences in the natures of those markets. First, all
participants in the Futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close Futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
Futures markets. Second, the liquidity of the Futures markets depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the Futures markets could be reduced, thus producing distortion. Third, from
the point-of-view of speculators, the deposit requirements in the Futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the Futures markets may
cause temporary price distortions.
If a Portfolio uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Manager then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Portfolio will
realize a loss on the Hedging Instruments that is not offset by a reduction in
the price of the debt securities purchased.
ILLIQUID AND RESTRICTED SECURITIES. No more than 15% of the value of a
Portfolio's net assets, determined as of the date of purchase, may be invested
in illiquid securities including repurchase agreements which have a maturity of
longer than seven days, interest-rate swaps,
B-22
<PAGE>
currency swaps, caps, floors and collars, or in other securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. There will generally be a lapse of time between a mutual fund's decision
to sell an unregistered security and the registration of such security promoting
sale. Adverse market conditions could impede a public offering of such
securities. When purchasing unregistered securities, each of the Portfolios
will seek to obtain the right of registration at the expense of the issuer
(except in the case of Rule 144A securities).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act for which there is a readily available market may be deemed to be
liquid. The Manager will monitor the liquidity of such restricted securities
subject to the supervision of the Trustees. In reaching liquidity decisions the
Manager will consider, INTER ALIA, pursuant to guidelines and procedures
established by the Trustees, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
B-23
<PAGE>
Commercial paper issues in which a Portfolio's net assets may be invested
include securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the
so-called private placement exemption from registration which is afforded by
Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper
is restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Portfolio's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Manager has determined to be liquid
pursuant to guidelines established by the Trustees. The Trustees delegated to
the Manager the function of making day-to-day determinations of liquidity with
respect to Section 4(2) paper, pursuant to guidelines approved by the Trustees
that require the Manager to take into account the same factors described above
for other restricted securities and require the Manager to perform the same
monitoring and reporting functions.
HYBRID INSTRUMENTS; INDEXED/STRUCTURED SECURITIES. Hybrid Instruments,
including indexed or structured securities, have been developed and combine the
elements of futures contracts or options with those of debt, preferred equity or
a depository instrument (hereinafter "Hybrid Instruments"). Generally, a Hybrid
Instrument will be a debt security, preferred stock, depository share, trust
certificate, certificate of deposit or other evidence of indebtedness on which a
portion of or all interest payments, and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by reference to
prices, changes in prices, or differences between prices, of securities,
currencies, intangibles, goods, articles or commodities (collectively
"Underlying Assets") or by another objective index, economic factor or other
measure, such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-denominated Hybrid
Instrument whose redemption price is linked to the average three year
B-24
<PAGE>
interest rate in a designated group of countries. The redemption price formula
would provide for payoffs of greater than par if the average interest rate was
lower than a specified level, and payoffs of less than par if rates were above
the specified level. Furthermore, the Portfolio could limit the downside risk
of the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the Portfolio
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Portfolio could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to
the discussion of futures, options, and forward contracts herein for a
discussion of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of principal
loss (or gain). The latter scenario may result if "leverage" is used to
structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
B-25
<PAGE>
Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
Portfolio and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party or issuer of the Hybrid Instrument would be an additional risk
factor which the Portfolio would have to consider and monitor. Hybrid
Instruments also may not be subject to regulation of the CFTC, which generally
regulates the trading of commodity futures by U.S. persons, the Securities and
Exchange Commission (the "SEC"), which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the Portfolio. Accordingly, each Portfolio will limit its investments in
Hybrid Instruments to 10% of total assets at the time of purchase. However,
because of their volatility, it is possible that a Portfolio's investment in
Hybrid Instruments will account for more than 10% of the Portfolio's return
(positive or negative).
When-Issued Securities and Firm Commitment Agreement. A Portfolio may
purchase or sell securities on a "when-issued" or "delayed delivery" basis and
may purchase securities on a firm commitment basis. Although a Portfolio will
enter into such transactions for the purpose of acquiring securities for its
portfolio or for delivery pursuant to options contracts it has entered into, the
Portfolio may dispose of a commitment prior to settlement. "When-issued" or
"delayed delivery" refers to securities whose terms and indenture are available
and for which a market exists, but which are not available for immediate
delivery. When such transactions are negotiated, the price (which is generally
expressed in yield terms) is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. During the
period between commitment by a Portfolio and settlement (generally within two
months but not to exceed 120 days), no payment is made for the securities
purchased by the purchaser, and no interest accrues to the purchaser from the
transaction. Such securities are subject to market fluctuation, and the value
at delivery may be less than the purchase price. A Portfolio will maintain a
segregated account with its custodian, consisting of cash or liquid securities
at least equal to the value of purchase commitments until payment is made. A
Portfolio will likewise segregate liquid assets in respect of securities sold on
a delayed delivery basis.
A Portfolio will engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When a Portfolio engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result
B-26
<PAGE>
in a Portfolio losing the opportunity to obtain a price and yield considered to
be advantageous. If a Portfolio chooses to (i) dispose of the right to acquire
a when-issued security prior to its acquisition or (ii) dispose of its right to
deliver or receive against a firm commitment, it may incur a gain or loss. (At
the time a Portfolio makes a commitment to purchase or sell a security on a
when-issued or firm commitment basis, it records the transaction and reflects
the value of the security purchased, or if a sale, the proceeds to be received
in determining its net asset value.)
To the extent a Portfolio engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Portfolio enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and firm commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Manager before settlement of a purchase will affect
the value of such securities and may cause a loss to a Portfolio.
When-issued transactions and firm commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Portfolio might sell securities in
its portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Portfolio might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Portfolio may lend portfolio securities in amounts up to
33 1/3% of total assets to brokers, dealers and other financial institutions,
provided, that such loans are callable at any time by the Portfolio and are at
all times secured by cash or equivalent collateral . In lending its portfolio
securities, a Portfolio receives income while retaining the securities'
potential for capital appreciation. The advantage of such loans is that a
Portfolio continues to receive the interest and dividends on the loaned
securities while at the same time earning interest on the collateral, which will
be invested in short-term obligations. A loan may be terminated by the borrower
on one business day's notice or by a Portfolio at any time. If the borrower
fails to maintain the requisite amount of collateral, the loan automatically
terminates, and the Portfolio could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Manager to be creditworthy.
On termination of the loan, the borrower is required to return the securities to
a component; and any gain or loss in the market price of the loaned security
during the loan would inure to the Portfolio. Each Portfolio will pay
reasonable finders', administrative and custodial fees in connection with a loan
of its
B-27
<PAGE>
securities or may share the interest earned on collateral with the borrower.
Loans of portfolio securities will only be made to firms deemed by the Manager
to be creditworthy.
Since voting or consent rights which accompany loaned securities pass to
the borrower, each Portfolio will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights if
the matters involved would have a material effect on the Portfolio's investment
in the securities which are the subject of the loan.
REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into reverse
repurchase agreements with brokers, dealers, domestic and foreign banks or other
financial institutions that have been determined by the Manager to be
creditworthy. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. It may also be
viewed as the borrowing of money by the Portfolio. The Portfolio's investment
of the proceeds of a reverse repurchase agreement is the speculative factor
known as leverage. A Portfolio will enter into a reverse repurchase agreement
only if the interest income from investment of the proceeds is expected to be
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the Custodian a separate account with a segregated portfolio
of cash or liquid securities in an amount at least equal to its purchase
obligations under these agreements (including accrued interest). In the event
that the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio's
repurchase obligation, and the Portfolio's use of proceeds of the agreement may
effectively be restricted pending such decision. Reverse repurchase agreements
are considered to be borrowings and are subject to the percentage limitations on
borrowings. See "Investment Restrictions."
DOLLAR ROLLS. Each Portfolio may enter into "dollar rolls" in which the
Portfolio sells mortgage or other asset-backed securities ("Roll Securities")
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Portfolio foregoes principal and
interest paid on the Roll Securities. The Portfolio is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Portfolio also could be
compensated through the receipt of fee income equivalent to a lower forward
price. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar roll transaction. A
Portfolio will only enter into covered rolls. Because "roll" transactions
involve both the sale and purchase of a security, they may cause the reported
portfolio turnover rate to be higher than that reflecting typical portfolio
management activities.
B-28
<PAGE>
Dollar rolls involve certain risks including the following: if the
broker-dealer to whom the Portfolio sells the security becomes insolvent, the
Portfolio's right to purchase or repurchase the security subject to the dollar
roll may be restricted and the instrument which the Portfolio is required to
repurchase may be worth less than an instrument which the Portfolio originally
held. Successful use of dollar rolls will depend upon the Manager's ability to
predict correctly interest rates and in the case of mortgage dollar rolls,
mortgage prepayments. For these reasons, there is no assurance that dollar
rolls can be successfully employed.
STANDBY COMMITMENTS -- Standby commitments are put options that entitle
holders to same day settlement at an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise. A Portfolio may acquire standby commitments to enhance the liquidity
of portfolio securities, but only when the issuers of the commitments present
minimal risk of default. Ordinarily, the Portfolio may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. A Portfolio may purchase standby
commitments separate from or in conjunction with the purchase of securities
subject to such commitments. In the latter case, the Portfolio would pay a
higher price for the securities acquired, thus reducing their yield to maturity.
Standby commitments will not affect the dollar-weighted average maturity of the
Portfolio, or the valuation of the securities underlying the commitments.
