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PROSPECTUS - JUNE 1, 1998
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FOCUS PORTFOLIO
Style Select Series-Registered Trademark-
The SunAmerica Center
733 Third Avenue, New York, NY 10017-3204
General Marketing and Shareholder Information
(800) 858-8850
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Focus Portfolio (the "Portfolio") is a separate investment portfolio of Style
Select Series, Inc., an open-end management investment company (the "Fund"). The
Portfolio seeks long-term growth of capital by investing generally in equity
securities. The Portfolio is managed by SunAmerica Asset Management Corp.
("SunAmerica"). The assets of the Portfolio are normally allocated among at
least three investment advisers (each, an "Adviser"), selected by SunAmerica
subject to the review and approval of the Fund's Board of Directors. Each
Adviser is independently responsible for advising its respective portion of the
Portfolio's assets by selecting its ten favorite stocks for the Portfolio. The
Advisers are BRAMWELL CAPITAL MANAGEMENT, INC. ("Bramwell"), JENNISON ASSOCIATES
LLC ("Jennison") and MARSICO CAPITAL MANAGEMENT, LLC ("Marsico").
The Portfolio currently offers Class A, Class B and Class II shares. The
offering price is the next-determined net asset value per share, plus for each
class a sales charge which, at the investor's option, may be (i) imposed at the
time of purchase (Class A shares), (ii) deferred (Class B shares and purchases
of Class A shares in excess of $1 million) or (iii) with elements of a sales
charge that is both imposed at the time of purchase and deferred (Class II
shares). Class B shares may be subject to a declining contingent deferred sales
charge ("CDSC") that may be imposed on redemptions made within six years of
purchase. Class B shares of the Portfolio will convert automatically to Class A
shares on the first business day of the month following the seventh anniversary
of the issuance of such Class B shares. Class II shares may be subject to a CDSC
imposed on redemptions made within one year of purchase. Each class makes
distribution and account maintenance and service fee payments under a
distribution plan pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "1940 Act"). See "Purchase of Shares."
Shares of the Portfolio 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.
This Prospectus explains concisely what you should know before investing in the
Portfolio. Please read it carefully before investing and retain it for future
reference. You can find more detailed information about the Portfolio in the
Statement of Additional Information dated June 1, 1998, which is incorporated by
reference into this Prospectus. The Statement of Additional Information may be
obtained without charge by contacting the Fund at the address or telephone
number listed above.
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.
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TABLE OF CONTENTS
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<TABLE>
<C> <S>
COVER Focus Portfolio
3 Summary of Fund Expenses
4 Investment Objective, Policies and
Restrictions
5 Investment Techniques and Risk
Factors
7 Management of the Portfolio
10 Purchase of Shares
14 Redemption of Shares
15 Exchange Privilege
16 Portfolio Transactions, Brokerage and
Turnover
17 Determination of Net Asset Value
17 Performance Data
17 Dividends, Distributions and Taxes
19 General Information
</TABLE>
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SUMMARY OF FUND EXPENSES
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A general comparison of the sales arrangements and other expenses applicable to
Class A, Class B and Class II shares follows:
<TABLE>
<CAPTION>
FOCUS PORTFOLIO
Class Class Class
A B II
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Initial Sales Load(1) 5.75% None 1.00%
Maximum Sales Load on Reinvested
Dividends None None None
Maximum Deferred Sales Load(2) None 4.00% 1.00%
Redemption Fees(3) None None None
Exchange Fees None None None
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ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.85% 0.85% 0.85%
12b-1 Fees(4) 0.35% 1.00% 1.00%
Other Expenses(5) (net of fee
waivers/expense reimbursements) 0.25% 0.25% 0.25%
TOTAL OPERATING EXPENSES (NET OF
FEE WAIVERS/EXPENSE
REIMBURSEMENTS)(5) 1.45% 2.10% 2.10%
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</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more. See "Purchase of
Shares."
(2) Purchases of Class A shares in excess of $1 million will be subject to a
CDSC on redemptions made within one year of purchase. The CDSC on Class B
shares applies only if a redemption occurs within six years from their
purchase date. The CDSC on Class II shares applies only on redemptions made
within one year of purchase.
(3) A $15.00 fee may be imposed for wire redemptions.
(4) 0.25% of the 12b-1 fee comprises an Account Maintenance and Service Fee. A
portion of the Account Maintenance and Service Fee is allocated to member
firms of the National Association of Securities Dealers, Inc. for
continuous personal service by such members to investors in the Portfolio,
such as responding to shareholder inquiries, quoting net asset values,
providing current marketing material and attending to other shareholder
matters. Class B or Class II shareholders who own their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than
the economic equivalent of the maximum front-end sales charge permitted
under the Conduct Rules of the National Association of Securities Dealers,
Inc.
(5) SunAmerica has voluntarily agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate set forth
above under Total Operating Expenses. The information provided in the table
represents estimated amounts for the current fiscal year net of current fee
waivers/expense reimbursements. In the absence of such waivers and
reimbursements, other expenses are estimated to be 0.40%, 0.40% and 0.40%,
respectively, and total operating expenses are estimated to be 1.60%, 2.25%
and 2.25%, respectively, for Class A, B and II, respectively.
EXAMPLE:
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You would pay the following expenses on a $1,000 investment over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period. The 5% return and the expenses used in this example should not
be considered indicative of actual or expected performance or expenses both of
which will vary:
<TABLE>
<CAPTION>
1 YEARS 3 YEARS
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<S> <C> <C>
FOCUS PORTFOLIO
(Class A Shares) $ 71 $ 101
(Class B Shares)* $ 61 $ 96
(Class II Shares) $ 41 $ 75
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 YEARS 3 YEARS
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<S> <C> <C>
FOCUS PORTFOLIO
(Class A Shares) $ 71 $ 101
(Class B Shares)* $ 21 $ 66
(Class II Shares) $ 31 $ 75
</TABLE>
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* Class B shares convert to Class A shares on the first business day of the
month following the seventh anniversary of the purchase of such Class B
shares.
The foregoing examples should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
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INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
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The investment objective of the Portfolio is long-term growth of capital. The
Portfolio seeks to achieve its investment objective primarily through long-term
investment in equity securities. SunAmerica has selected three highly regarded
investment managers to serve as Advisers to the Portfolio. SunAmerica will
generally allocate investments in the Portfolio (and redemption requests)
equally among its three Advisers. Each Adviser will manage a portion of the
Portfolio's assets and will generally invest in the ten securities that
represent its favorite stock-picking ideas. The Portfolio's Advisers emphasize
different stock-picking styles and may invest in stocks with a range of market
capitalizations. Under normal circumstances, the Portfolio intends to be
substantially or fully invested in equity securities, including common stocks
and other securities with the characteristics of common stocks.
As described above, the Portfolio will seek to achieve its investment objective
through the combined efforts of three Advisers who will provide their ten
favorite stock-picking ideas at any point in time. SunAmerica believes that most
investment managers normally own a small number of stocks in which they are
highly confident. But because holding only 10 or 15 stocks is not considered
prudent from a diversification standpoint or practical given the large dollar
amounts managed by most successful managers, most stock mutual funds hold more
than 50 stocks. SunAmerica believes that, over time, the performance of most
investment managers' "highest confidence" stocks exceeds that of their more
diversified portfolios. In addition, SunAmerica has selected Advisers with a
variety of stock-picking disciplines. SunAmerica believes that during any given
year certain stock-picking styles will generate higher returns while others will
lag. By including a variety of stock-picking styles in a single mutual fund,
SunAmerica believes that the variability of returns among stock-picking styles
can be lessened.
The Portfolio will be actively managed by each Adviser, which will continuously
review its stock picks. An Adviser will sell a stock when it is out of favor or
to make room in its portion of the Portfolio for a new favorite. At times, an
Adviser's portion of the Portfolio may consist of fewer than ten stock
positions, for example after an out of favor stock has been sold but before a
new favorite is available for purchase. In addition, to facilitate the orderly
liquidation of stock positions, an Adviser may on occasion have more than ten
stock positions in its portion of the Portfolio.
The Fund expects that differences in investment returns among the portions of
the Portfolio managed by different Advisers will cause the actual percentage of
the Portfolio's assets managed by each Adviser to vary over time. SunAmerica
does not intend to rebalance the allocation in the Portfolio among the Advisers
but reserves the right to do so if the assets managed by an Adviser deviate
significantly from that portion managed by any other Adviser to the Portfolio.
Re-balancing may involve re-directing cash flows from a better performing
Adviser to one with relatively lower returns.
There can be no assurance that the Portfolio's investment objective will be met
or that the net return on an investment in the Portfolio will exceed that which
could have been obtained through other investment or savings vehicles. The
section "Investment Techniques and Risk Factors" contains a discussion of the
types of securities in which the Portfolio may invest and certain investment
techniques that each Adviser for the Portfolio may use. In addition, that
section contains a discussion of certain of the principal risks attendant to an
investment in the Portfolio.
Except as specifically indicated, the Portfolio's investment objective and the
investment policies and strategies described herein are not fundamental policies
of the Portfolio and may be changed by the Board without the approval of
shareholders. Certain investment restrictions may not be changed without a
majority vote of the outstanding voting securities of the Portfolio. The
Portfolio's fundamental investment restrictions are described in the Statement
of Additional Information. For purposes of any investment policies or
restrictions discussed below, the percentage limitations of the Portfolio will
be applied by each Adviser to the portion of the Portfolio's assets managed by
that Adviser and will be determined at the time of an investment. SunAmerica,
however, is ultimately responsible for overseeing compliance by the Advisers,
and
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will in such capacity verify that in the aggregate the investments of the
Portfolio complies with applicable percentage limitations.
The Portfolio is "non-diversified" (as such term is defined under the 1940 Act),
subject, however, to certain tax diversification requirements. See "Dividends,
Distributions and Taxes."
INVESTMENT TECHNIQUES AND RISK FACTORS
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Unless otherwise specified, the Portfolio may invest in the following securities
and use the following techniques. The stated percentage limitations are applied
to an investment at the time of purchase unless otherwise indicated.
COMMON STOCKS. The fundamental risk associated with any fund that invests
primarily in common stocks is that the value of the common stocks in the
portfolio might decrease. Stock markets generally tend to move in cycles, with
periods of rising stock prices and periods of falling stock prices. Individual
stock values may fluctuate in response to the activities of an individual
company or in response to general market and/or economic conditions.
Historically, common stocks have provided greater long-term returns and have
entailed greater short-term risks than other investment types. The Portfolio is
not an appropriate investment for those who are unable or unwilling to assume
the risks involved generally with investments in common stocks.
INVESTMENT IN SMALL-CAP COMPANIES. The Portfolio may invest in small companies
having market capitalizations of under $1 billion. While such companies may
realize more substantial growth than larger, more established companies, they
may also be subject to some additional risks. 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. 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.
FOREIGN SECURITIES. The Portfolio is authorized to invest up to 30% of its
total assets in U.S. dollar denominated securities of foreign companies
including American Depositary Receipts. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange-control
regulations. 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.
SHORT-TERM INVESTMENTS. In addition to its primary investments, the Portfolio
may also invest up to 25% of its total assets in both U.S. and non-U.S. dollar
denominated money market instruments (a) for liquidity purposes (to meet
redemptions and expenses) or (b) to generate a return on idle cash held in the
Portfolio pending investment in
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the Portfolio's equity securities. Money market instruments include securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
repurchase agreements, commercial paper, bankers' acceptances and certificates
of deposit. See the Appendix to the Statement of Additional Information for a
description of securities rating.
REPURCHASE AGREEMENTS. Under these types of agreements, the Portfolio buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time (generally within seven days) and price. The seller
must maintain appropriate collateral with the Portfolio's custodian (or at an
appropriate sub-custodian in the case of tri- or quad-party repurchase
agreements). The 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 Adviser,
subject to the guidance of the Directors. 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. There is no limit on the
amount of the Portfolio's net assets that may be subject to repurchase
agreements having a maturity of seven days or less for temporary defensive
purposes.
ILLIQUID AND RESTRICTED SECURITIES. No more than 15% of the value of the
Portfolio's net assets may be invested in securities which are illiquid,
including repurchase agreements that have a maturity of longer than seven days.
For this purpose, not all securities which are restricted are deemed to be
illiquid. For example, restricted securities which the Board of Directors, or
the Adviser pursuant to guidelines established by the Board of Directors, 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, the 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.
BORROWING. As a matter of fundamental policy, the Portfolio is authorized to
borrow up to 33 1/3% of its total assets from banks for temporary or emergency
purposes. The Portfolio will not borrow for investment purposes.
LOANS OF PORTFOLIO SECURITIES. The Portfolio may lend portfolio securities in
amounts up to 33 1/3% of its 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, the 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 be made only to
firms deemed by the Adviser to be creditworthy. The proceeds of such loans will
be invested in high-quality short-term debt securities, including repurchase
agreements.
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MANAGEMENT OF THE PORTFOLIO
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DIRECTORS. The Directors of the Fund are responsible for the overall
supervision of the operation of the Fund and the Portfolio and perform various
duties imposed on directors of investment companies by the 1940 Act and by the
State of Maryland.
SUNAMERICA ASSET MANAGEMENT CORP. SunAmerica is an indirect wholly owned
subsidiary of SunAmerica Inc., an investment-grade financial services company
which, as of March 31, 1998, held more than $55 billion in assets. SunAmerica
Inc.'s principal executive offices are located at 1 SunAmerica Center, Los
Angeles, CA 90067-6022. In addition to managing the Fund, SunAmerica serves as
adviser, manager and/or administrator for Anchor Pathway Fund, Anchor Series
Trust, Seasons Series Trust, SunAmerica Equity Funds, SunAmerica Income Funds,
SunAmerica Money Market Funds, Inc. and SunAmerica Series Trust. SunAmerica
managed, advised and/or administered assets of approximately $14.5 billion as of
March 31, 1998 for investment companies, individuals, pension accounts and
corporate and trust accounts.
SunAmerica selects the Advisers for the Portfolio, provides various
administrative services and supervises the Portfolio's daily business affairs,
subject to general review by the Directors. The Investment Advisory and
Management Agreement entered into between SunAmerica and the Fund, on behalf of
the Portfolio (the "Management Agreement") authorizes SunAmerica to manage the
assets of the Portfolio and/or to retain the Advisers to do so. SunAmerica
monitors the activities of the Advisers, and from time to time will recommend
the replacement of an Adviser on the basis of investment performance, style
drift, or other considerations.
The annual rate of the investment advisory fee payable to SunAmerica is 0.85% of
Assets. The term "Assets" means the average daily net assets of the Portfolio.
The investment advisory fees are accrued daily and paid monthly, and may be
higher than those charged to other funds.
SunAmerica has voluntarily agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate of 1.45% of the
Assets of Class A shares and 2.10% of the Assets of Class B and Class II shares
for the Portfolio. SunAmerica also may voluntarily waive or reimburse additional
amounts to increase the investment return to the Portfolio's investors.
SunAmerica may terminate all such waivers and/ or reimbursements at any time.
Further, any waivers or reimbursements made by SunAmerica with respect to the
Portfolio are subject to recoupment from the Portfolio within the following two
years, provided that the Portfolio is able to effect such payment to SunAmerica
and remain in compliance with the foregoing expense limitations.
THE ADVISERS. The organizations described below act as Advisers to the Focus
Portfolio pursuant to agreements with SunAmerica (each, a "Subadvisory
Agreement" and collectively the "Subadvisory Agreements"). The duties of each
Adviser include furnishing continuing advice and recommendations to the relevant
portion of the Portfolio regarding securities to be purchased and sold. Each
Adviser, therefore, generally formulates the continuing program for management
of the Assets under its control consistent with the Portfolio's investment
objective and the investment policies established by the Board. Because each
Adviser manages its portion of the Portfolio independently of the Portfolio's
other Advisers, the same security may be held in two different portions of the
Portfolio, or may be acquired for one portion of the Portfolio at the time that
the Adviser to another portion of the Portfolio deems it appropriate to dispose
of the security from that other portion. Under some market conditions, one or
more of the Advisers may believe that temporary, defensive investments in
short-term instruments or cash are appropriate when another Adviser or Advisers
believe continued exposure to the equity markets is appropriate for their
portions of the Portfolio.
Each of the Advisers is independent of SunAmerica and discharges its
responsibilities subject to the oversight and supervision of SunAmerica, which
pays the Advisers' fees. Each Adviser is paid monthly by SunAmerica a fee equal
to a percentage of the Assets of the Portfolio allocated to the Adviser. The
actual aggregate annual rate of such fee is 0.40%, expressed as a percentage of
the Assets of the Portfolio. In addition, SunAmerica has agreed to pay an
additional $50,000 to the Adviser with the highest total return for its portion
of the Portfolio for each calendar year.
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SunAmerica may terminate any Subadvisory Agreement without shareholder approval.
Moreover, SunAmerica has received an exemptive order from the Securities and
Exchange Commission which permits SunAmerica, subject to certain conditions, to
enter into Subadvisory Agreements relating to the Fund with Advisers approved by
the Board without obtaining shareholder approval. The exemptive order also
permits SunAmerica, subject to the approval of the Board, but without
shareholder approval, to employ new Advisers for new or existing Portfolios,
change the terms of particular Subadvisory Agreements or continue the employment
of existing Advisers after events that would otherwise cause an automatic
termination of a Subadvisory Agreement. Shareholders of the Portfolio have the
right to terminate a Subadvisory Agreement for the Portfolio at any time by a
vote of the majority of the outstanding voting securities of the Portfolio.
Shareholders will be notified of any Adviser changes. The order also permits the
Fund to disclose to shareholders the Advisers' fees only in the aggregate for
the Portfolio.
