<PAGE>
April 1, 1999 Prospectus
STYLE SELECT SERIES(REGISTERED)
o LARGE-CAP GROWTH PORTFOLIO
o MID-CAP GROWTH PORTFOLIO
o AGGRESSIVE GROWTH PORTFOLIO
o LARGE-CAP VALUE PORTFOLIO
o VALUE PORTFOLIO
o SMALL-CAP VALUE PORTFOLIO
o FOCUS PORTFOLIO
o FOCUSED GROWTH AND INCOME PORTFOLIO
o INTERNATIONAL EQUITY 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>
<S> <C>
Table of Contents
FUND HIGHLIGHTS .................................................................... 2
FINANCIAL HIGHLIGHTS .............................................................. 18
SHAREHOLDER ACCOUNT INFORMATION ................................................... 23
MORE INFORMATION ABOUT THE PORTFOLIOS ............................................. 30
INVESTMENT STRATEGIES ......................................................... 30
GLOSSARY ...................................................................... 34
INVESTMENT TERMINOLOGY ................................................... 34
RISK TERMINOLOGY ......................................................... 36
FUND MANAGEMENT .......................................................... 37
INFORMATION ABOUT ADVISERS ........................................................ 38
</TABLE>
SUNAMERICA
MUTUAL
[LOGO] FUNDS
<PAGE>
Fund Highlights
The following questions and answers are designed to
give you an overview of Style Select Series, Inc.
(the "Fund"), and to provide you with information
about the Fund's separate Portfolios and their
investment goals, principal strategies, and
principal investment techniques. Each goal may be
changed without shareholder approval, although you
will receive notice of any change. There can be no
assurance that any Portfolio's investment goal will
be met or that the net return on an investment in a
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 Portfolios,"
which is on page 30, and the glossary that follows
on page 34.
Q:WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS,
STRATEGIES AND TECHNIQUES?
A:
STYLE-BASED PORTFOLIOS
<TABLE>
<CAPTION>
Principal Principal
Investment Investment Investment
Fund Goal Strategy Techniques
- --------------- ------------ ------------- -------------------------------------------------
<S> <C> <C> <C>
LARGE-CAP long-term growth invests primarily in equity securities
GROWTH growth of (including, when deemed appropriate, by active
PORTFOLIO capital trading) selected on the basis of growth
criteria, issued by large-cap companies
MID-CAP GROWTH long-term growth invests primarily in equity securities
PORTFOLIO growth of (including, when deemed appropriate, by active
capital trading) selected on the basis of growth
criteria, issued by mid-cap companies
AGGRESSIVE long-term growth invests primarily in equity securities
GROWTH growth of (including, when deemed appropriate, by active
PORTFOLIO capital trading) selected on the basis of growth
criteria, issued by large-cap or mid-cap
companies
LARGE-CAP VALUE long-term value invests primarily in equity securities
PORTFOLIO growth of (including, when deemed appropriate, by active
capital trading) selected on the basis of value criteria,
issued by large-cap companies
VALUE PORTFOLIO long-term value invests primarily in equity securities
growth of (including, when deemed appropriate, by active
capital trading) selected on the basis of value criteria,
issued by large-cap or mid-cap companies
SMALL-CAP VALUE long-term value invests primarily in equity securities
PORTFOLIO growth of (including, when deemed appropriate, by active
capital trading) selected on the basis of value criteria,
issued by small-cap companies
</TABLE>
STYLIZED PORTFOLIOS
<TABLE>
<S> <C> <C> <C>
FOCUS PORTFOLIO long-term focus invests (including, when deemed appropriate, by
growth of active trading) in equity securities, without
capital regard to market capitalization
FOCUSED GROWTH long-term growth, value invests primarily in equity securities
AND INCOME growth of and focus (including, when deemed appropriate, by active
PORTFOLIO capital and trading) selected to achieve a blend of growth
current companies, value companies and companies that the
income Advisers believe have elements of growth and
value, issued by large-cap companies. Each
Adviser may emphasize either a growth orientation
or a value orientation at any particular time.
INTERNATIONAL long-term international invests primarily in equity securities
EQUITY growth of (including, when deemed appropriate, by active
PORTFOLIO capital trading) and other securities with equity
characteristics of non-U.S. issuers located in at
least three countries other than the U.S. and
selected without regard to market capitalization
at the time of purchase
</TABLE>
- -------------------
A "STYLE-BASED" Portfolio follows a strict investment approach based either on
a "value" or a "growth" philosophy and on market capitalization.
A "STYLIZED" Portfolio may engage in value or growth investing, in any
proportion or combination.
A FOCUS strategy is one in which an Adviser actively invests in a small number
of its favorite stock-picking ideas at any given moment, and may include
elements of value investing and growth investing in any combination. 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 FOCUS PORTFOLIO Adviser will invest in ten stocks,
while each FOCUSED GROWTH AND INCOME PORTFOLIO Adviser may invest in up to 30
stocks.
A Portfolio engages in ACTIVE TRADING when it frequently trades its portfolio
securities to achieve its investment goal.
The "GROWTH" ORIENTED philosophy to which the Large-Cap Growth, Mid-Cap Growth,
Aggressive Growth, Focus, Focused Growth and Income and International Equity
Portfolios partly subscribe-that of investing in securities believed to offer
the potential for capital appreciation-focuses on securities considered to have
a historical record of above-average growth rate; to have significant growth
potential; to have above-average earnings growth or the ability to sustain
earnings growth; to offer proven or unusual products or services; or to operate
in industries experiencing increasing demand.
The "VALUE" ORIENTED philosophy to which the Large-Cap Value, Value, Small-Cap
Value, Focus, Focused Growth and Income and International Equity Portfolios
partly subscribe-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 selection criteria is usually calculated
to identify stocks of companies with solid financial strength that have low
price-earnings ratios and may have generally been overlooked by the market.
The strategy of "INTERNATIONAL" INVESTING that the International Equity
Portfolio follows involves investing in at least three countries outside of the
United States, and may incorporate, in any combination, elements of value
investing, growth investing, and country allocation.
"COUNTRY ALLOCATION" is an investment strategy by which an Adviser purchases
securities based on research involving investment opportunities in particular
countries or regions, as opposed to opportunities in particular industries or
types of stocks. This research may include, but is not limited to, data and
forecasts about general regional economic strength, political and economic
stability, and valuation of currency.
MARKET CAPITALIZATION represents the total market value of the outstanding
securities of a corporation.
-------------------
2
<PAGE>
Companies are determined to be large-cap companies, mid-cap companies, or
small-cap companies based upon the market capitalization ranges prescribed by
the Style Box categories designed by Morningstar, Inc. Morningstar, Inc. may
change the Style Box market capitalization ranges over time as market conditions
and broad market valuations vary. Generally, these market capitalization ranges
are as follows: $1.2 billion or less for the Small-Cap category; between
$1.2 billion and $8.3 billion for the Mid-Cap category; and $8.3 billion or more
for the Large-Cap category. Under normal circumstances, at least 65% of the
total assets of each Portfolio will be invested in companies with market
capitalizations within the Portfolio's applicable range. Also, the median market
capitalization of the companies within each Portfolio will fall within its
applicable range.
With the exception of the International Equity Portfolio and Focused Growth and
Income Portfolio, each of which has two different professional Advisers, each
Portfolio provides investors with access to three different professional
Advisers, each with a distinct investment methodology within a particular
investment style. Each Adviser manages a separate portion of a Portfolio.
SunAmerica will initially allocate the assets of each 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.
With respect to each Portfolio except the Focus Portfolio, SunAmerica intends,
on a quarterly basis, to review the asset allocation in each 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 re-allocate cash flows among the Advisers, differently from
the manner described above, in an effort to effect a re-balancing of the
Portfolio's asset allocation. SunAmerica does not intend, but 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.
With respect to the Focus Portfolio, in general, SunAmerica will not rebalance
or reallocate the assets of the Portfolio among Advisers. However, 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, 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.
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS?
A: The following section describes the principal risks of each Portfolio, while
the chart on page 30 describes various additional risks.
RISKS OF INVESTING IN EQUITY SECURITIES
All of the Portfolios invest primarily in equity securities. As with any equity
fund, the value of your investment in any of these Portfolios 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 well under circumstances in which
"growth" stocks in general have fallen. In addition, individual stocks selected
for any of these Portfolios may underperform the market generally.
RISKS OF NON-DIVERSIFICATION
Each 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.
ADDITIONAL PRINCIPAL RISKS
Shares of the Portfolios are not bank deposits and are not guaranteed or insured
by any bank or SunAmerica or SunAmerica's affiliates, government entity or the
Federal Deposit Insurance Corporation. As with any mutual fund, there is no
guarantee that a Portfolio will be able to achieve its investment goals. If the
value of the assets of a Portfolio goes down, you could lose money.
ADDITIONAL RISKS SPECIFIC TO THE MID-CAP GROWTH PORTFOLIO
Stocks of smaller companies may be more volatile than, and not as readily
marketable as, those of larger companies. The Mid-Cap Growth Portfolio may be
riskier than the Large-Cap Growth, Focused Growth and Income or Large-Cap Value
Portfolios.
ADDITIONAL RISKS SPECIFIC TO THE AGGRESSIVE GROWTH PORTFOLIO AND SMALL-CAP VALUE
PORTFOLIO
Stocks of smaller companies may be more volatile than, and not as readily
marketable as, those of larger companies. These Portfolios may be riskier than
the Large-Cap Growth, Mid-Cap Growth, Focused Growth and Income or Large-Cap
Value Portfolios.
ADDITIONAL RISKS SPECIFIC TO THE INTERNATIONAL EQUITY PORTFOLIO
While investing internationally may reduce your risk by increasing the
diversification of your overall portfolio, the value of your investment may be
affected by fluctuating currency values, changing local and regional economic,
political and social conditions, and greater market volatility, and, in
addition, foreign securities may not be as liquid as domestic securities.
Q: HOW HAVE THE PORTFOLIOS PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Portfolios by showing changes in the Portfolios'
performance from calendar year to calendar year, and compare the Portfolios'
average annual returns to those of an appropriate market index. Sales
charges are not reflected in the bar chart. If these amounts were reflected,
returns would be less than those shown. Of course, past performance is not
necessarily an indication of how a Portfolio will perform in the future. The
Focus Portfolio has not been in operation for a full calendar year.
-------------------
3
<PAGE>
FUND HIGHLIGHTS
LARGE-CAP GROWTH PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5%
-------------------------------------------------------
0%
-5% 29.80%
-10%
-15%
-20%
-25%
-30%
'98
During the period shown in the bar chart, the highest return for a quarter was
25.42% (quarter ended 12/31/98) and the lowest return for a quarter was -11.64%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1998) Year Inception****
<S> <C> <C> <C>
Large-Cap Growth Portfolio* Class A 23.28% 15.72%
Class B 25.80% 17.48%
Class II 27.53% 19.60%
Russell 1000 Index** 38.71% 32.66%
Morningstar Large-Cap Growth Category*** 35.99% 27.28%
</TABLE>
* Includes sales charges.
** The Russell 1000(Registered) Index measures the performance of the 1,000
largest companies in the Russell 3000 Index, which represents approximately
89% of the total market capitalization of the Russell 3000 Index. As of the
latest reconstitution, the average market capitalization was approximately
$9.9 billion; the median market capitalization was approximately $3.7
billion. The smallest company in the index had an approximate market
capitalization of $1,404.7 million.
*** Developed by Morningstar, the Morningstar Large-Cap Growth Category
currently reflects a group of 223 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A, B and C shares commenced offering on October 15, 1997. On
December 1, 1998, the Class C shares were redesignated Class II shares.
- -------------------
4
<PAGE>
MID-CAP GROWTH PORTFOLIO (CLASS B)
35%
30%
25% 21.33%
20%
15% 13.29%
10%
5%
-----------------------------------------------------
0
-5%
-10%
-15%
-20%
-25%
-30%
'97 '98
During the period shown in the bar chart, the highest return for a quarter was
28.41% (quarter ended 12/31/98) and the lowest return for a quarter was -18.25%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Return Since Inception****
---------------------------------------------------
Average Annual Total Returns Morningstar
(as of the calendar year Past One Russell Mid- Mid-Cap Growth
ended December 31, 1998) Year Fund Cap Index** Category***
<S> <C> <C> <C> <C> <C>
Mid-Cap Growth Portfolio* Class A 15.24% 13.09% 18.97% 17.16%
Class B 17.33% 13.90% 18.97% 17.16%
Class II 19.18% 20.72% 22.34% 20.18%
Russell Mid-Cap Index** 17.03% N/A See Above
Morningstar Mid-Cap Growth Category*** 19.35% N/A See Above
</TABLE>
* Includes sales charges.
** Russell Midcap(Trademark) Index measures the performance of the 800 smallest
companies in the Russell 1000 Index, which represents approximately 35% of
the total market capitalization of the Russell 1000 Index. As of the latest
reconstitution, the average market capitalization was approximately
$3.7 billion; the median market capitalization was approximately
$2.9 billion. The largest company in the index had an approximate market
capitalization of $10.3 billion.
*** Developed by Morningstar, the Morningstar Mid-Cap Growth Category currently
reflects a group of 173 mutual funds that have portfolios with median
market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A and B shares commenced offering on November 19, 1996. Class C
shares, which were redesignated Class II shares on December 1, 1998,
commenced offering on March 6, 1997.
-------------------
5
<PAGE>
FUND HIGHLIGHTS
AGGRESSIVE GROWTH PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5%
--------------------------------------------------------
0 23.87% 30.58%
-5%
-10%
-15%
-20%
-25%
-30%
'97 '98
During the period shown in the bar chart, the highest return for a quarter was
32.67% (quarter ended 12/31/98) and the lowest return for a quarter was -15.85%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Return Since Inception****
---------------------------------------------------
Average Annual Total Returns Morningstar
(as of the calendar year ended Past One Russell 2500 Aggressive Growth
December 31, 1998) Year Fund Growth Index** Category***
<S> <C> <C> <C> <C> <C>
Aggressive Growth Portfolio* Class A 23.99% 24.73% 12.79% 13.92%
Class B 26.58% 25.96% 12.79% 13.92%
Class II 28.27% 26.92% 15.00% 16.33%
Russell 2500 Growth Index** 9.84% N/A See Above
Morningstar Aggressive Growth Category*** 13.53% N/A See Above
</TABLE>
* Includes sales charges.
** The Russell 2500(Trademark) Growth Index measures the performance of those
Russell 2500 companies with higher price-to-book ratios and higher
forecasted growth values.
*** Developed by Morningstar, the Morningstar Aggressive Growth Category
currently reflects a group of 123 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A and B shares commenced offering on November 19, 1996. Class C
shares, which were redesignated Class II shares on December 1, 1998,
commenced offering on March 6, 1997.
- -------------------
6
<PAGE>
Fund Highlights
LARGE-CAP VALUE PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5%
--------------------------------------
0
-5% 8.06%
-10%
-15%
-20%
-25%
-30%
'98
During the period shown in the bar chart, the highest return for a quarter was
14.88% (quarter ended 12/31/98) and the lowest return for a quarter was -13.83%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1998) Year Inception****
<S> <C> <C> <C>
Large-Cap Value Portfolio* Class A 2.48% 0.35%
Class B 4.06% 1.42%
Class II 5.98% 3.84%
Russell 1000 Value Index** 15.43% 16.72%
Morningstar Large-Cap Value Category*** 12.69% 11.06%
</TABLE>
* Includes sales charges.
** The Russell 1000(Registered) Value Index measures the performance of those
Russell 1000 companies with lower price-to-book ratios and lower forecasted
growth values.
*** Developed by Morningstar, the Morningstar Large-Cap Value Category
currently reflects a group of 263 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A, B and C shares commenced offering on October 15, 1997. On
December 1, 1998, the Class C shares were redesignated Class II shares.
- -------------------
7
<PAGE>
VALUE PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5%
------------------------------------------
0
-5% 28.67% -0.57%
-10%
-15%
-20%
-25%
-30%
'97 '98
During the period shown in the bar chart, the highest return for a quarter was
16.51% (quarter ended 12/31/98) and the lowest return for a quarter was -18.66%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Return Since Inception****
------------------------------------------------
Average Annual Total Returns Russell Morningstar
(as of the calendar year Past One Midcap Value Mid-Cap
ended December 31, 1998) Year Fund Index** Value Category***
<S> <C> <C> <C> <C> <C>
Value Portfolio* Class A -5.69% 11.04% 14.13% 14.05%
Class B -4.57% 11.84% 14.13% 14.05%
Class II -2.56% 10.16% 16.58% 16.49%
Russell Midcap Value Index** 1.32% N/A See Above
Morningstar Mid-Cap Value Category*** 1.12% N/A See Above
</TABLE>
* Includes sales charges.
** The Russell Midcap(Trademark) Value Index measures the performance of those
Russell Midcap companies with lower price-to-book ratios and lower
forecasted growth values. The stocks are also members of the Russell 1000
Value Index.
*** Developed by Morningstar, the Morningstar Mid-Cap Value Category currently
reflects a group of 141 mutual funds that have portfolios with median
market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A and B shares commenced offering on November 19, 1996. Class C
shares, which were redesignated Class II shares on December 1, 1998,
commenced offering on March 6, 1997.
-------------------
8
<PAGE>
FUND HIGHLIGHTS
SMALL-CAP VALUE PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5% -7.41%
------------------------------------------
0
-5%
-10%
-15%
-20%
-25%
-30%
'98
During the period shown in the bar chart, the highest return for a quarter was
14.06% (quarter ended 12/31/98) and the lowest return for a quarter was -19.98%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1998) Year Inception****
<S> <C> <C> <C>
Small-Cap Value Portfolio* Class A -12.09% -10.28%
Class B -11.41% -9.83%
Class II -9.26% -7.18%
Russell 2000 Value Index** -6.45% -4.05%
Morningstar Small-Cap Value Category*** -6.28% -7.24%
</TABLE>
* Includes sales charges.
** The Russell 2000 Value Index is a widely-recognized, capitalization-weighted
(companies with larger market capitalizations have more influence than those
with smaller market capitalizations) index of the 2,000 smallest companies
out of the 3,000 largest U.S. companies with lower growth rates and
price-to-book ratios.
*** Developed by Morningstar, the Morningstar Small-Cap Value Category
currently reflects a group of 180 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A, B and C shares commenced offering on October 15, 1997. On December
1, 1998, the Class C shares were redesignated Class II shares.