Issuers or financial intermediaries may obtain letters of credit or other
guarantees to support their ability to buy securities on demand. The Manager
may rely upon its evaluation of a bank's credit in determining whether to
support an instrument supported by a letter of credit. Standby commitments are
subject to certain risks, including the ability of issuers of standby
commitments to pay for securities at the time the commitments are exercised; the
fact that standby commitments are not marketable by the Portfolios; and the
possibility that the maturities of the underlying securities may be different
from those of the commitments.
INTEREST-RATE SWAPS, MORTGAGE SWAPS, CAPS, COLLARS AND FLOORS. In order to
protect the value of the Portfolio from interest rate fluctuations and to hedge
against fluctuations in the fixed income market in which certain of the
Portfolio's investments are traded, each Portfolio may enter into interest-rate
swaps and mortgage swaps or purchase or sell interest-rate caps, floors or
collars. The Portfolio will enter into these hedging transactions primarily to
preserve a return or spread on a particular investment or portion of the
portfolio and to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio may also enter
into interest-rate swaps for non-hedging purposes. Interest-rate swaps are
individually negotiated, and the Portfolio expects to achieve an acceptable
degree of correlation between its portfolio investments and interest-rate
positions. A Portfolio will only enter into interest-rate swaps on a net basis,
which means that the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest-rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
B-29
<PAGE>
interest-rate swaps is limited to the net amount of interest payments that the
Portfolio is contractually obligated to make. If the other party to an
interest-rate swap defaults, the Portfolio's risk of loss consists of the net
amount of interest payments that the Portfolio is contractually entitled to
receive. The use of interest-rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. All of these investments may be
deemed to be illiquid for purposes of the Portfolio's limitation on investment
in such securities. Inasmuch as these investments are entered into for good
faith hedging purposes, and inasmuch as segregated accounts will be established
with respect to such transactions, the Adviser believes such obligations do not
constitute senior securities and accordingly, will not treat them as being
subject to its borrowing restrictions. The net amount of the excess, if any, of
the Portfolio's obligations over its entitlements with respect to each
interest-rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by a custodian that
satisfies the requirements of the 1940 Act. The Portfolio will also establish
and maintain such segregated accounts with respect to its total obligations
under any interest-rate swaps that are not entered into on a net basis and with
respect to any interest-rate caps, collars and floors that are written by the
Portfolio.
A Portfolio will enter into these transactions only with banks and
recognized securities dealers believed by the Manager to present minimal credit
risk in accordance with guidelines established by the Board of Trustees. If
there is a default by the other party to such a transaction, the Portfolio will
have to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
Mortgage swaps are similar to interest-rate swaps in that they represent
commitments to pay and receive interest. The notional principal amount, upon
which the value of the interest payments is based, is tied to reference pool or
pools of mortgages.
The purchase of an interest-rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest-rate cap. The purchase of an interest-rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest-rate floor.
B-30
<PAGE>
PORTFOLIO TRADING. A Portfolio may engage in portfolio trading when it is
believed by the Manager that the sale of a 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.
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER RATINGS. Moody's employs the designations "Prime-1,"
"Prime-2" and "Prime-3" to indicate commercial paper having the highest capacity
for timely repayment. Issuers rated Prime-1 have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: leading market positions
in well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity. Issues rated
Prime-2 have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
Issuers rated Prime-3 have an acceptable capacity for repayment of
short-term promissory obligations. The effect of industry characteristics and
market composition may be more pronounced. Variability in earning and
profitability may result in changes in level of debt protection measurements and
the requirement for relatively high financial leverage. Adequate alternate
liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
B-31
<PAGE>
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of
earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8)
recognition by management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such
obligations.
Standard and Poor's ratings of commercial paper are graded into four
categories ranging from A for the highest quality obligations to D for the
lowest. A - Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2, and 3 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. B - Issues in this category are regarded as having only
adequate capacity for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities. C - This rating is assigned to
short-term debt obligations with a doubtful capacity for payment. D - The
rating indicates that the issues are either in default or are expected to be in
default upon maturity.
Duff & Phelps, Inc. ("Duff & Phelps") commercial paper ratings are
consistent with the short-term rating criteria utilized by money market
participants. Duff & Phelps commercial paper ratings refine the traditional 1
category. The majority of commercial issuers carry the higher short-term rating
yet significant quality differences within that tier do exist. As a
consequence, Duff & Phelps has incorporated gradations of 1+ and 1- to assist
investors in recognizing those differences.
Duff 1+ - Highest certainty of time repayment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations. Duff 1 - Very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor. Duff 1- - High certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small. Duff 2 - Good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although
ongoing funding needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small. Duff 3 - Satisfactory
liquidity and other protection factors, qualify issue as investment grade. Risk
factors are larger and subject to more variation. Nevertheless, timely payment
is expected. Duff 4 - Speculative investment characteristics. Liquidity is
not sufficient
B-32
<PAGE>
to insure against disruption in debt service. Operating factors and market
access may be subject to a high degree of variation. Duff 5 - Default.
The short-term ratings of Fitch Investor Services, Inc. ("Fitch") apply to
debt obligations that are payable on demand or have original maturities of
generally up to three years, including commercial paper, certificates of
deposit, medium-term notes, and municipal and investment notes. The short-term
rating places greater emphasis than a long-term rating on the existence of
liquidity necessary to meet the issuer's obligations in a timely manner. Fitch
short-term ratings are as follows: F-1+ Exceptionally Strong Credit Quality -
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment. F-1 Very Strong Credit Quality - Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+. F-2 Good Credit Quality - Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as good as it is for issues assigned F-1+ and F-1 ratings. F-3
Fair Credit Quality - Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade. F-5 Weak Credit Quality - Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions. D Default - Issues assigned this rating are in actual or imminent
payment default. LOC - The symbol LOC indicates that the rating is based on a
letter of credit issued by a commercial bank.
Thomson BankWatch, Inc. ("BankWatch") short-term ratings apply only to
unsecured instruments that have a maturity of one year or less. These
short-term ratings specifically assess the likelihood of an untimely payment of
principal and interest. TBW-1 is the highest category, which indicates a very
high degree of likelihood that principal and interest will be paid on a timely
basis. TBW-2 is the second highest category and, while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.
CORPORATE DEBT SECURITIES. Moody's rates the long-term debt securities
issued by various entities from "Aaa" to "C." Aaa - Best quality. These
securities carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a larger, or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
more unlikely to impair the fundamentally strong position of these issues. Aa -
High quality by all standards. They are rated lower than the best bond because
margins of protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risks appear somewhat greater. A - Upper medium
grade obligations. These bonds possess many favorable investment attributes.
Factors giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment sometime in
the future. Baa - Medium grade obligations. Interest payments and principal
security appear adequate for the present but certain protective elements may
B-33
<PAGE>
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. Ba - Have speculative elements; future
cannot be considered as well assured. The protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Bonds in this class are characterized by
uncertainty of position. B - Generally lack characteristics of the desirable
investment assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Caa -
Of poor standing. Issues may be in default or there may be present elements of
danger with respect to principal or interest. Ca - Speculative in a high
degree; often in default or have other marked shortcomings. C - Lowest rated
class of bonds; can be regarded as having extremely poor prospects of ever
attaining any real investment standings.
Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of the generic rating
category.
Standard & Poor's rates the long-term securities debt of various entities
in categories ranging from "AAA" to "D" according to quality. AAA - Highest
rating. Capacity to pay interest and repay principal is extremely strong. AA
- - High grade. Very strong capacity to pay interest and repay principal.
Generally, these bonds differ from AAA issues only in a small degree. A -
Have a strong capacity to pay interest and repay principal, although they are
somewhat more susceptible to the adverse effects of change in circumstances and
economic conditions than debt in higher rated categories. BBB - Regarded as
having adequate capacity to pay interest and repay principal. These bonds
normally exhibit adequate protection parameters, but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C - Regarded, on balance, as predominately speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. BB indicated the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 - Reserved for income bonds on which
no interest is being paid. D - In default and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within these ratings
categories.
BankWatch rates the long-term debt securities issued by various entities
either AAA or AA. AAA is the highest category, which indicates the ability to
repay principal and interest on a timely basis is very high. AA is the second
highest category, which indicates a superior ability to repay principal and
interest on a timely basis with limited incremental risk versus issues rated in
the
B-34
<PAGE>
highest category. Ratings in the long-term debt categories may include a plus
(+) or minus (-) designation which indicates where within the respective
category the issue is placed.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated for each Portfolio by dividing
(a) the lesser of purchases or sales of portfolio securities for the fiscal year
by (b) the monthly average of the value of portfolio securities owned during the
fiscal year. For purposes of this calculation, securities which at the time of
purchase had a remaining maturity of one year or less are excluded from the
numerator and the denominator. Transactions in Futures or the exercise of calls
written by a Portfolio may cause the Portfolio to sell portfolio securities,
thus increasing its turnover rate. The exercise of puts also may cause a sale
of securities and increase turnover; although such exercise is within a
Portfolio's control, holding a protective put might cause the Portfolio to sell
the underlying securities for reasons which would not exist in the absence of
the put. A Portfolio will pay a brokerage commission each time it buys of sells
a security in connection with the exercise of a put or call. Some commissions
may be higher than those which would apply to direct purchases or sales of
portfolio securities.
