<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1999
Securities Act File No. 333-11283
Investment Company Act File Act No. 811-07797
============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO. 19 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 20
(Check appropriate box or boxes)
STYLE SELECT SERIES, INC.
(Exact Name of Registrant as Specified in Charter)
The SunAmerica Center
733 Third Avenue
New York, NY 10017
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (800) 858-8850
Robert M. Zakem, Esq.
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address for Agent for Service)
Copy to:
Margery K. Neale, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
It is proposed that this filing will become effective
(check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on November 1, 1999 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|_| on (date) pursuant to paragraph (a)(1)
|X| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
<PAGE>
This Registration Statement incorporates by reference the Prospectus and
Statement of Additional Information as contained in Post-Effective Amendment
No. 16 to Registrant's Registration Statement under the Securities Act of 1933
on Form N-1A filed on April 2, 1999.
<PAGE>
NOVEMBER 1, 1999 PROSPECTUS
SUNAMERICA STYLE SELECT SERIES(REGISTERED)
[LOGO] FOCUSED VALUE PORTFOLIO
The Securities and Exchange Commission has not
approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any
representation to the contrary is a criminal
offense.
SUNAMERICA
MUTUAL
[LOGO] FUNDS
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS.......................................................2
SHAREHOLDER ACCOUNT INFORMATION.......................................5
MORE INFORMATION ABOUT THE PORTFOLIO.................................13
INVESTMENT STRATEGIES............................................13
GLOSSARY.........................................................15
INVESTMENT TERMINOLOGY......................................15
RISK TERMINOLOGY............................................17
FUND MANAGEMENT.............................................18
INFORMATION ABOUT ADVISERS...........................................19
SUNAMERICA
MUTUAL
[LOGO] FUNDS
<PAGE>
FUND HIGHLIGHTS
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The following questions and answers are designed to
give you an overview of SunAmerica Style Select
Series, Inc. (the "Fund"), and to provide you with
information about one of the Fund's separate
Portfolios and its investment goal, principal
strategy, and principal investment technique. The
investment goal may be changed without shareholder
approval, although you will receive notice of any
change. There can be no assurance that the
Portfolio's investment goal will be met or that the
net return on an investment in the Portfolio will
exceed what could have been obtained through other
investment or savings vehicles. More complete
investment information is provided in chart form,
under "More Information About the Portfolio," which
is on page 13 and the glossary that follows on
page 15.
Q: WHAT IS THE PORTFOLIO'S INVESTMENT GOAL,
STRATEGY AND TECHNIQUE?
A:
<TABLE>
<CAPTION>
Principal Principal
Investment Investment Investment
Fund Goal Strategy Techniques
- --------------- ------------ ------------- ----------------------------------------------
<S> <C> <C> <C>
FOCUSED long-term value and active trading of primarily domestic, but also
VALUE growth of focus foreign, equity securities that the Advisers
PORTFOLIO capital believe are undervalued in the market, without
regard to market capitalization.
</TABLE>
The Portfolio has three different professional
Advisers, each with its own investment methodology
within a particular investment style. Each Adviser
manages a separate portion of the Portfolio using
focus and value strategies.
SunAmerica Asset Management Corp. ("SunAmerica") is
the Portfolio's investment manager and will
initially allocate the assets of the Portfolio
equally among the Advisers. SunAmerica will also
allocate new cash from share purchases and
redemption requests equally among the Advisers,
unless SunAmerica determines, subject to the review
of the Board, that a different allocation of assets
would be in the best interests of the Portfolio and
its shareholders.
SunAmerica intends, on a quarterly basis, to review
the asset allocation in the Portfolio to ensure
that no portion of assets managed by an Adviser
exceeds that portion managed by any other Adviser
to the Portfolio by more than 5%. If such a
condition exists, SunAmerica generally will then
re-allocate cash flows among the Advisers so as to
effect a re-balancing of the Portfolio's asset
allocation. In addition, SunAmerica reserves the
right, subject to the review of the Board, to
reallocate assets from one Adviser to another when
it would be in the best interests of the Portfolio
and its shareholders to do so. In some instances,
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.
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE
PORTFOLIO?
A: The following section describes the principal
risks of the Portfolio, while the chart on
page 13 describes various additional risks.
RISKS OF INVESTING IN EQUITY SECURITIES
The Portfolio invests primarily in equity
securities. As with any equity fund, the value of
your investment in the Portfolio may fluctuate in
response to stock market movements. You should be
aware that the performance of different types of
equity stocks may decline under varying market
conditions--for example, "value" stocks may perform
poorly under circumstances in which "growth" stocks
in general have continued to rise. In addition,
individual stocks selected for the Portfolio may
underperform the market generally.
RISKS OF NON-DIVERSIFICATION
The Portfolio is non-diversified, which means that
it can invest a larger portion of its assets in the
stock of a single company than can some other
mutual funds. By concentrating in a smaller number
of stocks, the Portfolio's risk is increased
because the effect of each stock on the Portfolio's
performance is greater.
RISKS OF INVESTING IN SMALL COMPANIES
Stocks of smaller companies may be more volatile
than, and not as readily marketable as, those of
larger companies.
ADDITIONAL PRINCIPAL RISKS
Shares of the Portfolio are not bank deposits and
are not guaranteed or insured by any bank,
SunAmerica or SunAmerica's affiliates, any
government entity or the Federal Deposit Insurance
Corporation. As with any mutual fund, there is no
guarantee that the Portfolio will be able to
achieve its investment goals. If the value of the
assets of the Portfolio goes down, you could lose
money.
Performance information for the Portfolio is not
shown because it has been in existence for less
than one year.
- --------------------------------------------------------------------------------
A FOCUS strategy is one in which an Adviser actively invests in a small number
of holdings which constitute its favorite stock-picking ideas at any given
moment. A focus philosophy reflects the belief that, over time, the performance
of most investment managers' "highest confidence" stocks exceeds that of their
more diversified portfolios. Each Adviser may invest in up to 10 securities.
When deemed appropriate by an Adviser, the Portfolio may engage in ACTIVE
TRADING when it frequently trades its portfolio securities to achieve its
investment goal.
The "VALUE" ORIENTED philosophy to which the Portfolio subscribes--that of
investing in securities believed to be undervalued in the market--reflects a
contrarian approach, in that the potential for superior relative performance is
believed to be highest when stocks of fundamentally solid companies are out of
favor. The Advisers generally use a selection criteria calculated to identify
stocks of companies with solid financial strength, that may have low price-
earnings ratios and may have generally been overlooked by the market.
MARKET CAPITALIZATION represents the total market value of the outstanding
securities of a corporation.
- --------------------------------------------------------------------------------
2
<PAGE>
Q: WHAT ARE THE PORTFOLIO'S EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Portfolio.
<TABLE>
<CAPTION>
Class A Class B Class II
------- ------- --------
<S> <C> <C> <C>
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price)(1)................................. 5.75% None 1.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of amount redeemed)(2)......... None 4.00% 1.00%
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends...................... None None None
Redemption Fee(3)......................... None None None
Exchange Fee.............................. None None None
Maximum Account Fee....................... None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets)
Management Fees........................... 1.00% 1.00% 1.00%
Distribution and Service (12b-1)
Fees(4)................................... 0.35% 1.00% 1.00%
Other Expenses(5)......................... 0.42% 0.42% 0.42%
----- ----- ----
Total Annual Fund Operating Expenses(5)... 1.77% 2.42% 2.42%
----- ----- ----
----- ----- ----
Expense Reimbursement(5).................. 0.22% 0.22% 0.22%
Net Expenses(6)........................... 1.55% 2.20% 2.20%
----- ----- ----
----- ----- ----
</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.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase. The CDSC on Class B shares applies only if shares are redeemed
within six years of their purchase. The CDSC on Class II shares applies only
if shares are redeemed within eighteen months of their purchase. See page 5
for more information on the CDSCs.
(3) A $15.00 fee is imposed on wire redemptions.
(4) Because these fees are paid out of the Portfolio's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
(5) Estimated.
(6) The Board of Directors, including a majority of the Independent Directors,
approved the Investment Advisory and Management Agreement subject to the net
expense ratios set forth above. SunAmerica may not increase such ratios,
which are contractually required by agreement with the Board of Directors,
without the approval of the Directors, including a majority of the
Independent Directors. The expense waivers and fee reimbursements will
continue indefinitely, subject to termination by the Directors, including a
majority of the Independent Directors.
3
<PAGE>
FUND HIGHLIGHTS
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EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and that your investment has a 5% return each year and that
the Portfolio's operating expenses remain the same. Although your actual costs
may be higher or lower, based on these assumptions and the net expenses shown in
the fee table your costs would be:
If you redeemed your investment at the end of the periods indicated:
<TABLE>
<CAPTION>
1 Year 3 Years
FOCUSED VALUE PORTFOLIO
<S> <C> <C>
(Class A shares).................................... 724 1,036
(Class B shares).................................... 623 988
(Class II shares)................................... 421 781
</TABLE>
If you did not redeem your shares:
<TABLE>
<CAPTION>
1 Year 3 Years
FOCUSED VALUE PORTFOLIO
<S> <C> <C>
(Class A shares).................................... 724 1,036
(Class B shares).................................... 223 688
(Class II shares)................................... 321 781
</TABLE>
4
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
SELECTING A SHARE CLASS
The Portfolio offers three classes of shares through this Prospectus: Class A,
Class B and Class II shares.
Each class of shares has its own cost structure, so you can choose the one best
suited to your investment needs. Your broker or financial advisor can help you
determine which class is right for you.
CLASS A
[LOGO] Front-end sales charges, as described below. There are several ways to
reduce these charges, also described below.
[LOGO] Lower annual expenses than Class B or Class II shares.
CLASS B
[LOGO] No front-end sales charge; all your money goes to work for you right
away.
[LOGO] Higher annual expenses than Class A shares.
[LOGO] Deferred sales charge on shares you sell within six years of purchase,
as described below.
[LOGO] Automatic conversion to Class A shares approximately one year after such
time that no CDSC would be payable upon redemption, as described
below, thus reducing future annual expenses.
CLASS II
[LOGO] Front-end sales charge, as described below.
[LOGO] Higher annual expenses than Class A shares.
[LOGO] Deferred sales charge on shares you sell within eighteen months of
purchase, as described below.
[LOGO] No conversion to Class A.
CALCULATION OF SALES CHARGES
<TABLE>
<CAPTION>
CLASS A. Sales Charges are as follows: Sales Charge Concession to Dealers
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
YOUR INVESTMENT 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 1.00%
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE. Class A shares are available with no
front-end sales charge. However, a 1% CDSC is imposed on any shares you sell
within one year of purchase and a 0.50% CDSC is charged on any shares you sell
after the first year and within the second year after purchase.
CLASS B. Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a CDSC on shares you sell within six
years of buying them. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
Class B deferred charges:
<TABLE>
<CAPTION>
Years after purchase CDSC on shares being sold
<S> <C>
1st or 2nd year.......................... 4.00%
3rd or 4th year.......................... 3.00%
5th year................................. 2.00%
6th year................................. 1.00%
7th year and thereafter.................. None
</TABLE>
For purposes of the CDSC, we count all purchases you make during a calendar
month as having been made on the FIRST day of that month.
<TABLE>
<CAPTION>
CLASS II. Sales Charges are as follows: Sales Charge Concession to Dealers
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
<S> <C> <C> <C>
1.00% 1.01% 1.00%
</TABLE>
There is also a CDSC of 1% on shares you sell within 18 months after you buy
them.
DETERMINATION OF CDSC. Each CDSC is based on the original purchase cost or the
current market value of the shares being sold, whichever is less. There is no
CDSC on shares you purchase through reinvestment of dividends. To keep your CDSC
as low as possible, each time you place a request to sell shares we will first
sell any shares in your account that are not subject to CDSC. If there are not
enough of these shares available, we will sell shares that have the lower CDSC.
5
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
SALES CHARGE REDUCTIONS AND WAIVERS
WAIVERS FOR CERTAIN INVESTORS. Various individuals and institutions may
purchase CLASS A shares without front-end sales charges, including:
[LOGO] financial planners, institutions, broker-dealer representatives or
registered investment advisers utilizing Fund shares in fee-based
investment products under an agreement with the Distributor (this
waiver may also apply to front-end sales charges of Class II shares)
[LOGO] participants in certain retirement plans that meet applicable
conditions, as described in the Statement of Additional Information
[LOGO] Fund Directors and other individuals, and their families, who are
affiliated with the Portfolio or any fund distributed by SunAmerica
Capital Services, Inc.
[LOGO] selling brokers and their employees and sales representatives and
their families
[LOGO] participants in "Net Asset Value Transfer Program"
We will generally waive the CDSC for CLASS B or CLASS II shares in the
following cases:
[LOGO] within one year of the shareholder's death or becoming disabled
[LOGO] taxable distributions from or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which SunAmerica serves as a fiduciary
[LOGO] Fund Directors and other individuals, and their families, who are
affiliated with any Portfolio or any fund distributed by SunAmerica
Capital Services, Inc.
[LOGO] to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
[LOGO] participants in "Net Asset Value Transfer Program"
REDUCING YOUR CLASS A SALES CHARGES. There are several special purchase plans
that allow you to combine multiple purchases of Class A shares of SunAmerica
Mutual Funds to take advantage of the breakpoints in the sales charge
schedule. For information about the "Rights of Accumulation," "Letter of
Intent," "Combined Purchase Privilege," and "Reduced Sales Charges for Group
Purchases," contact your broker or financial advisor, or consult the Statement
of Additional Information.
To utilize: if you think you may be eligible for a sales charge reduction or
CDSC waiver, contact your broker or financial advisor.