- -------------------
9
<PAGE>
FOCUSED GROWTH AND INCOME PORTFOLIO* (CLASS B)
35%
30%
25%
20%
15%
10%
5%
---------------------------------------------
0
-5% 12.38%
-10%
-15%
-20%
-25%
-30%
'98
During the period shown in the bar chart, the highest return for a quarter was
18.70% (quarter ended 12/31/98) and the lowest return for a quarter was -13.91%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1998) Year Inception*****
<S> <C> <C> <C>
Focused Growth and Income Portfolio** Class A 6.60% 6.46%
Class B 8.38% 7.82%
Class II 10.26% 10.15%
S&P 500 Index*** 28.57% 25.97%
Morningstar Large-Cap Blend Category**** 21.74% 18.74%
</TABLE>
* The Portfolio's performance set forth above constitutes the performance of
the predecessor investment managers to the ones currently managing the
Portfolio, Marsico Capital Management, LLC and SunAmerica Asset Management
Corp.
** Includes sales charges.
*** The S&P 500(Registered) is the Standard & Poor's 500 Composite Stock Price
Index, a widely recognized, unmanaged index of common stock prices.
**** Developed by Morningstar, the Morningstar Large-Cap Blend Category
currently reflects a group of 429 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book
ratios similar to those of the Portfolio.
***** Class A, B and C shares commenced offering on October 15, 1997. On
December 1, 1998, the Class C shares were redesignated Class II shares.
-------------------
10
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO (CLASS B)
35%
30%
25%
20%
15%
10%
5% -3.47%
------------------------------------------
0% 9.60%
-5%
-10%
-15%
-20%
-25%
-30%
'97 '98
During the period shown in the bar chart, the highest return for a quarter was
15.22% (quarter ended 12/31/98) and the lowest return for a quarter was -16.47%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Return Since Inception****
-------------------------------------
Average Annual Total Returns MSCI Morningstar
(as of the calendar year Past One EAFE Foreign Stock
ended December 31, 1998) Year Fund Index** Category***
<S> <C> <C> <C> <C> <C>
International Equity Portfolio* Class A 3.93% 0.73% 10.37% 9.13%
Class B 5.60% 1.04% 10.37% 9.13%
Class II 7.51% 2.35% 12.13% 10.67%
MSCI EAFE Index** 10.56% N/A See Above
Morningstar Foreign Stock Category*** 12.21% N/A See Above
</TABLE>
* Includes sales charges.
** The MSCI EAFE Index consists of foreign companies located in developed
markets of 21 different countries of Europe, Australia, Asia and the Far
East.
*** Developed by Morningstar, the Morningstar Foreign Stock Category currently
reflects a group of 302 mutual funds that have portfolios with median
market capitalizations, price/earnings ratios, and price/book ratios
similar to those of the Portfolio.
**** Class A and B shares commenced offering on November 19, 1996. Class C
shares, which were redesignated Class II shares on December 1, 1998,
commenced offering on March 6, 1997.
-------------------
11
<PAGE>
FUND HIGHLIGHTS
Q: WHAT ARE THE PORTFOLIOS' EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Portfolios.
<TABLE>
<CAPTION>
Large-Cap Growth Mid-Cap Growth
Portfolio Portfolio
-------------------------------- --------------------
Class A Class B Class II Class A Class B
-------- -------- -------- -------- --------
<S> <C> <C> <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% 5.75% None
Maximum Deferred Sales Charge (Load) (as a percentage of
amount redeemed)(2)......................................... None 4.00% 1.00% None 4.00%
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends................................................... None None None None None
Redemption Fee(3)........................................... None None None None None
Exchange Fee................................................ None None None None None
Maximum Account Fee......................................... None None None None None
Annual Fund Operating Expenses (expenses that are deducted from
Fund assets)
Management Fees............................................. 1.00% 1.00% 1.00% 1.00% 1.00%
Distribution (12b-1) Fees(4)................................ 0.35% 1.00% 1.00% 0.35% 1.00%
Other Expenses.............................................. 1.15% 1.23% 1.85% 0.73% 0.76%
---- ---- ---- ---- ----
Total Annual Fund Operating Expenses........................... 2.50% 3.23% 3.85% 2.08% 2.76%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Expense Reimbursement.......................................... 0.72% 0.80% 1.42% 0.30% 0.33%
Net Expenses(5)................................................ 1.78% 2.43% 2.43% 1.78% 2.43%
<CAPTION>
Class II
--------
<S> <C>
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)(1)............................ 1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of
amount redeemed)(2)......................................... 1.00%
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends................................................... None
Redemption Fee(3)........................................... None
Exchange Fee................................................ None
Maximum Account Fee......................................... None
Annual Fund Operating Expenses (expenses that are deducted from
Fund assets)
Management Fees............................................. 1.00%
Distribution (12b-1) Fees(4)................................ 1.00%
Other Expenses.............................................. 0.82%
----
Total Annual Fund Operating Expenses........................... 2.82%
----
----
Expense Reimbursement(5)....................................... 0.39%
Net Expenses................................................... 2.43%
</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 one year 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.
(3) A $15.00 fee may be imposed on wire redemptions.
(4) Because these fees are paid out of a 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) The Board of Directors, including a majority of the Independent
Directors, approved the Investment Advisory and Management Agreement
subject to the net expense ratio 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.
- -------------------
12
<PAGE>
<TABLE>
<CAPTION>
Agressive Growth Large-Cap Value
Portfolio Portfolio
- -------------------------------- --------------------------------
Class A Class B Class II Class A Class B Class II
- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
%
5.75 None 1.00% 5.75% None 1.00%
None 4.00% 1.00% None 4.00% 1.00%
None None None None None None
None None None None None None
None None None None None None
None None None None None None
1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
0.70% 0.71% 0.87% 1.10% 1.04% 1.57%
---- ---- ---- ---- ---- ----
2.05% 2.71% 2.87% 2.45% 3.04% 3.57%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
0.27% 0.28% 0.44% 0.67% 0.61% 1.14%
1.78% 2.43% 2.43% 1.78% 2.43% 2.43%
</TABLE>
-------------------
13
<PAGE>
FUND HIGHLIGHTS
<TABLE>
<CAPTION>
Small-Cap
Value
Value Portfolio Portfolio
-------------------------------- --------
Class A Class B Class II Class A
-------- -------- -------- --------
<S> <C> <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% 5.75%
Maximum Deferred Sales Charge (Load) (as a percentage of
amount redeemed)(2)........................................................... None 4.00% 1.00% None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends..................................................................... None None None None
Redemption Fee(3)............................................................. None None None None
Exchange Fee.................................................................. None None None None
Maximum Account Fee........................................................... None None None None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees............................................................... 1.00% 1.00% 1.00% 1.00%
Distribution (12b-1) Fees(4).................................................. 0.35% 1.00% 1.00% 0.35%
Other Expenses................................................................ 0.60% 0.62% 0.64% 1.09%
---- ---- ---- ----
Total Annual Fund Operating Expenses............................................. 1.95% 2.62% 2.64% 2.44%
---- ---- ---- ----
---- ---- ---- ----
Expense Reimbursement............................................................ 0.17% 0.19% 0.21% 0.66%
Net Expenses(6).................................................................. 1.78% 2.43% 2.43% 1.78%
<CAPTION>
Class B Class II
-------- --------
<S> <C> <C>
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases (as a
percentage of offering price)(1).............................................. None 1.00%
Maximum Deferred Sales Charge (Load) (as a percentage of
amount redeemed)(2)........................................................... 4.00% 1.00%
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends..................................................................... None None
Redemption Fee(3)............................................................. None None
Exchange Fee.................................................................. None None
Maximum Account Fee........................................................... None None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees............................................................... 1.00% 1.00%
Distribution (12b-1) Fees(4).................................................. 1.00% 1.00%
Other Expenses................................................................ 1.05% 1.48%
---- ----
Total Annual Fund Operating Expenses............................................. 3.05% 3.48%
---- ----
---- ----
Expense Reimbursement............................................................ 0.62% 1.05%
Net Expenses(6).................................................................. 2.43% 2.43%
</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 one year 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.
(3) A $15.00 fee may be imposed on wire redemptions.
(4) Because these fees are paid out of a 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) The expense reimbursements are estimated based upon the prior fiscal
year end.
(6) The Board of Directors, including a majority of the Independent Directors,
approved the Investment Advisory and Management Agreement subject to the net
expense ratio 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.
- -------------------
14
<PAGE>
<TABLE>
<CAPTION>
Focused Growth International Equity Portfolio
Focus Portfolio and Income Portfolio
- -------------------------------- -------------------------------- --------------------------------
Class A Class B Class II Class A Class B Class II Class A Class B Class II
- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5.75% None 1.00% 5.75% None 1.00% 5.75% None 1.00%
None 4.00% 1.00% None 4.00% 1.00% None 4.00% 1.00%
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
None None None None None None None None None
0.85% 0.85% 0.85% 1.00% 1.00% 1.00% 1.10% 1.10% 1.10%
0.35% 1.00% 1.00% 0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
0.57% 0.57% 0.57% 1.05% 1.10% 2.54% 1.03% 1.06% 1.13%
---- ---- ---- ---- ---- ---- ---- ---- ----
1.77% 2.42% 2.42% 3.10% 2.40% 4.54% 2.48% 3.16% 3.23%
---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ----
0.32% 0.32% 0.32% 0.95%(5) 1.00%(5) 2.44%(5) 0.45% 0.48% 0.55%
1.45% 2.10% 2.10% 1.45% 2.10% 2.10% 2.03% 2.68% 2.68%
</TABLE>
-------------------
15
<PAGE>
FUND HIGHLIGHTS
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes 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 5 years 10 years
<S> <C> <C> <C> <C>
LARGE-CAP GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $$2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
MID-CAP GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $ 2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
AGGRESSIVE GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $ 2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
LARGE-CAP VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $ 2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $ 2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
SMALL-CAP VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 646 $1,058 $1,496 $ 2,531
(Class II shares)................................... $ 444 $ 850 $1,383 $ 2,839
FOCUS PORTFOLIO
(Class A shares).................................... $ 714 $1,007 $1,322 $ 2,210
(Class B shares)*................................... $ 613 $ 958 $1,329 $ 2,188
(Class II shares)................................... $ 411 $ 751 $1,218 $ 2,507
FOCUSED GROWTH AND INCOME PORTFOLIO
(Class A shares).................................... $ 714 $1,007 $1,322 $ 2,210
(Class B shares)*................................... $ 613 $ 958 $1,329 $ 2,188
(Class II shares)................................... $ 411 $ 751 $1,218 $ 2,507
INTERNATIONAL EQUITY PORTFOLIO
(Class A shares).................................... $ 769 $1,175 $1,605 $ 2,798
(Class B shares)*................................... $ 671 $1,132 $1,620 $ 2,783
(Class II shares)................................... $ 468 $ 924 $1,506 $ 3,082
</TABLE>
- -------------------
16
<PAGE>
If you did not redeem your shares:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
LARGE-CAP GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
MID-CAP GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
AGGRESSIVE GROWTH PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
LARGE-CAP VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
SMALL-CAP VALUE PORTFOLIO
(Class A shares).................................... $ 745 $1,103 $1,484 $ 2,549
(Class B shares)*................................... $ 246 $ 758 $1,296 $ 2,531
(Class II shares)................................... $ 344 $ 850 $1,383 $ 2,839
FOCUS PORTFOLIO
(Class A shares).................................... $ 714 $1,017 $1,322 $ 2,210
(Class B shares)*................................... $ 213 $ 668 $1,129 $ 2,188
(Class II shares)................................... $ 311 $ 751 $1,218 $ 2,507
FOCUSED GROWTH AND INCOME PORTFOLIO
(Class A shares).................................... $ 714 $1,017 $1,322 $ 2,210
(Class B shares)*................................... $ 213 $ 668 $1,129 $ 2,188
(Class II shares)................................... $ 311 $ 751 $1,218 $ 2,507
INTERNATIONAL EQUITY PORTFOLIO
(Class A shares).................................... $ 769 $1,175 $1,605 $ 2,798
(Class B shares)*................................... $ 271 $ 832 $1,420 $ 2,783
(Class II shares)................................... $ 368 $ 924 $1,506 $ 3,082
</TABLE>
- -------------------------------------
* Class B shares convert to Class A shares approximately seven years after
purchase. Therefore, expense information for years 8, 9 and 10 is the same
for both Class A and B shares.
-------------------
17
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights table for each Portfolio is intended to help you
understand the Portfolio's financial performance since inception. Certain
information reflects financial results for a single Fund share. The total
returns in each table represent the rate that an investor would have earned (or
lost) on an investment in a Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with each Portfolio's financial statements, are
included in the Fund's annual report to shareholders, which is available upon
request.
LARGE CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 12.50 $ -- $(0.71) $ (0.71) $ -- $ -- $ -- $ 11.79 (5.68)%
10/31/98.... 11.79 (0.11) 2.05 1.94 (0.01) $ -- (0.01) 13.72 16.42
CLASS B
-------
10/15/97-
10/31/97.... 12.50 $ -- (0.71) (0.71) $ -- $ -- $ -- 11.79 (5.68)
10/31/98.... 11.79 (0.21) 2.04 1.83 $ -- $ -- $ -- 13.62 15.54
CLASS C
-------
10/15/97-
10/31/97.... 12.50 $ -- (0.72) (0.72) $ -- $ -- $ -- 11.78 (5.76)
10/31/98.... 11.78 (0.20) 2.04 1.84 $ -- $ -- $ -- 13.62 15.64
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 23,609 1.78%(3) 0.34%(3) 1%
10/31/98.... 14,390 1.78 (0.90) 30
CLASS B
-------
10/15/97-
10/31/97.... 773 2.43(3) (0.84)(3) 1
10/31/98.... 26,125 2.43 (1.54) 30
CLASS C
-------
10/15/97-
10/31/97.... 166 2.43(3) (0.42)(3) 1
10/31/98.... 7,317 2.43 (1.54) 30
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Large-Cap Growth A........................... 0.59% 0.72%
Large-Cap Growth B........................... 1.53 0.80
Large-Cap Growth C........................... 3.29 1.42
</TABLE>
- --------------------------------------------------------------------------------
MID-CAP GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 12.50 $ (0.16) $ 1.37 $ 1.21 $ -- $ -- $ -- $ 13.71 9.68%
10/31/98.... 13.71 (0.18) 1.07 0.89 $ -- $ -- $ -- 14.60 6.49
CLASS B
-------
11/19/96-
10/31/97.... 12.50 (0.25) 1.38 1.13 $ -- $ -- $ -- 13.63 9.04
10/31/98.... 13.63 (0.27) 1.06 0.79 $ -- $ -- $ -- 14.42 5.80
<CAPTION>
CLASS C
-------
3/06/97-
10/31/97.... 11.93 (0.18) 1.89 1.71 $ -- $ -- $ -- 13.64 14.33
10/31/98.... 13.64 (0.27) 1.06 0.79 $ -- $ -- $ -- 14.43 5.79
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 18,404 1.85%(3) (1.19)%(3) 97%
10/31/98.... 32,115 1.78 (1.19) 135
CLASS B
-------
11/19/96-
10/31/97.... 35,739 2.47(3) (1.92)(3) 97
10/31/98.... 58,555 2.43 (1.84) 135
CLASS C
-------
3/06/97-
10/31/97.... 4,685 2.45(3) (1.97)(3) 97
10/31/98.... 9,482 2.43 (1.84) 135
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Mid-Cap Growth A..................... 0.34% 0.30%
Mid-Cap Growth B..................... 0.42% 0.33%
Mid-Cap Growth C..................... 0.96% 0.39%
</TABLE>
- -------------------
18
<PAGE>
AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS) (1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN (2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 12.50 $ (0.11) $ 3.51 $ 3.40 $ -- $ -- $ -- $ 15.90 27.20%
10/31/98.... 15.90 (0.16) 0.87 0.71 $ -- (0.11) (0.11) 16.50 4.55
CLASS B
-------
11/19/96-
10/31/97.... 12.50 (0.24) 3.54 3.30 $ -- $ -- $ -- 15.80 26.40
10/31/98.... 15.80 (0.27) 0.87 0.60 $ -- (0.11) (0.11) 16.29 3.87
<CAPTION>
CLASS C
-------
3/06/97-
10/31/97.... 13.38 (0.17) 2.59 2.42 $ -- $ -- $ -- 15.80 18.09
10/31/98.... 15.80 (0.27) 0.88 0.61 $ -- (0.11) (0.11) 16.30 3.94
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 38,537 1.84%(3) (0.77)%(3) 150%
10/31/98.... 55,925 1.78 (0.95) 142
CLASS B
-------
11/19/96-
10/31/97.... 48,594 2.47(3) (1.58)(3) 150
10/31/98.... 74,998 2.43 (1.60) 142
CLASS C
-------
3/06/97-
10/31/97.... 5,939 2.45(3) (1.68)(3) 150
10/31/98.... 10,568 2.43 (1.60) 142
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Aggressive Growth A.................. 0.26% 0.27%
Aggressive Growth B.................. 0.32% 0.28%
Aggressive Growth C.................. 0.73% 0.44%
</TABLE>
- --------------------------------------------------------------------------------
LARGE-CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 12.50 $ 0.01 $(0.65) $ (0.64) $ -- $ -- $ -- $ 11.86 (5.12)%
10/31/98.... 11.86 0.03 0.71 0.74 (0.01) $ -- (0.01) 12.59 6.22
CLASS B
-------
10/15/97-
10/31/97.... 12.50 $ -- (0.64) (0.64) $ -- $ -- $ -- 11.86 (5.12)
10/31/98.... 11.86 (0.04) 0.69 0.65 $ -- $ -- $ -- 12.51 5.52
CLASS C
-------
10/15/97-
10/31/97.... 12.50 $ -- (0.64) (0.64) $ -- $ -- $ -- 11.86 (5.12)
10/31/98.... 11.86 (0.04) 0.69 0.65 $ -- $ -- $ -- 12.51 5.52
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 23,240 1.78%(3) 1.07%(3) --%
10/31/98.... 12,921 1.78 0.22 37
CLASS B
-------
10/15/97-
10/31/97.... 1,325 2.43(3) 0.22(3) --
10/31/98.... 28,149 2.43 (0.34) 37
CLASS C
-------
10/15/97-
10/31/97.... 172 2.43(3) 0.53(3) --
10/31/98.... 5,823 2.43 (0.31) 37
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Large-Cap Value A.................... 0.58% 0.67%
Large-Cap Value B.................... 1.16 0.61
Large-Cap Value C.................... 3.22 1.14
</TABLE>
-------------------
19
<PAGE>
FINANCIAL HIGHLIGHTS
VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 12.50 $ -- $ 3.59 $ 3.59 $ -- $ -- $ -- $ 16.09 28.72%
10/31/98.... 16.09 $ -- (0.51) (0.51) $ -- (0.59) (0.59) 14.99 (3.32)
CLASS B
-------
11/19/96-
10/31/97.... 12.50 (0.11) 3.61 3.50 $ -- $ -- $ -- 16.00 28.00
10/31/98.... 16.00 (0.10) (0.50) (0.60) $ -- (0.59) (0.59) 14.81 (3.92)
CLASS C
-------
03/06/97-
10/31/97.... 13.56 (0.08) 2.52 2.44 $ -- $ -- $ -- 16.00 17.99
10/31/98.... 16.00 (0.11) (0.49) (0.60) $ -- (0.59) (0.59) 14.81 (3.92)
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 48,377 1.84%(3) --%(3) 48%
10/31/98.... 71,116 1.78 (0.01) 69
CLASS B
-------
11/19/96-
10/31/97.... 77,534 2.46(3) (0.74)(3) 48
10/31/98.... 111,030 2.43 (0.66) 69
CLASS C
-------
03/06/97-
10/31/97.... 9,384 2.45(3) (0.78)(3) 48
10/31/98.... 15,260 2.43 (0.66) 69
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Value A...................................... 0.28% 0.17%
Value B...................................... 0.34% 0.19%
Value C...................................... 0.63% 0.21%
</TABLE>
- --------------------------------------------------------------------------------
SMALL-CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 12.50 $ 0.01 $(0.37) $ (0.36) $ -- $ -- $ -- $ 12.14 (2.88)%
10/31/98.... 12.14 0.05 (1.36) (1.31) (0.01) $ -- (0.01) 10.82 (10.79)
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... 12.50 0.01 (0.38) (0.37) $ -- $ -- $ -- 12.13 (2.96)
10/31/98.... 12.13 (0.05) (1.33) (1.38) (0.01) $ -- (0.01) 10.74 (11.40)
<CAPTION>
CLASS C
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... 12.50 0.01 (0.37) (0.36) $ -- $ -- $ -- 12.14 (2.88)
10/31/98.... 12.14 (0.06) (1.33) (1.39) (0.01) $ -- (0.01) 10.74 (11.47)
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 21,346 1.78%(3) 2.57%(3) --%
10/31/98.... 15,051 1.78 0.42 50
CLASS B
-------
10/15/97-
10/31/97.... 3,112 2.43(3) 1.75(3) --
10/31/98.... 25,954 2.43 (0.44) 50
CLASS C
-------
10/15/97-
10/31/97.... 525 2.43(3) 1.75(3) --
10/31/98.... 5,968 2.43 (0.48) 50
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Small-Cap Value A............................ 0.57% 0.66%