The quarterly rebalancing of the Portfolios as described in the
Prospectus may also result in relatively higher portfolio turnover. Because
each particular component (each, a "Managed Component" or "component") of
the portfolio of each Multi-Managed Portfolio will be managed independently
of each other, it is possible that the same security may be purchased and
sold on the same day by two separate Managed Components of the same
Multi-Managed Portfolio, resulting in higher brokerage commissions for the
Portfolio.
High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by a
Portfolio. High portfolio turnover may also involve a possible increase in
short-term capital gains or losses.
INVESTMENT RESTRICTIONS
The Trust has adopted for each Portfolio certain investment restrictions
that are fundamental policies and cannot be changed without the approval of the
holders of a majority of that Portfolio's outstanding shares. Such majority is
defined as the vote of the lesser of (i) 67% or more of the outstanding shares
present at a meeting, if the holders of more than 50% of the outstanding shares
are present in person or by proxy or (ii) more than 50% of the outstanding
shares. All percentage limitations expressed in the following investment
restrictions are measured immediately after the relevant transaction is made.
Each Portfolio may not:
1. With respect to the Asset Allocation: Diversified Growth Portfolio and
the Stock Portfolio, invest more than 5% of the value of its total assets in the
securities of any one issuer,
B-35
<PAGE>
provided that this limitation shall apply only to 75% of the value of each such
Portfolio's total assets and, provided further, that the limitation shall not
apply to obligations issued or guaranteed by the government of the United States
or of any of its agencies or instrumentalities.
2. With respect to the Asset Allocation: Diversified Growth Portfolio and
the Stock Portfolio, as to 75% of its total assets, purchase more than 10% of
the outstanding voting securities of any one issuer.
3. Invest more than 25% of the Portfolio's total assets in the securities
of issuers in the same industry. (Industry shall be determined for this purpose
by reference to Standard Industrial Classification codes.) Obligations of the
U.S. government, its agencies and instrumentalities are not subject to this 25%
limitation on industry concentration.
4. 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); provided that a Portfolio may hold or
sell real estate acquired as a result of the ownership of securities.
5. Purchase or sell commodities or commodity contracts, except to the
extent that the Portfolio may do so in accordance with applicable law and the
Portfolio's Prospectus and Statement of Additional Information, as they may be
amended from time to time, and without registering as a commodity pool operator
under the Commodity Exchange Act. Any Portfolio may engage in transactions in
put and call options on securities, indices and currencies, spread transactions,
forward and futures contracts on securities, indices and currencies, put and
call options on such futures contracts, forward commitment transactions, forward
foreign currency exchange contracts, interest rate, mortgage and currency swaps
and interest rate floors and caps and may purchase hybrid instruments.
6. Make loans to others except for (a) the purchase of debt securities;
(b) entering into repurchase agreements; and (c) the lending of its portfolio
securities.
7. Borrow money, except that (i) each Portfolio may borrow from banks in
amounts up to 33 1/3% of its total assets for temporary or emergency purposes,
(ii) each of the Multi-Managed Growth and Moderate Growth Portfolios, through
its SunAmerica/aggressive growth component, may borrow for investment purposes
to the maximum extent permissible under the 1940 Act (with any percentage
limitation calculated only with respect to the total assets allocated to the
SunAmerica/aggressive growth component of such Multi-Managed Portfolio), and
(iii) a Portfolio may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities. This policy shall
not prohibit a Portfolio's engaging in reverse repurchase agreements, dollar
rolls and similar investment strategies described in the Prospectus and
Statement of Additional Information, as they may be amended from time to time.
B-36
<PAGE>
8. Issue senior securities as defined in the 1940 Act, except that each
Portfolio may enter into repurchase agreements, reverse repurchase agreements,
dollar rolls, lend its portfolio securities and borrow money from banks, as
described above, and engage in similar investment strategies described in the
Prospectus and Statement of Additional Information, as they may be amended from
time to time.
9. Engage in underwriting of securities issued by others, except to the
extent that the Portfolio may be deemed to be an underwriter in connection with
the disposition of portfolio securities of the Portfolio.
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a vote of shareholders. Each Portfolio may
not:
10. Purchase securities on margin.
11. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and, to the extent related to the
segregation of assets in connection with the writing of covered put and call
options and the purchase of securities or currencies on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin
arrangements with respect to forward contracts, options, futures contracts and
options on futures contracts. In addition, a Portfolio may pledge assets in
reverse repurchase agreements, dollar rolls and similar investment strategies
described in the Prospectus and Statement of Additional Information, as they may
be amended from time to time.
12. Sell securities short, including short sales "against the box" (i.e.,
where a Portfolio contemporaneously owns, or has the right to acquire at no
additional cost, securities identical or substantially similar to those sold
short) if as a result more than 25% of its net assets would be subject to such
short sales.
13. Purchase or sell securities of other investment companies except (i)
to the extent permitted by applicable law and (ii) that Janus may invest
uninvested cash balances of the Janus/growth component of each Multi-Managed
Portfolio in money market mutual funds that it manages to the extent permitted
by applicable law.
14. Enter into any repurchase agreement maturing in more than seven days
or investing in any other illiquid security if, as a result, more than 15% of a
Portfolio's net assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and sold
to "qualified institutional buyers" as defined in Rule 144A, which the Manager
has determined to be liquid pursuant to guidelines established by the Trustees,
will not be considered illiquid for purposes of this 15% limitation on illiquid
securities.
B-37
<PAGE>
TRUST OFFICERS AND TRUSTEES
The trustees and executive officers of the Trust, their ages and their
principal occupations for the past five years are set forth below. Each Trustee
also serves as a trustee of Anchor Pathway Fund and SunAmerica Series Trust.
Unless otherwise noted, the address of each executive officer and trustee is 1
SunAmerica Center, Century City, Los Angeles, California 90067-6022.
<TABLE>
<CAPTION>
Name, Age and Position(s) Principal Occupation(s) During Past Five Years
Held with the Trust ----------------------------------------------
-------------------
<S> <C>
RICHARDS D. BARGER, 66, Trustee* Senior Partner, Law Firm of Barger
& Wolen; former Director, Anchor
National Life Insurance Company
("Anchor National").
NORMAN J. METCALFE, 52, Vice Chairman and Chief Financial
Trustee* Officer, The Irvine Company (March
1993 to Present); Executive Vice
President (1986-1992) and Director
(1984-1993), SunAmerica Inc.;
President, SunAmerica Investments,
Inc. (joined SunAmerica Inc. in
1970); Executive Vice President and
Director, Anchor National.
ALLAN L. SHER, 65, Director, Board of Governors, American
Trustee Stock Exchange (1991 to present); Former
Chairman and Chief Executive Officer,
Bateman Eichler, Hill Richards (securities
firm) (1990-1992); Vice Chairman (1989-
1990), Senior Executive Vice President
(1985-1989) and Executive Vice President
(1983-1985), Drexel Burnham Lambert
Incorporated.
WILLIAM M. WARDLAW, 50, Partner, Freeman Spogli & Co., Incorporated
Trustee (privately owned merchant banking firm)
(1988-Present); Managing Partner, Riordan &
McKinzie (law firm specializing in corporate
and securities law) (1984-1988); Partner
(1980-1984) and Associate (1972-1980),
O'Melveny & Meyers (law firm).
JAMES K. HUNT, 43, Trustee, President, SunAmerica Corporate
Chairman and President* Finance (since January 1994);
Executive Vice President,
SunAmerica Investments, Inc. (1993
to present); Senior Vice President,
SunAmerica Investments Inc.
(1990-1993); Trustee, Chairman and
President, Anchor Pathway Fund and
SunAmerica Series Trust.
SCOTT L. ROBINSON, 48, Senior Vice Senior Vice President and Controller,
President, Treasurer and Controller SunAmerica Inc. (since 1991); Senior
Vice President of Anchor National
(since 1988). Vice President and Controller,
SunAmerica Inc. (1986-1991); Senior Vice
President, Treasurer and Controller,
Anchor Pathway Fund and
</TABLE>
B-38
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SunAmerica Series Trust; Joined SunAmerica
Inc. in 1978.
SUSAN L. HARRIS, 37, Senior Vice President, Secretary
Vice President, Counsel and Secretary (since 1995) and General Counsel
(since December 1994), SunAmerica
Inc.; Senior Vice President and
Secretary, Anchor National (since
1990); Vice President, Counsel and
Secretary, Anchor Pathway Fund and
SunAmerica Series Trust; Joined
PETER C. SUTTON, 31, Vice President SunAmerica Inc. in 1985.
The SunAmerica Center Vice President, SunAmerica, since
733 Third Avenue September 1994; Treasurer,
New York, NY 10017-3204 SunAmerica Mutual Funds, since
February 1996; Treasurer, Style
Select Series, Inc., since 1996; Vice
President, SunAmerica Series Trust,
Anchor Pathway Fund, since October 1994;
Controller, SunAmerica Mutual Funds (March
1993 to February 1996); Assistant
Controller, SunAmerica Mutual Funds
(1990-1993).
</TABLE>
* A trustee who is an "interested person" within the meaning of the 1940 Act.
The Trust pays no salaries or compensation to any of its officers, all
of whom are officers or employees of The Life Company or its affiliates.
A fee of $500 for each meeting attended and expenses are paid to each
Trustee who is not an officer or employee of Anchor National Life
Insurance Company or its affiliates for attendance at meetings of the
Board of Trustees.