REINSTATEMENT PRIVILEGE. If you sell shares of the Portfolio, within one year
after the sale you may invest some or all of the proceeds of the sale in the
same share class of the Portfolio without a sales charge. A shareholder may
use the reinstatement privilege only one time after selling such shares. If
you paid a CDSC when you sold your shares, we will credit your account with
the dollar amount of the CDSC at the time of sale. All accounts involved must
be registered in the same name(s).
DISTRIBUTION AND SERVICE (12B-1) FEES
Each class of shares of the Portfolio has its own 12b-1 plan that provides for
distribution and account maintenance and service fees (payable to the
Distributor) based on a percentage of average daily net assets, as follows:
ACCOUNT MAINTENANCE AND
CLASS DISTRIBUTION FEE SERVICE FEE
A 0.10% 0.25%
B 0.75% 0.25%
II 0.75% 0.25%
Because 12b-1 fees are paid out of the Portfolio's assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost
you more than paying other types of sales charges.
OPENING AN ACCOUNT
1. Read this prospectus carefully.
2. Determine how much you want to invest. The minimum initial investment for
each class of the Portfolio is as follows:
[LOGO] non-retirement account: $500
[LOGO] retirement account: $250
[LOGO] dollar cost averaging: $500 to open; you must invest at least $25 a
month
The minimum subsequent investment for the Portfolio is as follows:
[LOGO] non-retirement account: $100
[LOGO] retirement account: $25
3. Complete the appropriate parts of the Account Application, carefully
following the instructions. If you have questions, please contact your
broker or financial advisor or call Shareholder/Dealer Services at
1-800-858-8850, extension 5125.
4. Complete the appropriate parts of the Supplemental Account Application. By
applying for additional investor services now, you can avoid the delay and
inconvenience of having to submit an additional application if you want to
add services later.
5. Make your initial investment using the chart on the next page. You can
initiate any purchase, exchange or sale of shares through your broker or
financial advisor.
6
<PAGE>
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BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
.............................................................................
[LOGO] Make out a check for the investment amount, payable to the Focused
Value Portfolio or SunAmerica Funds.
[LOGO] Deliver the check and your completed Account Application (and
Supplemental Account Application, if applicable) to your broker or
financial advisor, or mail them to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204.
BY WIRE
.............................................................................
[LOGO] Deliver your completed application to your broker or financial
advisor or fax it to SunAmerica Fund Services, Inc. at 212-551-5585.
[LOGO] Obtain your account number by referring to your statement or by
calling your broker or financial advisor or Shareholder/Dealer
Services at 1-800-858-8850, ext. 5125.
[LOGO] Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Focused Value Portfolio, your choice of share class, your
new Portfolio number and account number and the name(s) in which the
account is registered. Your bank may charge a fee to wire funds.
ADDING TO AN ACCOUNT
BY CHECK
.............................................................................
[LOGO] Make out a check for the investment amount payable to the Focused
Value Portfolio or SunAmerica Funds.
[LOGO] Include the stub from your Fund statement or a note specifying the
Focused Value Portfolio, your share class, your account number and
the name(s) in which the account is registered.
[LOGO] Indicate the Focused Value Portfolio and account number in the memo
section of your check.
[LOGO] Deliver the check and your stub or note to your broker or financial
advisor, or mail them to:
NON-RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
c/o NFDS
P.O. Box 419373
Kansas City, Missouri 64141-6373
RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
BY WIRE
.............................................................................
[LOGO] Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Focused Value Portfolio, your choice of share class, your
new Portfolio number, account number and the name(s) in which the
account is registered. Your bank may charge a fee to wire funds.
To open or add to an account using dollar cost averaging, see "Additional
Investor Services."
7
<PAGE>
SELLING SHARES
HOW
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
.............................................................................
[LOGO] Accounts of any type.
[LOGO] Sales of any amount.
BY MAIL
.............................................................................
[LOGO] Accounts of any type.
[LOGO] Include all signatures and any additional documents that may be
required (see next page).
BY PHONE
.............................................................................
[LOGO] Most accounts.
[LOGO] Sales of less than $100,000.
BY WIRE
.............................................................................
[LOGO] Request by mail to sell any amount (accounts of any type).
[LOGO] Request by phone to sell less than $100,000.
REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
.............................................................................
[LOGO] Call your broker or financial advisor to place your order to sell
shares.
BY MAIL
.............................................................................
[LOGO] Write a letter of instruction indicating the Focused Value Portfolio,
your share class, your account number, the name(s) in which the
account is registered and the dollar value or number of shares you
wish to sell.
[LOGO] Sales of $100,000 or more require the letter of instruction to have a
signature guarantee.
[LOGO] A check will normally be mailed on the next business day to the
name(s) and address in which the account is registered, or otherwise
according to your letter of instruction.
[LOGO] Mail the materials to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
BY PHONE
.............................................................................
[LOGO] Call Shareholder/Dealer Services at 1-800-858-8850, extension 5125
between 8:30 a.m. and 7:00 p.m. (Eastern time) on most business days.
State the Focused Value Portfolio, the name of the person requesting
the redemption, your share class, your account number, the name(s) in
which the account is registered and the dollar value or number of
shares you wish to sell.
[LOGO] A check will be mailed to the name(s) and address in which the account
is registered.
BY WIRE
.............................................................................
[LOGO] Proceeds will normally be wired on the next business day. A $15 fee
will be deducted from your account.
To sell shares through a systematic plan, see "Additional Investor Services."
8
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES IN WRITING. In certain circumstances, you will need to make
your request to sell shares in writing. Corporations, executors,
administrators, trustees or guardians may need to include additional items
with a request to sell shares. You may also need to include a signature
guarantee, which protects you against fraudulent orders. You will need a
signature guarantee if:
[LOGO] your address of record has changed within the past 30 days
[LOGO] you are selling shares worth $100,000 or more
[LOGO] you are requesting payment other than by a check mailed to the
address of record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
[LOGO] a broker or securities dealer
[LOGO] a federal savings, cooperative or other type of bank
[LOGO] a savings and loan or other thrift institution
[LOGO] a credit union
[LOGO] a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the Portfolio and
each class is determined each business day at the close of regular trading on
the New York Stock Exchange (generally 4:00 p.m., Eastern time) by dividing
the net assets of each class by the number of such class's outstanding shares.
Investments for which market quotations are readily available are valued at
market at their price as of the close of regular trading on the New York Stock
Exchange for the day. All other securities and assets are valued at fair value
following procedures approved by the Directors.
BUY AND SELL PRICES. When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable CDSCs.
EXECUTION OF REQUESTS. The Portfolio is open on those days when the New York
Stock Exchange is open for regular trading. We execute buy and sell requests
at the next NAV to be calculated after the Portfolio receives your request in
good order. If the Portfolio or the Distributor receives your order before the
Portfolio's close of business (generally 4:00 p.m., Eastern time), you will
receive that day's closing price. If the Portfolio or the Distributor receives
your order after that time, you will receive the next business day's closing
price. If you place your order through a broker or financial advisor, you
should make sure the order is transmitted to the Portfolio before the
Portfolio's close of business. The Portfolio and the Distributor reserve the
right to reject any order to buy shares.
During periods of extreme volatility or market crisis, the Portfolio may
temporarily suspend the processing of sell requests, or may postpone payment
of proceeds for up to three business days or longer, as allowed by federal
securities laws.
The Portfolio may invest in securities that are primarily listed on foreign
exchanges that trade on weekends or other days when the Portfolio does not
price its shares. As a result, the value of the Portfolio's shares may change
on days when you will not be able to purchase or redeem your shares.
If the Portfolio determines that it would be detrimental to the best interests
of the remaining shareholders of the Portfolio to make payment of redemption
proceeds wholly or partly in cash, the Portfolio may pay the redemption price
by a distribution in kind of securities from the Portfolio in lieu of cash.
However, the Portfolio has made an election that requires it to pay a certain
portion of redemption proceeds in cash.
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded
in order to verify their accuracy. In addition, Shareholder/Dealer Services
will take measures to verify the identity of the caller, such as asking for
name, account number, social security or other taxpayer ID number and other
relevant information. If appropriate measures are not taken, the Portfolio is
responsible for any losses that may occur to any account due to an
unauthorized telephone call. Also for your protection, telephone transactions
are not permitted on accounts whose names or addresses have changed within the
past 30 days. At times of peak activity, it may be difficult to place requests
by phone. During these times, consider sending your request in writing.
9
<PAGE>
Shareholder Account Information
- --------------------------------------------------------------------------------
EXCHANGES. You may exchange shares of the Portfolio for shares of the same
class of any other fund distributed by SunAmerica Capital Services, Inc.
Before making an exchange, you should review a copy of the prospectus of the
fund into which you would like to exchange. All exchanges are subject to
applicable minimum investment requirements. A Systematic Exchange Program is
described under "Additional Investor Services."
If you exchange shares that were purchased subject to a CDSC, the CDSC will
continue to apply following the exchange. In determining the CDSC applicable
to shares being sold after an exchange, we will take into account the length
of time you held those shares prior to the exchange.
To protect the interests of other shareholders, we may cancel the exchange
privileges of any investors that, in the opinion of the Fund, are using market
timing strategies or making excessive exchanges. The Portfolio may change or
cancel its exchange privilege at any time, upon 60 days' written notice to its
shareholders. The Portfolio may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish to
have certificates for your shares, please call Shareholder/Dealer Services at
1-800-858-8850, extension 5125 for further information. You may sell or
exchange certificated shares only by returning the certificates to the
Portfolio, along with a letter of instruction and a signature guarantee. The
Portfolio does not issue certificates for fractional shares.
MULTI-PARTY CHECKS. The Fund may agree to accept a "multi-party check" in
payment for Fund shares. This is a check made payable to the investor by
another party and then endorsed over to the Fund by the investor. If you use a
multi-party check to purchase shares, you may experience processing delays. In
addition, the Fund is not responsible for verifying the authenticity of any
endorsement and assumes no liability for any losses resulting from a
fraudulent endorsement.
ADDITIONAL INVESTOR SERVICES
To select one or more of these additional services, complete the relevant
part(s) of the Supplemental Account Application. To add a service to an existing
account, contact your broker or financial advisor, or call Shareholder/Dealer
Services at 1-800-858-8850, extension 5125.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the Portfolio or any other fund of your choice distributed by SunAmerica
Capital Services, Inc. You determine the frequency and amount of your
investments, and you can terminate your participation at any time.
SYSTEMATIC WITHDRAWAL PLAN may be used for routine bill payment or periodic
withdrawals from your account. To use:
[LOGO] Make sure you have at least $5,000 worth of shares in your account.
[LOGO] Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of
the same fund is not advantageous to you, because of sales charges).
[LOGO] Specify the payee(s) and amount(s). The payee may be yourself or any
other party (which may require a signature guarantee), and there is
no limit to the number of payees you may have, as long as they are
all on the same payment schedule. Each withdrawal must be at least
$50.
[LOGO] Determine the schedule: monthly, quarterly, semi-annually, annually
or in certain selected months.
[LOGO] Make sure your dividends and capital gains are being reinvested.
You cannot elect the systematic withdrawal plan if you have requested
certificates for your shares.
SYSTEMATIC EXCHANGE PROGRAM may be used to exchange shares of the Portfolio
periodically for the same class of shares of one or more other fund
distributed by SunAmerica Capital Services, Inc. To use:
[LOGO] Specify the SunAmerica Mutual Fund(s) from which you would like money
withdrawn and into which you would like money invested.
[LOGO] Determine the schedule: monthly, quarterly, semi-annually, annually
or in certain selected months.
[LOGO] Specify the amount(s). Each exchange must be worth at least $50.
[LOGO] Accounts must be registered identically; otherwise a signature
guarantee will be required.
10
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ASSET PROTECTION PLAN (OPTIONAL). Anchor National Life Insurance Company
offers an Asset Protection Plan to certain investors in the Portfolio. The
benefits of this optional coverage payable at death will be related 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 the
purchased shares are redeemed prior to death, coverage with respect to these
shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Portfolio shares to pay the premiums for this coverage. These
redemptions will not be subject to CDSCs, but will have the same tax
consequences as any other Portfolio 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 Anchor National knows for whose benefit shares are purchased.
For instance, coverage cannot be made available for shares registered in the
name of your broker unless the broker provides Anchor National with
information regarding the beneficial owners of the shares. In addition,
coverage is available only to shares purchased on behalf of natural persons
between 21 and 75 years of age; 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.
Anchor National is a SunAmerica company.
Please call 1-800-858-8850, extension 5660 for more information, including the
cost of the Asset Protection Plan option.
RETIREMENT PLANS. SunAmerica Mutual Funds offer a range of qualified retirement
plans, including IRAs, Simple IRAs, Roth IRAs, SEPs, SARSEPs, 401(k) plans,
403(b) plans and other pension, educational and profit-sharing plans. Using
these plans, you can invest in any fund distributed by SunAmerica Capital
Services, Inc. with a low minimum investment of $250 or, for some group plans,
no minimum investment at all. To find out more, call Retirement Plans at
1-800-858-8850, extension 5134.
DIVIDEND, DISTRIBUTION AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
[LOGO] after every transaction that affects your account balance (except a
dividend reinvestment or automatic purchase from or automatic
redemption to your bank account)
[LOGO] after any changes of name or address of the registered owner(s)
[LOGO] in all other circumstances, annually
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Portfolio generally distributes most or all of its net earnings
in the form of dividends. Income dividends and capital gains distributions, if
any, are paid at least annually by the Portfolio.