Small-Cap Value B............................ 0.74 0.62
Small-Cap Value C............................ 1.42 1.05
</TABLE>
- -------------------
20
<PAGE>
FOCUS PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
06/08/98-
10/31/98.... $ 12.50 $ (0.01) $ 0.11 $ 0.10 $ -- $ -- $ -- $ 12.60 0.80%
<CAPTION>
CLASS B
-------
06/08/98--
10/31/98.... 12.50 (0.04) 0.10 0.06 $ -- $ -- $ -- 12.56 0.48
<CAPTION>
CLASS C
-------
06/08/98--
10/31/98.... 12.50 (0.04) 0.10 0.06 $ -- $ -- $ -- 12.56 0.48
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
06/08/98-
10/31/98.... $ 29,770 1.45%(3) (0.21)%(3) 106%
CLASS B
-------
06/08/98--
10/31/98.... 45,817 2.10(3) (0.92)%(3) 106
CLASS C
-------
06/08/98--
10/31/98.... 35,387 2.10(3) (0.93)%(3) 106
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97
--------
<S> <C>
Focus A...................................... 0.32%
Focus B...................................... 0.32%
Focus II..................................... 0.32%
</TABLE>
- --------------------------------------------------------------------------------
FOCUSED GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 12.50 $ 0.01 $(0.53) $ (0.52) $ -- $ -- $ -- $ 11.98 (4.16)%
10/31/98.... 11.98 0.03 1.04 1.07 (0.01) $ -- (0.01) 13.04 8.95
CLASS B
-------
10/15/97-
10/31/97.... 12.5 -- (0.54) (0.54) $ -- $ -- $ -- 11.96 (4.24)
10/31/98.... 11.96 (0.07) 1.8 1.01 (0.01) $ -- (0.01) 12.96 8.43
CLASS C
-------
10/15/97-
10/31/98.... 12.50 -- (0.53) (0.53) $ -- $ -- $ -- 11.97 (4.24)
10/31/98.... 11.97 (0.07) 1.06 0.99 (0.01) $ -- (0.01) 12.95 8.26
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
10/15/97-
10/31/97.... $ 23,593 1.78%(3) 1.35%(3) 2%
10/31/98.... 9,799 1.78 0.22 98
CLASS B
-------
10/15/97-
10/31/97.... 941 2.43(3) 0.29(3) 2
10/31/98.... 16,157 2.43 (0.52) 98
CLASS C
-------
10/15/97-
10/31/98.... 143 2.43 0.54(3) 2
10/31/98.... 2,490 2.43 (0.53) 98
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Focused Growth and Income A.................. 0.58% 0.62%
Focused Growth and Income B.................. 1.26 0.67
Focused Growth and Income C.................. 3.12 2.11
</TABLE>
-------------------
21
<PAGE>
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ------------ --------- ------ ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 12.50 $ 0.01 $(0.05) $ (0.04) $ -- $ -- $ -- $ 12.46 (0.32)%
10/31/98.... 12.46 (0.01) (0.01) (0.02) $ -- (0.22) (0.22) 12.22 (0.09)
<CAPTION>
CLASS B
-------
11/19/96-
10/31/97.... 12.50 (0.09) (0.03) (0.12) $ -- $ -- $ -- 12.38 (0.96)
10/31/98.... 12.38 (0.09) $ -- (0.09) $ -- (0.22) (0.22) 12.07 (0.67)
<CAPTION>
CLASS C
-------
3/06/97-
10/31/97.... 12.60 (0.07) (0.15) (0.22) $ -- $ -- $ -- 12.38 (1.75)
10/31/98.... 12.38 (0.09) $ -- (0.09) $ -- (0.22) (0.22) 12.07 (0.67)
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ------------ ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
11/19/96-
10/31/97.... $ 24,365 2.10%(3) 0.07%(3) 70%
10/31/98.... 28,418 2.03 (0.11) 114
CLASS B
-------
11/19/96-
10/31/97.... 42,656 2.72(3) (0.69)(3) 70
10/31/98.... 47,817 2.68 (0.74) 114
CLASS C
-------
3/06/97-
10/31/97.... 4,459 2.70(3) (0.75)(3) 70
10/31/98.... 7,982 2.68 (0.71) 114
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
International Equity A....................... 0.37% 0.45%
International Equity B....................... 0.45% 0.48%
International Equity C....................... 0.87% 0.55%
</TABLE>
- -------------------
22
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
SELECTING A SHARE CLASS
Each 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
o Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
o Lower annual expenses than Class B or Class II shares.
CLASS B
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within six years of purchase,
described below.
o 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
o Front-end sales charge, as described below.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within eighteen months of purchase,
as described below.
o No conversion to Class A.
CALCULATION OF SALES CHARGES
CLASS A. Sales Charges are as follows:
<TABLE>
<CAPTION>
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, there is a 1% CDSC on any shares you sell
within one year of 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>
<S> <C>
Years after purchase CDSC on shares being sold
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.
CLASS II. Sales Charges are as follows:
<TABLE>
<CAPTION>
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 a CDSC. If there are not
enough of these shares available, we will sell shares that have the lowest
CDSC.
- -------------------
23
<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:
o 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)
o participants in certain retirement plans that meet applicable conditions
o Fund Directors and other individuals who are affiliated with any
Portfolio or other SunAmerica Mutual Funds and their families
o selling brokers and their employees and sales representatives and their
families
o participants in "Net Asset Value Transfer Program"
We will generally waive the CDSC for CLASS B or CLASS II shares in the following
cases:
o within one year of the shareholder's death or becoming disabled
o taxable distributions or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which SunAmerica serves as a fiduciary
o Fund Directors and other individuals who are affiliated with any
Portfolio or other SunAmerica Mutual Funds and their families
o to make taxable distributions from certain retirement plans
o to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
o 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 a Portfolio, you may invest some
or all of the proceeds in the same share class of the same Portfolio within one
year without a sales charge. 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).
12B-1 FEES
Each class of shares of each 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 investments for
the Portfolios are as follows:
o non-retirement account: $500
o retirement account: $250
o dollar cost averaging: $500 to open; you must invest at least $25 a
month
The minimum subsequent investments for the Portfolios are as follows:
o non-retirement account: $100
o 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.
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.
- -------------------
24
<PAGE>
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
BY CHECK
...............................................................................
o Make out a check for the investment amount, payable to the specific
Portfolio or SunAmerica Funds.
o 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
o Make out a check for the investment amount payable to the specific
Portfolio or SunAmerica Funds.
o Include the stub from your Fund statement or a note specifying the
Portfolio name, your share class, your account number and the
name(s) in which the account is registered.
o Indicate the Portfolio and account number in the memo section of your
check.
o 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
...............................................................................
o Deliver your completed application to your broker or financial advisor
or fax it to SunAmerica Fund Services, Inc. at 212-551-5585.
o 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.
o 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 Portfolio name, 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.
o 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 Portfolio name, your share
class, your 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."
-------------------
25
<PAGE>
Shareholder Account Information
SELLING SHARES
HOW REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISER
...............................................................................
o Accounts of any type.
o Sales of any amount.
o Call your broker or financial advisor to place your order to sell
shares.
BY MAIL
...............................................................................
o Accounts of any type.
o Sales of any amount.
o Include all signatures and any additional documents that may be
required (see next page).
o 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
o Write a letter of instruction indicating the Portfolio name, 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.
o 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.
BY PHONE
...............................................................................
o Most accounts.
o Sales of less than $100,000.
o Call Shareholder/Dealer Services at
1-800-858-8850 between 8:30 a.m. and
7:00 p.m. (Eastern time) on most
business days. State the Portfolio
name, 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.
o A check will be mailed to the
name(s) and address in which the
account is registered, or to a
different address indicated in a
written authorization previously
provided to the Portfolio by the
shareholder(s) on the account.
BY WIRE
...............................................................................
o Request by mail to sell any amount
(accounts of any type).
o Request by phone to sell less than $100,000.
o 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 withdrawal plan,
see "Additional Investor Services."
- -------------------
26
<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:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o 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:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o 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 each Portfolio and
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. Each 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 Fund receives your request in good
order. If the Fund 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 Fund 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 its close of business. The Fund and the
Distributor reserve the right to reject any order to buy shares.
During periods of extreme volatility or market crisis, a 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.
Each Portfolio may invest to a large extent in securities that are primarily
listed on foreign exchanges that trade on weekends or other days when the Fund
does not price its shares. As a result, the value of this Portfolio's shares may
change on days when you will not be able to purchase or redeem your shares.
If the Fund determines that it would be detrimental to the best interests of the
remaining shareholders of the Fund to make payment of redemption proceeds wholly
or partly in cash, the Fund may pay the redemption price by a distribution in
kind of securities from the Fund in lieu of cash. However, the Fund 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 Fund 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.
-------------------
27
<PAGE>
Shareholder Account Information
EXCHANGES. You may exchange shares of a Portfolio for shares of the same class
of any other SunAmerica Mutual Fund. 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. Your CDSC schedule will not
change if you exchange Class C or Class II shares that you purchased prior to
December 1, 1998 for another Portfolio or fund's Class II shares (which
currently have a longer CDSC schedule).
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. A Portfolio may change or
cancel its exchange privilege at any time, upon 60 days' written notice to its
shareholders. A 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 for further information. You may sell or exchange certificated
shares only by returning the certificates to the Portfolios, along with a letter
of instruction and a signature guarantee. The Portfolios do 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.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the SunAmerica Mutual Funds of your choice. 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:
o Make sure you have at least $5,000 worth of shares in your account.
o 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).
o Specify the payee(s) and amount(s). The payee may be yourself or any
other party, 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.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o 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 a Portfolio
periodically for the same class of shares of one or more other SunAmerica Mutual
Funds. To use:
o Specify the SunAmerica Mutual Fund(s) from which you would like money
withdrawn and into which you would like money invested.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o Specify the amount(s). Each exchange must be worth at least $25.
o Accounts must be registered identically; otherwise a signature guarantee
will be required.
ASSET PROTECTION PLAN (OPTIONAL). Anchor National Life Insurance Company offers
an Asset Protection Plan to certain investors in the Fund. The benefits of this
optional coverage payable at death will be related to the amounts paid to
purchase Fund shares and to the value of the Fund 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 Fund 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 Fund redemptions.
- -------------------
28
<PAGE>
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in any 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 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, SARSEPs, 401(k) plans, 403(b)
plans and other pension and profit-sharing plans. Using these plans, you can
invest in any SunAmerica Mutual Fund with a low minimum investment of $250 or,
for some group plans, no minimum investment at all. To find out more, call
Shareholder/Dealer Services at 1-800-858-8850.
DIVIDEND AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
o after every transaction that affects your account balance (except a
dividend reinvestment or automatic purchase from your bank account)
o after any changes of name or address of the registered owner(s)
o in all other circumstances, quarterly or annually, depending upon the
Portfolio
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Portfolios generally distribute most or all of their net earnings
in the form of dividends. Income dividends, if any, and capital gains
distributions, if any, are paid annually by the Portfolios.
DIVIDEND REINVESTMENTS. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same Portfolio and share
class on which they were paid. Alternatively, dividends and distributions may be
reinvested in any other SunAmerica Mutual Fund 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 a Portfolio meets the requirements for being
a tax-qualified regulated investment company, which each Portfolio has in the
past and intends to in the future, it pays no federal income tax on the earnings
it distributes to shareholders.
Consequently, dividends you receive from a Portfolio, whether reinvested or
taken as cash, are generally considered taxable. Distributions of a 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.
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.
-------------------
29
<PAGE>
More Information About the Portfolios
INVESTMENT
STRATEGIES
Each Portfolio has its own investment goal and a strategy for pursuing it.
The chart summarizes information about each Portfolio's investment approach.
We have included a glossary to define the investment and risk terminology
used in the chart.
<TABLE>
<CAPTION>
LARGE-CAP MID-CAP
GROWTH GROWTH
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
What is the Portfolio's investment Long-term growth of capital Long-term growth of capital
goal?
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal growth growth
investment strategies?
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal investment (including, when investment (including, when
investment techniques? appropriate, active trading) appropriate, active trading)
in stocks of large companies in stocks of medium-size
that offer the potential for companies that offer the
long-term growth of capital potential for long-term
growth of capital
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal equity securities of large equity securities of medium-
investments (under normal market companies selected through sized companies selected
conditions)? a growth strategy through a growth strategy
- --------------------------------------------------------------------------------------------------
What are the Portfolio's principal o stock market volatility o stock market volatility
risks? o securities selection o securities selection
o non-diversification o non-diversification
- --------------------------------------------------------------------------------------------------
What other investment strategies
can the Portfolio use?
o Large company stocks see principal investments Yes
above
o Medium-sized company stocks Yes see principal investments
above
o Small company stocks Yes Yes
o Fixed income securities
Investment grade Yes Yes
Junk bonds Yes No
Asset-backed Securities Yes Yes
o REITs No No
o Short-term investments Yes (up to 25%) Yes (up to 25%)
o Defensive investments Yes Yes
o Foreign securities Yes (up to 30%) Yes (up to 30%)
ADRs/EDRs/GDRs Yes Yes
Foreign Investment Companies Yes (up to 10%) No
o Currency Transactions Yes Yes
o Illiquid securities Yes (up to 15%) Yes (up to 15%)
o Securities lending Yes (up to 33 1/3%) Yes (up to 33 1/3%)
o Borrowing for temporary or
emergency purposes Yes (up to 33 1/3%) Yes (up to 33 1/3%)
o Options and futures Yes Yes
o Hybrid Instruments Yes Yes
o Short sales Yes (up to 25%) Yes (up to 25%)
o Short sales (against-the-box) Yes (up to 25%) Yes (up to 25%)
o Special Situations Yes Yes
What other potential risks can o interest rate fluctuations o interest rate fluctuations
affect a Portfolio? o small market capitalization o small market capitalization
o foreign exposure o foreign exposure
o illiquidity o illiquidity
o derivatives o derivatives
o hedging o hedging
o credit quality o credit quality
o emerging markets o emerging markets
o euro conversion o euro conversion
o prepayment o prepayment
</TABLE>
- -------------------
30
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE LARGE-CAP SMALL-CAP
GROWTH VALUE VALUE VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
Long-term growth of capital Long-term growth of capital Long-term growth of capital Long-term growth of capital
- ------------------------------------------------------------------------------------------------------------------------------
growth value value value
- ------------------------------------------------------------------------------------------------------------------------------
investment (including, when investment (including, when investment (including, when investment (including, when
appropriate, active trading) appropriate, active trading) appropriate, active trading) appropriate, active trading)
in stocks of small and medium in stocks of large companies in stocks of medium-size in stocks of small companies
sized companies that offer the that offer the potential for companies that offer the that offer the potential for
potential for long-term growth long- term growth of capital potential for long-term growth long- term growth of capital
of capital of capital
- ------------------------------------------------------------------------------------------------------------------------------
equity securities of companies equity securities of large equity securities of companies equity securities of small
selected through a growth companies selected through selected through a value companies selected through
strategy; generally invests in a value strategy strategy; a significant a value strategy
small and medium-sized portion of Portfolio as a
companies whole will generally be
invested in medium-sized and
large companies
- ------------------------------------------------------------------------------------------------------------------------------
o stock market volatility o stock market volatility o stock market volatility o stock market volatility
o securities selection o securities selection o securities selection o securities selection
o small market capitalization o non-diversification o non-diversification o small market capitalization
o non-diversification o non-diversification
- ------------------------------------------------------------------------------------------------------------------------------
Yes see principal investments Yes Yes
above
see principal investments Yes see principal investments Yes
above above
see principal investments Yes Yes see principal investments
above above
Yes Yes Yes Yes
Yes No Yes Yes
Yes Yes Yes Yes
No Yes Yes Yes
Yes (up to 25%) Yes (up to 25%) Yes (up to 25%) Yes (up to 25%)
Yes Yes Yes Yes
Yes (up to 30%) Yes (up to 30%) Yes (up to 30%) Yes (up to 30%)
Yes Yes Yes Yes
Yes (up to 10%) No No No
Yes Yes Yes Yes
Yes (up to 15%) Yes (up to 15%) Yes (up to 15%) Yes (up to 15%)
Yes (up to 33 1/3%) Yes (up to 33 1/3%) Yes (up to 33 1/3%) Yes (up to 33 1/3%)
Yes (up to 33 1/3%) Yes (up to 33 1/3%) Yes (up to 33 1/3%) Yes (up to 33 1/3%)
Yes Yes Yes Yes
Yes Yes Yes Yes
Yes (up to 25%) Yes (up to 25%) Yes (up to 25%) Yes (up to 25%)
Yes (up to 25%) Yes (up to 25%) Yes (up to 25%) Yes (up to 25%)
Yes Yes Yes Yes
o interest rate fluctuations o interest rate fluctuations o interest rate fluctuations o interest rate fluctuations
o foreign exposure o small market capitalization o small market capitalization o foreign exposure
o illiquidity o foreign exposure o foreign exposure o illiquidity
o derivatives o illiquidity o illiquidity o derivatives
o hedging o derivatives o derivatives o hedging
o credit quality o hedging o hedging o credit quality
o emerging markets o credit quality o credit quality o emerging markets
o euro conversion o emerging markets o emerging markets o euro conversion
o prepayment o euro conversion o euro conversion o prepayment
o prepayment o prepayment
</TABLE>
-------------------
31
<PAGE>
MORE INFORMATION ABOUT THE PORTFOLIOS
<TABLE>
<S> <C>
FOCUS
PORTFOLIO
What is the Portfolio's investment Long-term growth of capital
goal?