The Advisers for the Portfolio are Bramwell, Jennison and Marsico.
BRAMWELL CAPITAL MANAGEMENT, INC.
Bramwell is a Delaware corporation located at 745 Fifth Avenue, New York, NY
10151. Elizabeth R. Bramwell is the founder and Chief Executive Officer of
Bramwell and owns all of the outstanding capital stock of Bramwell. As of April
30, 1998, Bramwell had under management approximately $605 million in assets.
Elizabeth R. Bramwell serves as the Portfolio Manager for Bramwell's
portion of the Portfolio. Ms. Bramwell founded Bramwell in 1994 and
has been the Chief Executive Officer ever since. From 1987 until
February 1994, Ms. Bramwell was President, Chief Investment Officer,
Portfolio Manager and Trustee of The Gabelli Growth Fund.
[PHOTO]
JENNISON ASSOCIATES LLC
Jennison is a Delaware limited liability company located at 466 Lexington
Avenue, New York, NY 10017. Jennison is wholly-owned by The Prudential Insurance
Company of America, a major diversified insurance and financial services
company. As of April 30, 1998, Jennison had approximately $42.5 billion in
assets under management for institutional and mutual fund clients.
Spiros "Sig" Segalas serves as the Portfolio Manager for Jennison's
portion of the Portfolio. Mr. Segalas is a founding director of
Jennison, which was established in 1969, and he has been the
Director and Equity Portfolio Manager ever since. In addition, Mr.
Segalas has served as President and Chief Investment Officer of
Jennison since 1993 and 1971, respectively.
[PHOTO]
MARSICO CAPITAL MANAGEMENT, LLC
Marsico is a Colorado limited liability company located at 1200 17th Street,
Suite 1300, Denver, CO 80202. Thomas F. Marsico is Chairman and Chief Executive
Officer and has voting control of Marsico. As of April 30, 1998, Marsico had
under management approximately $1 billion in assets.
Thomas F. Marsico serves as the Portfolio Manager for Marsico's
portion of the Portfolio. Mr. Marsico has been the Chairman and
Chief Executive Officer of Marsico since he formed Marsico in 1997.
From 1988 through 1997, Mr. Marsico served as the portfolio manager
of the Janus Twenty Fund and from 1991 through 1997, Mr. Marsico
served as the portfolio manager of the Janus Growth & Income Fund.
[PHOTO]
THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an
indirect wholly owned subsidiary of SunAmerica, acts as distributor of the
shares of the Portfolio pursuant to the Distribution Agreement between the
Distributor and the Fund on behalf of the Portfolio. The Distributor receives
all initial and deferred sales charges in connection with the sale of Portfolio
shares, all or a portion of which it may reallow to other broker-dealers. The
Distributor and other broker-dealers pay commissions to salespersons, as well as
the cost of printing and mailing prospectuses to potential investors and of any
advertising expenses incurred by them in connection with their distribution of
Portfolio shares.
The Distributor, at its expense, may from time-to-time provide additional
compensation to broker-dealers (including in some instances, affiliates of the
Distributor) in connection with sales of shares of the Portfolio. Such
compensation may include (i) full re-allowance of the front-end sales charge on
Class A and Class II shares; (ii) additional compensation with respect to the
sale of Class A,
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Class B and Class II shares; or (iii) financial assistance to broker-dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding the Portfolio and/or
other broker-dealer sponsored special events. In some instances, this
compensation will be made available only to certain broker-dealers whose
representatives have sold a significant amount of shares of the Portfolio.
Compensation may also include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
for meetings or seminars of a business nature. In addition, the following types
of non-cash compensation may be offered through sales contests: (i) travel
mileage on major air carriers; (ii) tickets for entertainment events (such as
concerts or sporting events); or (iii) merchandise (such as clothing, trophies,
clocks, pens or other electronic equipment). Broker-dealers may not use sales of
the Portfolio's shares to qualify for this compensation to the extent receipt of
such compensation may be prohibited by the laws of any state or any
self-regulatory agency, such as, for example, the National Association of
Securities Dealers, Inc. Dealers who receive bonuses or other incentives may be
deemed to be underwriters under the Securities Act.
Certain laws and regulations limit the ability of banks and other depository
institutions to underwrite and distribute securities. However, in the opinion of
SunAmerica based upon the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services to
investment companies of the type contemplated by the Distribution Plans (as
described below). The Directors will consider appropriate modifications to the
operations of the Portfolio, including discontinuance of payments under the
Distribution Plans to banks and other depository institutions, in the event such
institutions can no longer provide the services called for under their
agreements. Banks and other financial services firms may be subject to various
state laws regarding services described, and may be required to register as
dealers pursuant to state law.
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment
company directly or indirectly to pay expenses associated with the distribution
of its shares in accordance with a plan adopted by the investment company's
board of directors and approved by its shareholders. Pursuant to such rule, the
Directors and the shareholders of each class of shares of the Portfolio have
adopted Distribution Plans hereinafter referred to as the "Class A Plan," the
"Class B Plan," and the "Class II Plan" and collectively as the "Distribution
Plans." In adopting each Distribution Plan, the Directors determined that there
was a reasonable likelihood that each such Plan would benefit the Portfolio and
the shareholders of each respective class. The sales charge and distribution
fees of a particular class will not be used to subsidize the sale of shares of
any other class.
Under the Class A Plan, the Distributor may receive payments from the Portfolio
at an annual rate of up to 0.10% of the average daily net assets of the
Portfolio's Class A shares to compensate the Distributor and certain securities
firms for providing sales and promotional activities for distributing that class
of shares. Under the Class B and Class II Plans, the Distributor may receive
payments from the Portfolio at the annual rate of up to 0.75% of the average
daily net assets of the Portfolio's Class B and Class II shares to compensate
the Distributor and certain securities firms for providing sales and promotional
activities for distributing each such class of shares. The distribution costs
for which the Distributor may be reimbursed out of such distribution fees
include fees paid to broker-dealers that have sold Portfolio shares, commissions
and other expenses such as sales literature, prospectus printing and
distribution and compensation to wholesalers. It is possible that in any given
year the amount paid to the Distributor under the Class A Plan, the Class B Plan
or the Class II Plan will exceed the Distributor's distribution costs as
described above. The Distribution Plans provide that each class of shares of the
Portfolio may pay the Distributor an account maintenance and service fee of up
to 0.25% of the aggregate average daily net assets of such class of shares for
payments to broker-dealers for providing continuing account maintenance. In this
regard, some payments are used to compensate broker-dealers with trail
commissions or account maintenance and service fees in an amount up to 0.25% per
year of the assets maintained in the Portfolio by their customers.
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THE ADMINISTRATOR. The Fund has entered into a Service Agreement under the
terms of which SunAmerica Fund Services, Inc. ("SAFS" or the "Administrator"),
an indirect wholly owned subsidiary of SunAmerica Inc., assists the Transfer
Agent in providing shareholder services. Pursuant to the Service Agreement, as
compensation for services rendered, SAFS receives a fee from the Portfolio,
accrued daily and payable monthly, at an annual rate of 0.22% of the average
daily net assets. See the Statement of Additional Information for more
information.
PURCHASE OF SHARES
---------------------------------------------------------------------
GENERAL. Shares of the Portfolio are sold at the respective net asset value
next calculated after receipt of a purchase order, plus a sales charge, which,
at the election of the investor, either (i) may be imposed at the time of
purchase (Class A shares), (ii) may be imposed on a deferred basis (Class B
shares and certain Class A shares) or (iii) may contain certain elements of a
sales charge that is imposed at the time of purchase and that is deferred (Class
II Shares).
The minimum initial investment in the Portfolio is $500 and the minimum
subsequent investment is $100. However, for (i) wrap or certain other advisory
accounts for the benefit of clients of broker-dealers, financial institutions,
registered investment advisers or financial planners adhering to certain
standards established by the Distributor and (ii) Individual Retirement Accounts
("IRAs"), Keogh Plan accounts and accounts for other qualified plans, the
minimum initial investment is $250 and the minimum subsequent investment is $25.
The decision as to which class is most beneficial to an investor depends on the
amount and intended length of the investment. Investors should consult their
investment adviser for help in determining which class of shares is most
appropriate for them.
Generally, investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because there is a lower
distribution fee than Class B and Class II shares. Shareholders who purchase $1
million or more of shares of the Portfolio should only purchase Class A shares.
Investors making small investments might consider Class B because 100% of the
purchase price is invested immediately. Similarly, such an investor with a
shorter investment horizon may wish to consider Class II. Dealers may receive
different levels of compensation depending on which class of shares they sell.
Investors should consider the CDSC period and any conversion rights in the
context of their investment time frame. For example, while Class II shares have
a shorter CDSC period than Class B shares, Class II shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
Upon making an investment in shares of the Portfolio, an open account will be
established under which shares of the Portfolio and additional shares acquired
through reinvestment of dividends and distributions will be held for each
shareholder's account by State Street Bank and Trust Company ("State Street")
and its affiliate, National Financial Data Services ("NFDS") (collectively, the
"Transfer Agent"). Shareholders will not be issued certificates for their shares
unless they specifically so request in writing, but no certificate is issued for
fractional shares. Shareholders receive regular statements from the Transfer
Agent that report each transaction affecting their accounts. Further information
may be obtained by calling Shareholder/Dealer Services at (800) 858-8850.
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge, which varies with the size of the purchase as follows:
<TABLE>
<CAPTION>
SALES CONCESSION OF
CHARGE DEALERS
--------------------- -------------
% OF % OF % OF
OFFERING NET AMOUNT OFFERING
SIZE OF PURCHASE PRICE INVESTED PRICE
- ----------------------------------- -------- ---------- -------------
<S> <C> <C> <C>
Less than
$50,000.......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000..... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.... 3.75% 3.90% 3.00%
$250,000 but less than $500,000.... 3.00% 3.09% 2.25%
$500,000 but less than
$1,000,000....................... 2.10% 2.15% 1.35%
$1,000,000 or more................. None None see below
</TABLE>
No sales charge is payable at the time of purchase on investments of $1 million
or more. In addition, subject to the conditions listed below, shares may be
purchased at net asset value, without payment of a sales charge, by employee
benefit plans qualified under Sections 401 or 457 of the
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Internal Revenue Code of 1986, as amended (the "Code"), or employee benefit
plans created pursuant to Section 403(b) of the Code and sponsored by nonprofit
organizations defined under Section 501(c)(3) of the Code (collectively,
"Plans"). A Plan will qualify for purchases at net asset value provided that (a)
the initial amount invested in one or more of the investment portfolios of the
Fund (or in combination with the shares of other funds in the SunAmerica Mutual
Funds, which consist of the SunAmerica Equity Funds, SunAmerica Income Funds and
SunAmerica Money Market Fund and other portfolios of Style Select Series) is at
least $1 million (b) the sponsor signs a $1 million Letter of Intent, (c) such
shares are purchased by an employer-sponsored plan with at least 100 eligible
employees or (d) the purchases are by trustees or other fiduciaries for certain
employer-sponsored plans, the trustee, fiduciary or administrator for which has
an agreement with the Distributor with respect to such purchases and all such
transactions for the plan are executed through a single omnibus account.
Nevertheless, the Distributor will pay a commission to any dealer who initiates
or is responsible for such an investment, in the amount of 1.00% of the amount
invested. Redemptions of such shares within the twelve months following their
purchase will be subject to a CDSC at the rate of 1.00% of the lesser of the net
asset value of the shares being redeemed (exclusive of reinvested dividends and
distributions) or the total cost of such shares. This CDSC is paid to the
Distributor. Redemptions of such shares held longer than twelve months would not
be subject to a CDSC. However, one-half of the commission paid with respect to
such a purchase is subject to forfeiture by the dealer in the event the
redemption occurs during the second year from the date of purchase. In
determining whether a deferred sales charge is payable, it is assumed that
shares purchased with reinvested dividends and distributions and then other
shares held the longest are redeemed first.
To the extent that sales are made for personal investment purposes, the sales
charge is waived as to Class A shares purchased by current or retired officers,
directors, and other full-time employees of SunAmerica Inc. and its affiliates,
as well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by wrap or
certain other advisory accounts for the benefit of clients of broker-dealers,
financial institutions, registered investment advisers or financial planners
adhering to certain standards established by the Distributor. Shares purchased
under this waiver are subject to certain limitations described in the Statement
of Additional Information. Complete details concerning how an investor may
purchase shares at reduced sales charges may be obtained by contacting
Shareholder/Dealer Services at (800) 858-8850.
There are certain special purchase plans for Class A shares which can reduce the
amount of the initial sales charge to investors in the Funds. For more
information about "Combined Purchase Privilege," "Rights of Accumulation," the
"Letter of Intent," and "Reduced Sales Charges for Group Purchases," see the
Statement of Additional Information.
CLASS B SHARES. Class B shares are offered at net asset value. Certain
redemptions of Class B shares within the first six years of the date of purchase
are subject to a CDSC. The charge is assessed on an amount equal to the lesser
of the then-current market value or the purchase price of the shares being
redeemed. No charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. In determining whether a CDSC is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares of a class other than Class B that are not themselves
subject to a CDSC, second of any shares in the shareholder's Portfolio account
that are not subject to a CDSC (i.e., shares representing reinvested dividends
and distributions), third of shares held for more than six years and fourth of
shares held the longest during the six-year period. The CDSC will not be applied
to dollar amounts representing an increase in the net asset value of the shares
being redeemed since the time of purchase of such redeemed shares. The amount of
the CDSC, if any, will vary depending on the number of years from the time of
payment for the purchase of the shares until the time of redemption of such
shares. Solely for purposes of determining the number of years from the time of
any payment for the purchase of shares, all payments during a month are
aggregated and deemed to have been
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made on the first day of the month. The following table sets forth the rates of
the CDSC.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT WAS MADE REDEMPTION PROCEEDS
- -------------------------------------------------- -------------------------
<S> <C>
First............................................. 4%
Second............................................ 4%
Third............................................. 3%
Fourth............................................ 3%
Fifth............................................. 2%
Sixth............................................. 1%
Seventh and thereafter............................ 0%
</TABLE>
CONVERSION FEATURE--CLASS B SHARES. Class B shares (including a pro rata
portion of the Class B shares purchased through the reinvestment of dividends
and distributions) will convert automatically to Class A shares on the first
business day of the month following the seventh anniversary of the issuance of
such Class B shares. Subsequent to the conversion of a Class B share to a Class
A share, such share will no longer be subject to the higher distribution fee of
Class B shares. Such conversion will be on the basis of the relative net asset
values of Class B shares and Class A shares, without the imposition of any sales
load, fee or charge.
CLASS II SHARES. Class II shares are offered at net asset value plus an initial
sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE CONCESSION
- ---------------------------------------- OF DEALERS
-------------------
% OF % OF % OF
OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ------------------- ------------------- -------------------
<S> <C> <C>
1.00% 1.01% 1.00%
</TABLE>
Certain redemptions of Class II shares within the first year of the date of
purchase are subject to a CDSC of 1%. The method for calculating any such CDSC
will be the same method used for calculating the CDSC for Class B shares. See
"Class B Shares" above.
WAIVER OF CDSC. The CDSC applicable to Class B and Class II shares will be
waived, subject to certain conditions, in connection with redemptions which are
(a) requested within one year of the death of the shareholder of an individual
account or a joint tenant where the surviving joint tenant is the deceased's
spouse; (b) requested within one year after the shareholder of an individual
account or of a joint tenant on a spousal joint tenant account becomes disabled;
or the initial determination of disability of a shareholder; (c) taxable
distributions or loans to participants made by qualified retirement plans or
retirement accounts (not including rollovers) for which SunAmerica serves as
fiduciary (e.g., prepares all necessary tax reporting documents); provided that,
in the case of a taxable distribution, the plan participant or accountholder has
attained the age of 59 1/2 at the time the redemption is made; (d) made pursuant
to a Systematic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the Plan is
established, provided, however, that all dividends and capital gains
distributions are reinvested in Portfolio shares; and (e) made of shares in
accounts consisting of assets which were originally individually managed by
SunAmerica and had paid an investment advisory fee to SunAmerica. See the
Statement of Additional Information for further information concerning
conditions with respect to (a) and (b) above. For information on the waiver of
the CDSC contact Shareholder/Dealer services at (800)858-8850.
OTHER CDSC INFORMATION. For Federal income tax purposes, the amount of the CDSC
will reduce the amount realized on the redemption of shares, concomitantly
reducing gain or increasing loss. For information on the imposition and waiver
of the CDSC contact Shareholder/Dealer Services at (800) 858-8850.
ASSET PROTECTION PLAN (OPTIONAL). Anchor National Life Insurance Company (the
"Life Company"), an affiliate of the SunAmerica and the Distributor, offers an
Asset Protection Plan to certain investors in the Portfolio. The benefits of
this optional term life insurance (payable on the death of the insured) will
relate to the amounts paid to purchase Portfolio shares and to the value of the
Portfolio shares held for the benefit of the insured persons. However, to the
extent such purchased shares are redeemed prior to death, coverage with respect
to such shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Portfolio shares to pay the premiums for such coverage. Such
redemptions will not be subject to CDSCs, but will have the same tax
consequences as any other Fund redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in the Portfolio are
initially purchased or transferred. In addition, coverage cannot be made
available unless the Life Company knows for whose benefit shares are purchased.