The following table sets forth information summarizing the
compensation of each of the Trustees for his services as Trustee. The
compensation received from the Trust is estimated for the fiscal year
ending March 31, 1998, and the compensation received from other mutual
funds in the same fund complex as the Trust is based on the fiscal year
ended November 30, 1996.
COMPENSATION TABLE
- --------------------------------------------------------------------------------
Total
Pension or Compensation
Retirement from Registrant
Aggregate Benefits Accrued and Fund
Compensation as Part of Fund Complex Paid to
Trustee from Registrant Expenses Trustees*
- --------------------------------------------------------------------------------
Richards D. Barger $1,500 - $22,000
- --------------------------------------------------------------------------------
Norman J. Metcalfe $1,500 $20,250
- --------------------------------------------------------------------------------
Allan L. Sher $1,500 $0
- --------------------------------------------------------------------------------
William M. Wardlaw $1,500 - $0
- --------------------------------------------------------------------------------
* In addition to the Trust, the Trustees served on the boards of two other
funds in the same mutual fund complex as the Trust. Messrs. Sher and Wardlaw
began serving on the boards of the Trust and such other two funds in
March of 1997.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
The Trust, on behalf of each Portfolio, entered into an Investment Advisory
and Management Agreement with SAAMCo to handle the Trust's day-to-day affairs.
The Investment Advisory and Management Agreement ("Management Agreement")
provides that it will continue in effect until two years from the date of its
approval by the Board of Trustees, unless terminated, and may be renewed from
year to year as to each Portfolio for so long as such renewal is 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
each relevant Portfolio, and (ii) the vote of a majority of Trustees who are
not parties to the Management 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 Management Agreement also provides
that it may be terminated by either party without penalty upon 60 days'
written notice to the other party. The Management Agreement may be
terminated with respect to a Portfolio at any time, without penalty, by the
Trustees or by the holders of a majority of the respective Portfolio's
outstanding voting securities on sixty (60) days written notice to the
Adviser, or by the Adviser upon the approval by the Trust of another
investment advisory agreement or on six months' written notice, whichever is
earlier. The Agreement provides for automatic termination with respect to
each Portfolio in the event of its assignment (as defined in the 1940 Act).
B-39
<PAGE>
As compensation for its services, the Adviser receives from the Trust a
fee, accrued daily and payable monthly, based on the net assets of each
Portfolio at the rates set forth in the Prospectus.
PERSONAL TRADING. The Trust and the Adviser have adopted a written Code of
Ethics (the "Code") which prescribes general rules of conduct and sets forth
guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code is an individual who is a
trustee, director, officer, general partner or advisory person of the Trust or
the Adviser. Among the guidelines on personal securities trading include: (i)
securities being considered for purchase or sale, or purchased or sold, by any
Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii)
private placements, (iv) blackout periods, (v) short-term trading profits, (vi)
gifts, and (vii) services as a Trustee. These guidelines are substantially
similar to those contained in the Report of the Advisory Group on Personal
Investing issued by the Investment Company Institute's Advisory Panel. The
Adviser reports to the Board of Trustees on a quarterly
B-40
<PAGE>
basis, as to whether there were any violations of the Code by Access Persons of
the Trust or the Adviser during the quarter.
The Subadvisers have each adopted a written Code of Ethics, and have
represented that the provisions of such Code of Ethics are substantially similar
to those in the Code. Further, the Subadvisers report to the Adviser on a
quarterly basis, as to whether there were any Code of Ethics violations by
employees thereof who may be deemed Access Persons of the Trust. In turn, the
Adviser reports to the Board of Trustees as to whether there were any violations
of the Code by Access Persons of the Trust or the Adviser.
SUBADVISORY AGREEMENTS
Janus Capital Corporation ("Janus"), T. Rowe Price Associates, Inc. ("T.
Rowe Price"), Putnam Investment Management, Inc. ("Putnam") and Wellington
Management Company ("WMC") act as Subadvisers to certain of the Portfolios
pursuant to various Subadvisory Agreements with SAAMCo. Under the respective
Subadvisory Agreements, T. Rowe Price manages the investment and reinvestment of
the Stock Portfolio, Putnam manages the investment and reinvestment of the Asset
Allocation: Diversified Growth Portfolio, and Janus and WMC each manage the
investment and reinvestment of the component of the Multi-Managed Portfolios for
which they are responsible. Each of the Subadvisers is independent of SAAMCo
and discharges its responsibilities subject to the policies of the Trustees and
the oversight of supervision of SAAMCo, which pays the Subadvisers' fees.
The Adviser pays each Subadviser a monthly fee.
The Subadvisory Agreements will continue in effect for two years from the
dates thereof, unless terminated, and may be renewed from year to year
thereafter, so long as continuance is specifically approved at least annually
in accordance with the requirements of the 1940 Act. The Subadvisory
Agreements provide that they will terminate in the event of an assignment (as
defined in the 1940 Act) or upon termination of the Management Agreement.
[Each] Subadvisory Agreement may be terminated at any time, without penalty,
by the Portfolio or the Trust, by the Trustees, by the holders of a majority
of the respective Portfolio's outstanding voting securities, by the Adviser,
on not less than thirty (30) nor more than sixty (60) days' written notice to
the Subadviser, or by the Subadviser, on not less than ninety (90) days'
written notice to the Adviser and the Trust; provided, that the Subadviser
may not terminate the Subadvisory Agreement unless another subadvisory
agreement has been approved by the Trust in accordance with the 1940 Act, or
after six (6) months' written notice, whichever is earlier; provided,
further, that each may terminate its respective Subadvisory Agreement on
sixty (60) days' written notice in the event of a breach of such agreement by
the Adviser.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
B-41
<PAGE>
FEDERAL TAXES - Each Portfolio of the Trust intends to meet all the
requirements and to elect the tax status of a "regulated investment company"
under the provisions of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As such, a Portfolio will not be subject to federal
income tax on that portion of any income and net realized capital gains which it
distributes to its shareholders. Each Portfolio intends to distribute all
income and net realized capital gains to the Variable Separate Account. If a
Portfolio should fail to meet the requirements of Subchapter M, it would be
subject to income tax on its income and capital gains.
PRICE OF SHARES
Shares of the Trust are currently offered only to the Variable Separate
Account. The price paid for shares, the offering price, is the net asset value
per share calculated once daily at the close of regular trading (currently 4:00
p.m., New York time) each day the New York Stock Exchange is open. The New York
Stock Exchange is currently closed on weekends and on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas Day.
Stocks and convertible bonds and debentures traded on the New York Stock
Exchange are valued at the last sale price on such exchange on the day of
valuation, or if there is no sale on the day of valuation, at the last-reported
bid price. Non-convertible bonds and debentures and other long-term debt
securities are normally valued at prices obtained for the day of valuation from
a bond pricing service, when such prices are available. In circumstances in
which the Manager deems it appropriate to do so, an over-the-counter or exchange
quotation (at the mean of representative quoted bid or asked prices for such
securities or, if such prices are not available, at prices for securities of
comparable maturity, quality and type) may be used. Securities traded primarily
on securities exchanges outside the United States are valued at the last sale
price on such exchanges on the day of valuation, or if there is no sale on the
day of valuation, at the last-reported bid price. U.S. Treasury bills, and
other obligations issued by the U.S. Government, its agencies or
instrumentalities, certificates of deposit issued by banks, corporate short-term
notes and other short-term investments with original or remaining maturities in
excess of 60 days are valued at the mean of representative quoted bid and asked
prices for such securities as provided by a pricing service or, if such prices
are not available, for securities of comparable maturity, quality and type.
Short-term securities with 60 days or less to maturity are amortized to maturity
based on their cost to the Trust if acquired within 60 days of maturity or, if
already held by the Trust on the 60th day, are amortized to maturity based on
the value determined on the 61st day. Options on currencies purchased by a
Portfolio are valued at their last bid price in the case of listed options or at
the average of the last bid prices obtained from dealers in the case of OTC
options. Futures contracts involving foreign currencies traded on exchanges are
valued at their last sale or settlement price as of the close of such exchanges
or if no sales are reported, at the mean between the last reported bid and asked
prices. Other securities are valued on the basis of last sale or bid price (if
a last sale price is not available) in what is, in the opinion of the Manager,
the broadest and most representative market, that may be either a securities
exchange or the over-the-counter market. Where quotations
B-42
<PAGE>
are not readily available, securities are valued at fair value as determined in
good faith in accordance with procedures adopted by the Board of Trustees. The
fair value of all other assets is added to the value of securities to arrive at
the respective Portfolio's total assets.
A Portfolio's liabilities, including proper accruals of expense items, are
deducted from total assets.
The net asset value of the respective Portfolio is divided by the total
number of shares outstanding to arrive at the net asset value per share.
EXECUTION OF PORTFOLIO TRANSACTIONS
It is the policy of the Trust, in effecting transactions in portfolio
securities, to seek the best execution at the most favorable prices. The
determination of what may constitute best execution involves a number of
considerations, including the economic result to the Trust (involving both price
paid or received and any commissions and other costs), the efficiency with which
the transaction is effected where a large block is involved, the availability of
the broker to stand ready to execute potentially difficult transactions and the
financial strength and stability of the broker. Such considerations are
judgmental and are considered in determining the overall reasonableness of
brokerage commissions paid.
A factor in the selection of brokers is the receipt of research services --
analyses and reports concerning issuers, industries, securities, economic
factors and trends -- and other statistical and factual information. Research
and other statistical and factual information provided by brokers is considered
to be in addition to and not in lieu of services required to be performed by the
Manager.