- ---------------------------------------------------------------------------------------
What are the Portfolio's principal focus
investment strategies?
- ---------------------------------------------------------------------------------------
What are the Portfolio's principal investment (including, when appropriate, by
investment techniques? active trading) in equity securities, without
regard to market capitalization
- ---------------------------------------------------------------------------------------
What are the Portfolio's principal equity securities
investments (under normal market
conditions)?
- ---------------------------------------------------------------------------------------
What are the Portfolio's principal o market volatility
risks? o securities selection
o non-diversification
- ---------------------------------------------------------------------------------------
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/EDRs/GDRs Yes
Foreign Investment Companies No
Currency Transactions Yes
o Illiquid securities Yes (up to 15%)
o Securities lending Yes (up to 33 1/3%)
o Borrowing for temporary or Yes (up to 33 1/3%)
emergency purposes
o Options and futures Yes
o Hybrid Instruments No
o Short sales Yes
o Short sales (against-the-box) Yes
o Special Situations Yes
What other potential risks can o foreign exposure
affect a Portfolio? o emerging markets
o illiquidity
o derivatives
o small market capitalization
</TABLE>
FOCUSED GROWTH
AND INCOME
PORTFOLIO
Long-term growth of capital and reasonable level
of current income
growth and value
investment (including, when appropriate, active
trading) in stocks of large companies that offer
the potential for long-term growth of capital and
reasonable level of current income
equity securities of large companies consisting
of a blend of growth companies, value companies,
and companies with elements of both growth and value
o stock market volatility
o securities selection
o non-diversification
see principal investments above
Yes
Yes
Yes
Yes
Yes
Yes
Yes (up to 25%)
Yes
Yes (up to 30%)
Yes
No
Yes
Yes (up to 15%)
Yes (up to 33 1/3%)
Yes (up to 33 1/3%)
Yes
Yes
Yes (up to 25%)
Yes (up to 25%)
Yes
o interest rate fluctuations
o small market capitalization
o foreign exposure
o illiquidity
o derivatives
o hedging
o credit quality
o emerging markets
o euro conversion
o prepayment
- -------------------
32
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL
EQUITY
PORTFOLIO
<S> <C>
Long-term growth of capital
- ------------------------------------------
international
- ------------------------------------------
investment (including, when appropriate,
active trading) in stocks of foreign
securities that offer the potential for
long-term growth of capital
- ------------------------------------------
equity and other securities with equity
characteristics.
securities of issuers in at least 3
countries other than the United States
- ------------------------------------------
o stock market volatility
o securities selection
o foreign exposure
o currency volatility
o emerging markets
o non-diversification
- ------------------------------------------
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes (up to 25%)
Yes
see principal investments above
Yes
Yes (up to 10%)
Yes
Yes (up to 15%)
Yes (up to 33 1/3%)
Yes (up to 33 1/3%)
Yes
Yes
Yes (up to 25%)
Yes (up to 25%)
Yes
o small market capitalization
o interest rate fluctuations
o illiquidity
o derivatives
o hedging
o credit quality
o euro conversion
o prepayment
</TABLE>
-------------------
33
<PAGE>
MORE INFORMATION ABOUT THE PORTFOLIOS
PANIES 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.
GLOSSARY
--------
INVESTMENT TERMINOLOGY
GROWTH OF CAPITAL is growth of the value of an
investment.
ACTIVE TRADING means that a Portfolio may engage 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 a 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 generally have market
capitalizations of over $8.3 billion.
MEDIUM-SIZED COMPANIES generally have market
capitalizations ranging from $1.2 billion to
$8.3 billion.
SMALL COMPANIES generally have 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).
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 a Portfolio with sufficient
liquidity to meet redemptions and cover expenses.
DEFENSIVE INVESTMENTS include high quality fixed
income securities and money market instruments. A
Portfolio will make temporary defensive investments in
response to adverse market, economic, political or
other conditions. When a 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, a
Portfolio may not achieve its investment goal.
FOREIGN SECURITIES are issued by companies located
outside of the United States, including emerging
markets. Foreign securities may include American
Depositary Receipts (ADRS) or other similar securities
that convert into foreign securities, such as European
Depositary Receipts (EDRS) and Global Depositary
Receipts (GDRS).
It may be necessary under certain foreign laws, less
expensive, or more expedient to invest in FOREIGN
INVESTMENT COMPANIES, which invest in certain foreign
markets, including emerging markets. Investing through
such vehicles may involve frequent or layered fees or
expenses, and the Advisers will not invest in such
investment companies unless, in their judgment, the
potential benefits justify the payment of any
associated fees and expenses.
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.
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.
- -------------------
34
<PAGE>
A "JUNK BOND" is a high yield, high risk bond that does not meet the credit
quality standards of investment grade securities.
SECURITIES LENDING involves a loan of securities by a Portfolio in exchange for
cash or collateral. The Fund earns interest on the loan while retaining
ownership of the security.
The Fund may BORROW for temporary or emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of Fund
shares and in the yield on a Portfolio's portfolio. Borrowing will cost the Fund
interest expense and other fees. The cost of borrowing may reduce a 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 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.
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 a
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.
-------------------
35
<PAGE>
MORE INFORMATION ABOUT THE PORTFOLIOS
RISK TERMINOLOGY
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Portfolio's portfolio.
SECURITIES SELECTION: A strategy used by a Portfolio, or securities selected by
its Adviser, may fail to produce the intended return.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations
(particularly under $1 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.
NON-DIVERSIFICATION: By concentrating in a smaller number of stocks, a
Portfolio's risk is increased because the effect of each stock on the
Portfolio's performance is greater.
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.
CURRENCY VOLATILITY: The value of a Portfolio's foreign portfolio investments
may fluctuate due to changes in currency rates. A 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.
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.
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.
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. This type of issuer will typically issue JUNK
BONDS. In addition to the risk of default, junk bonds may be more volatile, less
liquid, more difficult to value and more susceptible to adverse economic
conditions or investor perceptions than other bonds.
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 Portfolios. There can be no
assurance that a Portfolio will not suffer any adverse consequences as a result
of the euro conversion.
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 a 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 a Portfolio may exhibit price
characteristics of longer-term debt securities.
- -------------------
36
<PAGE>
FUND MANAGEMENT
MANAGER. SunAmerica Asset Management Corp. selects the Advisers for the
Portfolios, may manage certain portions of Portfolios, provides various
administrative services, and supervises the daily business affairs of each
Portfolio. The Advisers are responsible for decisions to buy and sell securities
for the Portfolios, selection of broker-dealers and negotiation of commission
rates for their respective portion of the relevant 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 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 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 a Portfolio have the
right to terminate an agreement with an Adviser for that Portfolio at any time
by a vote of the majority of the outstanding voting securities of such
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 each Portfolio. For the fiscal year ended October 31, 1998, each
Portfolio paid SunAmerica a fee equal to 1.00% of average daily net assets
except the International Equity Portfolio, which paid a fee equal to 1.10% of
average daily net assets, and the Focus Portfolio, which paid a fee equal to
0.85% of average daily net assets.
SunAmerica, located in the SunAmerica Center, 733 Third Avenue, New York, New
York 10017, was organized in 1982 under the laws of Delaware, and managed,
advised or administered assets in excess of $16 billion as of March 25, 1999. In
addition to managing the Portfolios, SunAmerica serves as adviser, manager
and/or administrator for Anchor Pathway Fund, Anchor Series Trust, Seasons
Series Trust, SunAmerica Equity Funds, Inc., SunAmerica Income Funds, SunAmerica
Money Market Funds, Inc., SunAmerica Series Trust and SunAmerica Strategic
Investment Series, Inc.
-------------------
37
<PAGE>
INFORMATION ABOUT ADVISERS
The Advisers and Portfolio Managers for each Portfolio are described below:
STYLE-BASED PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGEMENT ALLOCATED AMONG THE FOLLOWING ADVISERS
- ------------------------------- -------------------------------------------------------------
<S> <C>
Large-Cap Growth Portfolio Janus Capital Corporation ("Janus")
L. Roy Papp & Associates ("Papp")
Montag & Caldwell, Inc. ("Montag & Caldwell")
Mid-Cap Growth Portfolio Miller Anderson & Sherrerd, LLP ("MAS")
T. Rowe Price Associates, Inc. ("T. Rowe Price") Wellington
Management Company, LLP ("Wellington Management")
Aggressive Growth Portfolio Janus
SunAmerica
Warburg Pincus Asset Management, Inc.
("Warburg")
Large-Cap Value Portfolio David L. Babson & Co., Inc. ("Babson")
Davis Selected Advisers, L.P. ("Davis")
Wellington Management
Value Portfolio Davis
Neuberger Berman, LLC ("Neuberger Berman")
American Century Investment Management, Inc.
("American Century")
Small-Cap Value Portfolio Berger Associates, Inc. ("Berger") (subcontracted to
Perkins, Wolf, McDonnell & Company ("PWM"))
The Glenmede Trust Company ("Glenmede")
Lazard
</TABLE>
STYLIZED PORTFOLIOS
<TABLE>
<S> <C>
Focus Portfolio Bramwell Capital Management, Inc. ("Bramwell"),
Jennison Associates LLC ("Jennison")
Marsico Capital Management, LLC ("Marsico")
Focused Growth and Income SunAmerica
Portfolio Marsico
International Equity Portfolio Bankers Trust Company ("BT")
Rowe Price-Fleming International, Inc. ("Rowe-Fleming")
</TABLE>
DESCRIPTION OF THE ADVISERS
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. As of October 28, 1998, American Century
had approximately $70 billion in total assets under management.
DAVID L. BABSON & CO., INC. Babson is a Massachusetts corporation, located at
One Memorial Drive, Cambridge, Massachusetts 02142. Babson provides investment
advisory services to a substantial number of institutional and other investors,
including other registered investment companies. As of December 31, 1998, Babson
had over $21.1 billion in assets under management.
BANKERS TRUST COMPANY. BT has principal offices at 130 Liberty Street, New York,
New York 10006. BT conducts a variety of general banking and trust activities
and is a major wholesale supplier of financial services to the international and
domestic institutional market. As of December 31, 1998, BT managed approximately
$370 billion in assets globally.
- -------------------
38
<PAGE>
BERGER ASSOCIATES, INC. Berger is a Delaware corporation, located at 210
University Boulevard, Suite 900, Denver, Colorado 80206, and serves as
investment adviser, sub-adviser, administrator, or sub-administrator to mutual
funds, and institutional and private investors.
BRAMWELL CAPITAL MANAGEMENT, INC. Bramwell is a Delaware corporation located at
745 Fifth Avenue, New York, NY 10151. As of April 30, 1998, Bramwell had
under management approximately $605 million in assets.
DAVIS SELECTED ADVISERS, L.P. Davis is a Colorado limited partnership, located
at 124 East Marcy Street, Santa Fe, New Mexico 87501. As of March 31, 1998,
Davis had assets under management of approximately $17.9 billion.
THE GLENMEDE TRUST COMPANY. Glenmede is a privately-owned, independent trust
company devoted exclusively to investment management and trust services, taxable
and tax exempt funds and institutions and individuals investing in U.S. and
International equity and fixed income securities. Glenmede is located at One
Liberty Place, 1650 Market Street, Suite 1200, Philadelphia, Pennsylvania 19103.
As of December 31, 1998, Glenmede had approximately $14.0 billion in assets
under management.
JANUS CAPITAL CORPORATION. Janus is a Colorado corporation located at 100
Fillmore Street, Denver, Colorado 80206-4923, and serves as investment adviser
or subadviser to mutual funds and individual, corporate, charitable and
retirement accounts. As of December 31, 1998, Janus had under management
approximately $108 billion.
JENNISON ASSOCIATES LLC. Jennison is a Delaware limited liability company
located at 466 Lexington Avenue, New York, NY 10017. As of December 31, 1998,
Jennison had approximately $46.4 billion in assets under management for
institutional and mutual fund clients.
LAZARD ASSET MANAGEMENT. Lazard is a division of Lazard Freres & Co. LLC, a New
York limited liability company. Located at 30 Rockefeller Plaza, New York, New
York 10112, Lazard provides investment management services to individual and
institutional clients. As of March 31, 1998, Lazard and its affiliated companies
managed client discretionary accounts with assets totaling approximately $67
billion.
MARSICO CAPITAL MANAGEMENT, LLC. Marsico is a Colorado limited liability company
located at 1200 17th Street, Suite 1300, Denver, CO 80202. As of January 31,
1999, Marsico had approximately $4.75 billion in assets under management.
MILLER ANDERSON & SHERRERD, LLP. MAS, a Pennsylvania limited liability
partnership founded in 1969, is located at One Tower Bridge, West Conshohocken,
Pennsylvania 19428. MAS provides investment services to employee benefit plans,
endowment funds, foundations and other institutional investors. As of March 31,
1998, MAS had in excess of $67.1 billion in assets under management.
MONTAG & CALDWELL, INC. Montag & Caldwell is a Georgia corporation located at
3343 Peachtree Road, Suite 1100, Atlanta, Georgia 30326-1022. Montag & Caldwell
was founded in 1945 and serves as investment adviser to employee benefit,
endowment, charitable and other institutional clients, as well as high net worth
individuals. As of March 31, 1998, Montag & Caldwell had in excess of
$20 billion in assets under management.
NEUBERGER BERMAN, LLC. Neuberger Berman is a Delaware limited liability company
located at 605 Third Avenue, New York, New York 10158-0180. Neuberger Berman has
been in the investment advisory business since 1939. As of March 31, 1998,
Neuberger Berman and its affiliates had assets under management of approximately
$59 billion.
L. ROY PAPP & ASSOCIATES. Papp is an Arizona partnership located at 6225 North
24th Street, Suite 150, Phoenix, Arizona 85016. Papp serves as investment
adviser to individuals, trusts, retirement plans, endowments, and foundations.
As of December 31, 1998, assets under management exceeded $1.5 billion.
PERKINS, WOLF, MCDONNELL & COMPANY. PWM, located at 53 West Jackson Boulevard,
Suite 818, Chicago, Illinois 60604, was organized as a Delaware corporation in
1980. PWM is a member of the National Association of Securities Dealers, Inc.
and, in 1984, registered with the Securities and Exchange Commission as an
investment adviser. As of March 31, 1998, PWM had assets under management of
approximately $325 million.
ROWE PRICE-FLEMING INTERNATIONAL, INC. Rowe-Fleming is a Maryland corporation,
incorporated in 1979. It is located at 100 East Pratt Street, Baltimore,
Maryland 21202. As of December 31, 1998, Rowe-Fleming managed over $32 billion
of foreign assets.
-------------------
39
<PAGE>
INFORMATION ABOUT ADVISERS
T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price is a Maryland corporation located
at 100 East Pratt Street, Baltimore, Maryland 21202. Founded in 1937, T. Rowe
Price and its affiliates managed over $148 billion for over six million
individual and institutional investor accounts as of December 31, 1998.
WARBURG PINCUS ASSET MANAGEMENT, INC. Warburg is a professional investment
advisory firm which provides investment services to investment companies,
employee benefit plans, endowment funds, foundations and other institutions and
individuals. As of December 31, 1998, Warburg managed approximately $21.5
billion in assets. Warburg is located at 466 Lexington Avenue, New York, NY
10017-3147.
WELLINGTON MANAGEMENT COMPANY, LLP. Wellington Management is a Massachusetts
limited liability partnership, located at 75 State Street, Boston, Massachusetts
02109. Wellington Management is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowments, foundations, and other institutions and individuals. As of
December 31, 1998, Wellington Management had investment management authority
with respect to approximately $211.3 billion of assets.
- -------------------
40
<PAGE>
STYLE-BASED PORTFOLIOS
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Large-Cap Growth Portfolio Marc Pinto Mr. Pinto has been a Vice
Portfolio Manager and Vice President and Portfolio
President of Portfolio Manager of Janus since 1997.
Management (Janus) He joined Janus in 1994. From
1993 to 1994, he was
Co-President of Creative
Retail Technology, a producer
of hardware for retail
clients. From 1991 to 1993,
Mr. Pinto was an equity
analyst at Priority
Investments Ltd., a family
owned business.