DIVIDEND REINVESTMENTS. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same share class on which
they were paid. Alternatively, dividends and distributions may be reinvested
in any other fund distributed by SunAmerica Capital Services, Inc. or paid in
cash (if more than $10). You will need to complete the relevant part of the
Account Application to elect one of these other options. For existing
accounts, contact your broker or financial advisor or call Shareholder/Dealer
Services at 1-800-858-8850 to change dividend and distribution payment
options.
TAXABILITY OF DIVIDENDS. As long as the Portfolio meets the requirements for
being a tax-qualified regulated investment company, which the Portfolio
intends to do, it pays no federal income tax on the earnings it distributes to
shareholders.
Consequently, dividends you receive from the Portfolio, whether reinvested or
taken as cash, are generally considered taxable. Distributions of the
Portfolio's long-term capital gains are taxable as capital gains; dividends
from other sources are generally taxable as ordinary income.
Some dividends paid in January may be taxable as if they had been paid the
previous December. Corporations may be entitled to take a dividends-received
deduction for a portion of certain dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
11
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Shareholder Account Information
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"BUYING INTO A DIVIDEND." You should note that if you purchase shares just
before a distribution, you will be taxed for that distribution like other
shareholders, even though that distribution represents simply a return of part
of your investment. You may wish to defer your purchase until after the record
date for the distribution, so as to avoid this tax impact.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the
sale price of the shares you sell or exchange, you may have a gain or a loss
on the transaction. You are responsible for any tax liabilities generated by
your transactions. If you hold Class B shares, you will not have a taxable
event when they convert into Class A shares.
SMALL ACCOUNTS. If you draw down an account so that its total value is less
than $500 ($250 for retirement plan accounts), you may be asked to purchase
more shares within 60 days. If you do not take action, the Fund may close out
your account and mail you the proceeds. Alternatively, you may be charged a
$2.00 monthly charge to maintain your account. Your account will not be closed
if its drop in value is due to Portfolio performance or the effects of sales
charges.
OTHER TAX CONSIDERATIONS. If you are neither a lawful permanent resident nor a
citizen of the U.S. or if you are a foreign entity, ordinary income dividends
paid to you (which include distributions of net short-term capital gains) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
By law, each Portfolio must withhold 31% of your distributions and proceeds if
you have not provided a taxpayer identification number or social security
number.
This section summarizes some of the consequences under current federal tax law
of an investment in the Portfolio. It is not a substitution for professional
tax advice. Consult your tax advisor about the potential tax consequences of
an investment in the Portfolio under all applicable laws.
12
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More Information About the Portfolio
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<TABLE>
<CAPTION>
FOCUSED VALUE
PORTFOLIO
<S> <C>
What is the Portfolio's investment goal? Long-term growth of capital
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal investment value and focus
strategies?
- --------------------------------------------------------------------------------------------------
What is the Portfolio's principal investment active trading of equity securities that the
technique? Advisers believe are undervalued in the market
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal risks? o stock market volatility
o securities selection
o non-diversification
o small market capitalization
- --------------------------------------------------------------------------------------------------
What other investment strategies can the
Portfolio use?
o Large company stocks Yes
o Medium-sized company stocks Yes
o Small company stocks Yes
o Fixed income securities
Investment grade Yes
Junk bonds No
Asset-backed securities Yes
o REITs Yes
o Short-term investments Yes (up to 25%)
o Defensive investments Yes
o Foreign securities Yes (up to 30%)
ADRs Yes
Currency transactions Yes
o Illiquid securities Yes (up to 15%)
o Securities lending Yes (up to 33 1/3%)
</TABLE>
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INVESTMENT STRATEGIES
The Portfolio has an investment goal and a strategy for pursuing it. The chart
summarizes information about the Portfolio's investment approach. Following
this chart is a glossary that further describes in the investment and risk
terminology that we use. Please review the glossary in conjunction with this
chart.
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
FOCUSED VALUE
PORTFOLIO
<S> <C>
o Borrowing
for investment purposes Yes (up to 50%)
for temporary or emergency purposes Yes (up to 33 1/3%)
o Options and futures Yes
o Hybrid instruments No
o Short sales Yes (up to 25%)
o Special situations Yes
- --------------------------------------------------------------------------------------------------
What other potential risks can affect the o foreign exposure
Portfolio?
o illiquidity
o derivatives
o hedging
o emerging markets
o euro conversion
o interest rate fluctuations
o credit quality
o prepayment
- --------------------------------------------------------------------------------------------------
</TABLE>
14
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INVESTMENT TERMINOLOGY
GROWTH OF CAPITAL is growth of the value of an
investment.
ACTIVE TRADING means that a Portfolio may engage,
when the Adviser deems appropriate, in frequent
trading of portfolio securities to achieve its
investment goal. In addition, because a Portfolio
may sell a security without regard to how long it
has held the security, active trading may have tax
consequences for certain shareholders, involving a
possible increase in short-term capital gains or
losses. Active trading may result in high portfolio
turnover and correspondingly greater brokerage
commissions and other transaction costs, which will
be borne directly by the Portfolio. During periods
of increased market volatility, active trading may
be more pronounced.
EQUITY SECURITIES include common and preferred
stocks, convertible securities, warrants and rights.
CONVERTIBLE SECURITIES are bonds or preferred stocks
that may be exchanged for common stock of the same
or a different company.
LARGE COMPANIES are currently considered to be those
with market capitalizations of over $8.3 billion.
MEDIUM-SIZED COMPANIES are currently considered to
be those with market capitalizations ranging from
$1.2 billion to $8.3 billion.
SMALL COMPANIES are currently considered to be those
with market capitalizations of $1.2 billion or less.
FIXED INCOME SECURITIES provide consistent interest
or dividend payments. They include corporate bonds,
notes, debentures, preferred stocks, convertible
securities, U.S. government securities and
mortgage-backed and asset-backed securities. The
issuer of a senior fixed income security is obligated
to make payments on this security ahead of other
payments to security holders. An INVESTMENT GRADE
fixed income security is rated in one of the top
four ratings categories by a debt rating agency (or
is considered of comparable quality by the Adviser).
A "JUNK BOND" is a high yield, high risk bond that
does not meet the credit quality standards of
investment grade securities. The Portfolio does not
intend to invest in junk bonds.
ASSET-BACKED SECURITIES represent an interest in a
pool of consumer or other types of loans. Payments
of principal and interest on the underlying loans are
passed through to the holders of asset-backed
securities over the life of the securities.
REAL ESTATE INVESTMENT TRUSTS ("REITs") are trusts
that invest primarily in commercial real estate or
real estate related loans. The value of an interest
in a REIT may be affected by the value and the cash
flows of the properties owned or the quality of the
mortgages held by the trust.
SHORT-TERM INVESTMENTS include money market
securities such as short-term U.S. government
obligations, repurchase agreements, commercial paper,
bankers' acceptances and certificates of deposit.
These securities provide the Portfolio with
sufficient liquidity to meet redemptions and cover
expenses.
DEFENSIVE INVESTMENTS include high quality fixed
income securities and money market instruments. The
Portfolio will make temporary defensive investments
in response to adverse market, economic, political or
other conditions. When the Portfolio takes a
defensive position, it may miss out on investment
opportunities that could have resulted from investing
in accordance with its principal investment strategy.
As a result, the Portfolio may not achieve its
investment goal.
FOREIGN SECURITIES are issued by companies located
outside of the United States and include securities
issued by companies located in emerging markets.
Foreign securities may include American Depositary
Receipts (ADRs) or other similar securities that
convert into foreign securities.
CURRENCY TRANSACTIONS include the purchase and sale
of currencies to facilitate securities transactions
and forward currency contracts, which are used to
hedge against changes in currency exchange rates.
- --------------------------------------------------------------------------------
LARGE COMPANIES and MEDIUM-SIZED COMPANIES generally have a substantial record
of operations (i.e., in business for at least five years) and are listed for
trading on the New York Stock Exchange or another national or international
stock exchange or, in some cases, are traded over the counter. SMALL COMPANIES
generally will be companies that have been in business for a shorter period of
time.
The two best-known debt rating agencies are Standard & Poor's Ratings Services,
a Division of The McGraw-Hill Companies, Inc., and Moody's Investors Service,
Inc. "Investment grade" refers to any security rated "BBB" or above by Standard
& Poor's or "Baa" or above by Moody's.
- --------------------------------------------------------------------------------
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ILLIQUID SECURITIES are subject to legal or contractual restrictions that may
make them difficult to sell. A security that cannot easily be sold within
seven days will generally be considered illiquid. Certain restricted
securities (such as Rule 144A securities) are not generally considered
illiquid because of their established trading market.
SECURITIES LENDING involves a loan of securities by the Portfolio in exchange
for cash or collateral. The Portfolio earns interest on the loan while
retaining ownership of the security.
The Portfolio may BORROW for temporary or emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of
Portfolio shares and in the yield on the Portfolio's portfolio. Borrowing will
cost the Portfolio interest expense and other fees. The cost of borrowing may
reduce the Portfolio's return.
A DERIVATIVE instrument is a contract, such as an option or a future, whose
value is based on the performance of an underlying asset.
OPTIONS AND FUTURES are contracts involving the right to receive or obligation
to deliver assets or money depending on the performance of one or more
underlying assets or financial instruments.
HYBRID INSTRUMENTS, including indexed or structured securities, can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market (or even
relatively nominal) rates. Under certain conditions, the redemption value of
such an investment could be zero. The Portfolio does not intend to invest in
hybrid instruments.
A SHORT SALE is the sale of a security that you do not own, but which you
intend to borrow in order to make delivery. A short sale is "against the box"
when the Portfolio sells short a security that it owns in its portfolio to
lock in appreciation on that security.
A SPECIAL SITUATION arises when, in the opinion of the Adviser, the securities
of a particular issuer will be recognized and appreciated in value due to a
specific development with respect to that issuer. Developments creating a
special situation might include, among others, a new product or process, a
technological breakthrough, a management change or other extraordinary
corporate event, or differences in market supply of and demand for the
security. Investments in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
16
<PAGE>
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RISK TERMINOLOGY
STOCK MARKET VOLATILITY: The stock market as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in the
Portfolio's portfolio.
SECURITIES SELECTION: A strategy used by the Portfolio, or securities selected
by an Adviser, may fail to produce the intended return.
NON-DIVERSIFICATION: By concentrating in a smaller number of stocks, the
Portfolio's risk is increased because the effect of each stock on the
Portfolio's performance is greater.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations
(particularly under $1.2 billion) tend to be at early stages of development
with limited product lines, market access for products, financial resources,
access to new capital, or depth in management. It may be difficult to obtain
reliable information and financial data about these companies. Consequently,
the securities of smaller companies may not be as readily marketable and may
be subject to more abrupt or erratic market movements.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as the U.S.
government. Foreign investments will also be affected by local political or
economic developments and governmental actions. Consequently, foreign
securities may be less liquid, more volatile and more difficult to price than
U.S. securities. These risks are heightened when the issuer is in an emerging
market.
ILLIQUIDITY: Certain securities may be difficult or impossible to sell at the
time and the price that the seller would like.
DERIVATIVES: Derivatives are subject to general risks relating to heightened
sensitivity to market volatility, interest rate fluctuations, illiquidity and
creditworthiness of the counterparty to the derivatives transactions.
HEDGING: Hedging is a strategy in which the Adviser uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio
of securities. While hedging strategies can be very useful and inexpensive
ways of reducing risk, they are sometimes ineffective due to unexpected
changes in the market. Moreover, while hedging can reduce or eliminate losses,
it can also reduce or eliminate gains.
EMERGING MARKETS: An emerging market country is one that the World Bank, the
International Finance Corporation or the United Nations or its authorities has
determined to have a low or middle income economy. Historical experience
indicates that the markets of emerging market countries have been more
volatile than more developed markets; however, such markets can provide higher
rates of return to investors.
EURO CONVERSION: Effective January 1, 1999, several European countries
irrevocably fixed their existing national currencies to a new single European
currency unit, the "euro." Certain European investments may be subject to
additional risks as a result of this conversion. These risks include adverse
tax and accounting consequences, as well as difficulty in processing
transactions. SunAmerica is aware of such potential problems and is
coordinating efforts to prevent or alleviate their adverse impact on the
Portfolio. There can be no assurance that the Portfolio will not suffer any
adverse consequences as a result of the euro conversion.
INTEREST RATE FLUCTUATIONS: Volatility of the bond market is due principally
to changes in interest rates. As interest rates rise, bond prices typically
fall; and as interest rates fall, bond prices typically rise. Longer-term and
lower coupon bonds tend to be more sensitive to changes in interest rates.
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CREDIT QUALITY: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will
be more likely than a higher rated issuer to default or otherwise become
unable to honor its financial obligations.
PREPAYMENT: Prepayment risk is the possibility that the principal of the loans
underlying asset-backed securities may be prepaid at any time. As a general
rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates the Portfolio may be required to
reinvest its assets in securities with lower interest rates. In periods of
increasing interest rates, prepayments generally may decline, with the effect
that the securities subject to prepayment risk held by the Portfolio may
exhibit price characteristics of longer-term debt securities.
FUND MANAGEMENT
MANAGER: SunAmerica Asset Management Corp. selects the Advisers for the
Portfolio, may manage certain portions of the Portfolio directly, provides
various administrative services, and supervises the daily business affairs of
the Portfolio. 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. SunAmerica may
terminate any agreement with another Adviser without shareholder approval.
Moreover, SunAmerica has received an exemptive order from the Securities and
Exchange Commission that permits SunAmerica, subject to certain conditions, to
enter into agreements relating to the Portfolio with Advisers approved by the
Board of Directors 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 agreements with Advisers 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 an agreement with an Adviser 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 annual rate of the investment advisory
fee payable to SunAmerica is 1.00% of average daily net assets. Payments to
the Advisers for their services is made by SunAmerica, not by the Portfolio.