The extent to which commissions may reflect the value of research services
cannot be presently determined. To the extent that research services of value
are provided by broker-dealers with or through whom the Manager places the
Trust's portfolio transactions, the Manager may be relieved of expenses it might
otherwise bear. Research services furnished by broker-dealers could be useful
and of value to the Manager in serving other clients as well as the Trust and
research services obtained by the Manager as a result of the placement of
portfolio brokerage of other clients could be useful and of value in serving the
Trust.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Trust is subject to an exemptive order
from the Securities and Exchange Commission (the "SEC"), permitting the Trust to
deal with securities dealers (that may be deemed to be affiliated persons of
B-43
<PAGE>
affiliated persons of the Trust solely because of any subadvisory relationship)
as a principal in purchases and sales of certain securities.
Subject to the above considerations, a Manager may use broker-dealer
affiliates of a Manager, as a broker for any Portfolio. In order for such
broker-dealer to effect any portfolio transactions for a Portfolio, the
commissions, fees or other remuneration received by the broker-dealer must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow such broker-dealer to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. Furthermore, the Trustees of
the Trust, including a majority of the non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to such broker-dealers are consistent with the
foregoing standard. These types of brokerage transactions are also subject to
such fiduciary standards as may be imposed upon the broker-dealers by applicable
law.
The policy of the Trust with respect to brokerage is reviewed by the Board
of Trustees from time-to-time. Because of the possibility of further regulatory
developments affecting the securities exchanges and brokerage practices
generally, the foregoing practices may be modified.
A Manager and its respective affiliates may manage, or have proprietary
interests in, accounts with similar or dissimilar or the same investment
objectives as one or more Portfolios of the Trust. Such account may or may not
be in competition with a Portfolio for investments. Investment decisions for
such accounts are based on criteria relevant to such accounts; portfolio
decisions and results of the Portfolio's investments may differ from those of
such other accounts. There is no obligation to make available for use in
managing the Portfolio any information or strategies used or developed in
managing such accounts. In addition, when two or more accounts seek to purchase
or sell the same assets, the assets actually purchased or sold may be allocated
among accounts on a good faith equitable basis at the discretion of the
account's adviser. In some cases, this system may adversely affect the price or
size of the position obtainable for a Portfolio.
If determined by a Manager to be beneficial to the interests of the Trust,
partners and/or employees of the Manager may serve on investment advisory
committees, which will consult with the subadviser regarding investment
objectives and strategies for the Trust. In connection with serving on such a
committee, such persons may receive information regarding a Portfolio's proposed
investment activities which is not generally available to unaffiliated market
participants, and there will be no obligation on the part of such persons to
make available for use in managing the Portfolio any information or strategies
known to them or developed in connection with their other activities.
It is possible that a Portfolio's holdings may include securities of
entities for which a Manager or its affiliate performs investment banking
services as well as securities of entities in which a subadviser or its
affiliate makes a market. From time to time, such activities may limit a
Portfolio's
B-44
<PAGE>
flexibility in purchases and sales of securities. When a Subadviser or its
affiliate is engaged in an underwriting or other distribution of securities of
an entity, the Subadviser may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Portfolio.
Because each Managed Component of a Multi-Managed Portfolio will be managed
independently of each other, it is possible that the same security may be
purchased and sold on the same day by two separate Managed Components, resulting
in higher brokerage commissions for the Portfolio.
GENERAL INFORMATION
CUSTODIAN - State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Trust's custodian.
In this capacity, State Street maintains the portfolio securities held by the
Trust, administers the purchase and sale of portfolio securities, and performs
certain other duties. State Street also serves as transfer agent and dividend
disbursing agent for the Trust.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL - Price Waterhouse LLP, 1177
Avenue of the Americas, New York, New York 10036, has been selected as the
Trust's independent accountants. Price Waterhouse LLP performs an annual audit
of the Trust's financial statements and provides tax consulting, tax return
preparation and accounting services relating to filings with the SEC. The firms
of Shereff, Friedman, Hoffman & Goodman LLP, 919 Third Avenue, New York, NY
10022, and Blazzard, Grodd & Hasenauer, P.C., Suite 213, Oceanwalk Mall, 101
North Ocean Drive, Hollywood, Florida 33019, have been selected to provide legal
counsel to the Trust.
REPORTS TO SHAREHOLDERS - Persons having a beneficial interest in the Trust
are provided at least semi-annually with reports showing the investments of the
Portfolios, financial statements and other information.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Shareholders of a Massachusetts
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. The risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which the Trust 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 Trust and provides that notice of the disclaimer
must be given in each agreement, obligation or instrument entered into or
executed by the Trust or Trustees. The Declaration of Trust provides for
indemnification of any shareholder held personally liable for the obligations of
the Trust and also provides for the Trust to reimburse the 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 Trust
B-45
<PAGE>
provides 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. The Prospectus and this Statement of Additional Information do not
contain all information set forth in the registration statement, its amendments
and exhibits thereto, that the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., to all of which reference is hereby made.
B-46
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS.
Contained in Part A, the Prospectus:
None
Contained in Part B, the Statement of Additional Information:
None
(b) EXHIBITS.
(1) Declaration of Trust. (1)
(2) By-Laws. (1)
(3) Voting Trust Agreement. Inapplicable.
(4) Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
(5)(a) Investment Advisory and Management Agreement between Registrant
and SunAmerica Asset Management Corp. ("SAAMCo"). (2)
(b) Subadvisory Agreement between SAAMCo and Janus Capital
Corporation. (2)
(c) Subadvisory Agreement between SAAMCo and Wellington Management
Company, LLP. (2)
(d) Form of Subadvisory Agreement between SAAMCo and Putnam
Investment Management, Inc. (2)
(e) Subadvisory Agreement between SAAMCo and T. Rowe Price
Associates, Inc. (2)
(6) Distribution Agreement. Inapplicable.
(7) Bonus, Profit Sharing, Pension or Similar Contracts.
Inapplicable.
(8) Custodian Agreement.
<PAGE>
(9) Fund Participation Agreement between Registrant and Anchor
National Life Insurance Company, on behalf of itself and Variable
Annuity Account Five.
(10) Opinion and Consent of Counsel. (2)
(11) Consent of Independent Accountants. Inapplicable.
(12) Financial Statements Omitted from Item 23. Inapplicable.
(13) Initial Capitalization Agreement. Inapplicable.
(14) Model Plan. Inapplicable.
(15) Rule 12b-1 Plan. Inapplicable.
(16) Performance Computations. Inapplicable.
(17) Powers of Attorney.
(1) Incorporated by reference to identically numbered exhibit to initial
registration statement of Registrant, filed July 23, 1996.
(2) Incorporated by reference to identically numbered exhibit to
Pre-effective Amendment No. 1 to registration statement of Registrant,
filed February 11, 1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Anchor National Life Insurance Company, Anchor Pathway Fund, Anchor Series
Trust, SunAmerica Inc., SunAmerica Life Insurance Company and SunAmerica
Series Trust.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1997, the number of record holders of Seasons Series
Trust was as follows:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Shares of Beneficial Interest 0
ITEM 27. INDEMNIFICATION.
Article VI of the Registrant's By-Laws relating to the indemnification of
officers and trustees is quoted below:
<PAGE>
ARTICLE VI
INDEMNIFICATION
The Trust shall provide any indemnification required by applicable law
and shall indemnify trustees, officers, agents and employees as follows:
(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 of 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, provided 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 proceeding, had no reasonable cause to believe such
Person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the Person did not reasonably believe his or her actions
to be in or not opposed to the best interests of the Trust, and, with
respect to any criminal action or proceeding, had reasonable cause to
believe that such Person's conduct was unlawful.
(b) The Trust shall indemnify any Trustee or officer of the Trust who was
or is a part 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 Trustee, 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 or otherwise 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).
C-3
<PAGE>
(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 in view of 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 disinterested and not parties
to such action, suit or proceedings, or (ii) if such a quorum of
disinterested Trustees so directs, by independent legal counsel in a
written opinion, and any determination so made shall be conclusive and
binding upon all parties.
(e) Expenses incurred in defending a civil or criminal action, writ 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 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. Such
determination must be made by disinterested Trustees or independent legal
counsel.
Prior to any payment being made pursuant to this paragraph, a majority of
quorum of disinterested, non-party Trustees of the Trust, or an independent
legal counsel in a written opinion, shall determine, based on a review of
readily available facts that there is reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
(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 a Trustee or officer
and shall inure to the benefit of the heirs, executors and administrators
of such a Person.
(h) Nothing in the Declaration or in these By-Laws shall be deemed to
protect any Trustee or officer 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 of any Person in contravention of any rule or regulation
and/or interpretation of the Securities and Exchange Commission.
* * * * * * * * * * * * * *
C-4
<PAGE>
The Investment Advisory and Management Agreement provides that in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties involved in the conduct of office on the
part of the Adviser (and its officers, directors, agents, employees,
controlling persons, shareholders and any other person or entity affiliated
with the Adviser to perform or assist in the performance of its obligations
under each Agreement) the Adviser shall not be subject to liability to the
Trust or to any other person for any act or omission in the course of, or
connected with, rendering services, including without limitation, any error
of judgment or mistake of law or for any loss suffered by any of them in
connection with the matters to which each Agreement relates, except to the
extent specified in Section 36(b) of the Investment Company Act of 1940
concerning loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services. Certain of the Subadvisory
Agreements provide for similar indemnification of the Subadviser by the
Adviser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, 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 or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF ADVISER.