For instance, coverage
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cannot be made available for shares registered in the name of your broker unless
the broker provides the Life Company with information regarding the beneficial
owners of such shares. In addition, coverage is available only to shares
purchased on behalf of natural persons under the age of 75 years; coverage is
not available with respect to shares purchased for a retirement account. Other
restrictions on the coverage apply. This coverage may not be available in all
states and may be subject to additional restrictions or limitations. Purchasers
of shares should also make themselves familiar with the impact on the Asset
Protection Plan coverage of purchasing additional shares, reinvestment of
dividends and capital gains distributions and redemptions.
Please call (800) 858-8850 for more information, including the cost of the Asset
Protection Plan option.
ADDITIONAL PURCHASE INFORMATION. All purchases are confirmed to each
shareholder. The Fund and the Distributor reserve the right to reject any
purchase order and may at any time discontinue the sale of any class of shares
of the Portfolio. Shares of the Portfolio may be purchased through the
Distributor or SAFS, by check or federal funds wire.
Shareholders who have met the minimum initial investment of the Portfolio may
elect to have periodic purchases made through a dollar cost averaging program.
At the shareholder's election, such purchases may be made from their bank
checking or savings account on a monthly, quarterly, semi-annual or annual
basis. Purchases can be made via electronic funds transfer through the Automated
Clearing House or by physical draft check. Purchases made via physical draft
check require an authorization card to be filed with the shareholder's bank.
Checks should be made payable to the "Focus Portfolio." If the payment is for a
retirement plan account for which the SunAmerica serves as fiduciary, please
indicate on the check that payment is for such an account. Payments to open new
accounts should be mailed to SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204, together with a completed New Account Application. Payment for
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., c/o
NFDS, P.O. Box 419373, Kansas City, Missouri 64141-6373 and the shareholder's
account number for the portfolio should appear on the check. For fiduciary
retirement plan accounts, both initial and subsequent purchases should be mailed
to SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica
Center, 733 Third Avenue, New York, New York 10017-3204. SAFS reserves the right
to reject any check made payable other than in the manner indicated above. Under
certain circumstances, the Fund will accept a multi-party check (E.G., a check
made payable to the shareholder by another party and then endorsed by the
shareholder to the Fund in payment for the purchase of shares); however, the
processing of such a check may be subject to a delay. The Fund does not verify
the authenticity of the endorsement of such multi-party check, and acceptance of
the check by the Fund should not be considered verification thereof. Neither the
Fund nor its affiliates will be held liable for any losses incurred as a result
of a fraudulent endorsement.
Shares will be priced at the net asset value next determined after the order is
placed with the Distributor or SAFS. See "Additional Information Regarding
Purchase of Shares" in the Statement of Additional Information for more
information regarding these services and the procedures involved and when orders
are deemed to be placed.
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REDEMPTION OF SHARES
---------------------------------------------------------------------
Shares of the Portfolio may be redeemed at any time at their net asset value
next determined, less any applicable CDSC, after receipt by the Fund of a
redemption request in proper form. Redemptions are taxable transactions for
federal income tax purposes. See "Dividends, Distributions and Taxes."
GENERAL. Normally payment is made by check mailed on the next business day for
shares redeemed, but in any event, payment is made by check mailed within seven
days after receipt by the Transfer Agent of share certificates or of a
redemption request, or both, in proper form. Under unusual circumstances, the
Portfolio may suspend repurchases or postpone payment for up to seven days or
longer, as permitted by the federal securities laws.
REGULAR REDEMPTION. Shareholders may redeem their shares by sending a written
request to SunAmerica Fund Services, Inc., Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. Requests for
redemption of shares with a value of less than $100,000 will be made by check
made payable to the shareholder(s) and mailed to the address of record. All
written requests for redemption of shares with a value of $100,000 or more, or
those mailed to an address other than the address of record, must be endorsed by
the shareholder(s) with signature(s) guaranteed by an "eligible guarantor
institution" which includes: banks, brokers, dealers, credit unions, securities
and exchange associations, clearing agencies and savings associations.
Guarantees must be signed by an authorized signatory of the eligible guarantor
and the words "Signature Guaranteed" must appear with the signature. Signature
guarantees by notaries will not be accepted. SAFS may request further
documentation from corporations, executors, administrators, trustees or
guardians.
REPURCHASE THROUGH THE DISTRIBUTOR. The Distributor is authorized, as agent for
the Portfolio, to offer to repurchase shares which are presented by telephone to
the Distributor by investment dealers. Orders received by dealers must be at
least $500. The repurchase price is the net asset value per share of the
applicable class of shares of the Portfolio next-determined after the repurchase
order is received, less any applicable CDSC. Repurchase orders received by the
Distributor after the Portfolio's close of business will be priced based on the
next business day's close. Dealers may charge for their services in connection
with the repurchase, but neither the Portfolio nor the Distributor imposes any
such charge. The offer to repurchase may be suspended at any time, as described
below.
TELEPHONE REDEMPTION. The Fund accepts telephone requests for redemption of
shares with a value of less than $100,000. The proceeds of a telephone
redemption may be sent by check payable to the shareholder(s) and mailed to the
address of record, or by wire to the shareholder's bank account as set forth in
the New Account Application Form or in a subsequent written authorization.
Shareholders utilizing the redemption through the electronic funds transfer
method will incur a $15.00 transaction fee. The Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Failure to do so may result in liability to the Fund for losses incurred due to
unauthorized or fraudulent telephone instructions. Such procedures include, but
are not limited to, requiring some form of personal identification prior to
acting upon instructions received by telephone and/or tape recording of
telephone instructions.
A shareholder making a telephone redemption should call Shareholder/Dealer
Services at (800) 858-8850, and state (i) the name of the shareholder(s)
appearing on the Fund's records, (ii) his or her account number with the Fund,
(iii) the name of the Portfolio, (iv) the amount to be redeemed and (v) the name
of the person(s) requesting the redemption. The Fund reserves the right to
terminate or modify the telephone redemption service at any time.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who have invested at least $5,000 in
the Portfolio may provide for the periodic payment from the account pursuant to
the Systematic Withdrawal Plan. Payment may be made by check or by electronic
funds transfer through the Automated Clearing House. At the shareholder's
election, such payment may be made directly to the shareholder or
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to a third party on a monthly, quarterly, semi-annual or annual basis. The
minimum periodic payment is $50. Maintenance of a withdrawal plan concurrently
with purchases of additional shares may be disadvantageous to a shareholder
because of the sales charge applicable to such purchases. Shareholders who have
been issued share certificates will not be eligible to participate in the
Systematic Withdrawal Plan and will have to comply with certain additional
procedures in order to redeem shares. Further information may be obtained by
calling Shareholder/Dealer Services at (800) 858-8850.
OTHER REDEMPTION INFORMATION. At various times, the Portfolio may be requested
to redeem shares for which it has not yet received good payment. The Portfolio
may delay or cause to be delayed the mailing of a redemption check until such
time as good payment (E.G., cash or certified check drawn on a United States
bank) has been collected for the purchase of such shares, which will not exceed
15 days.
Because of the high cost of maintaining smaller shareholder accounts, the
Portfolio may redeem, on at least 60 days' written notice and without
shareholder consent, any account that has a net asset value of less than $500
($250 for retirement plan accounts), as of the close of business on the day
preceding such notice, unless such shareholder increases the account balance to
at least $500 during such 60-day period. In the alternative, the Portfolio may
impose a $2.00 monthly charge on accounts below the minimum account size.
If a shareholder redeems shares of any class of the Portfolio and then within
one year from the date of redemption decides the shares should not have been
redeemed, the shareholder may use all or any part of the redemption proceeds to
reinstate, free of sales charges (Class A and Class II shares) and with the
crediting of any CDSC paid with respect to such reinstated shares at the time of
redemption (Class B and Class II shares), all or any part of the redemption
proceeds in shares of the Portfolio at the then-current net asset value.
Reinstatement may affect the tax status of the prior redemption.
EXCHANGE PRIVILEGE
---------------------------------------------------------------------
GENERAL. Shareholders of the Portfolio may exchange their shares for the same
class of shares of any other investment portfolio of the Fund or other funds in
the SunAmerica Family of Mutual Funds that offer such class at the respective
net asset value per share. In addition, Class II shares of the Portfolio can be
exchanged for Class C shares of any other investment portfolio of the Fund or
other funds in the SunAmerica Family of Mutual Funds. Before making an exchange,
a shareholder should obtain and review the prospectus of the fund whose shares
are being acquired. All exchanges are subject to applicable minimum initial or
subsequent investment requirements. Notwithstanding the foregoing, shareholders
may elect to make periodic exchanges on a monthly, quarterly, semi-annual and
annual basis through the Systematic Exchange Program. Through this program, the
minimum exchange amount is $25 and there is no fee for exchanges made. All
exchanges can only be effected if the shares to be acquired are qualified for
sale in the state in which the shareholder resides. Exchanges of shares
generally will constitute a taxable transaction except for IRAs, Keogh Plans and
other qualified or tax-exempt accounts. The exchange privilege may be terminated
or modified upon 60 days' written notice. Further information about the exchange
privilege may be obtained by calling Shareholder/Dealer Services at (800)
858-8850.
If a shareholder acquires Class A shares through an exchange from another
SunAmerica fund where the original purchase of such fund's Class A shares was
not subject to an initial sales charge because the purchase was in excess of $1
million, such shareholder will remain subject to the 1% CDSC, if any, applicable
to such redemptions. In such event, the period for which the original shares
were held prior to the exchange will be "tacked" with the holding period of the
shares acquired in the exchange for purposes of determining whether the 1% CDSC
is applicable upon a redemption of any of such shares.
A shareholder who acquires Class B or Class II shares through an exchange from
another
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SunAmerica fund will retain liability for any deferred sales charge which is
outstanding on the date of the exchange. In such event, the period for which the
original shares were held prior to the exchange will be "tacked" with the
holding period of the shares acquired in the exchange for purposes of
determining what, if any, CDSC is applicable upon a redemption of any of such
shares and the timing of conversion of Class B shares to Class A. In the event
that any Class B shares exchanged for Class B of the Portfolio have a lower CDSC
schedule, the lower schedule will apply upon redemption of such shares from the
Fund.
RESTRICTIONS ON EXCHANGES. Because excessive trading (including short-term
market timing trading) can hurt the Portfolio's performance, the Portfolio may
refuse any exchange sell order (1) if it appears to be a market timing
transaction involving a significant portion of the Portfolio's assets or (2)
from any shareholder account if previous use of the exchange privilege is
considered excessive. Accounts under common ownership or control, including, but
not limited to, those with the same taxpayer identification number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indications, will be considered one account for this purpose.
In addition, the Portfolio reserves the right to refuse any exchange purchase
order if, in the judgment of SunAmerica, the Portfolio would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. A shareholder's purchase exchange
may be restricted or refused if the Portfolio receives or anticipates
simultaneous orders affecting significant portions of the Portfolio's assets. In
particular, a pattern of exchanges that coincide with a market timing strategy
may be disruptive to the Portfolio and may therefore be refused.
Finally, as indicated under "Purchase of Shares," the Portfolio and Distributor
reserve the right to refuse any order for the purchase of shares.
PORTFOLIO TRANSACTIONS, BROKERAGE AND TURNOVER
---------------------------------------------------------------------
The Advisers are responsible for decisions to buy and sell securities for the
Portfolio, selection of broker-dealers and negotiation of commission rates for
their respective portion of the Portfolio. 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 the security usually includes a profit to the dealer). In underwritten
offerings, securities are purchased at a fixed price which includes an
underwriter's concession or discount. On occasion, certain money market
securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
As a general matter, the Advisers select broker-dealers which, in their best
judgment, provide prompt and reliable execution at favorable security prices and
reasonable commission rates. The Adviser may select broker-dealers which provide
them with research services and may cause the Portfolio to pay such
broker-dealers commissions which exceed those which other broker-dealers may
have charged, if in the Adviser's view the commissions are reasonable in
relation to the value of the brokerage and/or research services provided by the
broker-dealer. Brokerage arrangements may take into account the distribution of
Portfolio shares by broker-dealers, subject to best price and execution. In
addition, brokerage may be allocated to brokers that pay (or cause to be paid)
expenses of the Portfolio, subject to best price and execution. The Advisers may
effect portfolio transactions through an affiliated broker-dealer, acting as
agent and not as principal, in accordance with Rule 17e-1 under the 1940 Act and
other applicable securities laws.
The Portfolio has no limitation regarding its policy with respect to portfolio
turnover. The portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities, excluding short-term securities, by
the average monthly value of the Portfolio's long-term portfolio securities.
Because each of the Advisers manages its portion of the Portfolio's assets
independently, it is possible that the same security may be purchased and sold
on the same day by two or more Advisers, resulting in higher brokerage
commissions for the Portfolio. Notwithstanding the foregoing, however, the
portfolio turnover
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rate for the Portfolio is not expected to exceed 100%. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs which will be borne directly by the Portfolio. In addition, high portfolio
turnover may result in increased short-term capital gains, which, when
distributed to shareholders, are treated as ordinary income.
DETERMINATION OF NET ASSET VALUE
---------------------------------------------------------------------
The Portfolio is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally, 4:00 P.M., Eastern time). The Portfolio calculates the net
asset value of each class of its shares separately by dividing the total value
of each class's net assets by the shares outstanding of each class. Investments
for which market quotations are readily available are valued at market. All
other securities and assets are valued at fair value following procedures
approved by the Directors.
PERFORMANCE DATA
---------------------------------------------------------------------
The Portfolio may advertise performance data that reflect its total investment
return. A brief summary of the computations is provided below and a detailed
discussion is in the Statement of Additional Information. Total return is based
on historical earnings and is not intended to indicate future performance.
Total return performance data may be advertised by the Portfolio. The average
annual total return may be calculated for one-, five- and ten-year periods or
for the lesser period since inception. These performance data represent the
average annual percentage changes of a hypothetical $1,000 investment and
assumes the reinvestment of all dividends and distributions and includes sales
charges and recurring fees that are charged to shareholder accounts. The
Portfolio's advertisements may also reflect total return performance data
calculated by means of cumulative, aggregate, average, year-to-date, or other
total return figures. Further, the Portfolio may advertise total return
performance for periods of time in addition to those noted above.
Although expenses for Class B and Class II shares may be higher than those for
Class A shares, the performance of Class B and Class II shares may be higher
than the performance of Class A shares after giving effect to the impact of the
sales charges and 12b-1 fees applicable to each class of shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
---------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if any, and
the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed to the shareholders
at least annually. Dividends and distributions generally are taxable in the year
in which they are paid, except any dividends paid in January which were declared
in the previous calendar quarter will be treated as paid in December of the
previous year. With respect to capital gain distributions, the Portfolio's
policy is to offset any prior year capital loss carry forward against any
realized capital gains, and accordingly, no distribution of capital gains will
be made until gains have been realized in excess of any such loss carry forward.
Dividends and distributions are paid in additional shares based on the next
determined net asset value, unless the shareholder elects in writing, not less
than five business days prior to the payment date, to receive amounts in excess
of $10 in cash.
In addition to having the dividends and distributions of the Portfolio
reinvested in shares of the Portfolio, a shareholder may, if he or she so elects
on the New Account Application Form, have dividends and distributions invested
in the same class of shares of any other SunAmerica Mutual Fund
<PAGE>
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18
or any other investment series of the Fund at the then-current net asset value
of such fund(s).
TAXES. The Portfolio intends to qualify and elect to be taxed as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code"). While
so qualified, the Fund and the Portfolio will not be subject to U.S. federal
income tax on the portion of its investment company taxable income and net
capital gains distributed to its shareholders.
For federal income tax purposes, dividends of net investment income and
distributions of any net realized short-term capital gain, whether paid in cash
or reinvested in shares of the Portfolio, are taxable to shareholders as
ordinary income. Distributions made from the Portfolio's net capital gains
(including gains from certain transactions in futures and options) are taxable
to shareholders as capital gains, regardless of the length of time the
shareholder has owned Portfolio shares. Recent legislation created several
categories of capital gains. To the extent the Portfolio's income is derived
from certain dividends received from domestic corporations, a portion of the
dividends paid to corporate shareholders of the Portfolio will be eligible for
the 70% dividends received deduction.
Ordinary income dividends paid by the Portfolio to shareholders who are
non-resident aliens or foreign entities generally will be subject to a 30%
United States withholding tax under existing provisions of the Code applicable
to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Nonresident
shareholders are urged to consult their own tax advisers concerning the
applicability of the United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the conversion of
their Class B shares into Class A shares. A shareholder's basis in the Class A
shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class A shares will
include the holding period for the converted Class B shares.
A shareholder who holds shares as a capital asset (I.E., generally, for
investment) generally will recognize a capital gain or loss upon the sale or
exchange of such shares. In the case of an individual, any such capital gain
will be treated as short-term capital gain if the shares were held for not more
than 12 months, capital gain taxable at the maximum rate of 28% if such shares
were held for more than 12, but not more than 18 months, and capital gain
taxable at the maximum rate of 20% if such shares were held for more than 18
months. In the case of a corporation, any such capital gain will be treated as
long-term capital gain, taxable at the same rates as ordinary income, if such
shares were held for more than 12 months. Any such capital loss will be a
long-term capital loss if such shares were held for more than one year. However,
any loss realized by a shareholder who held shares for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
If a shareholder exercises the exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the fund
reduces any charges the shareholder would have owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales charge will
be treated as an amount paid for the new shares. See "Exchange Privilege."
A loss realized on a sale or exchange of shares of the Portfolio will be
disallowed if other Portfolio shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Under certain provisions of the Code, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Portfolio or who, to the Portfolio's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that the
investor is not otherwise subject to backup withholding.
<PAGE>
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19
Statements as to the tax status of distributions to shareholders of the
Portfolio will be mailed annually. Shareholders are urged to consult their own
tax advisors regarding specific questions as to federal, state or local taxes.