SunAmerica, located in The SunAmerica Center, 733 Third Avenue, New York, New
York 10017, was organized in 1982 under the laws of Delaware, and manages,
advises and/or administers assets in excess of $22 billion as of October 31,
1999. In addition to managing the Portfolio, SunAmerica serves as adviser,
manager and/or administrator for Anchor Pathway Fund, Anchor Series Trust,
Brazos Mutual Funds, Seasons Series Trust, SunAmerica Equity Funds, Inc.,
SunAmerica Income Funds, SunAmerica Money Market Funds, Inc., SunAmerica
Series Trust and SunAmerica Strategic Investment Series, Inc.
18
<PAGE>
Information About Advisers
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AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. American Century is a Delaware
corporation with principal offices at the American Century Tower, 4500 Main
Street, Kansas City, Missouri 64111. American Century has been in the
investment management business since 1958. As of October 1, 1999, American
Century had under management approximately $91.8 billion in assets.
EQSF ADVISERS, INC. (investment adviser to the Third Avenue Funds and referred
to as "Third Avenue") Third Avenue is a New York corporation located at 767
Third Avenue, New York, New York 10017. Third Avenue has been an investment
adviser and manager for mutual funds and private accounts since its
organization in 1986. As of June 28, 1999, Third Avenue had under management
approximately $1.8 billion in assets.
THORNBURG INVESTMENT MANAGEMENT, INC. Thornburg is a Delaware corporation with
principal offices at 119 East Marcy Street, Santa Fe, New Mexico, 87501, and
has been in the investment management business since 1982. As of
September 30, 1999, Thornburg had under management over $2.4 billion in
assets.
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION OF
PORTFOLIO MANAGER EXPERIENCE
- --------------------------------------------- ---------------------------------------------
<S> <C>
Phil Davidson Mr. Davidson is a Vice President and
Vice President and Portfolio Portfolio Manager and has been with American
Manager Century since 1993.
(American Century)
Scott A. Moore Mr. Moore has been a Portfolio Manager with
Portfolio Manager American Century since October, 1996. He
(American Century) joined American Century in 1993 as an
Investment Analyst.
Martin J. Whitman Mr. Whitman has been Chief Investment Officer
Chairman, CEO and of Third Avenue since 1991 and Chairman and
Portfolio Manager CEO since 1986. Mr. Whitman also has been
(Third Avenue) Chairman and CEO of Third Avenue Trust since
1990 and was President from 1991 to 1998.
William V. Fries, CFA Mr. Fries has been a Managing Director and
Managing Director and Portfolio Manager at Thornburg since 1995.
Portfolio Manager Previously, he had been affiliated with USAA
(Thornburg) Investment Management Company for over 20
years.
</TABLE>
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Information About Advisers
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DISTRIBUTOR. SunAmerica Capital Services, Inc. distributes the Portfolio's
shares. The Distributor, a SunAmerica company, receives the initial and
deferred sales charges, all or a portion of which may be re-allowed to other
broker-dealers. In addition, the Distributor receives fees under the
Portfolio's 12b-1 plans.
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. This
compensation may include (i) full re-allowance of the front-end sales charge
on Class A shares; (ii) additional compensation with respect to the sale of
Class A, Class B or 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 number 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 applicable law or the rules of any
self-regulatory agency, such as the National Association of Securities
Dealers, Inc. Dealers who receive bonuses or other incentives may be deemed to
be underwriters under the Securities Act of 1933.
Certain laws and regulations limit the ability of banks and other depository
institutions to underwrite and distribute securities. However, in the opinion
of the Distributor 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 Portfolio's
12b-1 plans. Banks and other financial services firms may be subject to
various state laws regarding these services, and may be required to register
as dealers pursuant to state law.
ADMINISTRATOR. SunAmerica Fund Services, Inc. assists the Portfolio's transfer
agent in providing shareholder services. The Administrator, a SunAmerica
company, is paid a monthly fee by each Fund for its services at the 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.
SunAmerica, the Distributor and Administrator are all located in The
SunAmerica Center, 733 Third Avenue, New York, New York 10017.
YEAR 2000. Many computer and computer-based systems cannot distinguish the
year 2000 from the year 1900 because of the way they encode and calculate
dates. This is popularly known as the "Year 2000 Issue." The 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. We
recognize the importance of the Year 2000 Issue and are taking appropriate
steps necessary in preparation for the year 2000. The Fund's management fully
anticipates that their systems will be adapted in time for the year 2000, and
to further this goal they have coordinated a plan to repair, adapt or replace
their systems as necessary. They have also obtained representations from their
outside service providers that they are doing the same. The Fund's management
completed their plan significantly by the end of the 1998 calendar year and
expects to perform appropriate systems testing during the 1999 calendar year.
If the problem has not been fully addressed, however, the Fund could be
negatively impacted. The Year 2000 Issue could also have a negative impact on
the companies in which the Fund invests, which could hurt the Fund's
investment returns.
20
<PAGE>
For More Information
- --------------------------------------------------------------------------------
The following documents contain more information about the Portfolio and are
available free of charge upon request:
ANNUAL AND SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on portfolio holdings. The reports also contain a
written analysis of market conditions and investment strategies that
significantly affected the Portfolio's performance during the last
applicable period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional
information about the Portfolio's policies, investment restrictions and
business structure. This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Portfolio
by contacting:
SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
1-800-858-8850, extension 5125
or
by calling your broker or financial advisor.
Information about the Portfolio (including the SAI) can be reviewed and copied
at the Public Reference Room of the Securities and Exchange Commission,
Washington, D.C. Call (800) SEC-0330 for information on the operation of the
Public Reference Room. Information about the Portfolio is also available on
the Securities and Exchange Commission's web-site at http://www.sec.gov and
copies may be obtained upon payment of a duplicating fee by writing the Public
Reference Section of the Securities and Exchange Commission, Washington, D.C.
20549-6009.
You should rely only on the information contained in this prospectus. No one
is authorized to provide you with any different information.
SUNAMERICA
[LOGO] MUTUAL FUNDS
DISTRIBUTOR: SunAmerica Capital Services
INVESTMENT COMPANY ACT
File No. 811-07797
<PAGE>
SUNAMERICA STYLE SELECT SERIES(Registered)
Focused Value Portfolio
Statement of Additional Information
dated November 1, 1999
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
Focused Value Portfolio (the "Portfolio") is one of ten separate
investment portfolios of SunAmerica 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 advisers
(each, an "Adviser"), selected by SunAmerica subject to the review and approval
of the Fund's Board of Directors, each of which is independently responsible for
advising its respective portion of the Portfolio's assets by selecting up to ten
of its favorite securities for the Portfolio. In choosing Advisers, SunAmerica
will seek to obtain, within the Portfolio's overall objective, a distinct
investment style. This Statement of Additional Information relates only to the
Focused Value Portfolio.
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Portfolio's Prospectuses dated November
1, 1999. To obtain a Prospectus free of charge, please call the Fund at (800)
858-8850. The Prospectus is incorporated by reference into this Statement of
Additional Information and this Statement of Additional Information is
incorporated by reference into the Prospectus. The Fund's audited financial
statements are incorporated into this Statement of Additional Information by
reference to its 1998 annual report to shareholders. You may request a copy of
the annual report at no charge by calling (800) 858-8850 or writing the Fund at
SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica Center,
733 Third Avenue, New York, New York 10017-3204. Capitalized terms used herein
but not defined have the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUND.....................................................................B-3
INVESTMENT OBJECTIVES AND POLICIES...........................................B-3
INVESTMENT RESTRICTIONS.....................................................B-29
DIRECTORS AND OFFICERS......................................................B-31
ADVISERS, DISTRIBUTOR AND ADMINISTRATOR.....................................B-35
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................B-40
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES.........................B-41
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES.......................B-47
EXCHANGE PRIVILEGE..........................................................B-48
DETERMINATION OF NET ASSET VALUE............................................B-49
PERFORMANCE DATA............................................................B-50
DIVIDENDS, DISTRIBUTIONS AND TAXES..........................................B-54
RETIREMENT PLANS............................................................B-59
DESCRIPTION OF SHARES.......................................................B-60
FINANCIAL STATEMENTS........................................................B-62
APPENDIX..............................................................Appendix-1
</TABLE>
<PAGE>
No dealer, salesperson 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 Fund, 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.
B-2
<PAGE>
THE FUND
The Fund, organized as a Maryland corporation on July 3, 1996, is a
non-diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). On August 19,
1999, the Directors approved the creation of the Focused Value Portfolio, one of
ten separate investment portfolios of the Fund (collectively, the "Portfolios").
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the Portfolio are described in
the Portfolio's Prospectus. Certain types of securities in which the Portfolio
may invest and certain investment practices the Portfolio may employ, which are
described under "More Information about the Portfolio - Investment Strategies"
in the Prospectus, are discussed more fully below. Unless otherwise specified,
the Portfolio may invest in the following securities. The stated percentage
limitations are applied to an investment at the time of purchase unless
indicated otherwise.
Warrants and Rights. 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. Rights represent a preemptive right of stockholders to
purchase additional shares of a stock at the time of a new issuance before the
stock is offered to the general public, allowing the stockholder to retain the
same ownership percentage after the new stock offering.
Convertible Securities and Preferred Stocks. Convertible securities may
be debt securities or preferred stock with a conversion feature. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than non-convertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed that combine higher or lower current income
with options and other features. Generally, preferred stock has a specified
dividend and ranks after bonds and before common stocks in its claim on income
for dividend payments and on assets should the company be liquidated. While most
preferred stocks pay a dividend, the Portfolio may purchase preferred stock
where the issuer has omitted, or is in danger of omitting, payment of its
dividend. Such investments would be made primarily for their capital
appreciation potential.
Investment in Small, Unseasoned Companies. As described in the
Prospectus, the Portfolio may invest in the securities of small companies.
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
B-3
<PAGE>
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 as
compared to 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. 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.
Mid-Cap companies, as described in the Prospectus, 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 securities of foreign issuers in the form
of 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 that 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 that 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
B-4
<PAGE>
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.
Investments in foreign securities, including securities of emerging
market 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); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers; less volume on foreign exchanges than on U.S. exchanges; greater
volatility and less liquidity on foreign markets than in the U.S.; less
regulation of foreign issuers, stock exchanges and brokers than the U.S.;
greater difficulties in commencing lawsuits; higher brokerage commission rates
and custodian fees than the U.S.; increased possibilities in some countries of
expropriation, confiscatory taxation, political, financial or social instability
or adverse diplomatic developments; the imposition of foreign taxes on
investment income derived from such countries; and differences (which may be
favorable or unfavorable) between the U.S. economy and foreign economies.
The performance of investments in securities denominated in a foreign
currency ("non-dollar securities") will depend on, among other things, the
strength of the foreign currency against the dollar and the interest rate
environment in the country issuing the foreign currency. Absent other events
that could otherwise affect the value of non-dollar securities (such as a change
in the political climate or an issuer's credit quality), appreciation in the
value of the foreign currency generally can be expected to increase the value of
the Portfolio's non-dollar securities in terms of U.S. dollars. A rise in
foreign interest rates or decline in the value of foreign currencies relative to
the U.S. dollar generally can be expected to depress the value of the
Portfolio's non-dollar securities. Currencies are evaluated on the basis of
fundamental economic criteria (e.g., relative inflation levels and trends,
growth rate forecasts, balance of payments status and economic policies) as well
as technical and political data.
Because the Portfolio may invest in securities that are listed
primarily on foreign exchanges that trade on weekends or other days when the
Fund does not price its shares, the value of the Portfolio's shares may change
on days when a shareholder will not be able to purchase or redeem shares.
B-5
<PAGE>
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 are also affected by the perceived ability
of the issuer to make timely payments of principal and interest.
B-6
<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.
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 (AAA, AA, A or BBB) or by 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.
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. For these securities, the payment
of principal and interest is unconditionally guaranteed by the U.S. government.
They are of the highest possible credit quality. These securities are subject to
variations in market value due to fluctuations in interest rates, but if held to
maturity, are guaranteed by the U.S. government to be paid in full.
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 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 ("FMHA") and the Export-Import Bank are backed by the full faith
and credit of the United States.
The Portfolio may also invest in securities issued by U.S. government
instrumentalities and certain federal agencies that are neither direct
obligations of, nor are they guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; and others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan Banks. 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 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
B-7
<PAGE>
or FHLMC certificates (as further discussed 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.
The U.S. government or the issuing agency guarantees the payment of interest and
principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates. 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. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through certificates.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. Thus, 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:
B-8
<PAGE>
GNMA Certificates. GNMA Certificates are mortgage-backed securities
that 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 FMHA, 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. 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. FNMA issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates represent a pro rata share
of all interest and principal payments made and owed on the underlying pool.
FNMA guarantees timely payment of interest and principal on FNMA Certificates.
The FNMA guarantee is not backed by the full faith and credit of the U.S.
government.
Conventional mortgage pass-through securities ("Conventional Mortgage
Pass-Throughs") represent participation interests in pools of mortgage loans
that are issued by trusts formed by originators of the institutional investors
in mortgage loans (or represent custodial arrangements administered by such
institutions). These originators and institutions include commercial banks,
savings and loans associations, credit unions, savings banks, insurance
companies, investment banks or special purpose subsidiaries of the foregoing.