SunAmerica Asset Management Corp. ("SAAMCo"), the Adviser of the Trust, is
primarily in the business of providing investment management, advisory and
administrative services. Reference is made to the most recent Form ADV and
schedules thereto of SAAMCo on file with the Commission (File No.
801-19813) for a description of the names and employment of the directors
and officers of SAAMCo and other required information.
C-5
<PAGE>
T. Rowe Price Associates, Inc., Janus Capital Corporation, Wellington
Management Company, and Putnam Investment Management, Inc., the
Subadvisers of certain of the Portfolios of the Trust, are primarily
engaged in the business of rendering investment advisory services.
Reference is made to the most recent Form ADV and schedules thereto on file
with the Commission for a description of the names and employment of the
directors and officers of T. Rowe Price Associates, Inc., Janus Capital
Corporation, Wellington Management Company, and Putnam Investment
Management, Inc. and other required information:
FILE NO.
T. Rowe Price Associates, Inc. 801-856
Janus Capital Corporation 80-13991
Wellington Management Company 801-15908
Putnam Investment Management, Inc. 801-7974
ITEM 29. PRINCIPAL UNDERWRITERS.
There is no Principal Underwriter for the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian, transfer agent and dividend paying
agent. It maintains books, records and accounts pursuant to the
instructions of the Trust.
SunAmerica Asset Management Corp., is located at The SunAmerica Center, 733
Third Avenue, New York, New York 10017-3204. T. Rowe Price Associates,
Inc. is located at 100 East Pratt Street, Baltimore, Maryland 21202.
Janus Capital Corporation is located at 100 Fillmore Street, Suite 300,
Denver, Colorado 80296-4923. Wellington Management Company is located at
75 State Street, Boston, Massachusetts 02109. Putnam Investment
Management, Inc. is located at One Post Office Square, Boston,
Massachusetts. Each of the Adviser and Subadvisers maintain the books,
accounts and records required to be maintained pursuant to Section 31(a) of
the Investment Company Act of 1940 and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS
To file a post-effective amendment, using financial statements which may
not be certified, within four to six months of the effective date of this
Registration Statement.
The Registrant will furnish each person to whom a Prospectus is delivered
with a copy of Registrant's latest annual report to shareholders, upon request
and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 31st day of March, 1997.
SEASONS SERIES TRUST
REGISTRANT
By: /s/ Peter C. Sutton, Vice President
------------------------------------
(Peter C. Sutton, Vice President)
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
* Trustee, Chairman and
- ------------------------- President (Principal
James K. Hunt Executive Officer)
* Senior Vice President,
- ------------------------- Treasurer and Controller
Scott L. Robinson Principal Financial and
Accounting Officer)
* Trustee
- -------------------------
Richard S. Barger
*
- ------------------------- Trustee
Norman J. Metcalfe
*
- ------------------------- Trustee
Allan L. Sher
*
- ------------------------- Trustee
William M. Wardlaw
By: /s/ Robert M. Zakem March 31, 1997
-----------------------------------
(Robert M. Zakem, Attorney-in-Fact)
C-7
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
(8) Custodian Agreement.
(9) Fund Participation Agreement between Registrant and Anchor National
Life Insurance Company, on behalf of itself and Variable Annuity
Account Five.
(17) Powers of Attorney.
C-8
<PAGE>
CUSTODIAN CONTRACT
Between
SEASONS SERIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By
It. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States. . . . . . . . . . 2
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Registration of Securities . . . . . . . . . . . . . . . . . . . . . 4
2.4 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Availability of Federal Funds. . . . . . . . . . . . . . . . . . . . 5
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Payment of Fund Monies . . . . . . . . . . . . . . . . . . . . . . . 5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 Appointment of Agents. . . . . . . . . . . . . . . . . . . . . . . . 7
2.10 Deposit of Fund Assets in U.S. Securities System . . . . . . . . . . 7
2.11 Fund Assets Held in the Custodian's Direct
Paper System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.12 Segregated Account . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Ownership Certificates for Tax Purposes. . . . . . . . . . . . . . .10
2.14 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.15 Communications Relating to Portfolio Securities. . . . . . . . . . .10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States. . . . . . . . . . . . . . . .11
3.1 Appointment of Foreign Sub-Custodians. . . . . . . . . . . . . . . .11
3.2 Assets to be Held. . . . . . . . . . . . . . . . . . . . . . . . . .11
3.3 Foreign Securities Systems . . . . . . . . . . . . . . . . . . . . .11
3.4 Holding Securities . . . . . . . . . . . . . . . . . . . . . . . . .11
3.5 Agreements with Foreign Banking Institutions . . . . . . . . . . . .12
3.6 Access of Independent Accountants of the Fund. . . . . . . . . . . .12
3.7 Reports by Custodian . . . . . . . . . . . . . . . . . . . . . . . .12
3.8 Transactions in Foreign Custody Account. . . . . . . . . . . . . . .12
3.9 Liability of Foreign Sub-Custodians. . . . . . . . . . . . . . . . .13
3.10 Liability of Custodian . . . . . . . . . . . . . . . . . . . . . . .13
3.11 Reimbursement for Advances . . . . . . . . . . . . . . . . . . . . .13
3.12 Monitoring Responsibilities. . . . . . . . . . . . . . . . . . . . .14
3.13 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . . . . . .14
<PAGE>
3.14 Tax Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
4. Payments for Sales or Repurchases or Redemptions
of Shares of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . .15
5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . .15
6. Actions Permitted Without Express Authority . . . . . . . . . . . . . . .15
7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . . . . .16
8. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income . . . . . . . . . . . .16
9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
10. Opinion of Fund's Independent Accountants . . . . . . . . . . . . . . . .17
11. Reports to Fund by Independent Public Accountants . . . . . . . . . . . .17
12. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . . . . .17
13. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . . . . .17
14. Effective Period, Termination and Amendment . . . . . . . . . . . . . . .19
15. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . .20
16. Interpretive and Additional Provisions. . . . . . . . . . . . . . . . . .20
17. Additional Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
18. Massachusetts Law to Apply. . . . . . . . . . . . . . . . . . . . . . . .21
19. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
20. Shareholder Communications Election . . . . . . . . . . . . . . . . . . .21
<PAGE>
CUSTODIAN CONTRACT
This Contract between Seasons Series Trust, a business trust organized and
existing under the laws of The Commonwealth of Massachusetts, having its
principal place of business at One SunAmerica Center, Los Angeles, California
90067-6022 hereinafter called the "Fund", and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in six series, Multi-
Managed Growth Portfolio, Multi-Managed Moderate Growth Portfolio, Multi-Managed
Income/Equity Portfolio, Multi-Managed Income Portfolio, Asset Allocation:
Diversified Growth Portfolio and Stock Portfolio (such series together with all
other series subsequently established by the Fund and made subject to this
Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios, ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign
<PAGE>
banking institutions and foreign securities depositories designated in Schedule
A hereto but only in accordance with the provisions of Article 3.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN IN THE UNITED STATES
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies (each, a U.S. Securities System") and (b)
commercial paper of an issuer for which State Street Bank and Trust Company
acts as issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian (the "Direct Paper
System") pursuant to Section 2.11.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
2
<PAGE>
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; PROVIDED that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, BUT ONLY against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, BUT ONLY against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
3
<PAGE>
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, UNLESS the Fund has authorized in
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the Banking
4
<PAGE>
Department of the Custodian or in such other banks or trust companies as it
may in its discretion deem necessary or desirable; PROVIDED, however, that
every such bank or trust company shall be qualified to act as a custodian
under the Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust company
shall on behalf of each applicable Portfolio be approved by vote of a
majority of the Board of Trustees of the Fund. Such funds shall be
deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S.
Securities
5
<PAGE>
System, in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section 2.11;
(d) in the case of repurchase agreements entered into between the Fund
on behalf of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Portfolio of securities owned by the Custodian along
with written evidence of the agreement by the Custodian to repurchase
such securities from the Portfolio or (e) for transfer to a time
deposit account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a confirmation from
a broker and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, BUT ONLY upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
2.8 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund
6
<PAGE>
on behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
PROVIDED, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "U.S. Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and regulations,
if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account ("Account") of the Custodian in the U.S. Securities System
which shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the U.S. Securities System
that payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Portfolio.
Copies of all advices from the U.S. Securities System of transfers of
securities for the account of the Portfolio shall identify the
Portfolio, be maintained for the Portfolio by the Custodian and be
provided to the Fund at its request. Upon request, the Custodian
shall furnish the Fund on behalf of the Portfolio confirmation of each
transfer to or from the account of the Portfolio in the form of a
written advice or notice and shall furnish to the Fund on behalf of
the Portfolio copies of daily transaction sheets
7
<PAGE>
reflecting each day's transactions in the U.S. Securities System for
the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage.
2.11 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may
deposit and/or maintain securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the
8
<PAGE>
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the U.S. Securities System for the account
of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio establish
and maintain a segregated account or accounts for and on behalf of each
such Portfolio, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
9
<PAGE>
2.14 PROXIES. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
3. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD OUTSIDE
OF THE UNITED STATES
3.1 APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Trustees, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities depositories
to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets.