Foreign shareholders are also urged to consult their own tax advisors regarding
the foreign tax consequences of ownership of interests in the Portfolio. See
"Dividends, Distributions and Taxes" in the Statement of Additional Information.
GENERAL INFORMATION
---------------------------------------------------------------------
REPORTS TO SHAREHOLDERS. The Fund sends to its shareholders audited annual and
unaudited semi-annual reports for the Portfolio. The financial statements
appearing in annual reports are audited by independent accountants. In addition,
the Transfer Agent sends to each shareholder having an account directly with the
Fund a statement confirming transactions in the account.
ORGANIZATION. The Fund, a corporation organized under the laws of the State of
Maryland on July 3, 1996, is an open-end management investment company, commonly
referred to as a mutual fund. The Fund consists of nine investment series,
including the Portfolio. The other eight series, which are not being offered
pursuant to this Prospectus, are: the Large-Cap Growth Portfolio, the Mid-Cap
Growth Portfolio, the Aggressive Growth Portfolio, the Large-Cap Blend
Portfolio, the Large-Cap Value Portfolio, the Value Portfolio, the Small-Cap
Value Portfolio and the International Equity Portfolio.
The total number of shares which the Fund has the authority to issue is one
billion (1,000,000,000) shares of common stock (par value $0.0001 per share),
amounting in aggregate par value to one hundred thousand dollars ($100,000.00).
The shares of the Portfolio are initially classified into three classes, each
consisting of twenty-five million (25,000,000) shares: Class A, Class B or Class
II.
The Fund does not hold annual shareholder meetings. The Directors are required
to call a meeting of shareholders for the purpose of voting upon the question of
removal of any Director when so requested in writing by the shareholders of
record holding at least 10% of the Fund's outstanding shares. Each share of the
Portfolio has equal voting rights on each matter pertaining to the Portfolio or
matters to be voted upon by the Fund, except as noted above. Each share of the
Portfolio is entitled to participate equally with the other shares of the
Portfolio in dividends and other distributions and the proceeds of any
liquidation, except that, due to the differing expenses borne by the two
classes, such dividends and proceeds are likely to be lower for Class B and
Class II shares than for Class A shares. See the Statement of Additional
Information for more information with respect to the distinctions among classes.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP has been
selected as independent accountants for the Portfolio. The firm of Shereff,
Friedman, Hoffman & Goodman, LLP has been selected as legal counsel for the
Portfolio.
YEAR 2000 READINESS. Many services provided to the Portfolio and its
shareholders by SunAmerica, the Advisers, the Distributor and the Administrator
rely on the smooth functioning of their computer and computer-based systems as
well as those of their outside service providers. Many computer and
computer-based systems cannot distinguish the year 2000 from the year 1900
because of the way systems encode and calculate dates. This year 2000 issue
could potentially have an adverse impact on the handling of security trades, the
payment of interest and dividends, pricing and account services. SunAmerica, the
Advisers, the Distributor and the Administrator recognize the importance of the
year 2000 Issue and are taking appropriate steps necessary in preparation of
year 2000. SunAmerica, the Advisers, the Distributor and the Administrator fully
anticipate that their systems and those of their outside service providers will
be adapted in time for the year 2000, and to further this goal they have
coordinated a plan to repair, adapt or replace systems that are not year 2000
compliant, and have obtained similar representations from their outside service
providers. SunAmerica, the Advisers, the Distributor and the Administrator
expect to significantly complete their plan by the end of the 1998 calendar
year, and perform appropriate systems testing during the 1999 calendar year.
<PAGE>
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20
SHAREHOLDER INQUIRIES. All inquiries regarding the Portfolio or Fund should be
directed to the Portfolio at the telephone number or address on the cover page
of this Prospectus. For questions concerning share ownership, dividends,
transfer of ownership or share redemption, contact SunAmerica Fund Services,
Inc. Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York,
NY 10017-3204, or call Shareholder/Dealer Services at (800) 858-8850.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS,
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO, SUNAMERICA,
ANY ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY MAY NOT LAWFULLY BE MADE.
<PAGE>
FOCUS PORTFOLIO
STYLE SELECT SERIES-Registered Trademark-
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 1, 1998
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
Focus Portfolio (the "Portfolio") is a separate investment portfolio of
Style Select Series, Inc. (the "Fund"). The Portfolio is managed by SunAmerica
Asset Management Corp. ("SunAmerica"). The assets of the Portfolio are normally
allocated among at least three investment advisers (each, an "Adviser") selected
by SunAmerica subject to the review and approval of the Fund's Board of
Directors. Each Adviser is independently responsible for advising its
respective portion of the Portfolio's assets by selecting its ten favorite
stocks for the Portfolio.
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Fund's Prospectus dated June 1, 1998. To obtain a
Prospectus, please call the Fund at (800) 858-8850. Capitalized terms used
herein but not defined have the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
PAGE
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
INVESTMENT OBJECTIVE AND POLICIES. . . . . . . . . . . . . . . . . . . . B-2
PORTFOLIO TURNOVER . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . B-24
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . B-26
ADVISERS, DISTRIBUTOR AND ADMINISTRATOR. . . . . . . . . . . . . . . . . B-30
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . B-35
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES. . . . . . . . . . . B-36
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES. . . . . . . . . . B-41
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . B-42
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-43
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . B-47
RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-51
DESCRIPTION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . B-53
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . B-54
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . APPENDIX-1
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in
this Statement of Additional Information or in the Prospectus, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Portfolio, SunAmerica, any Adviser or
SunAmerica Capital Services (the "Distributor"). This Statement of
Additional Information and the Prospectus do not constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby in
any jurisdiction in which such an offer to sell or solicitation of an offer
to buy may not lawfully be made.
<PAGE>
THE FUND
The Fund, organized as a Maryland corporation on July 3, 1996, is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). On March 31, 1998, the Directors
approved the creation of the Focus Portfolio, one of the nine separate
investment portfolios of the Fund (collectively the "Portfolios").
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio, certain types of securities in
which the Portfolio may invest and certain investment practices which the
Portfolio may employ, are described in the Prospectus and are discussed more
fully below.
DIVERSIFICATION. The Portfolio is classified as "non-diversified" for
purposes of the 1940 Act, which means that the Portfolio is not limited by the
1940 Act with regard to the portion of its assets that may be invested in the
securities of a single issuer. To the extent the Portfolio makes investments in
excess of 5% of its assets in the securities of a particular issuer, its
exposure to the risks associated with that issuer is increased. Because the
Portfolio invests in a limited number of issuers, the performance of particular
securities may adversely affect the performance of the Portfolio or subject the
Portfolio to greater price volatility than that experienced by diversified
investment companies.
The Portfolio intends to maintain the required level of diversification and
otherwise conduct its operations in order to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company, the Portfolio must,
among other things, diversify its holdings so that, at the end of each quarter
of the taxable year, (i) at least 50% of the market value of the Portfolio's
assets is represented by cash, U.S. government securities, the securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Portfolio's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one
issuer, or two or more issuers controlled by Portfolio and which are engaged
in the same, similar or related trades or businesses (other than U.S.
government securities or the securities of other regulated investment
companies). In the unlikely event application of the Portfolio's strategy
would result in a violation of these requirements of the Code, the Portfolio
would be required to deviate from its strategy to the extent necessary to
avoid losing its status as a regulated investment company.
WARRANTS. The 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.
B-2
<PAGE>
INVESTMENT IN SMALL, UNSEASONED COMPANIES. As described in the Prospectus,
the 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 securities
when the Portfolio attempts to dispose of its holdings, the Portfolio may
receive lower prices than might otherwise be obtained.
Companies with a market capitalization of $1 billion to $5 billion 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.
The Portfolio may invest in U.S. dollar denominated securities of foreign
companies including American Depositary Receipts (ADRs). 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.
The 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 Fund'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 the 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.
B-3
<PAGE>
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
investments due to changes in currency rates and control regulations (e.g.,
currency blockage); 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 Portfolio may invest
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 the 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.
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 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 is also affected by the perceived ability of the issuer to
make timely payments of principal and interest.
B-4
<PAGE>
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. The 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. A
Portfolio may invest only in corporate bonds or notes of issuers having
outstanding short-term securities rated in the top two rating categories by
Standard & Poor's and Moody's. See Appendix for description of investment-grade
ratings by Standard & Poor's and Moody's.
INVESTMENT GRADE. A designation applied to intermediate and long-term
corporate debt securities rated within the highest four rating categories
assigned by Standard & Poor's ("S&P") (AAA, AA, A or BBB) or by Moody's
Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), or, if unrated,
considered by the Adviser 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.
ZERO COUPON BONDS, STEP-COUPON BONDS, DEFERRED INTEREST BONDS AND PIK
BONDS. Fixed income securities in which the 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 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. The
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.
U.S. GOVERNMENT SECURITIES. The 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. The 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, the Portfolio must look principally to the agency issuing or
guaranteeing the
B-5
<PAGE>
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.
The Portfolio may, in addition to the U.S. government securities noted
above, invest in mortgage-backed securities (including private
mortgage-backed securities), such as GNMA, FNMA or FHLMC certificates (as
defined below), 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 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. The
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:
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GNMA CERTIFICATES. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that the 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 or the Farmers' Home Administration, or guaranteed by the
Veterans Administration. 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.
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 the
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
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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 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 each Portfolio 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.
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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 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 Portfolio 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 the
Portfolio 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 the 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 the 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 Directors may be considered liquid securities not subject to
the Portfolio's limitation on investments in illiquid securities.
ASSET BACKED SECURITIES. The 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.
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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 losses resulting from ultimate default
ensures payment through insurance policies or letters of credit obtained by the
issuer or sponsor from third parties. The 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.
LOAN PARTICIPATIONS. The Portfolio may invest in loan participations.
Loan participations are loans sold by the lending bank to an investor. The loan
participant borrower may be a company with highly-rated commercial paper that
finds it can obtain cheaper funding through a loan participation than with
commercial paper and can also increase the company's name recognition in the
capital markets. Loan participations often generate greater yield than
commercial paper.
The borrower of the underlying loan will be deemed to be the issuer except
to the extent the Portfolio derives its rights from the intermediary bank which
sold the loan participations. Because loan participations are undivided
interests in a loan made by the issuing bank, the Portfolio may not have the
right to proceed against the loan participations borrower without the consent of
other holders of the loan participations. In addition, loan participations will
be treated as illiquid if, in the judgment of the Adviser, they can not be sold
within seven days.
SHORT-TERM DEBT SECURITIES. As described in the Prospectus, in addition to
its primary investments, the Portfolio may also invest in the following types of
money market and short-term fixed-income securities:
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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), including Eurodollar certificates of
deposit (certificates of deposit issued by domestic or foreign banks
located outside the U.S.) and Yankee certificates of deposit
(certificates of deposit issued by branches of foreign banks located
in the U.S.), domestic and foreign 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 with total assets in excess of $1
billion, based on the latest published reports. The Portfolio may
also invest in obligations issued by U.S. commercial banks with total
assets of less than $1 billion if the principal amount of these
obligations owned by the Portfolio is fully insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Portfolio may also invest
in notes and obligations issued by foreign branches of U.S. and
foreign commercial banks.
SAVINGS ASSOCIATION OBLIGATIONS - Certificates of deposit
(interest-bearing time deposits) issued by mutual savings banks or
savings and loan associations with assets in excess of $1 billion and
whose deposits are insured by the FDIC. The Portfolio may also invest
in obligations issued by mutual savings banks or savings and loan
associations with total assets of less than $1 billion if the
principal amount of these obligations owned by the Portfolio is fully
insured by the FDIC.
COMMERCIAL PAPER - Short-term notes (up to 12 months) issued by
domestic corporations or governmental bodies. The Portfolio may only
purchase commercial paper judged by the Adviser to be of suitable
investment quality. This includes commercial paper that is (a) rated
in the two highest categories by Standard & Poor's Corporation
("Standard & Poor's") and by Moody's Investors Service, Inc.
("Moody's"), or (b) other commercial paper deemed on the basis of the
issuer's creditworthiness to be of a quality appropriate for the
Portfolio. See Appendix for a description of the ratings. The
Portfolio will not purchase commercial paper described in (b) above if
such paper would in the aggregate exceed 15% of its total assets after
such purchase. The commercial paper in which the Portfolio may invest
includes variable amount master demand notes. Variable amount master
demand notes permit the 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
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the participants increase or decrease the extent of their participation.
Investments in these instruments are limited to those that have a
demand feature enabling the Portfolio unconditionally to receive the
amount invested from the issuer upon seven or fewer days' notice. In
connection with master demand note arrangements, the Adviser, subject to
the direction of the Directors, 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 Adviser also
considers the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not
rated by Moody's or Standard & Poor's and the 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 the repayment notice period unless the Adviser has
reason to believe that the borrower could not make timely repayment upon
demand.
CORPORATE BONDS AND NOTES - See "Corporate Debt Instruments"
above.
REPURCHASE AGREEMENTS. The 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 the Portfolio's money is invested in the
security. Whenever the Portfolio enters into a repurchase agreement, it obtains
collateral having a value equal to at least 102% (100% if such collateral is in
the form of cash) of the repurchase price, including accrued interest. 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
Directors have established guidelines to be used by the Adviser in connection
with transactions in repurchase agreements and will regularly monitor the
Portfolio's use of repurchase agreements. The 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 the Portfolio's net
assets that may be subject to repurchase agreements having a maturity of seven
days or less for temporary defensive purposes.
OPTIONS AND FUTURES STRATEGIES. The Portfolio may write (i.e., sell)
call options ("calls") on securities that are traded on U.S. 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 writing such a covered call, up to 25% of the Portfolio's total assets
may be subject to calls. All such calls written by the 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
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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.
Primarily for hedging purposes, and from time to time for income
enhancement, the Portfolio may use interest rate futures contracts and stock and
bond index futures contracts, including futures on U.S. government securities
(together, "Futures"); and call and put options on equity and debt securities,
Futures, stock and bond indices and foreign currencies (all the foregoing
referred to as "Hedging Instruments"). Hedging Instruments may be used to
attempt to: (i) protect against possible declines in the market value of the
Portfolio's portfolio resulting from downward trends in the equity and debt
securities markets (generally due to a rise in interest rates); (ii) protect the
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.
The 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 the Portfolio to retain unrealized gains in the value of
portfolio securities which have appreciated, or to facilitate selling securities
for investment reasons, the 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, the Portfolio could: (i) purchase Futures, or (ii) purchase
calls on such Futures or on securities. Additional information about the
Hedging Instruments the Portfolio may use is provided below.
OPTIONS
OPTIONS ON SECURITIES. As noted above, the Portfolio may write and
purchase call and put options on equity and debt securities.
When the 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. The 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, the Portfolio may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether 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 the Portfolio retains the
underlying security and the premium received. If the Portfolio could not effect
a closing purchase transaction due to lack of a market, it
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would hold the callable securities until the call expired or was exercised.
When the 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. The 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 the 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 the
Portfolio as writing a covered call. The premium the 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, the 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,
the Portfolio (as the writer of the put) realizes a gain in the amount of the
premium. If the put is exercised, the 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, the
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.
The 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 the 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. The
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 the 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 the 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).
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Buying a put on an investment the 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, the 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, the Portfolio will deposit in escrow liquid assets with
a value equal to or greater than the exercise price of the underlying
securities. The Portfolio therefore forgoes the opportunity of investing the
segregated assets or writing calls against those assets. As long as the
obligation of the Portfolio as the put writer continues, it may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring the Portfolio to take delivery of the underlying security against
payment of the exercise price. The 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 the Portfolio effects a closing purchase transaction
by purchasing a put of the same series as that previously sold. Once the
Portfolio has been assigned an exercise notice, it is thereafter not allowed to
effect a closing purchase transaction.
OPTIONS ON SECURITIES INDICES. As noted above, the 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 the Portfolio buys a call on a securities index, it pays a premium. During
the call period, upon exercise of a call by the 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 the
Portfolio buys a put on a 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, the 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
Fund'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
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payments, called variation margin, will be paid to or by the futures broker on a
daily basis. Prior to expiration of the Future, if the 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 the
Portfolio's current or intended investments in fixed-income securities. For
example, if the Portfolio owned long-term bonds and interest rates were expected
to increase, the 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
the 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 the 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 the Portfolio's
interest rate futures contracts would be expected to increase at approximately
the same rate, thereby keeping the net asset value of the 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, the 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 the 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 the Portfolio's current or intended
investments from broad fluctuations in stock or bond prices. For example, the
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 the 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 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.
OPTIONS ON FUTURES. As noted above, the Portfolio may purchase and write
options on interest rate futures contracts, stock and bond index futures
contracts and forward contracts. (Unless otherwise specified, options on
interest rate futures contracts, options on stock and bond index 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
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<PAGE>
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, the 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 the Portfolio has written is exercised, the Portfolio will incur
a loss which will be reduced by the amount of the 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, the Portfolio's losses from exercised Options on Futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The 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, the
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 the Portfolio will
increase prior to acquisition, due to a market advance or changes in interest
rates, the 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.
ADDITIONAL INFORMATION ABOUT OPTIONS AND FUTURES STRATEGIES AND THEIR USE
The Fund's custodian, or a securities depository acting for the custodian,
will act as the Portfolios' 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 the Portfolio's entering into a closing
transaction.
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. The
Portfolio's option activities may affect its turnover rate and brokerage
commissions. The exercise by the Portfolio of puts on securities will cause
the sale of related investments, increasing portfolio turnover. Although
such exercise is within the 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. The 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
B-17
<PAGE>
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 the Portfolio's net asset value being
more sensitive to changes in the value of the underlying investments.