For federal income tax purposes, such trusts are generally treated as grantor
trusts or real estate mortgage investment conduits ("REMICs") and, in
B-9
<PAGE>
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 the Portfolio may
invest is a collateralized mortgage obligation ("CMO"). CMOs are fully
collateralized bonds that are the general obligations of the issuer thereof
(e.g., the U.S. government, a U.S. government instrumentality, or a private
issuer). Such bonds generally are secured by an assignment to a trustee (under
the indenture pursuant to which the bonds are issued) of collateral consisting
of a pool of mortgages. Payments with respect to the underlying mortgages
generally are made to the trustee under the indenture. Payments of principal and
interest on the underlying mortgages are not passed through to the holders of
the CMOs as such (i.e., the character of payments of principal and interest is
not passed through, and therefore payments to holders of CMOs attributable to
interest paid and principal repaid on the underlying mortgages do not
necessarily constitute income and return of capital, respectively, to such
holders), but such payments are dedicated to payment of interest on and
repayment of principal of the CMOs.
Principal and interest on the underlying mortgage assets may be
allocated among the several classes of CMOs in various ways. In certain
structures (known as "sequential pay" CMOs), payments of principal, including
any principal prepayments, on the mortgage assets generally are applied to the
classes of CMOs in the order of their respective final distribution dates. Thus,
no payment of principal will be made on any class of sequential pay CMOs until
all other classes having an earlier final distribution date have been paid in
full.
Additional structures of CMOs include, among others, "parallel pay"
CMOs. Parallel pay CMOs are structured to apply principal payments and
prepayments of the mortgage assets to two or
B-10
<PAGE>
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 accrue interest at a specified rate only 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 that 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 that 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 or none 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.
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
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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.
Therefore, there is the possibility that the issuer of the asset-backed security
may be unable to meet its payments, in whole or in part, to the holders of the
asset-backed securities, including the Fund. 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 that 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.
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 that 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 that make regular payments of interest. The Portfolio will
accrue income on such investments for tax and accounting purposes, as required,
that 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.
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
that sold the loan participations. Because loan participations are undivided
interests in a loan made by the issuing bank, the Portfolio may not have
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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 up to 25% of its total
assets in 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's portfolio during periods when an Adviser is unable
to locate favorable investment opportunities. For temporary defensive purposes,
the Portfolio may invest up to 100% of its total assets in cash and short-term
fixed income securities, including corporate debt obligations and money market
instruments rated in one of the two highest categories by a nationally
recognized statistical rating organization (or determined by the Adviser to be
of equivalent quality). The types of short-term and temporary defensive
investments in which the Portfolio may invest are described below:
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.
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Commercial Paper - Short-term notes (up to 12 months) issued
by domestic and foreign corporations or governmental bodies. The
Portfolio may purchase commercial paper only if 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
and by 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 the 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 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 - 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. The 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 the Appendix for a description of investment-grade
ratings by Standard & Poor's and Moody's.
Government Securities - Debt securities maturing within one
year of the date of purchase include adjustable-rate mortgage
securities backed by GNMA, FNMA, FHLMC and other non-agency issuers.
Although certain floating or variable rate obligations (securities
whose coupon rate changes at least annually and generally more
frequently) have maturities in excess of one year, they are also
considered short-term debt securities. See "U.S. Government Securities"
above. The Portfolio may also purchase securities issued or guaranteed
by a foreign government, its agencies or instrumentalities. See
"Foreign Securities" above.
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Repurchase Agreements. The Portfolio may enter into repurchase
agreements involving only securities in which it could otherwise invest and with
selected banks, brokers and securities dealers whose financial condition is
monitored by the Adviser, subject to the guidance of the Board of Directors. 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 that
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 under the repurchase agreement defaults,
the Portfolio may incur a loss if the value of the collateral securing the
repurchase agreements has declined and may incur disposition costs in connection
with liquidating the collateral. 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.
Diversification. The Portfolio is classified as "non-diversified" for
purposes of the 1940 Act, which means that it is not limited by the 1940 Act
with regard to the portion of 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 Portfolio's
performance 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 under the Code, 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 (other
than U.S. government securities or the securities of other regulated investment
companies).
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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.
Derivatives 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). 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.
In addition, the Portfolio could experience capital losses, which might
cause previously distributed short-term capital gains to be re-characterized as
a non-taxable return of capital to shareholders.
The Portfolio may also write put options ("puts"), which give the
holder of the option the right to sell the underlying security to the Portfolio
at the stated exercise price. The Portfolio will receive a premium for writing a
put option that increases the Portfolio's return. The Portfolio writes only
covered put options, which means that so long as the Portfolio is obligated as
the writer of the option it will, through its custodian, have deposited and
maintained cash or liquid securities denominated in U.S. dollars or non-U.S.
currencies with a securities depository with a value equal to or greater than
the exercise price of the underlying securities.
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. All puts and calls on securities, interest rate
Futures or stock and bond index Futures or options on such Futures purchased or
sold by the Portfolio will normally be listed on either (1) a national
securities or commodities exchange or (2) over-the-counter markets. Because the
markets for these instruments are relatively new and still developing, the
ability of the Portfolio to engage in such transactions may be limited.
Derivatives 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 that have appreciated; (iii) facilitate selling securities
for investment reasons; or (iv) establish a position in the equity and debt
securities markets as a temporary substitute for purchasing particular equity
and debt securities.
The Portfolio's use of 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 that 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
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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
derivatives 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 increase 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 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
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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).
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.
The Portfolio may use spread transactions for any lawful purpose
consistent with the Portfolio's investment objective. The Portfolio may purchase
covered spread options from securities dealers. Such covered spread options are
not presently exchange-listed or exchange-traded. The purchase of a spread
option gives the Portfolio the right to put, or sell, a security that it owns at
a
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fixed dollar spread or fixed yield spread in relationship to another security
that the Portfolio does not own, but which is used as a benchmark. The risk to
the Portfolio in purchasing covered spread options is the cost of the premium
paid for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is provided only during the life
of the spread option.
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 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
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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 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 the Portfolio
intends to purchase. If a put or call option the Portfolio has written is
exercised, the Portfolio will incur a loss that 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.
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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 or
exchange 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 the Portfolio intends to purchase may
be less expensive.
Additional Information About Derivatives 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 that 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 result in 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 that 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 that
would apply to direct purchases or sales of such underlying investments.
Premiums paid for options are small in relation to the market value of the
related investments, and consequently, put and call options offer large amounts
of leverage. The leverage offered by trading in options could result in 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 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 Derivatives
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
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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
that 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 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
Participation in the options or Futures markets involves investment
risks and transaction costs to which the Portfolio would not be subject absent
the use of these strategies. If the Adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Portfolio may leave the Portfolio in a worse
position than if such strategies were not used. There is also a risk in using
short hedging by selling Futures to attempt to protect against decline in value
of the portfolio securities (due to an increase in interest rates) that the
prices of such Futures will correlate imperfectly with the behavior of the cash
(i.e., market value) prices of the Portfolio's securities. The ordinary spreads
between prices in the cash and Futures markets are subject to distortions due to
differences in the natures of those markets. First, all participants in the
Futures markets are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
Futures contracts through offsetting transactions that 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
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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 establishes 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 derivatives 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 that 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 that 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 that
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, as described below).
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.
For example, restricted securities that the Board of Directors, or the
Adviser pursuant to guidelines established by the Board of Directors, has
determined to be marketable, such as securities
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eligible for sale under Rule 144A promulgated under the Securities Act, 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 that by its terms can be liquidated before its nominal
fixed-term on seven days or less notice is regarded as a liquid instrument. 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). 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.
Commercial paper issues in which the 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 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. The 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.
Short Sales. The Portfolio may sell a security it does not own in
anticipation of a decline in the market value of that security (short sales). To
complete such a transaction, the Portfolio must borrow the security to make
delivery to the buyer. The Portfolio then is obligated to replace the security
borrowed by purchasing it at market price at the time of replacement. The price
at such time may be more or less than the price at which the security was sold
by the Portfolio. Until the security is replaced, the Portfolio is required to
pay to the lender any dividends or interest that accrue during the period of the
loan. To borrow the security, the Portfolio also may be required to pay a
premium, which would increase the cost of the security sold. The proceeds of the
short sale will be retained
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by the broker, to the extent necessary to meet margin requirements, until the
short position is closed out. Until the Portfolio replaces a borrowed security,
the Portfolio will maintain daily a segregated account, containing cash or
liquid securities, at such a level that (i) the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and (ii) the amount deposited in the segregated
account plus the amount deposited with the broker as collateral will not be less
than the market value of the security at the time it was sold short. The
Portfolio will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Portfolio replaces the borrowed security. The Portfolio will realize a gain if
the security declines in price between those dates. This result is the opposite
of what one would expect from a cash purchase of a long position in a security.
The amount of any gain will be decreased, and the amount of any loss increased,
by the amount of any premium, dividends or interest the Portfolio may be
required to pay in connection with a short sale.
The Portfolio may make "short sales against the box." A short sale is
against the box to the extent that the Portfolio contemporaneously owns, or has
the right to obtain without payment, securities identical to those sold short.
The Portfolio may not enter into a short sale, including a short sale against
the box, if, as a result, more than 25% of its net assets would be subject to
such short sales.
Borrowing. As a matter of fundamental policy the Portfolio is authorized to
borrow up to 331/3% of its total assets for temporary or emergency purposes. In
seeking to enhance investment performance, the Portfolio may borrow money for
investment purposes and may pledge assets to secure such borrowings. This is the
speculative factor known as leverage. This practice may help increase the net
asset value of the assets of the Portfolio in an amount greater than would
otherwise be the case when the market values of the securities purchased through
borrowing increase. In the event the return on an investment of borrowed monies
does not fully recover the costs of such borrowing, the value of the Portfolio's
assets would be reduced by a greater amount than would otherwise be the case.
The effect of leverage will therefore tend to magnify the gains or losses to the
Portfolio as a result of investing the borrowed monies. During periods of
substantial borrowings, the value of the Portfolio's assets would be reduced due
to the added expense of interest on borrowed monies. The Portfolio is authorized
to borrow, and to pledge assets to secure such borrowings, up to the maximum
extent permissible under the 1940 Act (i.e., presently 50% of net assets). The
time and extent to which the Portfolio may employ leverage will be determined by
the Adviser in light of changing facts and circumstances, including general
economic and market conditions, and will be subject to applicable lending
regulations of the Board of Governors of the Federal Reserve Board.
In seeking to enhance investment performance, the Portfolio may
increase its ownership of securities by borrowing at fixed rates of interest up
to the maximum extent permitted under the 1940 Act (presently 50% of net assets)
and investing the borrowed funds, subject to the restrictions stated in the
Prospectus. Any such borrowing will be made only pursuant to the requirements of
the 1940 Act and will be made only to the extent that the value of
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the Fund's assets less its liabilities, other than borrowings, is equal to at
least 300% of all borrowings including the proposed borrowing. If the value of
the Portfolio's assets, so computed, should fail to meet the 300% asset coverage
requirement, the Portfolio is required, within three business days, to reduce
its bank debt to the extent necessary to meet such requirement and may have to
sell a portion of its investments at a time when independent investment judgment
would not dictate such sale. Interest on money borrowed is an expense the
Portfolio would not otherwise incur, so that it may have little or no net
investment income during periods of substantial borrowings. Since substantially
all of the Portfolio's assets fluctuate in value, but borrowing obligations are
fixed when the Portfolio has outstanding borrowings, the net asset value per
share of the Portfolio correspondingly will tend to increase and decrease more
when the Portfolio's assets increase or decrease in value than would otherwise
be the case. The Portfolio's policy regarding use of leverage is a fundamental
policy, which may not be changed without approval of the shareholders of the
Portfolio.
Loans of Portfolio Securities. Consistent with applicable regulatory
requirements, the Portfolio may lend portfolio securities in amounts up to
331/3% 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 high-quality short-term debt securities, including repurchase
agreements. A loan may be terminated by the borrower on one business day's
notice or by the 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 be made only 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 that 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 that are the subject of the loan.
Reverse Repurchase Agreements. The 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
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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. The 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. The Portfolio may enter into "dollar rolls" in which the
Portfolio sells mortgage or other asset-backed securities ("Roll Securities")
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Portfolio foregoes principal and
interest paid on the Roll Securities. The Portfolio is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Portfolio also could be
compensated through the receipt of fee income equivalent to a lower forward
price. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position that matures on
or before the forward settlement date of the dollar roll transaction. The
Portfolio will enter into only 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 the Portfolio is required to
repurchase may be worth less than an instrument 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. The 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. The Portfolio
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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. The Portfolio will enter into interest-rate swaps only on a net
basis, which means that the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. Interest-rate swaps do not involve the delivery of securities,
other underlying assets or principal. Accordingly, the risk of loss with respect
to 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, SunAmerica 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.
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The 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 a
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.
Special Situations. A "special situation" arises when, in the opinion
of the Adviser, the securities of a particular issuer will be recognized and
appreciate in value due to a specific development with respect to that issuer.
Developments creating a special situation might include, among others, a new
product or process, a technological breakthrough, a management change or other
extraordinary corporate event, or differences in market supply of and demand for
the security. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
Future Developments. The Portfolio may invest in securities and other
instruments that do not presently exist but may be developed in the future,
provided that each such investment is consistent with the Portfolio's investment
objectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Prospectus and Statement of Additional Information
will be amended or supplemented as appropriate to discuss any such new
investments.
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
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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, that
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 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 and indices, spread transactions, forward and futures
contracts on securities and indices, put and call options on such futures
contracts, forward commitment transactions, 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; (c) the lending of its portfolio
securities; and (d) as otherwise permitted by exemptive order of the SEC.
5. Borrow money, except that (i) the Portfolio may borrow in amounts up
to 331/3% 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, 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.
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The following additional restrictions are not fundamental policies and
may be changed by the Directors without a vote of shareholders. The Portfolio
may not:
8. 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.