3.2 ASSETS TO BE HELD. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
10
<PAGE>
3.3 FOREIGN SECURITIES SYSTEMS. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or in
a book-entry system for the central handling of securities located outside
the United States (each a "Foreign Securities System") only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof (Foreign Securities Systems and
U.S. Securities Systems are collectively referred to herein as the
"Securities Systems"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
3.4 HOLDING SECURITIES. The Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign sub-
custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, PROVIDED HOWEVER, that (i) the
records of the Custodian with respect to securities and other non-cash
property of the Fund which are maintained in such account shall identify by
book-entry those securities and other non-cash property belonging to the
Fund and (ii) the Custodian shall require that securities and other non-
cash property so held by the foreign sub-custodian be held separately from
any assets of the foreign sub-custodian or of others.
3.5 AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each agreement with a
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the assets of each Portfolio
will be freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to each applicable Portfolio; (d)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to the
books and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e) assets of the
Portfolios held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.7 REPORTS BY CUSTODIAN. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained by
a foreign banking
11
<PAGE>
institution for the Custodian on behalf of each applicable Portfolio
indicating, as to securities acquired for a Portfolio, the identity of the
entity having physical possession of such securities.
3.8 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. (a) Except as otherwise provided
in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7
of this Contract shall apply, MUTATIS MUTANDIS to the foreign securities of
the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 LIABILITY OF CUSTODIAN. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation,
12
<PAGE>
nationalization, insurrection, civil strife or armed hostilities) or (b)
other losses (excluding a bankruptcy or insolvency of State Street London
Ltd. not caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 REIMBURSEMENT FOR ADVANCES. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's
assets to the extent necessary to obtain reimbursement.
3.12 MONITORING RESPONSIBILITIES. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the case
of any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 BRANCHES OF U.S. BANKS. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction
of the Custodian, State Street London Ltd. or both.
3.14 TAX LAW. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the
13
<PAGE>
Custodian as custodian of the Fund by the tax law of jurisdictions other
than those mentioned in the above sentence, including responsibility for
withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES OF THE FUND
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares of the Fund, the Custodian shall honor checks
drawn on the Custodian by a holder of Shares, which checks have been furnished
by the Fund to the holder of Shares, when presented to the Custodian in
accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
5. PROPER INSTRUCTIONS
Proper Instructions as used throughout this Contract means a writing signed
or initialled by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three - party agreement which requires a segregated asset account in
accordance with Section 2.12.
14
<PAGE>
6. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, PROVIDED that all such payments shall be accounted for to
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Portfolio shall be made at the time or times described from
time to time in the Fund's currently effective prospectus related to such
Portfolio.
15
<PAGE>
9. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
13. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
16
<PAGE>
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel (who may be counsel for the Fund)
on all matters, and shall be without liability for any action reasonably taken
or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions, computer viruses or communications disruptions, acts
of war or terrorism, riots, revolutions, work stoppages, natural disasters or
other similar events or acts; (ii) errors by the Fund or the Investment Advisor
in their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent payment or clearing
system to deliver to the Custodian's sub-custodian or agent securities purchased
or in the remittance or payment made in connection with securities sold; (v) any
delay or failure of any company, corporation, or other body in charge of
registering or transferring securities in the name of the Custodian, the Fund,
the Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including non-
receipt of bonus, dividends and rights and other accretions or benefits; (vi)
delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System; and
(vii) any provision of any present or future law or regulation or order of the
United States of America, or any state thereof, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
17
<PAGE>
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; PROVIDED, however that the
Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Fund has approved the
initial use of a particular Securities System by such Portfolio, as required by
Rule 17f-4 under the Investment Company Act of 1940, as amended and that the
Custodian shall not with respect to a Portfolio act under Section 2.11 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has approved the initial use of
the Direct Paper System by such Portfolio ; PROVIDED FURTHER, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of
18
<PAGE>
each applicable Portfolio then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of each such Portfolio
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. INTERPRETIVE AND ADDITIONAL PROVISIONS
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, PROVIDED that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
17. ADDITIONAL FUNDS
In the event that the Fund establishes one or more series of Shares in
addition to Multi-Managed Growth Portfolio, Multi-Managed Moderate Growth
Portfolio, Multi-Managed Income/Equity Portfolio, Multi-Managed Income
Portfolio, Asset Allocation: Diversified Growth Portfolio and Stock Portfolio
with respect to which it desires to have the Custodian render services as
19
<PAGE>
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
18. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. SHAREHOLDER COMMUNICATIONS ELECTION
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
20
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 25th day of February , 1997.
ATTEST SEASONS SERIES TRUST
/s/ Robert M. Zakem By /s/ Peter C. Sutton
- ------------------------- --------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Francene S. Hayes By /s/ Ronald E. Logue
- ------------------------- --------------------------------
Executive Vice President
21
<PAGE>
SCHEDULE A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of Seasons Series
Trust for use as sub-custodians for the Fund's securities and other assets:
(Insert banks and securities depositories)
Certified:
- -------------------------
Fund's Authorized Officer
Date:
--------------------
22
<PAGE>
FUND PARTICIPATION AGREEMENT
AGREEMENT, made on this 2nd day of January, 1997, between ANCHOR NATIONAL
LIFE INSURANCE COMPANY ("Anchor National"), a life insurance company organized
under the laws of the State of Arizona, on behalf of itself and on behalf of
VARIABLE ANNUITY ACCOUNT FIVE ("Variable Account"), a separate account of Anchor
National existing pursuant to the laws of the State of Arizona, and SEASONS
SERIES TRUST ("Fund"), an open-end management investment company established
pursuant to the laws of the Commonwealth of Massachusetts under a Declaration of
Fund dated October 11, 1995 which is composed of multiple investment series
("Portfolios").
WITNESSETH:
WHEREAS, Anchor National, by resolution, has established the Variable
Account on its books of account for the purpose of funding certain variable
annuity contracts issued by it; and
WHEREAS, the Variable Account is divided into various portfolios
("Divisions") under which the income, gains and losses, whether or not realized,
from assets allocated to each such Division are, in accordance with the
applicable variable annuity contracts, credited to or charged against such
Division without regard to any income, gains or losses of other Divisions or
separate accounts of Anchor National; and
WHEREAS, the Variable Account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940 ("Act"); and
WHEREAS, the Fund, a registered, open-end, diversified management
investment company, is divided into various Portfolios, each Portfolio being
subject to separate investment objectives and restrictions which may not be
changed without a majority vote of the shareholders of each such Portfolio; and
WHEREAS, the Variable Account desires to purchase shares of the Fund in
connection with the issuance of certain variable annuity contracts to be
marketed under the name Seasons (collectively with other contracts and policies
that may be funded through the Fund, "Contracts"); and
WHEREAS, the Fund agrees to make shares of certain of its Portfolios
available to serve as underlying investment media for the corresponding
Divisions of the Variable Account; and
WHEREAS, SUNAMERICA CAPITAL SERVICES, INC. ("Distributor"), which serves as
the distributor for the Contracts funded in the Variable Account pursuant to an
agreement with Anchor National on behalf of itself and the Variable Account is a
broker-dealer registered as such under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc.;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of mutual covenants
and conditions set forth herein and for other good and valuable consideration,
Anchor National (on behalf of itself and the Variable Account) and the Fund
hereby agree as follows:
1. The Contracts funded by the Variable Account will provide for the
allocation of net amounts among certain Divisions of the Variable Account for
investment in the shares of the portfolios of the Fund underlying each such
Division. The selection of a particular Division is to be made (and such
selection may be changed) in accordance with the terms of the applicable
Contract.
2. No representation is made as to the number or amount of such Contracts
to be sold. Anchor National, pursuant to its agreement with Distributor, will
make reasonable efforts to market those Contracts it determines from time to
time to offer for sale and, although it is not required to offer for sale new
Contracts, Anchor National will accept payments and otherwise service existing
Contracts funded in the Variable Account.
3. Fund shares to be made available to the respective Divisions of the
Variable Account shall be sold by each of the respective Portfolios of the Fund
and purchased by Anchor National for that Division at the net asset value next
computed after receipt of each order, as established in accordance with the
provisions of the then current prospectus of the Fund. Shares of a particular
Portfolio of the Fund shall be ordered in such quantities and at such times as
determined by Anchor National to be necessary to meet the requirements of those
Contracts having amounts allocated to the Division for which the Fund Portfolio
shares serve as the underlying investment medium. Orders and payments for
shares purchased will be sent promptly to the Fund and will be made payable in
the manner established from time to time by the Fund for the receipt of such
payments. The Fund reserves the right to delay transfer of its shares until the
payment check has cleared. The Fund has the obligation to insure that its
shares to be made available to the appropriate Division(s) under the Contracts
are registered at all times under the Securities Act of 1933 ("1933 Act").
4. The Fund will redeem the shares of the various Portfolios when
requested by Anchor National on behalf of the corresponding Division of the
Variable Account at the net asset value next computed after receipt of each
request for redemption, as established in accordance with the provisions of the
then current prospectus of the Fund. The Fund will make payment in the manner
established from time to time by the Fund for the receipt of such redemption
requests, but in no event shall payment be delayed for a greater period than is
permitted by the Act.
5. Transfer of the Fund's shares will be by book entry only. No stock
certificates will be issued to the Variable Account. Shares ordered from a
particular Portfolio to the Fund will be recorded in an appropriate title for
the corresponding Division of the Variable Account.