L. Roy Papp Mr. Papp has been in the
Partner, Portfolio Manager money management field since
(Papp) 1955. He has served as
managing general partner of
Papp since 1989.
Rosellen C. Papp Ms. Papp has been the
Partner, Portfolio Manager Director of Research of Papp
(Papp) since 1981.
Ronald E. Canakaris Mr. Canakaris has been in the
(Investment Management Team) money management business
President and Chief since 1968 and has served as
Investment Officer (Montag & President and Chief
Caldwell) Investment Officer of Montag
& Caldwell since 1984.
Mid-Cap Growth Portfolio Arden C. Armstrong Ms. Armstrong joined MAS as a
Portfolio Manager (MAS) Portfolio Manager in 1986.
Brian W. H. Berghuis Mr. Berghuis joined T. Rowe
(Investment Advisory Price in 1985.
Committee)
Managing Director and Equity
Portfolio Manager (T. Rowe
Price)
Marc L. Baylin Mr. Baylin joined T. Rowe
(Investment Advisory Price in 1993.
Committee)
Vice President and Investment
Analyst (T. Rowe Price)
James A. C. Kennedy Mr. Kennedy joined T. Rowe
(Investment Advisory Price in 1978. He is Chairman
Committee) of the Equity Steering
Managing Director and Committee and is Director of
Director (T. Rowe Price) the Equity Division, as well
as Director of Research. He
has responsibility for the
equity trading department and
is Chairman of the Brokerage
Control Committee.
</TABLE>
-------------------
41
<PAGE>
Information About Advisers
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
John F. Wakeman
Mid-Cap Growth Portfolio (Investment Advisory Mr. Wakeman joined T. Rowe
(continued) Committee) Price in 1989.
Vice President and Portfolio
Manager (T. Rowe Price)
Francis V. Wisneski Mr. Wisneski is a Senior Vice
Senior Vice President President and has 29 years of
(Wellington Management) professional experience with
Wellington Management.
Aggressive Growth Portfolio Scott W. Schoelzel Mr. Schoelzel joined Janus
Executive Vice President and Capital in January 1994.
Portfolio Manager (Janus)
Donna Calder (Domestic Equity Prior to joining SunAmerica
Investment Team) Portfolio as a Portfolio Manager in
Manager (SAAMCo) February 1998, Ms. Calder
served as a General Partner
of Manhattan Capital
Partners, L.P.
Elizabeth B. Dater Ms. Dater has been with
Managing Director (Warburg) Warburg since 1978.
Stephen J. Lurito Mr. Lurito has been with
Managing Director (Warburg) Warburg since 1987.
Large-Cap Value Portfolio Roland W. Whitridge Mr. Whitridge has been
Portfolio Manager (Babson) employed by Babson in
portfolio management for over
twenty years.
Christopher C. Davis Mr. Davis joined Davis in
Portfolio Manager (Davis) September 1989 as an
assistant portfolio manager
and research analyst.
John R. Ryan (Value/Yield Mr. Ryan has been a portfolio
Team) Senior Vice President, manager with Wellington
Managing Partner and Head of Management's Value/Yield
Value/Yield Team (Wellington investment team since 1981
Management) and has held the position of
Senior Vice President of
Wellington Management since
1987. Mr. Ryan became a
Managing Partner on
January 1, 1996.
Value Portfolio Christopher C. Davis See above.
Portfolio Manager (Davis)
Shelby M. C. Davis Since 1968, Mr. Davis has
Former Co-Manager (Davis) been a director of Venture
Advisers, Inc. He is also a
director and officer of all
investment companies managed
by Davis.
</TABLE>
- -------------------
42
<PAGE>
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Value Portfolio Michael M. Kassen Mr. Kassen has been Managing
(continued) Portfolio Manager, Managing Director since January 1994
Director, Vice President and and a Vice President and
Principal (Neuberger Berman) Portfolio Manager since June
1990, of Neuberger Berman
Management Inc. and a
principal of Neuberger Berman
since January 1993.
Robert I. Gendelman Mr. Gendelman has been a
Senior Portfolio Manager, principal of Neuberger Berman
Assistant Vice President and since December 1996. He was a
Principal (Neuberger Berman) portfolio manager for another
mutual fund manager from 1992
to 1993.
Scott A. Moore Mr. Moore has been a member
Portfolio Manager (American of the team that manages the
Century) Portfolio since October 1996
and Portfolio Manager since
February 1999. He joined
American Century in August
1993 as an Investment
Analyst.
Phil Davidson Mr. Davidson is a Vice
Vice President and Portfolio President and Portfolio
Manager (American Century) Manager and has been with
American Century since 1993.
Previously, he had been a
vice president and equity
portfolio manager for
Boatmen's Trust Company in
St. Louis, where he
specialized in the management
of institutional equity
accounts using a value
oriented investment style.
Small-Cap Value Portfolio Robert H. Perkins Robert Perkins has been an
President, Chief Investment investment manager since
Officer and Director (PWM) 1970. Mr. Perkins owns 49% of
PWM's outstanding common
stock and serves as President
and Chief Investment Officer
and as a director of PWM.
Herbert W. Gullquist See above.
(Investment Team)
Vice Chairman (Lazard)
Vice Chairman (Lazard)
</TABLE>
-------------------
43
<PAGE>
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Small-Cap Value Portfolio Eileen D. Alexanderson Ms. Alexanderson is a
(continued) (Investment Team) Managing Managing Director of Lazard
Director, Portfolio Manager responsible for U.S./global
(Lazard) equity management and
overseeing the day-to-day
operations of the U.S.
small-cap and U.S. mid-cap
equity investment teams.
Ms. Alexanderson joined the
firm in 1979 and has
18 years of investment
experience. She is a CFA and
holds a B.S. from St. John's
University.
Robert J. Mancuso, CFA Mr. Mancuso has been with
Vice President and Lead Glenmede since 1992.
Portfolio Manager (Glenmede)
</TABLE>
- -------------------
44
<PAGE>
INFORMATION ABOUT ADVISERS
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Small-Cap Value Portfolio Scott R. Abernathy, CFA Mr. Abernathy has been with
(continued) Vice President and Portfolio Glenmede since 1991.
Manager (Glenmede)
Thomas R. Angers, CFA Mr. Angers has been with
Vice President and Director Glenmede since 1995. Before
of Equity Research (Glenmede) joining Glenmede, he was a
Vice President, Portfolio
Manager and securities
analyst for Independence
Capital Management, Inc.
Larry R. Bernstein, CFA Mr. Bernstein joined Glenmede
Vice President (Glenmede) in 1998 as a Vice President
in the Investment Policy and
Strategy department. Prior to
joining Glenmede, he was a
Vice President at the
Provident Capital Management
unit of PNC Bank in
Philadelphia.
Barry D. Kohout, CFA Mr. Kohout has been with
Vice President and Equity Glenmede since 1996. Before
Research Analyst (Glenmede) joining Glenmede, he was an
investment manager for
Constellation Investments,
Inc. and senior equity
research analyst for
Independence Capital
Management, Inc.
Robert T. Niemeyer, Sr., CFA Mr. Niemeyer has been with
Vice President and Equity Glenmede since 1997. Prior to
Research Analyst (Glenmede) joining Glenmede, he served
as Vice President, Senior
Investment Officer, Equity
Research Analyst, Assistant
Vice President and Senior
Investment Officer during his
twenty-one years at PNC Bank.
Anthony J. Albuquerque Mr. Albuquerque has been with
Equity Research Associate Glenmede since 1995. Prior to
(Glenmede) joining Glenmede, he was a
research associate at
Bloomberg Financial Markets.
</TABLE>
-------------------
45
<PAGE>
STYLIZED PORTFOLIOS
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Focus Portfolio Elizabeth R. Bramwell Ms. Bramwell founded Bramwell
Portfolio Manager (Bramwell) in 1994 and has been the
Chief Executive Officer ever
since. From 1987 until
February 1994, Ms. Bramwell
was President, Chief
Investment Officer, Portfolio
Manager and Trustee of The
Gabelli Growth Fund.
Spiros "Sig" Segalas Mr. Segalas is a founding
Portfolio Manager (Jennison) director of Jennison, which
was established in 1969, and
he has been a Director and
Equity Portfolio Manager ever
since. In addition,
Mr. Segalas has served as
President and Chief
Investment Officer of
Jennison since 1993 and 1971,
respectively.
Thomas F. Marsico Mr. Marsico has been the
Portfolio Manager (Marsico) Chairman and Chief Executive
Officer of Marsico since he
formed Marsico in 1997. From
1988 through 1997,
Mr. Marsico served as the
portfolio manager of the
Janus Twenty Fund and from
1991 through 1997,
Mr. Marsico served as the
portfolio manager of the
Janus Growth & Income Fund.
Focused Growth and Income Thomas F. Marsico See above
Portfolio Portfolio Manager
(Marsico)
Francis Gannon Mr. Gannon has been a Vice
Portfolio Manager President and Portfolio
(SunAmerica) Manager with the firm since
1996. He joined SunAmerica as
an equity analyst in 1993.
International Equity Michael Levy Mr. Levy's experience prior
Portfolio (International Equity Team) to joining BT includes
Managing Director of Bankers investment banking and equity
Trust Funds Management, Head analysis with Oppenheimer &
of International Equity Team Company and he has more than
(BT) twenty-six years of business
experience, of which sixteen
years have been in the
investment industry.
</TABLE>
- --------------------
46
<PAGE>
INFORMATION ABOUT ADVISERS
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
International Equity Robert L. Reiner Mr. Reiner has 16 years of
Portfolio (International Equity Team) investment industry
(continued) Managing Director of Bankers experience, previously at
Trust Funds Management (BT) Scudder, Stevens & Clark
where he was responsible for
providing equity research and
macroeconomic/market
coverage.
Martin G. Wade Mr. Wade joined Rowe- Fleming
Portfolio Manager (Rowe- in 1979 and he has 28 years
Fleming) of experience with the
Fleming Group in research,
client service, and
investment management.
(Fleming Group includes
Flemings and/or Jardine
Fleming)
Robert W. Smith Mr. Smith joined Rowe-
Portfolio Manager (Rowe- Fleming in 1996. He joined T.
Fleming) Rowe Price in 1992 and has
12 years of experience in
financial analysis.
Mark C. J. Bickford-Smith Mr. Bickford-Smith joined
Portfolio Manager (Rowe- Rowe-Fleming in 1995 and has
Fleming) 14 years of experience in
equity research and portfolio
management.
John R. Ford Mr. Ford joined Rowe- Fleming
Portfolio Manager (Rowe- in 1982 and has 17 years of
Fleming) experience with Fleming Group
in research and portfolio
management.
James B. M. Seddon Mr. Seddon joined Rowe-
Portfolio Manager (Rowe- Fleming in 1987 and has
Fleming) 12 years of experience in
portfolio management.
David J. L. Warren Mr. Warren joined Rowe-
Portfolio Manager (Rowe- Fleming in 1984 and has
Fleming) 17 years of experience in
equity research, fixed income
research, and portfolio
management.
</TABLE>
DISTRIBUTOR SunAmerica Capital Services, Inc. distributes each 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 each
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 a 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 one or more of the
Portfolios, 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
-------------------
47
<PAGE>
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 Portfolios' 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 Portfolios' 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 Portfolios' 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 .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.
- -------------------
48
<PAGE>
FOR MORE INFORMATION
The following documents contain more information about the Portfolios 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 a Portfolio's performance during the last applicable
period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional information
about the Portfolios' 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 Portfolios
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
or
by calling your broker or financial advisor.
Information about the Portfolios (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 Portfolios 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
MUTUAL
[LOGO] FUNDS
DISTRIBUTOR: SunAmerica Capital Services
INVESTMENT COMPANY ACT
File No. 811-07797
<PAGE>
April 1, 1999 Prospectus
STYLE SELECT SERIES(REGISTERED)
o FOCUS PORTFOLIO
o FOCUSED GROWTH AND INCOME 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>
<S> <C>
FUND HIGHLIGHTS ...................................................................... 2
FINANCIAL HIGHLIGHTS ................................................................. 7
SHAREHOLDER ACCOUNT INFORMATION ...................................................... 9
MORE INFORMATION ABOUT THE PORTFOLIOS ................................................ 17
INVESTMENT STRATEGIES ............................................................ 17
GLOSSARY ......................................................................... 19
INVESTMENT TERMINOLOGY ...................................................... 19
RISK TERMINOLOGY ............................................................ 21
FUND MANAGEMENT ............................................................. 22
INFORMATION ABOUT ADVISERS ........................................................... 23
</TABLE>
SUNAMERICA
MUTUAL
[LOGO] FUNDS
<PAGE>
FUND HIGHLIGHTS
- -------------------------------------------------------------------------------
A FOCUS strategy is one in which an Adviser actively invests in a small number
of its favorite stock-picking ideas at any given moment, and may include
elements of value investing and growth investing in any combination. 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 FOCUS PORTFOLIO Adviser will invest in ten stocks,
while each FOCUSED GROWTH AND INCOME PORTFOLIO Adviser may invest in up to 30
stocks.
A Portfolio engages in ACTIVE TRADING when it frequently trades its portfolio
securities to achieve its investment goal.
The "GROWTH" ORIENTED philosophy to which the Portfolios partly subscribe--
that of investing in securities believed to offer the potential for capital
appreciation--focuses on securities considered to have a historical record of
above-average growth rate; to have significant growth potential; to have
above-average earnings growth or value or the ability to sustain earnings
growth; to offer proven or unusual products or services; or to operate in
industries experiencing increasing demand.
The "VALUE" ORIENTED philosophy to which the Portfolios partly subscribe--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 selection criteria is usually calculated to identify stocks of
companies with solid financial strength that 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.
The following questions and answers are designed to
give you an overview of Style Select Series, Inc.
(the "Fund"), and to provide you with information
about two of the Fund's separate Portfolios and
their investment goals, principal strategies, and
principal investment techniques. Each goal may be
changed without shareholder approval, although you
will receive notice of any change. There can be no
assurance that any Portfolio's investment goal will
be met or that the net return on an investment in a
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
Portfolios," which is on page 17, and the glossary
that follows on page 19.
Q:WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS,
STRATEGIES AND TECHNIQUES?
A:
<TABLE>
<CAPTION>
Principal Principal
Investment Investment Investment
Fund Goal Strategy Techniques
- --------------- ------------ ------------- ----------------------------------------------
<S> <C> <C> <C>
FOCUS long-term focus invests (including, when deemed appropriate,
PORTFOLIO growth of by active trading) in equity securities,
capital without regard to market capitalization
FOCUSED long-term growth, value invests primarily in equity securities
GROWTH growth of and focus (including, when deemed appropriate, by active
AND capital and trading) selected to achieve a blend of growth
INCOME current companies, value companies and companies that
PORTFOLIO income the Advisers believe have elements of growth
and value issued by large cap companies. Each
Adviser may emphasize either a growth
orientation or a value orientation at any
particular time.
</TABLE>
Companies are determined to be large-cap companies
based upon the market capitalization range
prescribed by the Style Box category designed by
Morningstar, Inc. Morningstar, Inc. may change the
Style Box market capitalization range over time as
market conditions and broad market valuations vary.
Generally, the market capitalization range is $8.3
billion or more for the Large-Cap category. Under
normal circumstances, at least 65% of the total
assets of the Focused Growth and Income Portfolio
will be invested in companies with market
capitalizations within the Portfolio's applicable
range. Also, the median market capitalization of
the companies within the Portfolio will fall within
its applicable range.
The Focused Growth and Income Portfolio has
two different professional Advisers, while the
Focus Portfolio provides investors with access to
at least three different professional Advisers,
each with its own distinct investment methodology
within a particular investment style. Each Adviser
manages a separate portion of a Portfolio.
SunAmerica will initially allocate the assets of
each 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.
With respect to the Focused Growth and Income
Portfolio, SunAmerica intends, on a quarterly
basis, to review the asset allocation in each
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 re-allocate cash flows among the Advisers,
differently from the manner described above, in an
effort to effect a re-balancing of the Portfolio's
asset allocation. SunAmerica does not intend, but
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.
With respect to the Focus Portfolio, in general,
SunAmerica will not rebalance or reallocate the
assets of the Portfolio among Advisers. However,
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, 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.
- -------------------
2
<PAGE>
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE PORTFOLIOS?
A: The following section describes the principal risks of each Portfolio, while
the chart on page 17 describes various additional risks.
RISKS OF INVESTING IN EQUITY SECURITIES
Both of the Portfolios invest primarily in equity securities. As with any
equity fund, the value of your investment in any of these Portfolios 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 well
under circumstances in which "growth" stocks in general have fallen. In
addition, individual stocks selected for any of these Portfolios may
underperform the market generally.
RISKS OF NON-DIVERSIFICATION
Each 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 Portfolios are not bank deposits and are not guaranteed or
insured by any bank or SunAmerica or SunAmerica's affiliates, government
entity or the Federal Deposit Insurance Corporation. As with any mutual
fund, there is no guarantee that a Portfolio will be able to achieve its
investment goals. If the value of the assets of a Portfolio goes down, you
could lose money.
Q: HOW HAVE THE PORTFOLIOS PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables illustrate the risks of
investing in the Focused Growth and Income Portfolio by showing changes in
the Portfolio's performance from calendar year to calendar year, and compare
the Portfolios' average annual returns to those of an appropriate market
index. Sales charges are not reflected in the bar chart. If these amounts
were reflected, returns would be less than those shown. Of course, past
performance is not necessarily an indication of how a Portfolio will perform
in the future. The Focus Portfolio has not been in operation for a full
calendar year.
-------------------
3
<PAGE>
Fund Highlights
FOCUSED GROWTH AND INCOME PORTFOLIO* (CLASS B)
[BAR CHART]
'98
- ----------
35% 12.38%
30%
25%
20%
15%
10%
5%
0
- - 5%
- -10%
- -15%
- -20%
- -25%
- -30%
During the period shown in the bar chart, the highest return for a quarter was
18.70% (quarter ended 12/31/98) and the lowest return for a quarter was -13.91%
(quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1998) Year Inception*****
<S> <C> <C> <C>
Focused Growth and Income Portfolio** Class A 6.60% 6.46%
Class B 8.38% 7.82%
Class II 10.26% 10.15%
S&P 500 Index*** 28.57% 25.97%
Morningstar Large-Cap Blend Category**** 21.74% 18.74%
</TABLE>
* The Portfolio's performance set forth above constitutes the performance of
the predecessor investment managers to the ones currently managing the
Portfolio, Marsico Capital Management, LLC and SunAmerica Asset Management
Corp.