9. 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.
10. 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.
11. 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, SunAmerica Money Market Funds, Inc., SunAmerica
Strategic Investment Series, Inc. and the Fund. An asterisk indicates those
Directors who are interested persons of the Fund within the meaning of the 1940
Act.
B-31
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
S. James Coppersmith, 66 Director Retired; formerly, President and General
7 Elmwood Road Manager, WCVB-TV, a division of the
Marblehead, MA 01945 Hearst Corporation, (1982 to 1994);
Director/ Trustee of SAMF and Anchor
Series Trust ("AST").
Samuel M. Eisenstat, 58 Chairman of the Attorney, solo practitioner;
430 East 86th Street Board Chairman of the Boards of
New York, NY 10028 Directors/Trustees of SAMF and AST.
Stephen J. Gutman, 55 Director Partner and Managing Member of B.B.
515 East 79th Street Associates LLC (menswear specialty
New York, NY 10021 retailing and other activities) since June
1988; Director/Trustee of SAMF and
AST.
Peter A. Harbeck,*45 Director and Director and President, SunAmerica Asset
The SunAmerica Center President Management Corp. ("SunAmerica");
733 Third Avenue Director, SunAmerica Capital Services,
New York, NY 10017-3204 Inc. ("SACS"), since August 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.
Sebastiano Sterpa, 69 Director Founder and Chairman of the Board of the
73473 Mariposa Drive Sterpa Group (real estate) since 1962;
Palm Desert, CA 92260 Director, Real Estate Business Service
and Countrywide Financial; Director/
Trustee of SAMF.
</TABLE>
B-32
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
J. Steven Neamtz, 38 Vice President Executive Vice President, SunAmerica,
The SunAmerica Center since April 1996; Director and President,
733 Third Avenue SACS, since April 1996; formerly,
New York, NY 10017-3204 Executive Vice President, New England
Funds, L.P. from July 1990 to April 1996.
Peter C. Sutton, 34 Treasurer Senior Vice President, SunAmerica, since
The SunAmerica Center April 1997; Treasurer, SAMF and AST,
733 Third Avenue since February 1996; Vice President and
New York, NY 10017-3204 Assistant Treasurer of SAST and APF,
since 1994; Vice President, Seasons, since
April 1997; formerly, Vice President,
SunAmerica, from 1994 to 1997; Controller,
SAMF and AST, from March 1993 to February
1996; Assistant Controller, SAMF and AST,
from 1990 to 1993.
Robert M. Zakem, 41 Secretary Senior Vice President and General
The SunAmerica Center Counsel, SunAmerica, since April 1993;
733 Third Avenue Executive Vice President, General
New York, NY 10017-3204 Counsel and Director, SACS, since
August 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; formerly, Vice President and
Associate General Counsel, SunAmerica, from
March 1992 to April 1993.
</TABLE>
* A trustee who may be deemed to be an interested person as that term is
defined in the 1940 Act.
The Directors of the Fund are responsible for the overall supervision
of the operation of the Fund and each Portfolio and perform various duties
imposed on directors of investment companies by the 1940 Act and under the
Fund's articles of incorporation. Directors and officers of the Fund are also
Directors and officers of some or all of the other investment companies managed,
administered or
B-33
<PAGE>
advised by SunAmerica, and distributed by SunAmerica Capital Services ("SACS" or
the "Distributor") and other affiliates.
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 SAMF and/or AST, 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. The Audit Committee is charged with
recommending to the full Board the engagement or discharge of the Fund's
independent accountants; directing investigations into matters within the scope
of the independent accountants' duties; reviewing with the independent
accountants the audit plan and results of the audit; approving professional
services provided by the independent accountants and other accounting firms
prior to the performance of such services; reviewing the independence of the
independent accountants; considering the range of audit and non-audit fees; and
preparing and submitting Committee minutes to the full Board. Each member of the
Audit Committee receives an aggregate of up to $5,000 in annual compensation for
serving on the Audit Committees of SAMF and/or AST, 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 SAMF and AST 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
SAMF or AST (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. With respect to Sebastiano Sterpa, the
Disinterested Directors have determined to make an exception to existing policy
and allow Mr. Sterpa to remain on the Board past age 70, until he has served for
ten years. Mr. Sterpa will cease accruing retirement benefits upon reaching age
70, although such benefits will continue to accrue interest as provided for in
the Retirement Plan. 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.
B-34
<PAGE>
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, 1998. The Directors who are interested persons
of the Fund receive no compensation.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Registrant
Compensation Accrued as Part of Benefits Upon and Fund Complex
Director from Fund Fund Expenses* Retirement*+ Paid to Directors*
<S> <C> <C> <C> <C>
S. James Coppersmith $9,302 $41,035 $29,670 $65,000
Samuel M. Eisenstat** 9,740 36,130 46,083 69,000
Stephen J. Gutman 9,302 37,402 60,912 65,000
Sebastiano Sterpa*** 9,399 25,201 7,900 43,333
</TABLE>
* Information is for the six investment companies in the complex that pay
fees to these directors/trustees. The complex consists of SAMF and AST.
** 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 October 15, 1999, the Directors and officers of the Fund owned in
the aggregate less than 1% of each class of each Portfolio's total outstanding
shares.
ADVISERS, DISTRIBUTOR AND ADMINISTRATOR
SunAmerica Asset Management Corp. SunAmerica, which was 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 a
wholly-owned subsidiary of SunAmerica Inc., which in turn is a wholly-owned
subsidiary of American International Group, Inc. ("AIG"), the leading U.S.-based
international insurance organization. AIG, a Delaware corporation, is a holding
company that through its subsidiaries is primarily engaged in a broad range of
insurance and insurance related activities and financial services in the United
States and abroad. AIG, through its subsidiaries, is also engaged in a range of
financial services activities. As of October 31, 1999, SunAmerica managed,
advised and/or administered more than $22 billion of assets.
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
B-35
<PAGE>
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 Portfolio pays, or causes to be paid, all other expenses of the Fund and the
Portfolio, 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 costs of the
Portfolio and their shares under federal and state securities laws; the cost and
expense of printing, including typesetting, and distributing Prospectuses and
Statements of Additional Information respecting the Portfolio, and supplements
thereto, to the shareholders of the Portfolio; 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 Portfolio; postage; insurance premiums on property or personnel (including
Officers and Directors) of the Fund that 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 fee payable to SunAmerica is
1.00% of average daily net assets. Payments to the Advisers for their services
are made by SunAmerica, not by the Portfolio. SunAmerica has received an
exemptive order that, among other things, permits the Portfolio to disclose the
Advisers' fees only in the aggregate. The highest aggregate annual rate of fees
payable by SunAmerica to the Advisers of the Portfolio for the first year of
operation - i.e., the fee rate charged on the first dollar held by each
Portfolio - is 0.50% of the average daily net assets of the Portfolio.
SunAmerica has agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate of 1.55% of the
assets of Class A shares and 2.20% 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. 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, for a period of two years from the date of execution unless
terminated sooner, and thereafter from year to year, if 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 its shareholders, for any act or omission by it or for any
losses sustained by the Portfolio or their
B-36
<PAGE>
shareholders, except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
The Advisers. American Century Investment Management, Inc. ("American Century"),
EQSF Advisers, Inc. ("Third Avenue") and Thornburg Investment Management, Inc.
("Thornburg") act as Advisers to the Portfolio pursuant to various subadvisory
agreements with SunAmerica.
Each Adviser is independent of SunAmerica and discharges its
responsibilities subject to the policies of the Directors and the supervision of
SunAmerica, which pays the Advisers' fees. American Century is a wholly-owned
subsidiary of American Century Companies, Inc. Third Avenue is a privately held
New York corporation and Thornburg is a privately held Delaware corporation.
As described in the Prospectus, SunAmerica will initially allocate the
assets of the Portfolio equally among the Advisers, 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.
In addition, SunAmerica intends, on a quarterly basis, to review the asset
allocation in the Portfolio to ensure that no portion of assets managed by an
Adviser exceeds that portion managed by any other Adviser to the Portfolio by
more than 5%. If such a condition exists, SunAmerica will then reallocate cash
flows among the Advisers so as to effect a rebalancing of the Portfolio's asset
allocation. 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 aggregate annual rates, as a percentage
of daily net assets, of the fees payable by SunAmerica to the Advisers for the
Portfolio may vary according to the level of assets of the Portfolio.
The Subadvisory Agreements continue in effect for a period of two years
from the date of their execution, unless terminated sooner. Thereafter, they may
be renewed from year to year, 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 its shareholders, for any act or omission by it or for any
losses sustained by the Portfolio or its shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties. SunAmerica may terminate any agreement with an Adviser
without shareholder approval. Moreover,
B-37
<PAGE>
SunAmerica has received an exemptive order from the SEC that permits SunAmerica,
subject to certain conditions, to enter into agreements relating to the Fund
with Advisers approved by the Board of Directors 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 Funds, change the terms of particular agreements with Advisers or
continue the employment of existing Advisers after events that would otherwise
cause an automatic termination of a subadvisory agreement. Shareholders will be
notified of any Adviser changes.
Personal Trading. The Fund and SunAmerica have adopted a written Code of Ethics
(the "SunAmerica Code"), which prescribes general rules of conduct and sets
forth guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person is defined in the SunAmerica Code as an individual who
is a trustee, director, officer, general partner or advisory person of the Fund
or SunAmerica. The topics covered in 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 SunAmerica Code
by Access Persons of the Fund or SunAmerica during the quarter.
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 SunAmerica 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 SunAmerica Code by
Access Persons of the Fund or SunAmerica.
The Distributor. The Fund, on behalf of each Portfolio, has entered into a
distribution agreement (the "Distribution Agreement") with the Distributor, a
registered broker-dealer and an indirect wholly owned subsidiary of AIG, to act
as the principal underwriter in connection with the continuous offering of each
class of shares of each 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 Portfolios 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 each
Portfolio, for distribution to persons who are not shareholders of such
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 each 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.
B-38
<PAGE>
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 Portfolios. 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 Portfolios, 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 "Fund Management Distributor" in
the Prospectus for certain information with respect to the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from the
Portfolio at an annual rate of up to 0.10% of 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 also 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.
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
Disinterested Directors who have no direct or indirect financial interest in the
operation of the Plans or in any agreements related to the Plans (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,
B-39
<PAGE>
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 AIG, 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.
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 that 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 each respective 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-analyses and reports concerning issuers, industries, securities,
economic factors and trends-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. The
research services consist of assessments and analysis of the business or
prospects of a company, industry
B-40
<PAGE>
or economic sector. Certain research services furnished by brokers may be useful
to the Adviser with respect to clients other than the Fund and not all of these
services may be used by the Adviser in connection with 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.
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 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. 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.
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
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 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.
Shareholders who have met the Portfolio's minimum initial investment
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
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or by physical draft check. Purchases made via physical draft check require an
authorization card to be filed with the shareholder's bank.
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 (i) may be imposed at the time of purchase (Class A
shares), (ii) may be deferred (Class B shares, and purchases of Class A shares
in excess of $1 million) or (iii) may contain elements of a sales charge that is
both imposed at the time of purchase and deferred (Class II shares). Reference
is made to "Shareholder Account Information" in the Prospectus for certain
information as to the purchase of Portfolio shares.
Waiver of Contingent Deferred Sales Charges. As discussed under "Shareholder
Account Information" 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 or Class II shares are not redeemed within one year of the death,
they will remain Class B shares or Class II shares, as applicable, 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.
Purchases through the Distributor. An investor may purchase shares of the
Portfolio through dealers who 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 regular trading 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 Focused Value 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
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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 "Shareholder Account Information" 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 Fund's close of business, the purchase of shares of a Fund will be
effected on that day. If the order is received after the Fund's close of
business, the order will be effected on the next business day.
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- 5585.
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 Focused Value 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
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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), 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 the Portfolio, one or more of
the other Portfolios (or in combination with the shares of other SAMF) is at
least $750,000, (b) the sponsor signs a $750,000 Letter of Intent, (c) such
shares are purchased by an employer-sponsored plan with at least 75 eligible
employees, or (d) the purchases are by trustees or other fiduciaries for certain
employer-sponsored plans, the trustee, fiduciary or administrator that 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.
Reduced Sales Charges (Class A Shares only). As discussed under "Shareholder
Account Information" 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:
1. an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act (which includes corporations that are corporate affiliates of each
other);
2. an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
3. 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);
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4. tax-exempt organizations qualifying under Section 501(c)(3) of the
Code (not including 403(b) plans);
5. employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
6. group purchases as described below.
A combined purchase currently may also include shares of other funds in
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 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.
Letter of Intent. A reduction of sales charges is also available to an
investor who, pursuant to a written "Letter of Intent" 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
Portfolio, or of other funds advised by SunAmerica that 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
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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
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.
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 at least annually access to the group's membership
by means of written communication or direct presentation to the membership at a
meeting; (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 that meets the
requirements stated above and 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
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group or a member's beneficiary. For example, a qualified group could consist of
a trade association that 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.
Net Asset Value Transfer Program. Investors may purchase shares of the
Portfolio at net asset value to the extent that the investment represents the
proceeds from a redemption of a non-SunAmerica mutual fund in which the investor
either (a) paid a front-end sales load or (b) was subject to, or paid a CDSC on
the redemption proceeds. Shareholders may purchase either Class A, Class B or
Class II shares through the program to the extent that they previously held
shares of a non-SunAmerica Mutual Fund with a similar load structure to the
respective SunAmerica Mutual Fund share class. With respect to sales of Class A
shares through the program, the Distributor will pay a 0.50% commission and
0.25% service fee to any dealer who initiates or is responsible for such an
investment. With respect to sales of Class B shares through the program, they
will receive 0.50% of the amount invested as commission and 0.25% as a service
fee, payable beginning the 13th month following the purchase of such shares.