In the future, the 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 the Portfolio's investment
objectives, legally permissible and adequately disclosed.
REGULATORY ASPECTS OF OPTIONS AND FUTURES
The 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 the 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 the 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 other sanctions. Due to requirements under the 1940 Act, when the
Portfolio purchases a Future, the Portfolio will segregate 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.
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
B-18
<PAGE>
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 the 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 Adviser
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 the
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, 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, the Portfolio will seek to obtain the right of registration at the
expense of the issuer (except in the case of Rule 144A securities).
B-19
<PAGE>
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 Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Directors. In reaching liquidity decisions
the Adviser will consider, INTER ALIA, pursuant to guidelines and procedures
established by the Directors, 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).
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 Adviser has determined to be liquid
pursuant to guidelines established by the Directors. The Directors have
delegated to the Advisers the function of making day-to-day determinations of
liquidity with respect to Section 4(2) paper, pursuant to guidelines approved by
the Directors that require the Advisers to take into account the same factors
described above for other restricted securities and require the Advisers to
perform the same monitoring and reporting functions.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the 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, the Portfolio receives income while retaining the
securities' potential for capital appreciation. The advantage of such loans
is that the 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 the
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<PAGE>
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 Adviser to be creditworthy. On termination of
the loan, the borrower is required to return the securities to the Portfolio;
and any gain or loss in the market price of the loaned security during the
loan would inure to the Portfolio. The Portfolio will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
Since voting or consent rights which accompany loaned securities pass to
the borrower, the 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 Adviser 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 a
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
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<PAGE>
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.
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 Adviser'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 Adviser
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 Portfolio; 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 portfolios from interest rate fluctuations and to
hedge against fluctuations in the fixed income market in which certain of the
Portfolios' investments are traded, the 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,
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<PAGE>
other underlying assets or principal. Accordingly, the risk of loss with
respect to 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 Fund 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 Adviser to present minimal credit
risk in accordance with guidelines established by the Board of Directors. 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-23
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated for the 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 the 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 the
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. The Portfolio will pay a brokerage commission each time it buys or
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. Because each of the Advisers to the Portfolio
manages its portion of the Portfolio's assets independently, it is possible that
the same security may be purchased and sold on the same day by two or more
Advisers to the Portfolio, resulting in higher brokerage commissions for the
Portfolio. It is not anticipated that the annual rate of portfolio turnover
will exceed 200%.
High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Portfolio. High portfolio turnover may also involve a possible increase in
short-term capital gains or losses.
INVESTMENT RESTRICTIONS
The Fund has adopted for the Portfolio certain investment restrictions that
are fundamental policies and cannot be changed without the approval of the
holders of a majority of the 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.
The Portfolio may not:
1. Invest more than 25% of the Portfolio's total assets in the securities
of issuers in the same industry. Obligations of the U.S. Government, its
agencies and instrumentalities are not subject to this 25% limitation on
industry concentration.
2. 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 the Portfolio may hold
or sell real estate acquired as a result of the ownership of securities.
3. Purchase or sell commodities or commodity contracts, except to the
extent that the Portfolio may do so in accordance with applicable law and the
Prospectus and Statement of
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<PAGE>
Additional Information, as they may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange Act. The
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.
4. 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.
5. Borrow money, except that (i) the Portfolio may borrow from banks in
amounts up to 33 1/3% of its total assets for temporary or emergency purposes,
(ii) the Portfolio may borrow for investment purposes to the maximum extent
permissible under the 1940 Act (i.e., presently 50% of net assets), and (iii)
the 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 the 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.
6. Issue senior securities as defined in the 1940 Act, except that the
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.
7. 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 Directors without a vote of shareholders. The Portfolio may
not:
1. Purchase securities on margin, provided that margin deposits in
connection with futures contracts, options on futures contracts and other
derivative instruments shall not constitute purchasing securities on margin.
2. 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, the 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.
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<PAGE>
3. Invest in securities of other registered investment companies, except
by purchases in the open market, involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (determined at
the time of investment) would be invested in such securities, or except as part
of a merger, consolidation or other acquisition.
4. 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
the 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 Adviser
has determined to be liquid pursuant to guidelines established by the Directors,
will not be considered illiquid for purposes of this 15% limitation on illiquid
securities.
DIRECTORS AND OFFICERS
The following table lists the Directors and executive officers of the Fund,
their ages, business addresses, and principal occupations during the past five
years. The SunAmerica Mutual Funds ("SAMF") consist of SunAmerica Equity Funds,
SunAmerica Income Funds and SunAmerica Money Market Funds, Inc. An asterisk
indicates those Directors who are interested persons of the Fund within the
meaning of the 1940 Act.
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position with the Fund During Past 5 Years
--------------------- ---------------------- -------------------
<S> <C> <C>
S. James Coppersmith, 65 Director Director/Trustee of the Boston
Emerson College Stock Exchange, Uno Restaurant
100 Beacon Street Corp., Waban Corp., Kushner-Locke
Boston, MA 02116 Co., Chyron Inc.; Chairman of
the Board of Emerson College;
formerly, President and General
Manager, WCVB-TV, a division of
the Hearst Corp., from 1982
to 1994 (retired);
Director/Trustee of SAMF and
Anchor Series Trust ("AST").
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<PAGE>
Principal Occupations
Name, Age and Address Position with the Fund During Past 5 Years
--------------------- ---------------------- -------------------
Samuel M. Eisenstat, 58 Chairman of the Attorney in private practice;
430 East 86th Street Board President and Chief Executive
New York, NY 10028 Officer, Abjac Energy
Corporation; Director/Trustee of
Atlantic Realty Trust, UMB Bank
and Trust (a subsidiary of United
Mizrachi Bank), North European
Royalty Trust, Volt Information
Sciences Funding, Inc. (a
subsidiary of Volt Information
Sciences, Inc.) and Venture
Partners International (an
Israeli venture capital fund);
Chairman of the Boards of
Directors/Trustees of SAMF and
AST.
Stephen J. Gutman, 55 Director Partner and Chief Operating
515 East 79th Street Officer of B.B. Associates LLC
New York, NY 10021 (menswear specialty retailing and
other activities) since May 1989;
Director/Trustee of SAMF and AST.
Peter Harbeck**, 44 Director and Director and President,
The SunAmerica Center President SunAmerica Asset Management Corp.
733 Third Avenue ("SunAmerica"); Director,
New York, NY 10017-3204 SunAmerica Capital Services, Inc.
("SACS"), since February 1993;
Director and President,
SunAmerica Fund Services,
Inc. ("SAFS"), since May 1988;
President, SAMF and AST;
Executive Vice President and
Chief Operating Officer,
SunAmerica, from May 1988 to
August 1995; Executive Vice
President, SACS, from November
1991 to August 1995; Director,
Resources Trust Company.
Peter McMillan III*, 40 Director Executive Vice President and
1 SunAmerica Center Chief Investment Officer,
Los Angeles, CA 90067 SunAmerica Investments, Inc.,
since August 1989;
Director/Trustee of SAMF;
Director, Resources Trust
Company.
B-27
<PAGE>
Principal Occupations
Name, Age and Address Position with the Fund During Past 5 Years
--------------------- ---------------------- -------------------
Sebastiano Sterpa, 68 Director Founder of Sterpa Realty, Inc., a
Suite 200 full service real estate firm,
200 West Glenoaks Blvd. since 1962; Chairman of the
Glendale, CA 91202 Sterpa Group, real estate
investments and management
company, since 1962;
Director/Trustee of SAMF.
J. Steven Neamtz, 39 Vice President Executive Vice President,
The SunAmerica Center SunAmerica, since April 1996;
733 Third Avenue President, SACS, since April
New York, NY 10017-3204 1996; formerly, Executive
Vice President, New England
Funds, L.P. from July 1990 to
April 1996.
Peter C. Sutton, 33 Treasurer Senior Vice President,
The SunAmerica Center SunAmerica, since April 1997;
733 Third Avenue Treasurer, SAMF and AST, since
New York, NY 10017-3204 February 1996; Vice President,
SunAmerica Series Trust and
Anchor Pathway Fund, since October
1994; Vice President, Seasons
Series Trust, since April 1997;
formerly, Vice President,
SunAmerica, from 1994 to 1997;
Controller, SAMF and AST, from
March 1993 to February 1996;
Assistant Controller, SAMF,
from 1990 to 1993.
Robert M. Zakem, 40 Secretary Senior Vice President and General
The SunAmerica Center Counsel, SunAmerica, since April
733 Third Avenue 1993; Executive Vice President,
New York, NY 10017-3204 General Counsel and Director, SACS,
since February 1993; Vice President,
General Counsel and Assistant
Secretary, SAFS, since January 1994;
Vice President, SunAmerica Series
Trust, Anchor Pathway and Seasons
Series Trust; Assistant Secretary,
SunAmerica Series Trust and Anchor
Pathway Fund, since September 1993;
Assistant Secretary, Seasons Series
Trust, since April 1997.
</TABLE>
Directors and officers of the Fund are also Directors and officers of some
or all of the other investment companies managed, administered or advised by
SunAmerica, and distributed by SunAmerica Capital Services ("SACS" or the
"Distributor") and other affiliates of SunAmerica Inc.
B-28
<PAGE>
The Fund pays each Director who is not an interested person of the Fund,
SunAmerica or any Adviser, nor a party to any Management Agreement or
Subadvisory Agreement (collectively, the "Disinterested Directors") annual
compensation in addition to reimbursement of out-of-pocket expenses in
connection with attendance at meetings of the Directors. Specifically, each
Disinterested Director receives an aggregate of up to $60,000 in annual
compensation for acting as director or trustee to the SAMF, AST and/or the Fund,
a pro rata portion of which, based on relative net assets, is borne by the Fund.
In addition, each Disinterested Director also serves on the Audit Committee
of the Board of Directors. Each member of the Audit Committee receives an
aggregate of up to $5,000 in annual compensation for serving on the Audit
Committees of the SAMF, AST and/or the Fund, a pro rata portion of which, based
on relative net assets, is borne by the Fund. The Fund also has a Nominating
Committee, comprised solely of Disinterested Directors, which recommends to the
Directors those persons to be nominated for election as Directors by
shareholders and selects and proposes nominees for election by Directors between
shareholders' meetings. Members of the Nominating Committee serve without
compensation.
The Directors (and Trustees) of the SAMF, AST and the Fund have adopted the
SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the
"Retirement Plan") effective January 1, 1993 for the Disinterested Directors.
The Retirement Plan provides generally that if a Disinterested Director who has
at least 10 years of consecutive service as a Disinterested Director of any of
the SAMF, AST or the fund (an "Eligible Director") retires after reaching age 60
but before age 70 or dies while a Director, such person will be eligible to
receive a retirement or death benefit from each SunAmerica mutual fund with
respect to which he or she is an Eligible Director. As of each birthday, prior
to the 70th birthday, each Eligible Director will be credited with an amount
equal to (i) 50% of his or her regular fees (excluding committee fees) for
services as a Disinterested Director of each SunAmerica mutual fund for the
calendar year in which such birthday occurs, plus (ii) 8.5% of any amounts
credited under clause (i) during prior years. An Eligible Director may receive
any benefits payable under the Retirement Plan, at his or her election, either
in one lump sum or in up to fifteen annual installments.
The following table sets forth information summarizing the compensation
that the Fund paid each Disinterested Director for his services as Director for
the fiscal year ended October 31, 1997. The Directors who are interested
persons of the Fund receive no compensation.
B-29
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Pension or Retirement Estimated Annual Registrant and Fund
Compensation from Benefits Accrued as Part Benefits Upon Complex Paid to
Director Fund of Fund Expenses* Retirement*+ Directors*
<S> <C> <C> <C> <C>
S. James Coppersmith $4,570 $37,812 $29,670 $65,000
Samuel M. Eisenstat** $4,782 $33,285 $46,089 $69,000
Stephen J. Gutman $4,570 $34,414 $60,912 $65,000
Sebastiano Sterpa*** $4,570 $23,173 $7,900 $43,333
</TABLE>
* Information is for the five investment companies in the complex which
pay fees to these directors/trustees. The complex consists of the
SAMF, AST and the Fund.
** Mr. Eisenstat receives additional compensation for serving as Chairman
of each of the boards in the complex, $300 of which is payable by the
Fund.
*** Mr. Sterpa is not a trustee of AST.
+ Assuming participant elects to receive benefits in 15 yearly
installments.
As of March 31, 1998, the Directors and officers of the Fund owned in the
aggregate less than 1% of the Fund's total outstanding shares.
ADVISERS, DISTRIBUTOR AND ADMINISTRATOR
SUNAMERICA ASSET MANAGEMENT CORP. SunAmerica, organized as a Delaware
corporation in 1982, is located at The SunAmerica Center, 733 Third Avenue, New
York, NY 10017-3204, and acts as the investment manager to the Portfolio
pursuant to the Investment Advisory and Management Agreement (the "Management
Agreement") with the Fund, on behalf of the Portfolio. SunAmerica is an
indirect wholly owned subsidiary of SunAmerica Inc. SunAmerica Inc. is
incorporated in the State of Maryland and maintains its principal executive
offices at 1 SunAmerica Center, Los Angeles, CA 90067-6022, telephone (310)
772-6000.
Under the Management Agreement, and except as delegated to the Advisers
under the Subadvisory Agreements (as defined below), SunAmerica manages the
investment of the assets of the Portfolio and obtains and evaluates economic,
statistical and financial information to formulate and implement investment
policies for the Portfolio. Any investment program undertaken by SunAmerica
will at all times be subject to the policies and control of the Directors.
SunAmerica also provides certain administrative services to the Portfolio.
Except to the extent otherwise specified in the Management Agreement,
the Portfolios pay, or causes to be paid, all other expenses of the Fund and
each of the Portfolios, including, without limitation, charges and expenses
of any registrar, custodian, transfer and dividend disbursing agent;
brokerage commissions; taxes; engraving and printing of share certificates;
registration and qualification costs of the Portfolios and their shares under
federal and state securities laws; the cost and expense of printing,
B-30
<PAGE>
including typesetting, and distributing Prospectuses and Statements of
Additional Information respecting the Portfolios, and supplements thereto, to
the shareholders of the Portfolios; all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; all expenses incident to any dividend,
withdrawal or redemption options; fees and expenses of legal counsel and
independent accountants; membership dues of industry associations; interest
on borrowings of the Portfolios; postage; insurance premiums on property or
personnel (including Officers and Directors) of the Fund which inure to its
benefit; extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any indemnification relating
thereto); and all other costs of the Fund's operation.
The annual rate of the investment advisory fees that apply to the Portfolio
are set forth in the Prospectus.
Effective the date of commencement of operations with respect to the
Portfolio, SunAmerica has voluntarily agreed to waive fees or reimburse
expenses, if necessary, to keep operating expenses at or below an annual rate of
1.45% of the Assets of Class A shares and 2.10% of the Assets of Class B and
Class II shares for the Portfolio. SunAmerica also may voluntarily waive or
reimburse additional amounts to increase the investment return to the
Portfolio's investors. SunAmerica may terminate all such waivers and/or
reimbursements at any time. Further, any waivers or reimbursements made by
SunAmerica with respect to the Portfolio are subject to recoupment from the
Portfolio within the following two years, provided that the Portfolio is able to
effect such payment to SunAmerica and remain in compliance with the foregoing
expense limitations. The potential reimbursements are accounted for as possible
contingent liabilities that are not recordable on the balance sheet of the
Portfolio until collection is probable, but appear as footnote disclosure to the
Portfolio's financial statements. At such time as it appears probable that the
Portfolio is able to effect such reimbursement and that SunAmerica intends to
seek such reimbursement, the amount of the reimbursement will be accrued as an
expense of the Portfolio for that current period.
The Management Agreement continues in effect with respect to the Portfolio
after an initial two-year term from year to year provided that such continuance
is approved at least annually by vote of a majority of the Directors or by the
holders of a majority of the Portfolio's outstanding voting securities. Any
such continuation also requires approval by a majority of the Disinterested
Directors by vote cast in person at a meeting called for such purpose. The
Management Agreement may be terminated with respect to the Portfolio at any
time, without penalty, on 60 days' written notice by the Directors, by the
holders of a majority of the Portfolio's outstanding voting securities or by
SunAmerica. The Management Agreement automatically terminates with respect to
the Portfolio in the event of its assignment (as defined in the 1940 Act and the
rules thereunder).
Under the terms of the Management Agreement, SunAmerica is not liable to
the Portfolio, or their shareholders, for any act or omission by it or for any
losses sustained by the Portfolio or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
B-31
<PAGE>
THE ADVISERS. The organizations identified in the Prospectus act as
Advisers to the Fund and its Portfolio pursuant to the Subadvisory Agreements
with SunAmerica.
As described in the Prospectus, SunAmerica will initially allocate the
assets of the Portfolio equally among the Advisers for the Portfolio, and
subsequently, allocations of new cash flow and of redemption requests will be
made equally among the Advisers of the Portfolio unless SunAmerica determines,
subject to the review of the Directors, that a different allocation of assets
would be in the best interests of the Portfolio and its shareholders. The Fund
expects that differences in investment returns among the portions of the
Portfolio managed by different Advisers will cause the actual percentage of the
Portfolio's assets managed by each Adviser to vary over time. In general, the
Portfolio's assets once allocated to one Adviser will not be reallocated (or
"rebalanced") to another Adviser for the Portfolio. However, SunAmerica
reserves the right, subject to the review of the Board, to reallocate assets
from one Adviser to another when deemed in the best interests of the
Portfolio and its shareholders including when the assets managed by an
Adviser exceed that portion managed by any other Adviser to the Portfolio.