** Includes sales charges.
*** The S&P 500(Registered) is the Standard & Poor's 500 Composite Stock Price
Index, a widely recognized, unmanaged index of common stock prices.
**** Developed by Morningstar, the Morningstar Large-Cap Blend Category
currently reflects a group of 429 mutual funds that have portfolios with
median market capitalizations, price/earnings ratios, and price/book
ratios similar to those of the Portfolio.
***** Class A, B and C shares commenced offering on October 15, 1997. On
December 1, 1998, the Class C shares were redesignated Class II shares.
- -------------------
4
<PAGE>
Q: WHAT ARE THE PORTFOLIOS' EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Portfolios.
<TABLE>
<CAPTION>
Focused Growth and
Focus Portfolio Income Portfolio
-------------------------------- --------------------------------
Class A Class B Class II Class A Class B Class II
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <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% 5.75% None 1.00%
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed)(2)..... None 4.00% 1.00% None 4.00% 1.00%
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends........................ None None None None None None
Redemption Fee(3)........................... None None None None None None
Exchange Fee................................ None None None None None None
Maximum Account Fee......................... None None None None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees............................. 0.85% 0.85% 0.85% 1.00% 1.00% 1.00%
Distribution (12b-1) Fees(4)................ 0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
Other Expenses.............................. 0.57% 0.57% 0.57% 1.05% 1.10% 2.54%
---- ---- ---- ---- ---- ----
Total Annual Fund Operating Expenses........ 1.77% 2.42% 2.42% 2.40% 3.10% 4.54%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Expense Reimbursement....................... 0.32% 0.32% 0.32% 0.95%(5) 1.00(5)% 2.44%(5)
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
Net Expenses(6)............................. 1.45% 2.10% 2.10% 1.45% 2.10% 2.10%
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</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 one year 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.
(3) A $15.00 fee may be imposed on wire redemptions.
(4) Because these fees are paid out of a 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) The expense reimbursements are estimated based upon the prior fiscal year
end.
(6) The Board of Directors, including a majority of the Independent Directors,
approved the Investment Advisory and Management Agreement subject to the net
expense ratio 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.
-------------------
5
<PAGE>
FUND HIGHLIGHTS
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes 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 5 years 10 years
<S> <C> <C> <C> <C>
FOCUS PORTFOLIO
(Class A shares).................................... $ 714 $1,007 $1,322 $ 2,210
(Class B shares)*................................... $ 613 $ 958 $1,329 $ 2,188
(Class II shares)................................... $ 411 $ 751 $1,218 $ 2,507
FOCUSED GROWTH AND INCOME PORTFOLIO
(Class A shares).................................... $ 714 $1,007 $1,322 $ 2,210
(Class B shares)*................................... $ 613 $ 958 $1,329 $ 2,188
(Class II shares)................................... $ 411 $ 751 $1,218 $ 2,507
</TABLE>
If you did not redeem your shares:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
FOCUS PORTFOLIO
(Class A shares).................................... $ 714 $1,017 $1,322 $ 2,210
(Class B shares)*................................... $ 213 $ 668 $1,129 $ 2,188
(Class II shares)................................... $ 311 $ 751 $1,218 $ 2,507
FOCUSED GROWTH AND INCOME PORTFOLIO
(Class A shares).................................... $ 714 $1,017 $1,322 $ 2,210
(Class B shares)*................................... $ 213 $ 668 $1,129 $ 2,188
(Class II shares)................................... $ 311 $ 751 $1,218 $ 2,507
</TABLE>
- -------------------------------------
* Class B shares convert to Class A shares approximately seven years after
purchase. Therefore, expense information for years 8, 9 and 10 is the same
for both Class A and B shares.
- -------------------
6
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights table for each Portfolio is intended to help you
understand the Portfolio's financial performance since inception. Certain
information reflects financial results for a single Fund share. The total
returns in each table represent the rate that an investor would have earned (or
lost) on an investment in the Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each Portfolio's financial
statements, are included in the Fund's annual report to shareholders, which is
available upon request.
FOCUS PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS)(1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ----------- --------- --------- ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
06/08/98--
10/31/98..... $ 12.50 $ (0.01) $ 0.11 $ 0.10 $ -- $ -- $ -- $ 12.60 0.80%
CLASS B
-------
06/08/98--
10/31/98..... 12.50 (0.04) 0.10 0.06 $ -- $ -- $ -- 12.56 0.48
<CAPTION>
CLASS II
--------
06/08/98--
10/31/98..... 12.50 (0.04) 0.10 0.06 $ -- $ -- $ -- 12.56 0.48
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED(2) (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ----------- ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
06/08/98--
10/31/98..... $ 29,770 1.45%(3) (0.21)%(3) 106%
CLASS B
-------
06/08/98--
10/31/98..... 45,817 2.10(3) (0.92)(3) 106
CLASS II
--------
06/08/98--
10/31/98..... 35,387 2.10(3) (0.93)(3) 106
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/98
--------
<S> <C>
Focus A...................................... 0.32%
Focus B...................................... 0.32
Focus II..................................... 0.32
</TABLE>
-------------------
7
<PAGE>
Financial Highlights
FOCUSED GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET INVEST- MENTS (BOTH FROM FROM NET BUTIONS NET ASSET
VALUE, MENT REALIZED NET INVEST- INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND MENT MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS) (1) UNREALIZED) INCOME INCOME GAINS BUTIONS PERIOD RETURN(2)
- ----------- --------- --------- ------------ ----------- ---------- ------- ------- --------- ------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/15/97--
10/31/97..... $ 12.50 $ 0.01 $(0.53) $ (0.52) $ -- $ -- $ -- $ 11.98 (4.16)%
10/31/98..... 11.98 0.03 1.04 1.07 (0.01) $ -- (0.01) 13.04 8.95
CLASS B
-------
10/15/97--
10/31/97..... 12.50 $ -- (0.54) (0.54) $ -- $ -- $ -- 11.96 (4.32)
10/31/98..... 11.96 (0.07) 1.08 1.01 (0.01) $ -- (0.01) 12.96 8.43
CLASS C
-------
10/15/97--
10/31/97..... 12.50 $ -- $(0.53) $ (0.53) $ -- $ -- $ -- 11.97 (4.24)
10/31/98..... 11.97 (0.07) 1.06 0.99 (0.01) $ -- (0.01) 12.95 8.26
<CAPTION>
RATIO OF NET
INVESTMENT
NET ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS) TO
PERIOD PERIOD TO AVERAGE AVERAGE PORTFOLIO
ENDED(2) (000'S) NET ASSETS(4) NET ASSETS(4) TURNOVER
- ----------- ---------- ---------- ------------ ---------
CLASS A
-------
<S> <C> <C> <C> <C>
10/15/97--
10/31/97..... $ 23,593 1.78%(3) 1.35%(3) 2%
10/31/98..... 9,799 1.78 0.22 98
CLASS B
-------
10/15/97--
10/31/97..... 941 2.43(3) 0.29(3) 2
10/31/98..... 16,157 2.43 (0.52) 98
CLASS C
-------
10/15/97--
10/31/97..... 143 2.43(3) 0.54(3) 2
10/31/98..... 2,490 2.43 (0.53) 98
</TABLE>
- ---------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Annualized
(4) Net of the following expense reimbursements (based on average net
assets):
<TABLE>
<CAPTION>
10/31/97 10/31/98
-------- --------
<S> <C> <C>
Focused Growth and Income A.................. 0.58% 0.62%
Focused Growth and Income B.................. 1.26 0.67
Focused Growth and Income C.................. 3.12 2.11
</TABLE>
- -------------------
8
<PAGE>
Shareholder Account Information
SELECTING A SHARE CLASS
Each 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
o Front-end sales charges, as described below. There are several ways to reduce
these charges, also described below.
o Lower annual expenses than Class B or Class II shares.
CLASS B
o No front-end sales charge; all your money goes to work for you right away.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within six years of purchase, as
described below.
o 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
o Front-end sales charge, as described below.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within eighteen months of purchase,
as described below.
o 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, there is a 1% CDSC on any shares you sell
within one year of 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>
<S> <C>
Years after purchase CDSC on shares being sold
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 a CDSC. If there are not
enough of these shares available, we will sell Shares that have the lowest CDSC.
-------------------
9
<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:
o 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)
o participants in certain retirement plans that meet applicable conditions
o Fund Directors and other individuals who are affiliated with any
Portfolio or other SunAmerica Mutual Funds and their families
o selling brokers and their employees and sales representatives and their
families
o participants in "Net Asset Value Transfer Program"
We will generally waive the CDSC for CLASS B or CLASS II shares in the following
cases:
o within one year of the shareholder's death or becoming disabled
o taxable distributions or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which SunAmerica serves as a fiduciary
o Fund Directors and other individuals who are affiliated with any
Portfolio or other SunAmerica Mutual Funds and their families
o to make taxable distributions from certain retirement plans
o to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
o 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, you may invest
some or all of the proceeds in the same share class of the Portfolio within one
year without a sales charge. 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).
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:
<TABLE>
<CAPTION>
ACCOUNT MAINTENANCE AND
CLASS DISTRIBUTION FEE SERVICE FEE
<S> <C> <C>
A 0.10% 0.25%
B 0.75% 0.25%
II 0.75% 0.25%
</TABLE>
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 investments for
the Portfolios are as follows:
o non-retirement account: $500
o retirement account: $250
o dollar cost averaging: $500 to open; you must invest at least $25 a
month
The minimum subsequent investments for the Portfolios are as follows:
o non-retirement account: $100
o 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.
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.
- -------------------
10
<PAGE>
BUYING SHARES
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
BY CHECK
...............................................................................
o Make out a check for the investment amount, payable to the specific
Portfolio or SunAmerica Funds.
o 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.
o Make out a check for the investment amount payable to the specific
Portfolio or SunAmerica Funds.
o Include the stub from your Fund statement or a note specifying the
Portfolio name, your share class, your account number and the name(s)
in which the account is registered.
o Indicate the Portfolio and account number in the memo section of your
check.
o 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
...............................................................................
o Deliver your completed application to your broker or financial advisor
or fax it to SunAmerica Fund Services, Inc. at 212-551-5585.
o 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.
o 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 Portfolio name, 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.
o 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 Portfolio name, your share class, your 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 an account using dollar cost averaging, see "Additional Investor
Services."
-------------------
11
<PAGE>
Shareholder Account Information
- -------------------------------------------------------------------------------
SELLING SHARES
HOW REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
...............................................................................
o Accounts of any type.
o Sales of any amount.
o Call your broker or financial advisor to place your order to sell
shares.
BY MAIL
...............................................................................
o Accounts of any type.
o Sales of any amount.
o Write a letter of instruction indicating the Portfolio name, 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.
o Include all signatures and any additional documents that may be
required (see next page).
o 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.
o 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
...............................................................................
o Most accounts.
o Sales of less than $100,000.
o Call Shareholder/Dealer Services at 1-800-858-8850 between 8:30 a.m.
and 7:00 p.m. (Eastern time) on most business days. State the Portfolio
name, 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.
o A check will be mailed to the name(s)and address in which the account
is registered, or to a different address indicated in a written
authorization previously provided to the Portfolio by the
shareholder(s)on the account.
By wire
...............................................................................
o Request by mail to sell any amount
o Request by phone to sell less than $100,000.
o Proceeds will normally be wired on the (accounts of any type). next
business day. A $15 fee will be deducted from your account.
To sell shares through a systematic withdrawal plan, see
"Additional Investor Services."
- -------------------
12
<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:
o your address of record has changed within the past 30 days
o you are selling more than $100,000 worth of shares
o 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:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o 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 each Portfolio and
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. Each 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 Fund receives your request in good
order. If the Fund 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 Fund 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 its close of business. The Fund and the
Distributor reserve the right to reject any order to buy shares.
During periods of extreme volatility or market crisis, a 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.
Each Portfolio may invest to a large extent in securities that are primarily
listed on foreign exchanges that trade on weekends or other days when the Fund
does not price its shares. As a result, the value of this Portfolio's shares may
change on days when you will not be able to purchase or redeem your shares.
If the Fund determines that it would be detrimental to the best interests of the
remaining shareholders of the Fund to make payment of redemption proceeds wholly
or partly in cash, the Fund may pay the redemption price by a distribution in
kind of securities from the Fund in lieu of cash. However, the Fund 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 Fund 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.
-------------------
13
<PAGE>
Shareholder Account Information
- -------------------------------------------------------------------------------
EXCHANGES. You may exchange shares of a Portfolio for shares of the same class
of any other SunAmerica Mutual Fund. 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. Your CDSC schedule will not
change if you exchange Class C or Class II shares that you purchased prior to
December 1, 1998 for another Portfolio or fund's Class II shares (which
currently have a longer CDSC schedule).
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. A Portfolio may change or
cancel its exchange privilege at any time, upon 60 days' written notice to its
shareholders. A 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 for further information. You may sell or exchange certificated
shares only by returning the certificates to the Portfolios, along with a letter
of instruction and a signature guarantee. The Portfolios do 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.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the SunAmerica Mutual Funds of your choice. 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:
o Make sure you have at least $5,000 worth of shares in your account.
o 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).
o Specify the payee(s) and amount(s). The payee may be yourself or any
other party, 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.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o 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 a Portfolio
periodically for the same class of shares of one or more other SunAmerica Mutual
Funds. To use:
o Specify the SunAmerica Mutual Fund(s) from which you would like money
withdrawn and into which you would like money invested.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o Specify the amount(s). Each exchange must be worth at least $25.
o Accounts must be registered identically; otherwise a signature
guarantee will be required.
- -------------------
14
<PAGE>
ASSET PROTECTION PLAN (OPTIONAL). Anchor National Life Insurance Company offers
an Asset Protection Plan to certain investors in the Fund. The benefits of this
optional coverage payable at death will be related to the amounts paid to
purchase Fund shares and to the value of the Fund 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 Fund 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 Fund redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in any 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 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, SARSEPs, 401(k) plans, 403(b)
plans and other pension and profit-sharing plans. Using these plans, you can
invest in any SunAmerica Mutual Fund with a low minimum investment of $250 or,
for some group plans, no minimum investment at all. To find out more, call
Shareholder/Dealer Services at 1-800-858-8850.
DIVIDEND AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
o after every transaction that affects your account balance (except a
dividend reinvestment or automatic purchase from your bank account)
o after any changes of name or address of the registered owner(s)
o in all other circumstances, quarterly or annually, depending upon the
Portfolio
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Portfolios generally distribute most or all of their net earnings
in the form of dividends. Income dividends, if any, are paid quarterly by the
FOCUSED GROWTH AND INCOME PORTFOLIO and annually by the other Portfolios.
Capital gains distributions, if any, are paid annually by the Portfolios.
DIVIDEND REINVESTMENTS. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same Portfolio and share
class on which they were paid. Alternatively, dividends and distributions may be
reinvested in any other SunAmerica Mutual Fund 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 a Portfolio meets the requirements for being
a tax-qualified regulated investment company, which each Portfolio has in the
past and intends to in the future, it pays no federal income tax on the earnings
it distributes to shareholders.
Consequently, dividends you receive from a Portfolio, whether reinvested or
taken as cash, are generally considered taxable. Distributions of a 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.
-------------------
15
<PAGE>
SHAREHOLDER ACCOUNT INFORMATION
- -------------------------------------------------------------------------------
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.
- -------------------
16
<PAGE>
MORE INFORMATION ABOUT THE PORTFOLIOS
- -------------------------------------------------------------------------------
INVESTMENT
STRATEGIES
Each Portfolio has its own investment goal and a strategy for pursuing it.
The chart summarizes information about each Portfolio's investment approach.
We have included a glossary to define the investment and risk terminology
used in the chart.
<TABLE>
<S> <C> <C>
FOCUS FOCUSED GROWTH AND
PORTFOLIO INCOME PORTFOLIO
What is the Portfolio's Long-term growth of Long-term growth of capital
investment goal? capital and reasonable level of
current income
- ---------------------------------------------------------------------------------------------------
What are the Portfolio's principal focus growth and value
investment strategies?
- ---------------------------------------------------------------------------------------------------
What are the Portfolio's principal investment (including, when investment (including, when
investment techniques? appropriate, by active appropriate, active trading)
trading) in equity in stocks of large companies
securities, without regard to that offer the potential for
market capitalization long-term growth of capital
and reasonable level of
current income
- ---------------------------------------------------------------------------------------------------
What are the Portfolio's principal equity securities equity securities of large
investments (under normal market companies consisting of a
conditions)? blend of growth companies,
value companies, and companies
with elements of both growth
and value
- ---------------------------------------------------------------------------------------------------
What are the Portfolio's principal o market volatility o stock market volatility
risks? o securities selection o securities selection
o non-diversification o non-diversification
- ---------------------------------------------------------------------------------------------------
</TABLE>
-------------------
17
<PAGE>
MORE INFORMATION ABOUT THE PORTFOLIOS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
FOCUS FOCUSED GROWTH AND
PORTFOLIO INCOME PORTFOLIO
What other investment strategies can
the Portfolio use?
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
o Large company stocks Yes see principal investments
above
o Medium-sized company stocks Yes Yes
o Small company stocks Yes Yes
o Fixed income securities
Investment grade Yes Yes
Junk bonds No Yes
Asset-backed securities Yes Yes
o REITs Yes Yes
o Short-term investments Yes (up to 25%) Yes (up to 25%)
o Defensive investments Yes Yes
o Foreign securities Yes (up to 30%) Yes (up to 30%)
ADRs/EDRs/ Yes Yes
GDRs
Foreign investment companies No No
Currency transactions Yes Yes
o Illiquid securities Yes (up to 15%) Yes (up to 15%)
o Securities lending Yes (up to 33 1/3%) Yes (up to 33 1/3%)
o Borrowing for temporary or Yes (up to 33 1/3%) Yes (up to 33 1/3%)
emergency purposes
o Options and futures Yes Yes
o Hybrid instruments No Yes
o Short sales Yes Yes (up to 25%)
o Short sales (against-the-box) Yes Yes (up to 25%)
o Special situations Yes Yes
- ---------------------------------------------------------------------------------------------------
What other potential risks can o foreign exposure o interest rate fluctuations
affect a Portfolio? o emerging markets o small market capitalization
o illiquidity o foreign exposure
o small market capitalization o illiquidity
o derivatives
o hedging
o credit quality
o emerging markets
o euro conversion
o prepayment
- ---------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
18
<PAGE>
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.