(Class B shares will convert to Class A shares as provided in the prospectus.).
These payments are subject, however, to forfeiture in the event of a redemption
during the first year from the date of purchase. No commission shall be paid on
sales of Class II shares, but dealers will receive a 1% service fee, commencing
immediately and paid quarterly. In addition, it is essential that a NAV Transfer
Program Form accompany the New Account Application to indicate that the
investment is intended to participate in the Net Asset Value Transfer Program
(formerly, Exchange Program for Investment Company Shares). This program may be
revised or terminated without notice by the Distributor. For current
information, contact Shareholder/Dealer Services at (800) 858-8850.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Shareholder Account Information" 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 the Portfolio to make payment wholly
or partly in cash, the Fund may pay the redemption price in whole, or in part,
by a distribution in kind of securities from the Portfolio in lieu of cash.
However, 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 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.
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The Distributor is authorized, as agent for the Portfolio, to offer to
repurchase shares that 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.
EXCHANGE PRIVILEGE
Shareholders in the Portfolio may exchange their shares for the same
class of shares of any other Portfolio or other SunAmerica Mutual Funds that
offer such class at the respective net asset value per share. 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 $50 and there is no fee for
exchanges made. All exchanges can be effected only 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 Mutual 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 CDSC, if
any, as described in the Prospectus 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 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 SunAmerica Mutual Fund will retain liability for any
deferred sales charge 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. A
shareholder's CDSC schedule will not change if such shareholder exchanges Class
C or Class II shares purchased prior to December 1, 1998 for Class II shares
(which currently have a longer CDSC schedule).
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
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<PAGE>
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 the Adviser, 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.
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. Investments
for which market quotations are readily available are valued at their price as
of the close of regular trading on the New York Stock Exchange for the day. All
other securities and assets are valued at fair value following procedures
approved by the Directors.
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 Adviser 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 Adviser, 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.
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The Portfolio's liabilities, including proper accruals of expense
items, are deducted from total assets.
PERFORMANCE DATA
The Portfolio may advertise performance data that reflects various
measures of total return and the Portfolio may advertise data that reflects
yield. 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:
(a) 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;
(b) All dividends and distributions are reinvested at net
asset value;
and
(c) 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.
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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.
Comparisons
The Portfolio may compare its total return or yield 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.
c) 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.
d) The NYSE composite or component indices -- unmanaged
indices of all industrial, utilities, transportation,
and finance stocks listed on the NYSE.
e) 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.
f) 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.
g) 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.
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h) 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.
i) 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 that rate mutual fund performance over
specified time periods.
j) 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.
k) 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.
l) Savings and Loan Historical Interest Rates as published
in the U.S. Savings & Loan League Fact Book.
m) 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.
n) 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.
o) 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.
p) Value Line Geometric Index -- broad based index made up
of approximately 1700 stocks each of which have an
equal weighting.
q) 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.
r) 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.
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<PAGE>
s) 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.
t) 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.
u) 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
v) 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.
w) 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.
x) 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.
y) 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.
z) 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.
aa) Morgan Stanley Capital International World Index -- An
arithmetic, market value-weighted average of the
performance of over 1,470 securities listed on
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<PAGE>
the stock exchanges of countries in Europe, Australia,
the Far East, Canada and the United States.
bb) Russell 2000 and 3000 Indices -- represents the top
2,000 and the top 3,000 stocks, respectively, traded on
the NYSE, American Stock Exchange and National
Association of Securities Dealers Automated Quotations,
by market capitalizations.
cc) 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.
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 that 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-dividend 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
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company, the Portfolio generally must, among other things, (a) derive at least
90% of its gross income from the sales or other disposition of securities,
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.
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 the 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 (i.e., the excess of net capital gains from
the sale of assets held for more than 12 months over net short-term capital
losses, and including such gains from certain transactions in futures and
options), if any, are taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 20% with
respect to assets held for more than 12 months. The maximum capital gains rate
for corporate shareholders currently is the same as the maximum tax rate for
ordinary income.
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Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on 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, taxable at the same rates as ordinary income
if the shares were held for not more than 12 months and capital gain taxable at
the maximum rate of 20% if such shares were held for more than 12 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 loss will be treated as long-term capital
loss if such shares were held for more than 12 months. A loss recognized on the
sale or exchange of shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any long-term capital gains
distribution with respect to such shares.
Generally, any loss realized on a sale or exchange of shares of the
Portfolio will be disallowed if other shares of the Portfolio 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 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.
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
that Portfolio's assets to be invested in various countries is not known. 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 but 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
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<PAGE>
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 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
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<PAGE>
elections also are provided in the Code; no determination has been reached to
make any of these elections.
Code Section 1259 requires 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).
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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 the 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.
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
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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.
DESCRIPTION OF SHARES
Ownership of the Fund is represented by shares of common stock. The
total number of shares that 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, shares of ten Portfolios of the Fund have been authorized
pursuant to the Fund's Articles of Incorporation ("Articles"): the Large-Cap
Growth Portfolio, the Mid-Cap Growth Portfolio, the Aggressive Growth Portfolio,
the Large-Cap Value Portfolio, the Value Portfolio, the Small-Cap Value
Portfolio, the Focus Portfolio, the Focused Growth and Income Portfolio, the
Focused Value Portfolio and the International Equity Portfolio. The Large-Cap
Growth Portfolio, the Mid-Cap Growth Portfolio, the Focused Growth and Income
Portfolio and the Focused Value Portfolio are divided into three classes of
shares, designated as Class A, Class B and Class II. The Aggressive Growth
Portfolio, Large-Cap Value Portfolio, Value Portfolio, Small-Cap Value
Portfolio, Focus Portfolio, and International Equity Portfolio are divided into
four classes of shares, designated as Class A, Class B, Class II and Class Z.
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 Portfolio of the Fund's
shares represents the interests of the shareholders of that Portfolio 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
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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. 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 the Portfolio's
policies, only shareholders of the Portfolios 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
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 other Portfolio or other
SunAmerica Funds that offer that class. 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, to the fullest extent permitted by Maryland
statutory or decisional law, as amended or interpreted (as limited by the 1940
Act) that no Director or officer of the Fund shall be personally liable to the
Fund or to stockholders for money damages. The Articles provide that the Fund
shall indemnify (i) the Directors and officers, whether serving the Fund or its
request any other entity, to the full extent required or permitted by the
General Laws of the State of Maryland now or hereafter in force (as limited by
the 1940 Act), including the advance of expenses under the procedures and to the
full extent permitted by law, and (ii) other employees and agents to such extent
as shall be authorized by the Board of Directors or the Fund's By-laws and be
permitted by law. The duration of the Fund shall be perpetual.
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.
Focused Value Portfolio
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Class A Class B Class II
------- ------- --------
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
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
Reports to Shareholders. The Fund sends audited annual and unaudited semi-annual
reports to shareholders of the Portfolio. 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. PricewaterhouseCoopers 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 Swidler Berlin Shereff Friedman,
LLP, 919 Third Avenue, New York, NY 10022, has been selected as legal counsel to
the Fund.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 858-8850 or writing the Fund at SunAmerica Fund Services,
B-62
<PAGE>
Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York,
New York 10017-3204.
B-63
<PAGE>
PART C
OTHER INFORMATION
Item 23: Exhibits.
(a) (i) Articles of Incorporation, as Amended. Incorporated herein
by reference to Exhibit 1(A) of the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on August
30, 1996.
(ii) Articles Supplementary dated August 1, 1996. Incorporated
herein by reference to Exhibit 1(B) of the Registrant's
Registration Statement on Form N-1A (File No. 333- 11283)
filed on August 30, 1996.
(iii) Articles of Amendment dated August 19, 1996. Incorporated
herein by reference to Exhibit 1(C) of the Registrant's
Registration Statement on Form N-1A (File No. 333- 11283)
filed on August 30, 1996.
(iv) Articles of Amendment dated November 13, 1996. Incorporated
herein by reference to Exhibit 1(D) of Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on November 14, 1996.
(b) By-Laws. Incorporated herein by reference to Exhibit 2 of the
Registrant's Registration Statement on Form N-1A (File No. 333-11283)
filed on August 30, 1996.
(c) Instruments Defining Rights of Shareholders. Incorporated herein by
reference to Exhibits (a) and (b) above.
(d) (i) Investment Advisory Agreement. Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No. 18 to the Registrant's
Registration Statement on Form N-1A (File No. 333-11283) filed
on October 29, 1999.
(ii) Subadvisory Agreement between SunAmerica Asset
Management Corp. ("SunAmerica") and American Century
Investment Management, Inc. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on October 29, 1999.
(iii) Subadvisory Agreement between SunAmerica and Bankers
Trust Company. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(iv) Subadvisory Agreement between SunAmerica and Berger
Associates, Inc. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(v) Subadvisory Agreement between SunAmerica and David L.
Babson & Co., Inc. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(vi) Subadvisory Agreement between SunAmerica and Bramwell
Capital Management, Inc. Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No.
333-11283) filed on February 26, 1999.
(vii) Subadvisory Agreement between SunAmerica and Credit
Suisse Asset Management, LLC (formerly known as Warburg
Pincus Asset Management, Inc.) Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No. 333-11283)
filed on February 26, 1999.
(viii) Subadvisory Agreement between SunAmerica and Davis
Selected Advisers, L.P. Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No.
333-11283) filed on February 26, 1999.
(ix) Subadvisory Agreement between SunAmerica and EQSF
Advisers, Inc. Incorporated herein by reference to the
identically numbered Exhibit of Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on October 29, 1999.
(x) Subadvisory Agreement between SunAmerica and Janus
Capital Corporation. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xi) Subadvisory Agreement between SunAmerica and Jennison
Associates LLC. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xii) Subadvisory Agreement between SunAmerica and Lazard
Asset Management. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
C-1
<PAGE>
(xiii) Subadvisory Agreement between SunAmerica and Marsico
Capital Management, LLC. Incorporated herein by
reference to Exhibit (d)(xiii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed
on February 26, 1999.
(xiv) Subadvisory Agreement between SunAmerica and Miller
Anderson & Sherrerd, LLP. Incorporated herein by reference
to Exhibit (d)(iv) of Post-Effective Amendment No.13 to
the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 26, 1999.
(xv) Subadvisory Agreement between SunAmerica and Montag &
Caldwell, Inc. Incorporated herein by reference to
Exhibit (d)(xv) of Post-Effective Amendment No.13
to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 26, 1999.
(xvi) Subadvisory Agreement between SunAmerica and
Neuberger Berman, LLC. Incorporated herein by
reference to Exhibit (d)(xvii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xvii) Subadvisory Agreement between SunAmerica and Rowe
Price-Fleming International, Inc. Incorporated herein
by reference to Exhibit (d)(xviii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xviii) Subadvisory Agreement between SunAmerica and T. Rowe
Price Associates, Inc. Incorporated herein by
reference to Exhibit (d)(xix) of Post-Effective Amendment
No.13 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on February 26, 1999.
(xix) Subadvisory Agreement between SunAmerica and Thornburg
Investment Management, Inc. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on October 29, 1999.
(xx) Subadvisory Agreement between SunAmerica and
Wellington Management Company, LLP. Incorporated
herein by reference to the identically numbered Exhibit
of Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No. 333-11283)
filed on February 26, 1999.
(e) (i) Distribution Agreement. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective Amendment
No. 13 to the Registrant's Registration Statement on Form
N-1A (File No. 333-11283) filed on February 26, 1999.
(ii) Form of Selling Agreement. Incorporated herein by reference
to Exhibit (e)(ii) of Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on December 30, 1998.
(f) Disinterested Trustees and Directors' Retirement Plan. Incorporated
herein by reference to Exhibit 7 of Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
(g) Custodian Agreement. Incorporated herein by reference to Exhibit 8 of
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File No. 333- 11283) filed on November 14,
1996.
(h) (i) Service Agreement. Incorporated herein by reference to
Exhibit 9(a) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
(ii) Transfer Agency Agreement. Incorporated herein by reference
to Exhibit 9(b) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A
C-2
<PAGE>
(File No. 333-11283) filed on November 14, 1996.
(i) Opinion of Counsel to the Registrant. Filed herewith
(j) Consent of Independent Accountants. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective Amendment No. 18
to the Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on October 29, 1999.
(k) Not applicable.
(l) Not applicable.
(m) Distribution Plans. Incorporated herein by reference to the
identically numbered Exhibit of Post-Effective Amendment No. 18 to the
Registrant's Registration Statement on Form N-1A (File No. 333-11283)
filed on October 29, 1999.
(n) Not applicable.
(o) (i) 18f-3 Plan. Incorporated herein by reference to Exhibit
5(b)(15) of Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on June 15, 1998.
(ii) Powers of Attorney. Incorporated herein by reference to
Exhibit 17(a) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
Item 24. Persons Controlled by or Under Common Control with Registrant
There are no persons controlled by or under common control with
Registrant.
Item 25. Indemnification
5.01 Indemnification of Directors and Officers. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a proceeding by or
in the right of the Corporation in which such person shall have been adjudged to
be liable to the Corporation), by reason of being or having been a director or
officer of the Corporation, or serving or having served at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another entity in which the Corporation has an interest as a shareholder,
creditor or otherwise (a "Covered Person"), against all liabilities, including
but not limited to amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and reasonable expenses (including attorney's fees)
actually incurred by the Covered Person in connection with any such action, suit
or proceeding, except (i) liability in connection with any proceeding in which
it is determined that (A) the act or omission of the Covered Person was material
to the matter giving rise to the proceeding, and was committed in bad faith or
was the result of active and deliberate dishonesty, or (B) the Covered Person
actually received an improper personal benefit in money, property or services,
or (C) in the case of any criminal proceeding, the Covered Person had reasonable
cause to believe that the act or omission was unlawful, and (ii) liability to
the Corporation or its security holders to which the Covered Person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office (any or all of the conduct referred to in clauses (i) and (ii) being
hereinafter referred to as "Disabling Conduct").