6. The Fund shall furnish notice promptly to Anchor National of any
dividend or distribution payable on its shares which are subject to this
Agreement. All of such dividends and distributions as are payable on each of
the Portfolio shares in the title for the corresponding Division of
-2-
<PAGE>
the Variable Account shall be automatically reinvested in additional shares of
that Portfolio of the Fund. The Fund shall notify Anchor National of the number
of shares so issued.
7. All expenses incident to the performance of the Fund under this
Agreement shall be paid by the Fund. The Fund shall ensure that all of its
shares which are subject to this Agreement are registered and authorized for
issue in accordance with applicable federal and state laws prior to their
purchase by the Variable Account. Anchor National shall bear none of the
expenses for the cost of registration of the Fund's shares, preparation of the
Fund's prospectuses, proxy materials and reports, the distribution of such items
to shareholders, the preparation of all statements and notices required by any
federal or state law or any taxes on the issue or transfer of the Fund's shares
subject to this Agreement.
8. Anchor National, either directly or through Distributor, shall make no
representations concerning the Fund's shares which are subject to this Agreement
other than those contained in the then current prospectus of the Fund and in
printed information subsequently issued by the Fund as supplemental to such
prospects.
9. Anchor National and the Fund acknowledge that in the future, the
Fund's shares may become available for investment by separate accounts of other
insurance companies, which may or may not be affiliated persons (as that term is
defined in the Act) of Anchor National (collectively with Anchor National,
"Participating Insurers"). In such event, (a) the Fund shall undertake that its
Board of Trustees ("Board") will monitor the Fund for the existence of material
irreconcilable conflicts that may arise between the Contract owners of
Participating Insurers, for the purpose of identifying and remedying any such
conflict and (b) paragraphs 10, 11 and 12 shall apply. In discharging its
responsibilities under paragraphs 10, 11 and 12 hereinafter, Anchor National
will cooperate and coordinate, to the extent necessary, with the Board and with
other Participating Insurers. The Fund agrees that it will require, as a
condition to participation, that all Participating Insurers shall have
obligations and responsibilities regarding conflicts of interest corresponding
to those that are agreed to herein by Anchor National pursuant to such
paragraphs 10, 11 and 12 and pursuant to this paragraph 9.
10. Anchor National shall provide pass-through voting privileges to all
variable Contract owners so long as the U.S. Securities and Exchange Commission
continues to interpret the Act to require pass-through voting privileges for
variable Contract owners. Anchor National shall be responsible for assuring
that the Variable Account calculates voting privilege in a manner consistent
with separate accounts of other Participating Insurers, as determined by the
Board. Anchor National will vote shares for which it has not received voting
instructions in the same proportion as it votes shares for which it has received
instructions.
11. Anchor National will report to the Board any potential or existing
conflicts of which it is or becomes aware between any of its Contract owners or
between any of its Contract owners and Contract owners of other Participating
Insurers. Anchor National will be responsible for assisting the Board in
carrying out its responsibilities to identify material conflicts by providing
the Board with all
-3-
<PAGE>
information available to it that is reasonably necessary for the Board to
consider any issues raised, including information as to a decision by Anchor
National to disregard voting instructions of its Contract owners.
12. The Board's determination of the existence of an irreconcilable
material conflict and its implications shall be made known promptly by it to
Anchor National and other Participating Insurers. An irreconcilable material
conflict may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance tax, or securities laws or regulations, or a public ruling,
private letter ruling, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by variable
annuity Contract owners and variable life insurance Contract owners or by
Contract owners of different Participating Insurers; or (f) a decision by a
Participating Insurer to disregard the voting instructions of variable Contract
owners.
13. If it is determined by a majority of the Board or a majority of its
disinterested Trustees that a material irreconcilable conflict exists that
affects the interests of Anchor National Contract owners, Anchor National shall,
in cooperation with other Participating Insurers whose Contract owners'
interests are also affected by the conflict, take whatever steps are necessary
to remedy or eliminate the irreconcilable material conflict, which steps could
include: (a) withdrawing the assets allocable to the Variable Account from the
Fund or any portfolio and reinvesting such assets in a different investment
medium, including another Portfolio of the Fund, or submitting the question of
whether such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any particular
group (e.g., annuity Contract owners or life insurance Contract owners) that
votes in favor of such segregation, or offering to the affected Contract owners
of the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account. Anchor National
shall take such steps at its expense if the conflict affects solely the
interests of the owners of Anchor National Contracts, but shall bear only its
equitable portion of any such expense if the conflict also affects the interest
of the Contract owners of one or more Participating Insurers other than Anchor
National, PROVIDED: that this sentence shall not be construed to require the
Fund to bear any portion of such expense. If a material irreconcilable conflict
arises because of Anchor National's decision to disregard Contract owner voting
instructions and that decision represents a minority position or would preclude
a majority vote, Anchor National may be required, at Fund's election, to
withdraw the Variable Account's investment in the Fund, and no charge or penalty
will be imposed against the Variable Account as a result of such a withdrawal.
Anchor National agrees to take such remedial action as may be required under
this paragraph 13 with a view only to the interests of its Contract owners. For
purposes of this paragraph 13, a majority of the disinterested members of the
Board shall determine whether or not any proposed action adequately remedies any
irreconcilable conflict, but in no event will Fund be required to establish a
new funding medium for any variable Contracts. Anchor National shall not be
required by this paragraph 13 to establish a new funding medium for any variable
Contract if an offer to do so has been declined by vote of a majority of
affected Contract owners.
-4-
<PAGE>
14. This Agreement shall terminate:
(a) at the option of Anchor National or the Fund upon 60 days'
advance written notice to all other parties to this Agreement; or
(b) at the option of Anchor National if any of the Fund's shares are
not reasonably available to meet the requirements of the
Contracts funded in the Variable Account as determined by Anchor
National. Prompt notice of election to terminate shall be
furnished by Anchor National; or
(c) at the option of Anchor National upon institution of formal
proceedings against the Fund by the Securities and Exchange
Commission; or
(d) upon the vote of Contract owners having an interest in a
particular Division of the Variable Account to substitute the
shares of another investment company for the corresponding Fund
Portfolio shares in accordance with the terms of the Contracts
for which those Fund shares had been selected to serve as the
underlying investment medium. Anchor National will give 30 days'
prior written notice to the Fund of the date of any proposed
action to replace the Fund's shares; or
(e) in the event the Fund's shares are not registered, issued or sold
in accordance with applicable state and/or federal law or such
law precludes the use of such shares as the underlying investment
medium of the Contracts funded in the Variable Account. Prompt
notice shall be given by each party to all other parties in the
event that the conditions stated in subsections (b), (c) or (d)
of this paragraph 14 should occur.
15. Notwithstanding any other provisions of this Agreement, the
obligations of the Fund hereunder are not personally binding upon any of the
trustees, shareholders, officers, employees or agents of the Fund; resort in
satisfaction of such obligations shall be had only to the assets and property of
the Fund and not to the private property of any of such Fund's trustees,
shareholders, officers, employees or agents.
16. This Agreement shall be construed in accordance with the laws of the
State of California.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ANCHOR NATIONAL LIFE INSURANCE COMPANY
By: /s/ Jana Waring Greer
Jana Waring Greer
Senior Vice President
VARIABLE ANNUITY ACCOUNT FIVE
BY: ANCHOR NATIONAL LIFE INSURANCE
COMPANY
By: /s/ Jana Waring Greer
Jana Waring Greer
Senior Vice President
SEASONS SERIES TRUST
By: /s/ Robert M. Zakem
Robert M. Zakem
Assistant Secretary
Acknowledged and Agreed:
SUNAMERICA CAPITAL SERVICES, INC.
By: /s/ J. Steven Neamtz Dated: January 2, 1997
J. Steven Neamtz
President
-6-
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and trustees
of Seasons Series Trust do hereby severally constitute and appoint Susan L.
Harris, Scott L. Robinson, Peter C. Sutton and Robert M. Zakem or any of them,
the true and lawful agents and attorneys-in-fact of the undersigned with respect
to all matters arising in connection with the Registration Statement on Form N-
1A and any and all amendments (including post-effective amendments) thereto,
with full power and authority to execute said Registration Statement for and on
behalf of the undersigned, in our names and in the capacities indicated below,
and to file the same, together with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission. The
undersigned hereby give to said agents and attorneys-in-fact full power and
authority to act in the premises, including, but not limited to, the power to
appoint a substitute or substitutes to act hereunder with the same power and
authority as said agents and attorneys-in fact would have if personally acting.
The undersigned hereby ratify and confirm all that said agents and attorneys-in-
fact, or any substitute or substitutes, may do by virtue hereof.
WITNESS the due execution hereof on the date and in the capacity set forth
below.
Signature Title Date
- --------- ----- ----
/s/ James K. Hunt Trustee, Chairman and President February 25, 1997
- ------------------------- (Principal Executive Officer)
James K. Hunt
/s/ Scott L. Robinson Senior Vice President, Treasurer February 25, 1997
- ------------------------- and Controller (Principal Financial
Scott L. Robinson and Accounting Officer)
/s/ Richards D. Barger Trustee February 25, 1997
- -------------------------
Richards D. Barger
/s/ Norman J. Metcalfe Trustee February 25, 1997
- -------------------------
Norman J. Metcalfe
/s/ Allan L. Sher Trustee February 25, 1997
- -------------------------
Allan L. Sher
/s/ William M. Wardlaw Trustee February 25, 1997
- -------------------------
William M. Wardlaw