GLOSSARY INVESTMENT TERMINOLOGY
GROWTH OF CAPITAL is growth of the value of an
investment.
ACTIVE TRADING means that a Portfolio may engage 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 a 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 generally have market capitalizations
of over $8.3 billion.
MEDIUM-SIZED COMPANIES generally have market
capitalizations ranging from $1.2 billion to $8.3
billion.
SMALL COMPANIES generally have 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).
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 a Portfolio with sufficient
liquidity to meet redemptions and cover expenses.
DEFENSIVE INVESTMENTS include high quality fixed
income securities and money market instruments. A
Portfolio will make temporary defensive investments in
response to adverse market, economic, political or
other conditions. When a 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, a
Portfolio may not achieve its investment goal.
FOREIGN SECURITIES are issued by companies located
outside of the United States, including emerging
markets. Foreign securities may include American
Depositary Receipts (ADRS) or other similar securities
that convert into foreign securities, such as European
Depositary Receipts (EDRS) and Global Depositary
Receipts (GDRS).
It may be necessary under certain foreign laws, less
expensive, or more expedient to invest in FOREIGN
INVESTMENT COMPANIES, which invest in certain foreign
markets, including emerging markets. Investing through
such vehicles may involve frequent or layered fees or
expenses, and the Advisers will not invest in such
investment companies unless, in their judgment, the
potential benefits justify the payment of any
associated fees and expenses.
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.
-------------------
19
<PAGE>
More Information About the Portfolios
- -------------------------------------
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.
A "JUNK BOND" is a high yield, high risk bond that does not meet the credit
quality standards of investment grade securities.
SECURITIES LENDING involves a loan of securities by a Portfolio in exchange for
cash or collateral. The Fund earns interest on the loan while retaining
ownership of the security.
The Fund may BORROW for temporary or emergency purposes including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of Fund
shares and in the yield on a Portfolio's portfolio. Borrowing will cost the Fund
interest expense and other fees. The cost of borrowing may reduce a 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 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.
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 a
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.
- -------------------
20
<PAGE>
RISK TERMINOLOGY
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Portfolio's portfolio.
SECURITIES SELECTION: A strategy used by a Portfolio, or securities selected by
its Adviser, may fail to produce the intended return.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations
(particularly under $1 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.
NON-DIVERSIFICATION: By concentrating in a smaller number of stocks, a
Portfolio's risk is increased because the effect of each stock on the
Portfolio's performance is greater.
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.
CURRENCY VOLATILITY: The value of a Portfolio's foreign portfolio investments
may fluctuate due to changes in currency rates. A 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.
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.
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.
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. This type of issuer will typically issue JUNK
BONDS. In addition to the risk of default, junk bonds may be more volatile, less
liquid, more difficult to value and more susceptible to adverse economic
conditions or investor perceptions than other bonds.
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.
-------------------
21
<PAGE>
More Information About the Portfolios
- -------------------------------------
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 Portfolios. There can be no
assurance that a Portfolio will not suffer any adverse consequences as a result
of the euro conversion.
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 a 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 a Portfolio may exhibit price
characteristics of longer-term debt securities.
FUND MANAGEMENT
MANAGER. SunAmerica Asset Management Corp. selects the Advisers for the
Portfolios, may manage certain portions of Portfolios, provides various
administrative services, and supervises the daily business affairs of each
Portfolio. The Advisers are responsible for decisions to buy and sell securities
for the Portfolios, selection of broker-dealers and negotiation of commission
rates for their respective portion of the relevant 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 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 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 a Portfolio have the
right to terminate an agreement with an Adviser for that Portfolio at any time
by a vote of the majority of the outstanding voting securities of such
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 each Portfolio. For the fiscal year ended October 31, 1998, the
Focused Growth and Income Portfolio paid SunAmerica a fee equal to 1.00% of
average daily net assets and the Focus Portfolio paid a fee equal to 0.85% of
average daily net assets.
SunAmerica, located in the SunAmerica Center, 733 Third Avenue, New York, New
York 10017, was organized in 1982 under the laws of Delaware, and managed,
advised or administered assets in excess of $16 billion as of March 25, 1999. In
addition to managing the Portfolios, SunAmerica serves as adviser, manager
and/or administrator for Anchor Pathway Fund, Anchor Series Trust, Seasons
Series Trust, SunAmerica Equity Funds, Inc., SunAmerica Income Funds, SunAmerica
Money Market Funds, Inc., SunAmerica Series Trust and SunAmerica Strategic
Investment Series, Inc.
- -------------------
22
<PAGE>
Information About Advisers
- --------------------------
The Advisers and Portfolio Managers for the Portfolios are described below:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGEMENT ALLOCATED AMONG THE FOLLOWING ADVISERS
- ------------------------------- -------------------------------------------------------------
<S> <C>
Focus Portfolio Bramwell Capital Management, Inc. ("Bramwell"),
Jennison Associates LLC ("Jennison")
Marsico Capital Management, LLC ("Marsico")
Focused Growth and Income
Portfolio SunAmerica
Marsico
</TABLE>
DESCRIPTION OF THE ADVISERS
BRAMWELL CAPITAL MANAGEMENT, INC. Bramwell is a Delaware corporation located at
745 Fifth Avenue, New York, NY 10151. As of April 30, 1998 Bramwell had under
management approximately $605 million in assets.
JENNISON ASSOCIATES LLC. Jennison is a Delaware limited liability company
located at 466 Lexington Avenue, New York, NY 10017. As of December 31, 1998,
Jennison had approximately $46.4 billion in assets under management for
institutional and mutual fund clients.
MARSICO CAPITAL MANAGEMENT, LLC. Marsico is a Colorado limited liability company
located at 1200 17th Street, Suite 1300, Denver, CO 80202. As of January 31,
1999, Marsico had approximately $4.75 billion in assets under management.
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Focus Portfolio Elizabeth R. Bramwell Ms. Bramwell founded Bramwell
Portfolio Manager in 1994 and has been the
(Bramwell) Chief Executive Officer ever
since. From 1987 until
February 1994, Ms. Bramwell
was President, Chief
Investment Officer, Portfolio
Manager and Trustee of The
Gabelli Growth Fund.
Spiros "Sig" Segalas Mr. Segalas is a founding
Portfolio Manager director of Jennison, which
(Jennison) was established in 1969, and
he has been a Director and
Equity Portfolio Manager ever
since. In addition,
Mr. Segalas has served as
President and Chief
Investment Officer of
Jennison since 1993 and 1971,
respectively.
</TABLE>
-------------------
23
<PAGE>
<TABLE>
<CAPTION>
Information About Advisers
- -------------------------------------------------------------------------------------------
NAME, TITLE AND AFFILIATION
PORTFOLIO OF PORTFOLIO MANAGER EXPERIENCE
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Focus Portfolio Thomas F. Marsico Mr. Marsico has been the
(continued) Portfolio Manager Chairman and Chief Executive
(Marsico) Officer of Marsico since he
formed Marsico in 1997. From
1988 through 1997,
Mr. Marsico served as the
portfolio manager of the
Janus Twenty Fund and from
1991 through 1997,
Mr. Marsico served as the
portfolio manager of the
Janus Growth & Income Fund.
Focused Growth and Income Thomas F. Marsico See above
Portfolio Portfolio Manager
(Marsico)
Francis Gannon Mr. Gannon has been a Vice
Portfolio Manager President and Portfolio
(SunAmerica) Manager with the firm since
1996. He joined SunAmerica as
an equity analyst in 1993.
</TABLE>
DISTRIBUTOR SunAmerica Capital Services, Inc. distributes each 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 each
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 a 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 one or more of the
Portfolios, 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 Portfolios' 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 Portfolios' 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 Portfolios' 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 .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.
- -------------------
24
<PAGE>
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.
-------------------
25
<PAGE>
[This page left intentionally blank]
<PAGE>
[This page left intentionally blank]
<PAGE>
For More Information
- -------------------------------------------------------------------------------
The following documents contain more information about the Portfolios 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 a Portfolio's performance during the last applicable
period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional information
about the Portfolios' 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 Portfolios
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
or
by calling your broker or financial advisor.
Information about the Portfolios (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 Portfolios 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
MUTUAL
[LOGO] FUNDS
DISTRIBUTOR: SunAmerica Capital Services
INVESTMENT COMPANY ACT
File No. 811-07797
<PAGE>
STYLE SELECT SERIES
Statement of Additional Information
dated April 1, 1999
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
Style Select Series, Inc. (the "Fund") is a mutual fund consisting of
nine different investment portfolios: 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, and the International
Equity Portfolio (each, a "Portfolio"). Each Portfolio is managed by
SunAmerica Asset Management Corp. ("SunAmerica"). With the exception of the
Focused Growth and Income and International Equity Portfolios, each of which
has two investment advisers (each, an "Adviser"), the assets of each Portfolio
are normally allocated among at least three Advisers, each of which is
independently responsible for advising its respective portion of the
Portfolio's assets. The Advisers may include SunAmerica, and otherwise will
consist of professional investment advisers selected by SunAmerica subject to
the review and approval of the Fund's Board of Directors. In choosing Advisers,
SunAmerica will seek to obtain, within each Portfolio's overall objective, a
distinct investment style.
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Fund's Prospectuses dated March 1,
1999 and April 1, 1999. To obtain a Prospectus free of charge, please call
the Fund at (800) 858-8850. Each 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
Page
The Fund ..................................................................B-3
Investment Objectives and Policies.........................................B-3
Investment Restrictions................................................... B-38
Directors and Officers.....................................................B-40
Advisers, Distributor and Administrator....................................B-44
Portfolio Transactions and Brokerage.......................................B-54
Additional Information Regarding Purchase of Shares........................B-57
Additional Information Regarding Redemption of Shares......................B-64
Exchange Privilege.........................................................B-65
Determination of Net Asset Value...........................................B-66
Performance Data...........................................................B-67
Dividends, Distributions and Taxes.........................................B-72
Retirement Plans...........................................................B-77
Description of Shares......................................................B-79
Additional Information.....................................................B-81
Financial Statements.......................................................B-88
Appendix............................................................Appendix-1
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the 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"). The Fund consists
of nine Portfolios; each offers Class A, Class B and Class II shares. Class A
and Class B shares of the Mid-Cap Growth Portfolio, Aggressive Growth
Portfolio, the Value Portfolio and the International Equity Portfolio commenced
offering on November 19, 1996. Class C of those Portfolios commenced offering
March 6, 1997. Class A, Class B and Class C shares of the Large-Cap Growth
Portfolio, the Large-Cap Blend Portfolio, the Large-Cap Value Portfolio and
Small-Cap Value Portfolio commenced offering October 15, 1997. On March 31,
1998, the Directors approved the creation of the Focus Portfolio, which
commenced offering on June 1, 1998. On December 1, 1998, Class C shares of each
of the Portfolios except Focus Portfolio were redesignated as Class II shares.
The Aggressive Growth Portfolio, Large-Cap Value Portfolio, Value Portfolio,
Small-Cap Value Portfolio, Focus Portfolio and International Equity
Portfolio each also offers Class Z shares. The Class Z shares of the Aggressive
Growth Portfolio, Large-Cap Value Portfolio, Value Portfolio, Small-Cap Value
Portfolio and International Equity Portfolio commenced offering on April 1,
1998. The Class Z shares of the Focus Portfolio commenced offering on April
1, 1999. On April 1, 1999, the Large-Cap Blend Portfolio changed its name to the
Focused Growth and Income Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Portfolios are
described in the Fund's Prospectus. Certain types of securities in which the
Portfolios may invest and certain investment practices the Portfolios may
employ, which are described under "More Information about the Portfolios -
Investment Strategies" in the Prospectus, are discussed more fully below.
Unless otherwise specified, each 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. A Portfolio may invest in warrants, which give
the holder of the warrant a right to purchase a given number of shares of a
particular issue at a specified price until expiration. Such investments
generally can provide a greater potential for profit or loss than investments
of equivalent amounts in the underlying common stock. The prices of warrants do
not necessarily move with the prices of the underlying securities. If the
holder does not sell the warrant, he risks the loss of his entire investment if
the market price of the underlying stock does not, before the expiration date,
exceed the exercise price of the warrant plus the cost thereof. Investment in
warrants is a speculative activity. Warrants pay no dividends and confer no
rights (other than the right to purchase the underlying stock) with respect to
the assets of the issuer. 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
B-3
<PAGE>
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, a Portfolio may purchase preferred stock where the
issuer has omitted, or is in danger of omitting, payment of its dividend. Such
investments would be made primarily for their capital appreciation potential.
Investment in Small, Unseasoned Companies. As described in the
Prospectus, each Portfolio may invest in the securities of small companies
having market capitalizations under $1 billion. While such companies may
realize more substantial growth than larger, more established companies, they
may also be subject to some additional risks. It may be difficult to obtain
reliable information and financial data on such companies and the securities of
these small companies may not be readily marketable, making it difficult to
dispose of shares when desirable. A risk of investing in smaller, emerging
companies is that they often are at an earlier stage of development and
therefore have limited product lines, market access for such products,
financial resources and depth in management 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 a Portfolio attempts to dispose of its
holdings, the Portfolio may receive lower prices than might otherwise be
obtained.
Companies with a market capitalization of $1 billion to $5 billion
("Mid-Cap Companies") may also suffer more significant losses as well as
realize more substantial growth than larger, more established issuers. Thus,
investments in such companies tend to be more volatile and somewhat
speculative.
Foreign Securities. Investments in foreign securities offer potential
benefits not available from investments solely in securities of domestic
issuers by offering the opportunity to invest in foreign issuers that appear to
offer growth potential, or in foreign countries with economic policies or
business cycles different from those of the U.S., or to reduce fluctuations in
portfolio value by taking advantage of foreign stock markets that do not move
in a manner parallel to U.S. markets.
Each Portfolio may invest in securities of foreign issuers in the form
of American Depositary Receipts (ADRs). Each Portfolio except the Focus
Portfolio may also invest in securities of foreign issuers in the form of
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
similar securities convertible into securities of foreign issuers. The Focus
Portfolio may invest in U.S. dollar denominated securities of foreign
companies. 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.
B-4
<PAGE>
depositories. Holders of unsponsored ADRs generally bear all the costs
associated with establishing the unsponsored ADR. The depository of an
unsponsored ADR is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored ADR voting rights with respect to the deposited securities or pool
of securities. A Portfolio may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can
reduce costs and delays as well as potential currency exchange and other
difficulties. The Portfolio may purchase securities in local markets and direct
delivery of these ordinary shares to the local depository of an ADR agent bank
in the foreign country. Simultaneously, the ADR agents create a certificate
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 market value
of an ADR may not reflect undisclosed material information concerning the
issuer of the underlying security. For purposes of a Portfolio's investment
policies, the Portfolio's investments in these types of securities will be
deemed to be investments in the underlying securities. Generally ADRs, in
registered form, are dollar denominated securities designed for use in the U.S.
securities markets, which represent and may be converted into the underlying
foreign security. EDRs, in bearer form, are designed for use in the European
securities markets. Each Portfolio except the Focus Portfolio also may invest
in securities denominated in European Currency Units (ECUs). An ECU is a
"basket" consisting of specified amounts of currencies of certain of the twelve
member states of the European Community. In addition, each Portfolio may invest
in securities denominated in other currency "baskets."
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 a 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
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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 Portfolios 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 Portfolios' shares may change
on days when a shareholder will not be able to purchase or redeem shares.
Foreign Investment Companies. Each Portfolio except the Focus
Portfolio may invest in domestic closed-end investment companies that invest in
certain foreign markets, including developing countries or emerging markets.
The Large-Cap Growth, Aggressive Growth and International Equity Portfolios may
invest also in foreign investment companies that invest in such markets. Some
of the countries in which the Portfolios invest may not permit direct
investment by foreign investors such as the Portfolios. Investments in such
countries may be permitted only through foreign government-approved or
authorized investment vehicles, which may include other investment companies.
In addition, it may be less expensive and more expedient for the Portfolios to
invest in investment companies in a country that permits direct foreign
investment. Investing through such vehicles may involve frequent or layered
fees or expenses and may also be subject to limitation under the 1940 Act.
Under the 1940 Act, a fund may invest up to 10% of its assets in shares of
other investment companies and up to 5% of its assets in any one investment
company as long as the investment does not represent more than 3% of the voting
stock of the acquired investment company. The Portfolios will not invest in
such investment companies unless, in the judgment of the Advisers, the
potential benefits of such investments justify the payment of any associated
fees and expenses.
The Large-Cap Growth Portfolio, Aggressive Growth Portfolio and
International Equity Portfolio may invest in Passive Foreign Investment
Companies ("PFICs"), which are any foreign corporations that generate certain
amounts of passive income or hold certain amounts of assets for the production
of passive income. Passive income includes dividends, interest, royalties,
rents and annuities. To the extent that a Portfolio invests in PFICs, income
tax regulations may require the Portfolio to elect to recognize income
associated with the PFIC prior to the actual receipt of any such income in
order to avoid adverse tax consequences.
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
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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.
The Large-Cap Growth Portfolio, Mid-Cap Growth Portfolio and
Aggressive Growth Portfolio may invest in debt securities that the Advisers
expect have the potential for capital appreciation and which are rated as low
as "BBB" by Standard & Poor's Corporation, a division of the McGraw-Hill
Companies ("Standard & Poor's"), or "Baa" by Moody's Investors Service, Inc.
("Moody's") or, if unrated, determined by the Adviser to be of equivalent
quality. The Large-Cap Growth Portfolio and the Aggressive Growth Portfolio may
also invest in debt securities rated below "BBB" or "Baa" or unrated securities
of comparable quality (junk bonds).
The Focused Growth and Income Portfolio may invest up to 35% of its
total assets in securities of issuers other than Large-Cap Companies, which may
include debt securities that the Advisers expect to have the potential for
capital appreciation, including debt securities rated below "BBB" by Standard &
Poor's, or "Baa" by Moody's, or, if unrated, determined by the Advisers to be
of equivalent quality (junk bonds).