5.02 Procedure for Indemnification. Any indemnification under Section
5.01 shall (unless ordered by a court) be made by the Corporation only as
authorized for a specific proceeding by (i) a final decision on the merits by a
court or other body before whom the proceeding was brought that the Covered
Person to be indemnified was
C-3
<PAGE>
not liable by reason of Disabling Conduct, (ii) dismissal of the proceeding
against the Covered Person for insufficiency of evidence of any Disabling
Conduct, or (iii) a reasonable determination, based upon a review of the facts,
by a majority of a quorum of the directors who are neither "interested persons"
of the Corporation as defined in the Investment Company Act of 1940 nor parties
to the proceeding ("Disinterested Non-Party Directors"), or an independent legal
counsel in a written opinion, that the Covered Person was not liable by reason
of Disabling Conduct. The termination of any proceeding by judgment, order or
settlement shall not create a presumption that the Covered Person did not meet
the required standard of conduct; the termination of any proceeding by
conviction, or a plea of nolo contendere or its equivalent, or an entry of an
order of probation prior to judgment, shall create a rebuttable presumption that
the Covered Person did not meet the required standard of conduct. Any
determination pursuant to this Section 5.02 shall not prevent recovery from any
Covered Person of any amount paid to him in accordance with this By-Law as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction to be liable by reason of Disabling Conduct.
5.03 Advance Payment of Expenses. Reasonable expenses (including
attorneys' fees) incurred by a Covered Person may be paid or reimbursed by the
Corporation in advance of the final disposition of an action, suit or proceeding
upon receipt by the Corporation of (i) a written affirmation by the Covered
Person of his good faith belief that the standard of conduct necessary for
indemnification under this By-Law has been met and (ii) a written undertaking by
or on behalf of the Covered Person to repay the amount if it is ultimately
determined that such standard of conduct has not been met, so long as either (A)
the Covered Person has provided a security for his undertaking, (B) the
Corporation is insured against losses arising by reason of any lawful advances,
or (C) a majority of a quorum of the Disinterested Non-Party Directors, or an
independent legal counsel in a written opinion, has determined, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
5.04 Exclusivity, Etc. The indemnification and advance of expenses
provided by this By-Law shall not be deemed exclusive of any other rights to
which a Covered Person seeking indemnification or advance or expenses may be
entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors, or other provision that is consistent
with law, both as to action in an official capacity and as to action in another
capacity while holding office or while employed by or acting as agent for the
Corporation, shall continue in respect of all events occurring while the Covered
Person was a director or officer after such Covered Person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such Covered Person. The Corporation shall not
be liable for any payment under this By-Law in connection with a claim made by a
director or officer to the extent such director or officer has otherwise
actually received payment, under an insurance policy, agreement, vote or
otherwise, of the amounts otherwise indemnifiable hereunder. All rights to
indemnification and advance of expenses under the Charter and hereunder shall be
deemed to be a contract between the Corporation and each director or officer of
the Corporation who serves or served in such capacity at any time while this
By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law,
provided that no such amendment shall diminish the rights of any Covered Person
hereunder with respect to events occurring or claims made before its adoption or
as to claims made after its adoption in respect of events occurring before its
adoption. Any repeal or modification of this By-Law shall not in any way
diminish any rights to indemnification or advance of expenses of a Covered
Person or the obligations of the Corporation arising hereunder with respect to
events occurring, or claims made, while this By-Law or any provision hereof is
in force.
5.05 Insurance. The Corporation may purchase and maintain insurance on
behalf of any Covered Person against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such;
provided, however, that the Corporation shall not purchase insurance to
indemnify any Covered Person against liability for Disabling Conduct.
5.06 Severability: Definitions. The invalidity or unenforceability of
any provision of this Article V shall not affect the validity or enforceability
of any other provision hereof. The phrase "this By-Law" in this Article V means
this Article V in its entirety.
C-4
<PAGE>
Section 8 of the Article of Incorporation provides as follows:
(5) The Corporation shall indemnify (i) its directors and
officers, whether serving the Corporation or at its request any other entity, to
the full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses under the
procedures and to the full extent permitted by law, and (ii) other employees and
agents to such extent as shall be authorized by the Board of Directors or the
By-Laws of the Corporation and as permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such By-Laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. The right of
indemnification provided hereunder shall not be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
Corporation shall be personally liable to the Corporation or its stockholders
for money damages; provided, however, that this provision shall not be construed
to protect any director or officer against any liability to the Corporation or
its security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. No amendment, modification or repeal of
this provision shall adversely affect any right or protection provided hereunder
that exists at the time of such amendment, modification or repeal.
Item 26. Business and other Connections of Investment Adviser
SunAmerica is primarily in the business of providing investment
management, advisory and administrative services. Reference is made to
the most recent Form ADV and schedules thereto of SunAmerica on file
with the Commission (File No. 801-19813) for a description of the names
and employment of the directors and officers of SunAmerica and other
required information.
American Century Investment Management, Inc.; Bankers Trust Company;
Berger Associates, Inc.; David L. Babson & Co., Inc.; Bramwell Capital
Management, Inc.; Credit Suisse Asset Management, LLC; Davis Selected
Advisers, L.P.; EQSF Advisers, Inc.; Janus Capital Corporation;
Jennison Associates LLC; Lazard Asset Management; Marsico Capital
Management, LLC; Miller Anderson & Sherrerd, LLP; Montag & Caldwell,
Inc.; Neuberger Berman, LLC; Perkins, Wolf, McDonnell & Company;
Rowe-Price Fleming International, Inc.; T. Rowe Price Associates, Inc.;
and Wellington Management Company, LLP; the Advisers of certain of the
Portfolios of the Registrant, are primarily engaged in the business of
rendering investment advisory services. Reference is made to the recent
Form ADV and schedules thereto on file with the Commission for a
description of the names and employment of the directors and officers
of the following Advisers, and other required information:
<TABLE>
<CAPTION>
File No.
<S> <C>
American Century Investment Management, Inc. 801-08174
Berger Associates, Inc. 801-09451
David L. Babson & Co., Inc. 801-00241
Bramwell Capital Management, Inc. 801-46036
Credit Suisse Asset Management, LLC 801-37170
Davis Selected Advisers, L.P. 801-31648
EQSF Advisers, Inc. 801-27792
Janus Capital Corporation 801-13991
Jennison Associates LLC 801-05608
</TABLE>
C-5
<PAGE>
<TABLE>
<S> <C>
Lazard Asset Management 801-6568
Marsico Capital Management, LLC 801-54914
Miller Anderson & Sherrerd, LLP 801-10437
Montag & Caldwell, Inc. 801-15398
Neuberger Berman, LLC 801-03908
Perkins, Wolf, McDonnell & Company 801-19974
Rowe-Price Fleming International, Inc 801-14713
T. Rowe Price Associates, Inc. 801-00856
Thornburg Investment Management, Inc. 801-17853
Wellington Management Company, LLP 801-15908
</TABLE>
Reference is made to Post-Effective Amendment No. 26 to BT Investment
Funds' Registration Statement on Form N-1A (File No. 33-07404) filed
on October 26, 1998 for a description of the names and employment of
the directors and officers of Bankers Trust Company.
Item 27. Principal Underwriters
(a) The principal underwriter of the Registrant also acts as principal
underwriter for:
SunAmerica Income Funds
SunAmerica Money Market Funds, Inc.
SunAmerica Equity Funds
SunAmerica Strategic Investment Series, Inc.
(b) The following persons are the officers and directors of
SunAmerica Capital Services, Inc., the principal underwriter
of Registrant's Shares:
<TABLE>
<CAPTION>
Name and Principal
Business Address Position With Underwriter Position with the Registrant
------------------ ------------------------- ----------------------------
<S> <S> <C>
Peter A. Harbeck Director Director and President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
J. Steven Neamtz President and Director Vice President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Robert M. Zakem Executive Vice President, General Secretary and Chief Compliance
The SunAmerica Center Counsel and Director Officer
733 Third Avenue
New York, NY 10017-3204
Susan L. Harris Secretary None
SunAmerica, Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
</TABLE>
C-6
<PAGE>
<TABLE>
<S> <C> <C>
Debbie Potash-Turner Chief Financial Officer and None
The SunAmerica Center Controller
733 Third Avenue
New York, NY 10017-3204
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, and its affiliate, National Financial Data
Services, collectively, act as custodian, transfer agent and dividend
paying agent. They maintain books, records and accounts pursuant to the
instructions of the Fund.
SunAmerica is located at The SunAmerica Center, 733 Third Avenue, New
York, New York 10017-3204. SunAmerica has contracted with Callan
Associates, Inc. ("Callan") to compile historical performance data
relating to the Advisers, both individually and on a composite basis.
Registrant's records relating thereto are maintained by Callan. Callan
is located at 71 Stevenson Street, Suite 1300, San Francisco, CA 94105.
American Century Investment Management, Inc. is located at the
American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
Bankers Trust Company is located at 130 Liberty Street (One Bankers
Trust Plaza), New York 10006.
Berger Associates, Inc. is located at 210 University Boulevard, Suite
900, Denver, Colorado 80206.
David L. Babson & Co., Inc. is located at One Memorial Drive,
Cambridge, Massachusetts 02142-1300.
Bramwell Capital Management, Inc. is located at 745 Fifth Avenue, New
York, NY 10151.
Credit Suisse Asset Management, LLC is located at 466 Lexington Avenue,
New York, New York 10017-3147.
Davis Selected Advisers, L.P. is located at 124 East Marcy Street,
Santa Fe, New Mexico 87501.
EQSF Advisers, Inc. is located at 767 Third Avenue, New York, New York
10017.
Janus Capital Corporation is located at 100 Fillmore Street, Denver,
Colorado 80206-4923.
Jennison Associates LLC is located at 466 Lexington Avenue, New York,
NY 10017.
Lazard Asset Management is located at 30 Rockefeller Plaza, New York,
New York 10112.
Marsico Capital Management, LLC is located at 1200 17th Street, Suite
1300, Denver, CO 80202.
Miller Anderson & Sherrerd, LLP is located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428.
Montag & Caldwell, Inc. is located at 3343 Peachtree Road, NE, Suite
1100, Atlanta, Georgia 30326-1022.
Neuberger Berman, LLC is located at 605 Third Avenue, New York, New
York 10158-0180.
Perkins, Wolf, McDonnell & Company is located at 53 West Jackson
Boulevard, Suite 818, Chicago, Illinois 60604.
C-7
<PAGE>
Rowe Price-Fleming International, Inc. is located at 100 East Pratt
Street, Baltimore, Maryland 21202.
Thornburg Management Company, Inc. is located at 119 East Marcy Street,
Santa Fe, New Mexico 87501.
T. Rowe Price Associates, Inc. is located at 100 East Pratt Street,
Baltimore, Maryland 21202.
Wellington Management Company, LLP is located at 75 State Street,
Boston, Massachusetts 02109.
Each of the Advisers maintains the books, accounts and records required to be
maintained pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
(the "1933 Act") and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 19 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 1st day
of November, 1999.
Style Select Series, Inc.
By: /s/ Peter A. Harbeck
-------------------------
Peter A. Harbeck
President
Pursuant to the requirements of the 1933 Act, the Post-Effective
Amendment No. 19 to the Registrant's Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated:
<TABLE>
<S> <C> <C>
/s/ Peter A. Harbeck President and Director November 1, 1999
- ------------------------------------ (Principal Executive Officer)
Peter A. Harbeck
/s/ Peter C. Sutton Treasurer
- ------------------------------------ (Principal Financial and
Peter C. Sutton Accounting Officer)
* Director
- ------------------------------------
S. James Coppersmith
* Director
- ------------------------------------
Samuel M. Eisenstat
* Director
- ------------------------------------
Stephen J. Gutman
* Director
- ------------------------------------
Sebastiano Sterpa
*By: /s/ Robert M. Zakem November 1, 1999
- -----------------------------------
Attorney-in-Fact
Robert M. Zakem
</TABLE>
<PAGE>
Exhibit Index
Exhibit No. Name
- ----------- ----
(j) Opinion and Consent of Counsel
<PAGE>
[SAAMCO LETTERHEAD]
Gentlemen:
This opinion is being furnished in connection with the filing by Style
Select Series, Inc., a Maryland Corporation ("Corporation"), of Post-Effective
Amendment No. 19 (the "Amendment") to the Registration Statement on Form N-1A
(the "Registration Statement") which registers an indefinite number shares of
beneficial interest of each series of the Corporation, $.0001 par value, (the
"Shares") under the Securities Act of 1933, as amended (the "1933 Act"),
pursuant to the Corporation's Registration Statement.
I am familiar with the proceedings taken by the Corporation in connection
with the authorization, issuance and sale of the Shares. In addition, I have
examined the Corporation's Articles of Incorporation, By-Laws and such other
documents that have been deemed relevant to the matters referred to herein.
Based upon the foregoing, I am of the opinion that, the Shares registered
by the Amendment are legally issued, fully paid and nonassessable shares of
beneficial interest of the Corporation.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Amendment, and to the filing of this
opinion under the securities laws of any state.
Very truly yours,
/s/ Robert M. Zakem
Robert M. Zakem