In some instances, where a reallocation results in any rebalancing of the
Portfolio from a previous allocation, the effect of the reallocation will be
to shift assets from a better performing Adviser to a portion of the
Portfolio with a relatively lower total return.
Each Adviser is paid monthly by SunAmerica a fee equal to a percentage of
the average daily net assets of the Portfolio allocated to the Adviser. The
actual aggregate annual rate of such fee is 0.40%, expressed as a percentage of
the Assets of the Portfolio. In addition, SunAmerica has agreed to pay an
additional $50,000 to the Adviser with the highest total return for its portion
of the Portfolio for each calendar year.
The Subadvisory Agreements will continue in effect for a period of two
years from the date of their execution, unless terminated sooner. They 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. Under the terms of the Subadvisory Agreements, no Adviser is liable
to the Portfolio, or their shareholders, for any act or omission by it or for
any losses sustained by the Portfolio or their shareholders, except in the case
of willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties.
PERSONAL TRADING. The Fund and SunAmerica have adopted a written Code of
Ethics (the "Ethics 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 Ethics Code is an individual who
is a trustee, director, officer, general partner or advisory person of the Fund
or SunAmerica. 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 SunAmerica, (ii) Initial Public Offerings, (iii)
private placements, (iv) blackout periods, (v) short-term trading profits, (vi)
gifts, and (vii) services as a director. 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.
SunAmerica reports to the Board of Directors on a quarterly basis, as to whether
there were any violations of the Ethics Code by Access Persons of the Fund or
SunAmerica during the quarter.
B-32
<PAGE>
The Advisers 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 Ethics Code. Further, the Advisers report to
SunAmerica 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 Fund
insofar as such violations related to the Fund. In turn, SunAmerica reports
to the Board of Directors as to whether there were any violations of the
Ethics Code by Access Persons of the Fund or SunAmerica.
THE DISTRIBUTOR. The Fund, on behalf of the Portfolio, has entered into a
distribution agreement (the "Distribution Agreement") with the Distributor, a
registered broker-dealer and an indirect wholly owned subsidiary of SunAmerica
Inc., to act as the principal underwriter of the shares of the Portfolio. The
address of the Distributor is The SunAmerica Center, 733 Third Avenue, New York,
NY 10017-3204. The Distribution Agreement provides that the Distributor has the
exclusive right to distribute shares of the Portfolio through its registered
representatives and authorized broker-dealers. The Distribution Agreement also
provides that the Distributor will pay the promotional expenses, including the
incremental cost of printing prospectuses, annual reports and other periodic
reports respecting the Portfolio, for distribution to persons who are not
shareholders of the Portfolio and the costs of preparing and distributing any
other supplemental sales literature. However, certain promotional expenses may
be borne by the Portfolio (see "Distribution Plans" below).
The Distribution Agreement with respect to the Portfolio will remain in
effect for two years from the date of execution unless terminated sooner, and
thereafter from year to year if such continuance is approved at least annually
by the Directors, including a majority of the Disinterested Directors. The Fund
and the Distributor each has the right to terminate the Distribution Agreement
with respect to the Portfolio on 60 days' written notice, without penalty. The
Distribution Agreement will terminate automatically in the event of its
assignment as defined in the 1940 Act and the rules thereunder.
The Distributor may, from time to time, pay additional commissions or
promotional incentives to brokers, dealers or other financial services firms
that sell shares of the Portfolio. In some instances, such additional
commissions, fees or other incentives may be offered only to certain firms,
including Royal Alliance Associates, SunAmerica Securities, Inc., Koegler Morgan
& Company, Financial Service Corporation and Advantage Capital Corporation,
affiliates of the Distributor, that sell or are expected to sell during
specified time periods certain minimum amounts of shares of the Portfolio, or of
other funds underwritten by the Distributor. In addition, the terms and
conditions of any given promotional incentive may differ from firm to firm.
Such differences will, nevertheless, be fair and equitable, and based on such
factors as size, geographic location, or other reasonable determinants, and will
in no way affect the amount paid to any investor.
DISTRIBUTION PLANS. As indicated in the Prospectus, the Directors of the
Fund have adopted Distribution Plans (the "Class A Plan," the "Class B Plan" and
the "Class II Plan" and collectively, the "Distribution Plans") pursuant to Rule
12b-1 under the 1940 Act. Reference is made to "Management of the Portfolio -
Distribution Plans" in the Prospectus for certain information with respect to
the Distribution Plans.
B-33
<PAGE>
Under the Class A Plan, the Distributor may receive payments from the
Portfolio at an annual rate of up to 0.10% of the average daily net assets of
the Portfolio's Class A shares to compensate the Distributor and certain
securities firms for providing sales and promotional activities for
distributing that class of shares. Under the Class B and Class II Plans, the
Distributor may receive payments from the Portfolio at the annual rate of up
to 0.75% of the average daily net assets of the Portfolio's Class B and Class
II shares to compensate the Distributor and certain securities firms for
providing sales and promotional activities for distributing each such class
of shares. The distribution costs for which the Distributor may be
reimbursed out of such distribution fees include fees paid to broker-dealers
that have sold Portfolio shares, commissions and other expenses such as sales
literature, prospectus printing and distribution and compensation to
wholesalers. It is possible that in any given year the amount paid to the
Distributor under the Class A Plan, the Class B Plan or the Class II Plan
will exceed the Distributor's distribution costs as described above. The
Distribution Plans provide that each class of shares of the Portfolio may pay
the Distributor an account maintenance and service fee of up to 0.25% of the
aggregate average daily net assets of such class of shares for payments to
broker-dealers for providing continuing account maintenance. In this regard,
some payments are used to compensate broker-dealers with trail commissions or
account maintenance and service fees in an amount up to 0.25% per year of the
assets maintained in the Portfolio by their customers.
Continuance of the Distribution Plans with respect to the Portfolio is
subject to annual approval by vote of the Directors, including a majority of the
Independent Directors. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of the Portfolio, without approval of the shareholders of the affected
class of shares of the Portfolio. In addition, all material amendments to the
Distribution Plans must be approved by the Directors in the manner described
above. A Distribution Plan may be terminated at any time with respect to the
Portfolio without payment of any penalty by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the affected class of shares of the
Portfolio. So long as the Distribution Plans are in effect, the election and
nomination of the Independent Directors of the Fund shall be committed to the
discretion of the Independent Directors. In the Directors' quarterly review of
the Distribution Plans, they will consider the continued appropriateness of, and
the level of, compensation provided in the Distribution Plans. In their
consideration of the Distribution Plans with respect to the Portfolio, the
Directors must consider all factors they deem relevant, including information as
to the benefits of the Portfolio and the shareholders of the relevant class of
the Portfolio.
THE ADMINISTRATOR. The Fund has entered into a Service Agreement, under
the terms of which SunAmerica Fund Services ("SAFS"), an indirect wholly owned
subsidiary of SunAmerica Inc., acts as a servicing agent assisting State Street
Bank and Trust Company ("State Street") in connection with certain services
offered to the shareholders of the Portfolio. Under the terms of the Service
Agreement, SAFS may receive reimbursement of its costs in providing such
shareholder services. SAFS is located at The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
The Service Agreement will remain in effect for two years from the date of
approval with respect to the Portfolio and from year to year thereafter provided
its continuance is approved annually by vote of the Directors including a
majority of the Disinterested Directors.
B-34
<PAGE>
Pursuant to the Service Agreement, as compensation for services
rendered, SAFS receives a fee from the Fund, computed and payable monthly
based upon an annual rate of 0.22% of average daily net assets. This fee
represents the full cost of providing shareholder and transfer agency
services to the Fund. From this fee, SAFS pays a fee to State Street, and
its affiliate, National Financial Data Services ("NFDS" and with State
Street, the "Transfer Agent") (other than out-of-pocket charges which would
be paid by the Fund). For further information regarding the Transfer Agent
see the section entitled "Additional Information" below.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Advisers are responsible for decisions
to buy and sell securities for the Portfolio, selection of broker-dealers and
negotiation of commission rates. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a negotiated
commission for their services. Orders may be directed to any broker-dealer
including, to the extent and in the manner permitted by applicable law, an
affiliated brokerage subsidiary of SunAmerica or another Adviser.
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 the 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.
An Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order.
However, the Adviser may select broker-dealers that provide it with research
services and may cause the Portfolio to pay such broker-dealers commissions that
exceed those that other broker-dealers may have charged, if in its view the
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by the broker-dealer. Certain research services
furnished by brokers may be useful to the Adviser with respect to clients other
than the Fund. No specific value can be determined for research services
furnished without cost to the Adviser by a broker. The Advisers are of the
opinion that because the material must be analyzed and reviewed by its staff,
its receipt does not tend to reduce expenses, but may be beneficial in
supplementing the Adviser's research and analysis. Therefore, it may tend to
benefit the Portfolio by improving the quality of the Adviser's investment
advice. The investment advisory fees paid by the Portfolio are not reduced
because the Adviser receives such services. When making purchases of
underwritten issues with fixed underwriting fees, the Adviser may designate the
use of broker-dealers who have agreed to provide the Adviser with certain
statistical, research and other information.
Subject to applicable law and regulations, consideration may also be given
to the willingness of particular brokers to sell shares of the Portfolio as a
factor in the selection of brokers for transactions effected on behalf of the
Portfolio, subject to the requirement of best price and execution.
B-35
<PAGE>
Although the objectives of other accounts or investment companies that
the Adviser manages may differ from those of the Portfolio, it is possible
that, at times, identical securities will be acceptable for purchase by the
Portfolio and one or more of the other accounts or investment companies that
the Adviser manages. However, the position of each account or company in the
securities of the same issue may vary with the length of the time that each
account or company may choose to hold its investment in those securities.
The timing and amount of purchase by each account and company will also be
determined by its cash position. If the purchase or sale of a security is
consistent with the investment policies of the Portfolio and one or more of
these other accounts or companies is considered at or about the same time,
transactions in such securities will be allocated in a manner deemed
equitable by the Adviser. The Adviser may combine such transactions, in
accordance with applicable laws and regulations. However, simultaneous
transactions could adversely affect the ability of the Portfolio to obtain or
dispose of the full amount of a security, which it seeks to purchase or sell,
or the price at which such security can be purchased or sold.
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Shares of the Portfolio are sold at the respective net asset value next
determined after receipt of a purchase order, plus a sales charge, which, at the
election of the investor, may be (i) imposed at the time of purchase (Class A
shares), (ii) deferred (Class B shares, and purchases of Class A shares in
excess of $1 million) or (iii) with elements of a sales charge that is both
imposed at the time of purchase and deferred (Class II shares). Reference is
made to "Purchase of Shares" in the Prospectus for certain information as to the
purchase of Portfolio shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. As discussed under "Purchase
of Shares" in the Prospectus, the CDSC may be waived on redemptions of Class B
and Class II shares under certain circumstances. The conditions set forth below
are applicable with respect to the following situations with the proper
documentation:
DEATH. CDSCs may be waived on redemptions within one year following the
death (i) of the sole shareholder on an individual account, (ii) of a joint
tenant where the surviving joint tenant is the deceased's spouse, or (iii) of
the beneficiary of a Uniform Gifts to Minors Act, Uniform Transfers to Minors
Act or other custodial account. The CDSC waiver is also applicable in the case
where the shareholder account is registered as community property. If, upon the
occurrence of one of the foregoing, the account is transferred to an account
registered in the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year of the death. If
Class B shares are not redeemed within one year of the death, they will remain
Class B shares and be subject to the applicable CDSC, when redeemed.
DISABILITY. A CDSC may be waived on redemptions occurring within one year
after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of
the Code). To be eligible for such waiver, (i) the disability must arise after
the purchase of shares and (ii) the disabled shareholder must have been under
age 65 at the time of the initial determination of disability. If the account
is transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
B-36
<PAGE>
PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of the
Portfolio through dealers which have entered into selected dealer agreements
with the Distributor. An investor's dealer who has entered into a distribution
arrangement with the Distributor is expected to forward purchase orders and
payment promptly to the Portfolio. Orders received by the Distributor before
the close of business will be executed at the offering price determined at the
close of regular trading on the New York Stock Exchange (the "NYSE") that day.
Orders received by the Distributor after the close of business will be executed
at the offering price determined after the close of the NYSE on the next trading
day. The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the fifth business day following the
investment. The Portfolio will not be responsible for delays caused by dealers.
PURCHASE BY CHECK. Checks should be made payable to the "Focus Portfolio"
or to "SunAmerica Funds." If the payment is for a retirement plan account for
which SunAmerica serves as fiduciary, please note on the check that payment is
for such an account. In the case of a new account, purchase orders by check
must be submitted directly by mail to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204, together with payment for the purchase price of such shares and a
completed New Account Application. Payment for subsequent purchases should be
mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas
City, Missouri 64141-6373 and the shareholder's Portfolio account number should
appear on the check. For fiduciary retirement plan accounts, both initial and
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204. Certified checks are not necessary but checks are accepted subject
to collection at full face value in United States funds and must be drawn on a
bank located in the United States. Upon receipt of the completed New Account
Application and payment check, the Transfer Agent will purchase full and
fractional shares of the Portfolio at the net asset value next computed after
the check is received, plus the applicable sales charge. Subsequent purchases
of shares of the Portfolio may be purchased directly through the Transfer Agent.
SAFS reserves the right to reject any check made payable other than in the
manner indicated above. Under certain circumstances, the Fund will accept a
multi-party check (e.g., a check made payable to the shareholder by another
party and then endorsed by the shareholder to the Fund in payment for the
purchase of shares); however, the processing of such a check may be subject to a
delay. The Fund does not verify the authenticity of the endorsement of such
multi-party check, and acceptance of the check by the Fund should not be
considered verification thereof. Neither the Fund nor its affiliates will be
held liable for any losses incurred as a result of a fraudulent endorsement.
There are restrictions on the redemption of shares purchased by check for which
funds are being collected. (See "Redemption of Shares" in the Prospectus.)
PURCHASE THROUGH SAFS. SAFS will effect a purchase order on behalf of a
customer who has an investment account upon confirmation of a verified credit
balance at least equal to the amount of the purchase order (subject to the
minimum $500 investment requirement for wire orders). If such order is received
at or prior to the Portfolio's close of business, the purchase of shares of the
Portfolio will be effected on that day. If the order is received after the
Portfolio's close of business, the order will be effected on the next business
day.
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PURCHASE BY FEDERAL FUNDS WIRE. An investor may make purchases by having
his or her bank wire Federal funds to the Fund's Transfer Agent. Federal funds
purchase orders will be accepted only on a day on which the Fund and the
Transfer Agent are open for business. In order to insure prompt receipt of a
Federal funds wire, it is important that these steps be followed:
1. You must have an existing SunAmerica Fund Account before wiring funds.
To establish an account, complete the New Account Application and send
it via facsimile to SAFS at: (212) 551-5343.
2. Call SunAmerica Fund Services' Shareholder/Dealer Services, toll free
at (800) 858-8850, extension 5125 to obtain your new account number.
3. Instruct the bank to wire the specified amount to the Transfer Agent:
State Street Bank and Trust Company, Boston, MA, ABA# 0110-00028; DDA#
99029712, SunAmerica Focus Portfolio, Class __ (include shareholder
name and account number).
WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A
SHARES. To the extent that sales are made for personal investment purposes, the
sales charge is waived as to Class A shares purchased by current or retired
officers, directors, and other full-time employees of SunAmerica and its
affiliates, as well as members of the selling group and family members of the
foregoing. In addition, the sales charge is waived with respect to shares
purchased by certain qualified retirement plans or employee benefit plans (other
than IRAs), which are sponsored or administered by SunAmerica or an affiliate
thereof. Such plans may include certain employee benefit plans qualified under
Sections 401 or 457 of the Code, or employee benefit plans created pursuant to
Section 403(b) of the Code and sponsored by nonprofit organizations defined
under Section 501(c)(3) of the Code (collectively, "Plans"). A Plan will qualify
for purchases at net asset value provided that (a) the initial amount invested
in one or more of the Portfolios (or in combination with the shares of other
SAMF) is at least $1,000,000, (b) the sponsor signs a $1,000,000 Letter of
Intent, (c) such shares are purchased by an employer-sponsored plan with at
least 100 eligible employees, or (d) the purchases are by trustees or other
fiduciaries for certain employer-sponsored plans, the trustee, fiduciary or
administrator for which has an agreement with the Distributor with respect to
such purchases and all such transactions for the plan are executed through a
single omnibus account. Further, the sales charge is waived with respect to
shares purchased by "wrap accounts" for the benefit of clients of
broker-dealers, financial institutions, financial planners or registered
investment advisers adhering to the following standards established by the
Distributor: (i) the broker-dealer, financial institution or financial planner
charges its client(s) an advisory fee based on the assets under management on an
annual basis, and (ii) such broker-dealer, financial institution or financial
planner does not advertise that shares of the Portfolio may be purchased by
clients at net asset value. Shares purchased under this waiver may not be
resold except to the Portfolio. Shares are offered at net asset value to the
foregoing persons because of anticipated economies in sales effort and sales
related expenses. Reductions in sales charges apply to purchases or shares by a
"single person" including an individual; members of a family unit comprising
husband, wife and minor children; or a trustee or other fiduciary purchasing for
a single fiduciary account. Complete details concerning how an investor may
purchase shares at reduced sales charges may be obtained by contacting the
Distributor.
B-38
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REDUCED SALES CHARGES (CLASS A SHARES ONLY). As discussed under "Purchase
of Shares" in the Prospectus, investors in Class A shares of the Portfolio may
be entitled to reduced sales charges pursuant to the following special purchase
plans made available by the Fund.
COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the
sales charge reductions or eliminations by combining purchases of Portfolio
shares into a single transaction:
(i) an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act (which includes corporations which are corporate affiliates of each
other);
(ii) an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account (including a pension, profit-sharing, or
other employee benefit trust created pursuant to a plan qualified under
Section 401 of the Code);
(iv) tax-exempt organizations qualifying under Section 501(c)(3) of the
Code (not including 403(b) plans);
(v) employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
(vi) group purchases as described below.
A combined purchase currently may also include shares of other funds in the
SAMF (other than money market funds) purchased at the same time through a single
investment dealer, if the dealer places the order for such shares directly with
the Distributor.
RIGHTS OF ACCUMULATION. A purchaser of Portfolio shares may qualify for a
reduced sales charge by combining a current purchase (or combined purchases as
described above) with shares previously purchased and still owned; provided the
cumulative value of such shares (valued at cost or current net asset value,
whichever is higher), amounts to $50,000 or more. In determining the shares
previously purchased, the calculation will include, in addition to other Class A
shares of the particular portfolio that were previously purchased, shares of the
other classes of the same portfolio, as well as shares of any class of any other
portfolio or of any of the other portfolios advised by SunAmerica, as long as
such shares were sold with a sales charge or acquired in exchange for shares
purchased with such a sales charge.
The shareholder's dealer, if any, or the shareholder, must notify the
Distributor at the time an order is placed of the applicability of the reduced
charge under the Right of Accumulation. Such notification must be in writing by
the dealer or shareholder when such an order is placed by mail. The reduced
sales charge will not be granted if: (a) such information is not furnished at
the time of the order; or (b) a review of the Distributor's or the Transfer
Agent's records fails to confirm the investor's represented holdings.
B-39
<PAGE>
LETTER OF INTENT. A reduction of sales charges is also available to an
investor who, pursuant to a written Letter of Intent which is set forth in the
New Account Application in the Prospectus, establishes a total investment goal
in Class A shares of one or more Portfolios to be achieved through any number of
investments over a thirteen-month period, of $50,000 or more. Each investment
in such Portfolios made during the period will be subject to a reduced sales
charge applicable to the goal amount. The initial purchase must be at least 5%
of the stated investment goal and shares totaling 5% of the dollar amount of the
Letter of Intent will be held in escrow by the Transfer Agent, in the name of
the investor. Shares of any class of shares of any of the Portfolios, or of
other funds advised by SunAmerica which impose a sales charge at the time of
purchase, which the investor intends to purchase or has previously purchased
during a 30-day period prior to the date of execution of the Letter of Intent
and still owns, may also be included in determining the applicable reduction;
provided, the dealer or shareholder notifies the Distributor of such prior
purchase(s).
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amounts of the investment goal. In the event the
investment goal is not achieved within the thirteen-month period, the
investor is required to pay the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges
actually paid. Such payment may be made directly to the Distributor or, if
not paid, the Distributor is authorized by the Letter of Intent to liquidate
a sufficient number of escrowed shares to obtain such difference. If the
goal is exceeded and purchases pass the next sales charge break-point, the
sales charge on the entire amount of the purchase that results in passing
that break-point, and on subsequent purchases, will be subject to a further
reduced sales charge in the same manner as set forth above under "Rights of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. At any time while a Letter of Intent is in effect, a
shareholder may, by written notice to the Distributor, increase the amount of
the stated goal. In that event, shares of the applicable one of the
Portfolios portfolio purchased during the previous 90-day period and still owned
by the shareholder will be included in determining the applicable sales charge.
The 5% escrow and the minimum purchase requirement will be applicable to the
new stated goal. Investors electing to purchase shares of one or more of the
Portfolios pursuant to this purchase plan should carefully read such Letter
of Intent.
REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may
purchase Class A shares of the Portfolio under the combined purchase privilege
as described above.
To receive a rate based on combined purchases, group members must purchase
Class A shares of the Portfolio through a single investment dealer designated by
the group. The designated dealer must transmit each member's initial purchase
to the Distributor, together with payment and completed New Account Application.
After the initial purchase, a member may send funds for the purchase of Class A
shares directly to the Transfer Agent. Purchases of the Portfolio's shares are
made at the public offering price based on the net asset value next determined
after the Distributor or the Transfer Agent receives payment for the Class A
shares. The minimum investment requirements described above apply to purchases
by any group member.
B-40
<PAGE>
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide its
designated investment dealer access to the group's membership by means of
written communication or direct presentation to the membership at a meeting on
not less frequently than an annual basis; (vi) the group or its investment
dealer will provide annual certification, in form satisfactory to the Transfer
Agent, that the group then has at least 25 members and that at least ten members
participated in group purchases during the immediately preceding 12 calendar
months; and (vii) the group or its investment dealer will provide periodic
certification, in form satisfactory to the Transfer Agent, as to the eligibility
of the purchasing members of the group.
Members of a qualified group include: (i) any group which meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is
carried on the records of the group or on the records of any constituent
member of the group as being a good standing employee, partner, member or
person of like status of the group or constituent member; or (iii) any
fiduciary purchasing shares for the account of a member of a qualified group
or a member's beneficiary. For example, a qualified group could consist of a
trade association which would have as its members individuals, sole
proprietors, partnerships and corporations. The members of the group would
then consist of the individuals, the sole proprietors and their employees,
the members of the partnership and their employees, and the corporations and
their employees, as well as the trustees of employee benefit trusts acquiring
the Portfolio's shares for the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Fund reserves the right to revise the terms of or to suspend
or discontinue group sales with respect to shares of the Portfolio at any time.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption of Portfolio shares.
If the Directors determine that it would be detrimental to the best
interests of the remaining shareholders of a Portfolio to make payment wholly
or partly in cash, the Fund, having filed with the SEC a notification of
election pursuant to Rule 18f-1 on behalf of each of the Portfolios, may pay
the redemption price in whole, or in part, by a distribution in kind of
securities from a Portfolio in lieu of cash. In conformity with applicable
rules of the SEC, the Portfolio is committed to pay in cash all requests for
redemption, by any shareholder of record, limited in amount with respect to
each shareholder during any 90-day period to the lesser of (i) $250,000, or
(ii) 1% of the net asset value of the Portfolio
B-41
<PAGE>
at the beginning of such period. If shares are redeemed in kind, the
redeeming shareholder would incur brokerage costs in converting the assets
into cash. The method of valuing portfolio securities is described below in
the section entitled "Determination of Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined.
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally, 4:00 p.m., Eastern time). The Portfolio calculates the net
asset value of each class of its shares separately by dividing the total value
of each class's net assets by the shares outstanding of such class.
Stocks are valued based upon closing sales prices reported on recognized
securities exchanges or, for listed securities having no sales reported and
for unlisted securities, upon last reported bid prices. Non-convertible
bonds, debentures, other long-term debt securities and short-term securities
with original or remaining maturities in excess of 60 days, are normally
valued at prices obtained for the day of valuation from a bond pricing
service of a major dealer in bonds, when such prices are available; however,
in circumstances in which the SunAmerica deems it appropriate to do so, an
over-the-counter or exchange quotation at the mean of representative bid or
asked prices 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. If a security's price is available
from more than one foreign exchange, the Portfolio uses the exchange that is
the primary market for the security. Short-term securities with 60 days or
less to maturity are amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the
60th day, are amortized to maturity based on the value determined on the 61st
day. Options traded on national securities exchanges are valued as of the
close of the exchange on which they are traded. Futures and options traded on
commodities exchanges are valued at their last sale price as of the close of
such exchange. 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 SunAmerica, the broadest and most representative market, that may be
either a securities exchange or the over-the-counter market. Where
quotations are not readily available, securities are valued at fair value as
determined in good faith in accordance with procedures adopted by the Board
of Directors. The fair value of all other assets is added to the value of
securities to arrive at the Portfolio's total assets.
The Portfolio's liabilities, including proper accruals of expense items,
are deducted from total assets.
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PERFORMANCE DATA
The Portfolio may advertise performance data that reflects various measures
of total return. An explanation of the data presented and the methods of
computation that will be used are as follows.
The Portfolio's performance may be compared to the historical returns of
various investments, performance indices of those investments or economic
indicators, including, but not limited to, stocks, bonds, certificates of
deposit, money market funds and U.S. Treasury Bills. Certain of these
alternative investments may offer fixed rates of return and guaranteed principal
and may be insured.
Average annual total return is determined separately for Class A, Class B
and Class II shares in accordance with a formula specified by the SEC. Average
annual total return is computed by finding the average annual compounded rates
of return for the 1-, 5-, and 10-year periods or for the lesser included periods
of effectiveness. The formula used is as follows:
n
P(1 + T) = ERV
P = a hypothetical initial purchase payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10- year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion thereof).
The above formula assumes that:
1. The maximum sales load (i.e., either the front-end sales load in the
case of the Class A or Class II shares or the deferred sales load that
would be applicable to a complete redemption of the investment at the
end of the specified period in the case of the Class B or Class II
shares) is deducted from the initial $1,000 purchase payment;
2. All dividends and distributions are reinvested at net asset value; and
3. Complete redemption occurs at the end of the 1-, 5-, or 10- year
periods or fractional portion thereof with all nonrecurring charges
deducted accordingly.
The Portfolio may advertise cumulative, rather than average return, for
each class of its shares for periods of time other than the 1-, 5-, and 10-year
periods or fractions thereof, as discussed above. Such return data will be
computed in the same manner as that of average annual total return, except that
the actual cumulative return will be computed.
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<PAGE>
COMPARISONS
The Portfolio may compare its total return to similar measures as
calculated by various publications, services, indices, or averages. Such
comparisons are made to assist in evaluating an investment in the Portfolio.
The following references may be used:
(a) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average),
and 20 transportation company stocks (Dow Jones Transportation Average).
Comparisons of performance assume reinvestment of dividends.
(b) Standard & Poor's 500 Composite Stock Price Index or its component
indices -- an unmanaged index composed of 400 industrial stocks, 40 financial
stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of
performance assume reinvestment of dividends.
Standard & Poor's 100 Stock Index -- an unmanaged index based on the
prices of 100 blue chip stocks, including 92 industrials, one utility, two
transportation companies, and five financial institutions. The Standard &
Poor's 100 Stock Index is a smaller, more flexible index for options trading.
(c) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation, and finance
stocks listed on the New York Stock Exchange.
(d) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
(e) Lipper: Mutual Fund Performance Analysis, Fixed Income Analysis, and
Mutual Fund Indices -- measures total return and average current yield for the
mutual fund industry. Ranks individual mutual fund performance over specified
time periods assuming reinvestment of all distributions, exclusive of sales
charges.
(f) CDA Mutual Fund Report, published by CDA Investment Technologies,
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(g) Mutual Fund Source Book, Principia and other publications and
information services provided by Morningstar, Inc. -- analyzes price, risk and
total return for the mutual fund industry.
(h) Financial publications: Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, Money, Pension and Investment Age,
United Mutual Fund Selector, and Wiesenberger Investment Companies Service, and
other publications containing financial analyses which rate mutual fund
performance over specified time periods.
B-44
<PAGE>
(i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of periodic change in the
price of goods and services in major expenditure groups.
(j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
- -- historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, treasury bills, and inflation.
(k) Savings and Loan Historical Interest Rates as published in the U.S.
Savings & Loan League Fact Book.
(l) Shearson-Lehman Municipal Bond Index and Government/Corporate Bond
Index -- unmanaged indices that track a basket of intermediate and long-term
bonds. Reflect total return and yield and assume dividend reinvestment.
(m) Salomon GNMA Index published by Salomon Brothers Inc. -- Market value
of all outstanding 30-year GNMA Mortgage Pass-Through Securities that includes
single family and graduated payment mortgages.
Salomon Mortgage Pass-Through Index published by Salomon Brothers Inc.
- --Market value of all outstanding agency mortgage pass-through securities that
includes 15- and 30-year FNMA, FHLMC and GNMA Securities.
(n) Value Line Geometric Index -- broad based index made up of
approximately 1700 stocks each of which have an equal weighting.
(o) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900 securities on the
stock exchanges of countries in Europe, Australia and the Far East.
(p) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred stocks. The original list of names was generated by
screening for convertible issues of $100 million or more in market
capitalization. The index is priced monthly.
(q) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated "AA" or "AAA." It is a
value-weighted, total return index, including approximately 800 issues.
(r) Salomon Brothers Broad Investment Grade Bond Index -- is a
market-weighted index that contains approximately 4700 individually priced
investment grade corporate bonds rated "BBB" or better, U.S. Treasury/agency
issues and mortgage pass-through securities.
B-45
<PAGE>
(s) Salomon Brothers World Bond Index -- measures the total return
performance of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds from 10 currencies:
Australian Dollars Netherlands Guilders
Canadian Dollars Swiss Francs
European Currency Units UK Pound Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
(t) J.P. Morgan Global Government Bond Index -- a total return, market
capitalization-weighted index, rebalanced monthly, consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, the United Kingdom, and the United States.
(u) Shearson Lehman Long-Term Treasury Bond Index -- is comprised of all
bonds covered by the Shearson Lehman Hutton Treasury Bond Index with maturities
of 10 years or greater.
(v) NASDAQ Industrial Index -- is comprised of more than 3,000 industrial
issues. It is a value-weighted index calculated on pure change only and does
not include income.
(w) The MSCI Combined Far East Free ex Japan Index -- a market
capitalization weighted index comprised of stocks in Hong Kong, Indonesia,
Korea, Malaysia, Philippines, Singapore and Thailand. Korea is included in this
index at 20% of its market capitalization.
(x) First Boston High Yield Index -- generally includes over 180 issues
with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
(y) Morgan Stanley Capital International World Index -- An arithmetic,
market value-weighted average of the performance of over 1,470 securities listed
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
(z) Russell 2000 and 3000 Indices -- represents the top 2,000 and the next
3,000 stocks traded on the New York Stock Exchange, American Stock Exchange and
National Association of Securities Dealers Automated Quotations, by market
capitalizations.
(aa) Russell Midcap Growth Index -- contains those Russell Midcap
securities with a greater-than-average growth orientation. The stocks are
also members of the Russell 1000 Growth Index, the securities in which tend
to exhibit higher price-to-book and price earnings ratios, lower dividend
yields and higher forecasted growth values than the Value universe.
B-46
<PAGE>
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Portfolio's portfolio, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Portfolio to calculate
its figures. Specifically, the Portfolio may compare its performance to that of
certain indices which include securities with government guarantees. However,
the Portfolio's shares do not contain any such guarantees. In addition, there
can be no assurance that the Portfolio will continue its performance as compared
to such other standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Portfolio intends to distribute to the
registered holders of its shares substantially all of its net investment
income, which includes dividends, interest and net short-term capital gains,
if any, in excess of any net long-term capital losses. The Portfolio intends
to distribute any net capital gains from the sale of assets held for more
than 12 months in excess of any net short-term capital losses. The current
policy of the Portfolio is to pay investment income dividends, if any, at
least annually. The Portfolio intends to pay net capital gains, if any,
annually. In determining amounts of capital gains to be distributed, any
capital loss carry-forwards from prior years will be offset against capital
gains.
Distributions will be paid in additional Portfolio shares based on the net
asset value at the close of business on the Ex or reinvestment date, unless the
dividends total in excess of $10.00 per distribution period and the shareholder
notifies the Portfolio at least five business days prior to the payment date to
receive such distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash, and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, no interest will accrue
on amounts represented by uncashed dividend or distribution checks.
TAXES. The Portfolio intends to qualify and elect to be taxed as a
regulated investment company under Subchapter M of the Code for each taxable
year. In order to be qualified as a regulated investment company, the
Portfolio generally must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, proceeds from loans of stock or
securities and certain other related income; and (b) diversify its holdings
so that, at the end of each fiscal quarter, (i) 50% of the market value of
the Portfolio's assets is represented by cash, government securities,
securities of other regulated investment companies and other securities
limited, in respect of any one issuer, to an amount no greater than 5% of the
Portfolio's assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer, (other than
government securities or the securities of other regulated investment
companies).
As a regulated investment company, the Portfolio will not be subject to
U.S. Federal income tax on its income and capital gains which it distributes as
dividends or capital gains distributions to shareholders provided that it
distributes to shareholders at least 90% of its investment company taxable
income for the taxable year. The Portfolio intends to distribute sufficient
income to meet this qualification requirement.
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Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, the Portfolio must distribute during each
calendar year (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses for the 12-month period ending on
October 31 of the calendar year, and (3) all ordinary income and net capital
gains for the previous years that were not distributed during such years. To
avoid application of the excise tax, the Portfolio intends to make distributions
in accordance with the calendar year distribution requirement. A distribution
will be treated as paid during the calendar year if actually paid during such
year. Additionally, a distribution will be treated as paid on December 31 of a
calender year if it is declared by the Portfolio in October, November or
December of such year, payable to shareholders of record on a date in such month
and paid by such Portfolio during January of the following year. Any such
distributions paid during January of the following year will be taxable to
shareholders as of such December 31, rather than the date on which the
distributions are received.
Distributions of net investment income and short-term capital gains are
taxable to the shareholder as ordinary dividend income regardless of whether the
shareholder receives such distributions in additional shares or in cash. The
portion of such dividends received from the Portfolio that will be eligible for
the dividends received deduction for corporations will be determined on the
basis of the amount of the Portfolio's gross income, exclusive of capital gains
from sales of stock or securities, which is derived as dividends from domestic
corporations, other than certain tax-exempt corporations and certain real estate
investment trusts, and will be designated as such in a written notice to
shareholders mailed not later than 60 days after the end of each fiscal year.
Distributions of net capital gains, if any, are taxable as capital gains
regardless of whether the shareholder receives such distributions in additional
shares or in cash or how long the investor has held his or her shares, and are
not eligible for the dividends received deduction for corporations.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending upon its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain if the shares were held for not more than
12 months, capital gain taxable at the maximum rate of 28% if such shares were
held for more than 12, but not more than 18 months, and capital gain taxable at
the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be long-term capital
loss if the shares have been held for more than one year. Generally, any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after the shares are disposed of. Any loss recognized by a
shareholder on the sale of shares of the Portfolio held by the shareholder for
six months or less will be treated for tax purposes as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Under certain circumstances (such as the exercise of an exchange
privilege), the tax effect of sales load charges imposed on the purchase of
shares in a regulated investment company is deferred if the shareholder does not
hold the shares for at least 90 days.
B-48
<PAGE>
Income received by the Portfolio from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries.
Income tax treaties between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine in advance the
effective rate of foreign tax to which the Portfolio will be subject, since
the amount of the Portfolio's assets to be invested in various countries is
not known. It is not anticipated that the Portfolio will qualify to pass
through to its shareholders the ability to claim as a foreign tax credit
their respective shares of foreign taxes paid by the Portfolio. If more than
50% in value of the Portfolio's total assets at the close of its taxable year
consists of securities of foreign corporations, the Portfolio will be
eligible, and intends, to file an election with the Internal Revenue Service
pursuant to which shareholders of the Portfolio will be required to include
their proportionate share of such foreign taxes in their U.S. income tax
returns as gross income, treat such proportionate share as taxes paid by
them, and deduct such proportionate share in computing their taxable incomes
or, alternatively, subject to certain limitations, and the Portfolio and the
shareholders satisfying certain holding period requirements, use them as
foreign tax credits against their U.S. income taxes. No deductions for
foreign taxes, however, may be claimed by non-corporate shareholders who do
not itemize deductions. Of course, certain retirement accounts which are not
subject to tax cannot claim foreign tax credits on investments in foreign
securities held in the Portfolio. A shareholder that is a nonresident alien
individual or a foreign corporation may be subject to U.S. withholding tax on
the income resulting from the Portfolio's election described in this
paragraph by may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Portfolio accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Portfolio actually collects such receivables or
pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses on forward foreign currency exchange contracts,
foreign currency gains or losses from futures contracts that are not
"regulated futures contracts" and from unlisted non-equity options, gains or
losses from sale of currencies or dispositions of debt securities denominated
in a foreign currency attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the security and the date
of disposition generally also are treated as ordinary gain or loss. These
gains, referred to under the Code as "Section 988" gains or losses, increase
or decrease the amount of the Portfolio's investment company taxable income
available to be distributed to its shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Portfolio would not be able to make
any ordinary dividend distributions, and any distributions made in the same
taxable year may be recharacterized as a return of capital to shareholders,
thereby reducing the basis of each shareholder's Portfolio shares. In
certain cases, the Portfolio may be entitled to elect to treat foreign
currency gains on forward or futures contracts, or options thereon, as
capital gains.
The Code includes special rules applicable to the listed non-equity
options, regulated futures contracts, and options on futures contracts which the
Portfolio may write, purchase or sell. Such options and contracts are
classified as Section 1256 contracts under the Code. The character of gain or
loss resulting from the sale, disposition, closing out, expiration or other
termination of Section 1256 contracts, except forward foreign currency exchange
contracts, is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Portfolio at the end
of a fiscal year, generally are required
B-49
<PAGE>
to be treated as sold at market value on the last day of such fiscal year for
Federal income tax purposes ("marked-to-market"). Over-the-counter options
are not classified as Section 1256 contracts and are not subject to the
marked-to-market rule or to 60/40 gain or loss treatment. Any gains or
losses recognized by the Portfolio from transactions in over-the-counter
options generally constitute short-term capital gains or losses. When call
options written, or put options purchased, by the Portfolio are exercised,
the gain or loss realized on the sale of the underlying securities may be
either short-term or long-term, depending on the holding period of the
securities. In determining the amount of gain or loss, the sales proceeds
are reduced by the premium paid for the puts or increased by the premium
received for calls.
A substantial portion of the Portfolio's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle consisting
of a listed option, futures contract, or option on a futures contract and of
U.S. Government securities would constitute a "mixed straddle" under the Code.
The Code generally provides with respect to straddles (i) "loss deferral" rules
which may postpone recognition for tax purposes of losses from certain closing
purchase transactions or other dispositions of a position in the straddle to the
extent of unrealized gains in the offsetting position, (ii) "wash sale" rules
which may postpone recognition for tax purposes of losses where a position is
sold and a new offsetting position is acquired within a prescribed period, (iii)
"short sale" rules which may terminate the holding period of securities owned by
the Portfolio when offsetting positions are established and which may convert
certain losses from short-term to long-term, and (iv) "conversion transaction"
rules which recharacterize capital gains as ordinary income. The Code provides
that certain elections may be made for mixed straddles that can alter the
character of the capital gain or loss recognized upon disposition of positions
which form part of a straddle. Certain other elections also are provided in the
Code; no determination has been reached to make any of these elections.
Newly-enacted Code Section 1259 will require the recognition of gain (but
not loss) if the Portfolio makes a "constructive sale" of an appreciated
financial position (e.g., stock). The Portfolio generally will be considered to
make a constructive sale of an appreciated financial position if it sells the
same or substantially identical property short, enters into a futures or forward
contract to deliver the same or substantially identical property, or enters into
certain other similar transactions.
The Portfolio may purchase debt securities (such as zero-coupon or
pay-in-kind securities) that contain original issue discount. Original issue
discount that accrues in a taxable year is treated as earned by the Portfolio
and therefore is subject to the distribution requirements of the Code. Because
the original issue discount earned by the Portfolio in a taxable year may not be
represented by cash income, the Portfolio may have to dispose of other
securities and use the proceeds to make distributions to shareholders.
The Portfolio may be required to backup withhold U.S. Federal income tax at
the rate of 31% of all taxable distributions payable to shareholders who fail to
provide their correct taxpayer identification number or fail to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's U.S. Federal
income tax liability. Any distributions of net investment income or short-term
capital gains made to a foreign shareholder will be subject to U.S. withholding
tax of 30% (or a lower treaty rate if applicable to such shareholder).
B-50
<PAGE>
The Portfolio may, from time to time, invest in "passive foreign
investment companies" (PFICs). A PFIC is a foreign corporation that, in
general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If any such Portfolio
acquires and holds stock in a PFIC beyond the end of the year of its
acquisition, the Portfolio will be subject to federal income tax on a portion
of any "excess distribution" received on the stock or of any gain from
disposition of the stock (collectively, PFIC income), plus interest thereon,
even if the Portfolio distributes the PFIC income as taxable dividend to its
shareholders. The balance of the PFIC income will be included in the
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
Proposed Treasury regulations provide that the Portfolio may make a
"mark-to-market" election with respect to any stock it holds of a PFIC. If
the election is in effect, at the end of the Fund's taxable year, the
Portfolio will recognize the amount of gains, if any, with respect to PFIC
stock. Recently enacted legislation codified this "mark-to-market" election
effective for tax years beginning after December 31, 1997. Any gains
resulting from such elections will be treated as ordinary income. No loss
will be recognized on PFIC stock. Alternatively, the Portfolio may elect to
treat any PFIC in which it invests as a "qualified electing fund," in which
case, in lieu of the foregoing tax and interest obligation, the Portfolio
will be required to include in income each year its pro rata share of the
qualified electing fund's annual ordinary earnings and net capital gain, even
if they are not distributed to the Portfolio; those amounts would be subject
to the distribution requirements applicable to the Portfolio described above.
It may be very difficult, if not impossible, to make this election because of
certain requirements thereof.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in each Portfolio. Qualification as a
regulated investment company under the Code for tax purposes does not entail
government supervision of management and investment policies.
RETIREMENT PLANS
Shares of the Portfolio are eligible to be purchased in conjunction with
various types of qualified retirement plans. The summary below is only a brief
description of the Federal income tax laws for each plan and does not purport to
be complete. Further information or an application to invest in shares of the
Portfolio by establishing any of the retirement plans described below may be
obtained by calling Retirement Plans at (800) 858-8850. However, it is
recommended that a shareholder considering any retirement plan consult a tax
adviser before participating.
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code
permit business employers and certain associations to establish pension and
profit sharing plans for employees. Shares of the Portfolio may be purchased by
those who would have been covered under the rules governing old H.R. 10 (Keogh)
Plans, as well as by corporate plans. Each business retirement plan provides
tax advantages for owners and participants. Contributions made by the employer
are tax-deductible, and participants do not pay taxes on contributions or
earnings until withdrawn.
B-51
<PAGE>
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits
public school employees and employees of certain types of charitable,
educational and scientific organizations specified in Section 501(c)(3) of
the Code, to purchase shares of the Portfolio and, subject to certain
limitations, exclude the amount of purchase payments from gross income for
tax purposes.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA). Section 408 of the Code permits
eligible individuals to contribute to an individual retirement program,
including Simplified Employee Pension Plans, commonly referred to as SEP-IRA.
Section 408A of the Code treats Roth IRAs as IRAs subject to certain special
rules applicable thereto. IRAs are subject to limitations with respect to the
amount that may be contributed, the eligibility of individuals to make
contributions, the amount if any, entitled to be contributed on a deductible
basis, and the time in which distributions would be allowed to commence. In
addition, certain distributions from some other types of retirement plans may be
placed on a tax-deferred basis in an IRA.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION (SARSEP). This plan was
introduced by a provision of the Tax Reform Act of 1986 as a unique way for
small employers to provide the benefit of retirement planning for their
employees. Contributions are deducted from the employee's paycheck before tax
deductions and are deposited into an IRA by the employer. These contributions
are not included in the employee's income and therefore are not reported or
deducted on his or her tax return.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE IRA). This plan was
introduced by a provision of the Small Business Job Protection Act of 1996 to
provide small employers with a simplified tax-favored retirement plan.
Contributions are deducted from the employee's paycheck before taxes and are
deposited into a SIMPLE IRA by the employer, who must make either matching
contributions or non-elective contributions. Contributions are tax-deductible
for the employer and participants do not pay taxes on contributions on earnings
until they are withdrawn.
ROTH IRA. This plan, introduced by Section 302 of the Taxpayer Relief Act
of 1997, generally permits individuals with adjusted gross income of up to
$95,000, and married couples with joint adjusted gross income of up to $150,000,
to contribute to a "Roth IRA." Contributions are not tax-deductible, but
distribution of assets (contributions and earnings) held in the account for at
least five years may be distributed tax-free under certain qualifying
conditions.
EDUCATION IRA. Established by the Taxpayer Relief Act of 1997, under
Section 530 of the Code, this plan permits individuals to contribute to an IRA
on behalf of any child under the age of 18. Contributions are not
tax-deductible but distributions are tax-free if used for qualified educational
expenses.
B-52
<PAGE>
DESCRIPTION OF SHARES
Ownership of the Fund is represented by shares of common stock. The total
number of shares which the Fund has authority to issue is one billion
(1,000,000,000) shares of common stock (par value $0.0001 per share), amounting
in aggregate par value to one hundred thousand dollars ($100,000.00).
Currently, nine Portfolios of shares of the Fund have been authorized
pursuant to the Fund's Articles of Incorporation ("Articles"): the Focus
Portfolio, the Large-Cap Growth Portfolio, the Mid-Cap Growth Portfolio, the
Aggressive Growth Portfolio, the Large-Cap Blend Portfolio, the Large-Cap
Value Portfolio, the Value Portfolio, the Small-Cap Value Portfolio and the
International Equity Portfolio. This Statement of Additional Information
relates only to the Focus Portfolio. The Focus Portfolio has been divided
into three classes of shares, designated as Class A, Class B and Class II.
The Directors may authorize the creation of additional Portfolios of shares
so as to be able to offer to investors additional investment portfolios
within the Fund that would operate independently from the Fund's present
portfolios, or to distinguish among shareholders, as may be necessary, to
comply with future regulations or other unforeseen circumstances. Each
series of the Fund's shares represents the interests of the shareholders of
that series in a particular portfolio of Fund assets. In addition, the
Directors may authorize the creation of additional classes of shares in the
future, which may have fee structures different from those of existing
classes and/or may be offered only to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The
Directors have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Directors, and appoint
their own successors, provided that at all times at least a majority of the
Directors have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting can,
if they choose, elect all Directors being elected, while the holders of the
remaining shares would be unable to elect any Directors. Although the Fund need
not hold annual meetings of shareholders, the Directors may call special
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Articles. Also, a shareholders meeting must be called, if
so requested in writing by the holders of record of 10% or more of the
outstanding shares of the Fund. In addition, the Directors may be removed by
the action of the holders of record of two-thirds or more of the outstanding
shares. All Portfolios of shares will vote with respect to certain matters,
such as election of Directors. When all Portfolios are not affected by a matter
to be voted upon, such as approval of investment advisory agreements or changes
in a Portfolio's policies, only shareholders of the portfolio affected by the
matter may be entitled to vote.
The classes of shares of the Portfolio are identical in all respects,
except that (i) each class may bear differing amounts of certain class-specific
expenses, (ii) Class A shares are subject to an initial sales charge, a
distribution fee and an ongoing account maintenance and service fee, (iii) Class
B shares are subject to a CDSC, a distribution fee and an ongoing account
maintenance and service fee, (iv) Class B shares convert automatically to Class
A shares on the first business day of the month seven years after the purchase
of such Class B Shares, (v) Class II shares are subject to an initial sales
charge, a distribution fee, an ongoing account maintenance and service fee and a
CDSC, (vi) each class has voting rights on matters that pertain to the Rule
12b-1 plan adopted with respect to such class, except that under certain
B-53
<PAGE>
circumstances, the holders of Class B shares may be entitled to vote on material
changes to the Class A Rule 12b-1 plan, and (vii) each class of shares will be
exchangeable only into the same class of shares of any of the Portfolios or
other SunAmerica Funds that offer that class; additionally, Class II shares of
the Portfolio will be exchangeable into Class C shares of any of the Portfolios
or other SunAmerica Funds that do not offer Class II shares. All shares of the
Fund issued and outstanding and all shares offered by the Prospectus when
issued, are fully paid and non-assessable. Shares have no preemptive or other
subscription rights and are freely transferable on the books of the Fund. In
addition, shares have no conversion rights, except as described above.
The Articles provide that no Director, officer, employee or agent of the
Fund is liable to the Fund or to a shareholder, nor is any Director, officer,
employee or agent liable to any third persons in connection with the affairs
of the Fund, except as such liability may arise from his or its own bad
faith, willful misfeasance, gross negligence or reckless disregard of his
duties. It also provides that all third persons shall look solely to the
Fund's property for satisfaction of claims arising in connection with the
affairs of the Fund. With the exceptions stated, the Articles provides that
a Director, officer, employee or agent is entitled to be indemnified against
all liability in connection with the affairs of the Fund. The Fund shall
continue, without limitation of time, subject to the provisions in the
Articles concerning termination by action of the shareholders.
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE. The following is the offering
price calculation for each Class of shares of the Portfolio. The Class A,
Class B and Class II calculations are based on the estimated value of the
Portfolio's net assets and number of shares outstanding on the date such
shares are first offered for sale to public investors.
<TABLE>
<CAPTION>
Focus Portfolio
---------------
Class A Class B Class II
------- ------- --------
<S> <C> <C> <C>
Net Assets. . . . . . . . $12,500 $12,500 $12,500
Number of Shares
Outstanding . . . . . . . 1000 1000 1000
Net Asset Value Per
Share (net assets
divided by number of
shares) . . . . . . . . . $12.50 $12.50 $12.50
Sales charge for Class
A Shares: 5.75% of
offering price (6.10%
of net asset value per
share)* . . . . . . . . . 0.76 -- --
Sales charge for Class
II Shares: 1.00% of
offering price (1.01%
of net asset value per
share)* . . . . . . . . . -- -- $0.13
Offering Price. . . . . . $13.26 -- $12.63
</TABLE>
- ------------------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
B-54
<PAGE>
REPORTS TO SHAREHOLDERS. The Fund sends audited annual and unaudited
semi-annual reports to shareholders of the Portfolios. In addition, the
Transfer Agent sends a statement to each shareholder having an account directly
with the Fund to confirm transactions in the account.
CUSTODIAN AND TRANSFER AGENCY. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent
for the Portfolio and in those capacities maintains certain financial and
accounting books and records pursuant to agreements with the Fund. Transfer
agent functions are performed for State Street by National Financial Data
Services, P.O. Box 419572, Kansas City, MO 64141-6572, an affiliate of State
Street.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177
Avenue of the Americas, New York, NY 10036, has been selected to serve as the
Fund's independent accountants and in that capacity examines the annual
financial statements of the Fund. The firm of Shereff, Friedman, Hoffman &
Goodman, LLP, 919 Third Avenue, New York, NY 10022, has been selected as
legal counsel to the Fund.
B-55
<PAGE>
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE'S CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and therefore not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of desirable
investments. 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 Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Appendix-1
<PAGE>
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: 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.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) 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
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Appendix-2
<PAGE>
Issuers rated PRIME-3 (or related supporting institutions) 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 earnings 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
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.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standards & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligers such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation;
Appendix-3
<PAGE>
and (3) protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
Appendix-4
<PAGE>
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
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.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the credit-worthiness of the obligor but do not take into
account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance
Appendix-5
<PAGE>
companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of not more
than 365 days. Ratings 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 the 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 are denoted
with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effect of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" 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 This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix-6