The Large-Cap Value Portfolio, Value Portfolio and Small-Cap Value
Portfolio may invest in debt securities that the Advisers expect to have the
potential for capital appreciation and which are rated as low as "BBB" by
Standard & Poor's, or "Baa" by Moody's, or, if unrated, determined by the
Advisers to be of equivalent quality. The Value Portfolio and Small Cap Value
Portfolio may also invest in debt securities rated below "BBB" or "Baa" or
unrated securities of comparable quality (junk bonds).
The International Portfolio may invest up to 35% of its total assets
in debt securities that the Advisers expect have the potential for capital
appreciation. The Portfolio may invest in such debt securities rated below
investment grade, that is below "BBB" by Standard & Poor's, or below "Baa" by
Moody's or, if unrated, determined by the Advisers to be of equivalent quality
(junk bonds).
The Focus Portfolio currently invests 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 or in instruments issued,
guaranteed or insured by the U.S. government, its agencies or
instrumentalities.
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 Focus Portfolio may
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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. A Portfolio may invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances. 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.
A Portfolio may also invest in securities issued by agencies of the
U.S. government or instrumentalities of the U.S. government. These obligations,
including those 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.
Each 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, a 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.
A Portfolio may, in addition to the U.S. government securities noted
above, invest in mortgage-backed securities (including private mortgage-backed
securities), such as GNMA, FNMA or FHLMC certificates (as 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
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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. A Portfolio may purchase mortgage-backed securities at a premium or
at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates,
the most widely available mortgage-backed securities:
GNMA Certificates. GNMA Certificates are mortgage-backed securities
that evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Portfolio may purchase are the modified pass-through type,
which entitle the holder to receive timely payment of
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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 a
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 either
case, are generally not subject to any significant amount of federal income tax
at the entity level.
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The mortgage pools underlying Conventional Mortgage Pass-Throughs
consist of conventional mortgage loans evidenced by promissory notes secured by
first mortgages or first deeds of trust or other similar security instruments
creating a first lien on residential or mixed residential and commercial
properties. Conventional Mortgage Pass-Throughs (whether fixed or adjustable
rate) provide for monthly payments that are a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amount paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans. A trust fund with respect to which a REMIC election has been
made may include regular interests in other REMICs, which in turn will
ultimately evidence interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of interest
than government and government-related pools because of the absence of any
direct or indirect government or agency payment guarantees. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loans, title, pool and hazard insurance and letters of credit. The insurance
and guarantees may be issued by private insurers and mortgage poolers. Although
the market for such securities is becoming increasingly liquid,
mortgage-related securities issued by private organizations may not be readily
marketable.
Another type of mortgage-backed security in which each Portfolio may
invest is a collateralized mortgage obligation ("CMO"). CMOs are fully
collateralized bonds 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 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.
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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.
Each 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 a
Portfolio invests. A common type of stripped mortgage-backed security has one
class receiving some of the interest and all or most of the principal (the
"principal only" class) from the mortgage pool, while the other class will
receive all or most of the interest (the "interest only" class). The yield to
maturity on an interest only class is extremely sensitive not only to changes
in prevailing interest rates, but also to the rate of principal payments,
including principal prepayments, on the underlying pool of mortgage assets, and
a rapid rate of principal payment may have a material adverse effect on a
Portfolio's yield. While interest-only and principal-only securities are
generally regarded as being illiquid, such securities may be deemed to be
liquid if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of a Portfolio's
net asset value per share. Only government interest only and principal only
securities backed by fixed-rate mortgages and determined to be liquid under
guidelines and standards established by the Directors may be considered liquid
securities not subject to a Portfolio's limitation on investments in illiquid
securities.
Certain Risk Factors Relating to High-Yield Bonds. These bonds present
certain risks, which are discussed below:
Sensitivity to Interest Rate and Economic Changes - High-
yield bonds are very sensitive to adverse economic changes and
corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may
experience financial stress that would adversely affect their ability
to service their principal and interest payment obligations, to meet
projected business goals, and to obtain additional financing. If the
issuer of a bond defaults on its obligations to pay interest or
principal or enters into bankruptcy proceedings, a Portfolio may incur
losses or expenses in seeking recovery of amounts owed to it. In
addition, periods of economic uncertainty and changes can be expected
to result
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in increased volatility of market prices of high-yield bonds and the
Portfolio's net asset value.
Payment Expectations - High-yield bonds may contain
redemption or call provisions. If an issuer exercises these provisions
in a declining interest rate market, a Portfolio would have to replace
the security with a lower yielding security, resulting in a decreased
return for investors. Conversely, a high-yield bond's value will
decrease in a rising interest rate market, as will the value of the
Portfolio's assets. If the Portfolio experiences unexpected net
redemptions, this may force it to sell high-yield bonds without regard
to their investment merits, thereby decreasing the asset base upon
which expenses can be spread and possibly reducing the Portfolio's
rate of return.
Liquidity and Valuation - There may be little trading in the
secondary market for particular bonds, which may affect adversely a
Portfolio's ability to value accurately or dispose of such bonds.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of
high-yield bonds, especially in a thin market.
Asset-Backed Securities. Each Portfolio may invest in asset-backed
securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties.
Asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support 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.
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A Portfolio will not pay any additional or separate fees for credit support.
The degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
Zero Coupon Bonds, Step-Coupon Bonds, Deferred Interest Bonds and PIK
Bonds. Fixed income securities in which a Portfolio may invest also include
zero coupon bonds, step-coupon bonds, deferred interest bonds and bonds on
which the interest is payable in kind ("PIK bonds"). Zero coupon and deferred
interest bonds are debt obligations 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. A 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. Each 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 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, each Portfolio may also invest up to 25%
of its total assets in both U.S. and non-U.S. dollar denominated money market
instruments (except that the Focus Portfolio may not invest in non-U.S. dollar
denominated money market instruments) (a) for liquidity purposes (to meet
redemptions and expenses) or (b) to generate a return on idle cash held in a
Portfolio's portfolio during periods when an Adviser is unable to locate
favorable investment opportunities. For temporary defensive purposes, each
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 a 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,
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repurchase agreements, commercial paper, bankers' acceptances, time
deposits and certificates of deposit. In addition, Janus Capital
Corporation, Neuberger Berman, LLC and T. Rowe Price may invest idle
cash of the assets of the Portfolios under their control in money
market mutual funds that they manage. Such an investment may entail
additional fees.
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. A 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"). A 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. A Portfolio may also invest in
obligations issued by mutual savings banks or savings and loan
associations with total assets of less than $1 billion if the
principal amount of these obligations owned by the Portfolio is fully
insured by the FDIC.
Commercial Paper - Short-term notes (up to 12 months) issued
by domestic and foreign corporations or governmental bodies. A
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. A
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 a Portfolio may invest
includes variable amount master demand notes. Variable amount master
demand notes permit a Portfolio to invest varying amounts at
fluctuating rates of interest pursuant to the agreement in the master
note. These are direct lending obligations between the lender and
borrower, they are generally not traded, and there is no secondary
market. Such instruments are payable with accrued interest in whole or
in part on demand. The amounts of the instruments are subject to daily
fluctuations as the participants increase or decrease the extent of
their participation. Investments in these instruments are limited to
those that have a demand feature enabling the Portfolio
unconditionally to receive the amount invested
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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 a Portfolio may invest in them only if it is
determined that at the time of investment the notes are of comparable
quality to the other commercial paper in which the Portfolio may
invest. Master demand notes are considered to have a maturity equal to
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 - A Portfolio may purchase
corporate obligations that mature or that may be redeemed in one year
or less. These obligations originally may have been issued with
maturities in excess of one year. A Portfolio may invest only in
corporate bonds or notes of issuers having outstanding short-term
securities rated in the top two rating categories by Standard & Poor's
and Moody's. See 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. A Portfolio may also purchase securities issued or
guaranteed by a foreign government, its agencies or instrumentalities.
See "Foreign Securities" above.
Repurchase Agreements. A 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 a
Portfolio's money is invested in the security. Whenever a 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 each
Portfolio's
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use of repurchase agreements. A Portfolio will not invest in repurchase
agreements maturing in more than seven days if the aggregate of such
investments along with other illiquid securities exceeds 15% of the value of
its net assets. However, there is no limit on the amount of a Portfolio's net
assets that may be subject to repurchase agreements having a maturity of seven
days or less for temporary defensive purposes.
Diversification. Each 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 any such 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 each Portfolio may invest, and the Focus 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. Each 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, a 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).
In the unlikely event application of a 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. Each Portfolio may write (i.e., sell) call
options ("calls") on securities that are traded on U.S. and foreign securities
exchanges and over-the-counter markets to enhance income through the receipt of
premiums from expired calls and any net profits from closing purchase
transactions, except that the Focus Portfolio will not write calls on
securities that are traded on foreign securities exchanges. After writing such
a covered call, up to 25% of a Portfolio's total assets may be subject to
calls. All such calls written by a Portfolio must be "covered" while the call
is outstanding (i.e., the Portfolio must own the securities subject to the call
or other securities acceptable for applicable escrow requirements). 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.
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Each 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. A Portfolio will receive a premium for writing a
put option that increases the Portfolio's return. A 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, each Portfolio may use interest rate futures contracts, foreign
currency futures contracts and stock and bond index futures contracts,
including futures on U.S. government securities (together, "Futures"); forward
contracts on foreign currencies; and call and put options on equity and debt
securities, Futures, stock and bond indices and foreign currencies, except that
the Focus Portfolio will not use foreign currency futures contracts or forward
contracts on foreign currencies. All puts and calls on securities, interest
rate Futures or stock and bond index Futures or options on such Futures
purchased or sold by a Portfolio will normally be listed on either (1) a
national securities or commodities exchange or (2) over-the-counter markets.
However, each such Portfolio may buy and sell options and Futures on foreign
equity indexes and foreign fixed income securities. Because the markets for
these instruments are relatively new and still developing, the ability of such
a 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 a Portfolio's portfolio resulting from downward trends in the equity and
debt securities markets (generally due to a rise in interest rates); (ii)
protect a Portfolio's unrealized gains in the value of its equity and debt
securities that have appreciated; (iii) facilitate selling securities for
investment reasons; (iv) establish a position in the equity and debt securities
markets as a temporary substitute for purchasing particular equity and debt
securities; or (v) reduce the risk of adverse currency fluctuations.
Forward foreign currency exchange contracts, currency options and
currency swaps may be entered into for non-hedging purposes when an Adviser
anticipates that a foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities or are not included in such portfolio. A Portfolio may use
currency contracts and options to cross-hedge, which involves selling or
purchasing instruments in one currency to hedge against changes in exchange
rates for a different currency with a pattern of correlation. To limit any
leverage in connection with currency contract transactions for non-hedging
purposes, a Portfolio will segregate cash or liquid securities in an amount
sufficient to meet its payment obligations in these transactions or otherwise
"cover" the obligation. Initial margin deposits made in connection with
currency futures transactions or premiums paid for currency options traded
over-the-counter or on a commodities exchange may each not exceed 5% of a
Portfolio's total assets in the case of non-bona fide hedging transactions.
Each such Portfolio may enter into currency swaps. Currency swaps involve the
exchange by a Portfolio with another party of their respective rights to make
or receive payments in specified currencies. Currency swaps usually involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A Portfolio will segregate,
cash or liquid securities equal to the net amount, if any, of the excess of the
Portfolio's obligations over its entitlement with respect to swap transactions.
To the extent that the net amount of a swap is held
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in a segregated account consisting of cash or liquid securities, the Fund
believes that swaps do not constitute senior securities under the 1940 Act and,
accordingly, they will not be treated as being subject to the Portfolio's
borrowing restrictions. The use of currency swaps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If an Adviser is
incorrect in its forecasts of market values and currency exchange rates, the
investment performance of a Portfolio would be less favorable than it would
have been if this investment technique were not used.
A 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 a
Portfolio to retain unrealized gains in the value of portfolio securities that
have appreciated, or to facilitate selling securities for investment reasons, a
Portfolio could: (i) sell Futures; (ii) purchase puts on such Futures or
securities; or (iii) write calls on securities held by it or on Futures. When
hedging to attempt to protect against the possibility that portfolio securities
are not fully included in a rise in value of the debt securities market, a
Portfolio could: (i) purchase Futures, or (ii) purchase calls on such Futures
or on securities. When hedging to protect against declines in the dollar value
of a foreign currency-denominated security, a Portfolio could: (i) purchase
puts on that foreign currency and on foreign currency Futures; (ii) write calls
on that currency or on such Futures; or (iii) enter into forward contracts on
foreign currencies at a lower rate than the spot ("cash") rate. Additional
information about the derivatives the Portfolio may use is provided below.
Options
Options on Securities. As noted above, each Portfolio may write and
purchase call and put options on equity and debt securities.
When a Portfolio writes a call on a security, it receives a premium
and agrees to sell the underlying security to a purchaser of a corresponding
call on the same security during the call period (usually not more than 9
months) at a fixed price (which may differ from the market price of the
underlying security), regardless of market price changes during the call
period. A Portfolio has retained the risk of loss should the price of the
underlying security 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, a 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 a Portfolio retains the
underlying security and the premium received. If a Portfolio could not effect a
closing purchase transaction due to lack of a market, it would hold the
callable securities until the call expired or was exercised.
When a Portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. A Portfolio benefits only if the
call is sold at a profit or if, during the call period, the market price of the
underlying investment is
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<PAGE>
above the sum of the call price plus the transaction costs and the premium paid
and the call is exercised. If the call is not exercised or sold (whether or not
at a profit), it will become worthless at its expiration date and a Portfolio
will lose its premium payment and the right to purchase the underlying
investment.
A put option on securities gives the purchaser the right to sell, and
the writer the obligation to buy, the underlying investment at the exercise
price during the option period. Writing a put covered by segregated liquid
assets equal to the exercise price of the put has the same economic effect to a
Portfolio as writing a covered call. The premium a Portfolio receives from
writing a put option represents a profit as long as the price of the underlying
investment remains above the exercise price. However, a Portfolio has also
assumed the obligation during the option period to buy the underlying
investment from the buyer of the put at the exercise price, even though the
value of the investment may fall below the exercise price. If the put expires
unexercised, a Portfolio (as the writer of the put) realizes a gain in the
amount of the premium. If the put is exercised, a Portfolio must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, a Portfolio may incur a loss, equal to the sum of the sale price of the
underlying investment and the premium received minus the sum of the exercise
price and any transaction costs incurred.
A Portfolio may effect a closing purchase transaction to realize a
profit on an outstanding put option it has written or to prevent an underlying
security from being put. Furthermore, effecting such a closing purchase
transaction will permit a Portfolio to write another put option to the extent
that the exercise price thereof is secured by the deposited assets, or to
utilize the proceeds from the sale of such assets for other investments by the
Portfolio. A Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from writing the option.
When a Portfolio purchases a put, it pays a premium and has the right
to sell the underlying investment to a seller of a corresponding put on the
same investment during the put period at a fixed exercise price. Buying a put
on an investment a Portfolio owns enables the Portfolio to protect itself
during the put period against a decline in the value of the underlying
investment below the exercise price by selling such underlying investment at
the exercise price to a seller of a corresponding put. If the market price of
the underlying investment is equal to or above the exercise price and as a
result the put is not exercised or resold, the put will become worthless at its
expiration date, and the Portfolio will lose its premium payment and the right
to sell the underlying investment pursuant to the put. The put may, however, be
sold prior to expiration (whether or not at a profit).
Buying a put on an investment a Portfolio does not own permits the
Portfolio either to resell the put or buy the underlying investment and sell it
at the exercise price. The resale price of the put will vary inversely with the
price of the underlying investment. If the market price of the underlying
investment is above the exercise price and as a result the put is not
exercised, the put will become worthless on its expiration date. In the event
of a decline in the stock market, a Portfolio could exercise or sell the put at
a profit to attempt to offset some or all of its loss on its portfolio
securities.
When writing put options on securities, to secure its obligation to
pay for the underlying security, a Portfolio will deposit in escrow liquid
assets with a value equal to or greater than the
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exercise price of the underlying securities. A Portfolio therefore forgoes the
opportunity of investing the segregated assets or writing calls against those
assets. As long as the obligation of a Portfolio as the put writer continues,
it may be assigned an exercise notice by the broker-dealer through whom such
option was sold, requiring a Portfolio to take delivery of the underlying
security against payment of the exercise price. A Portfolio has no control over
when it may be required to purchase the underlying security, since it may be
assigned an exercise notice at any time prior to the termination of its
obligation as the writer of the put. This obligation terminates upon expiration
of the put, or such earlier time at which a Portfolio effects a closing
purchase transaction by purchasing a put of the same series as that previously
sold. Once a Portfolio has been assigned an exercise notice, it is thereafter
not allowed to effect a closing purchase transaction.
Each Portfolio may use spread transactions for any lawful purpose
consistent with the Portfolio's investment objective. A Portfolio may purchase
covered spread options from securities dealers. Such covered spread options are
not presently exchange-listed or exchange-traded. The purchase of a spread
option gives a Portfolio the right to put, or sell, a security that it owns at
a fixed dollar spread or fixed yield spread in relationship to another security
that the Portfolio does not own, but which is used as a benchmark. The risk to
a Portfolio in purchasing covered spread options is the cost of the premium
paid for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect a Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is provided only during the life
of the spread option.
Options on Foreign Currencies. Each Portfolio except the Focus
Portfolio may write and purchase puts and calls on foreign currencies. A call
written on a foreign currency by a Portfolio is "covered" if the Portfolio owns
the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account by the Portfolio) upon conversion or exchange of other foreign currency
held in its portfolio. A put option is "covered" if the Portfolio segregates
cash or liquid securities with a value at least equal to the exercise price of
the put option. A call written by a Portfolio on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security the Portfolio owns or
has the right to acquire and is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, a
Portfolio collateralizes the option by segregating cash or liquid securities in
an amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily.
As with other kinds of option transactions, the writing of an option
on currency will constitute only a partial hedge, up to the amount of the
premium received. A Portfolio could be required to purchase or sell currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on currency may constitute an effective hedge against exchange rate
fluctuations; however, in the event of exchange rate movements adverse to a
Portfolio's position, the Portfolio may forfeit the entire amount of the
premium plus related transaction costs.
Options on Securities Indices. As noted above, each Portfolio may
write and purchase call and put options on securities indices. Puts and calls
on broadly-based securities indices are similar
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to puts and calls on securities except that all settlements are in cash and
gain or loss depends on changes in the index in question (and thus on price
movements in the securities market generally) rather than on price movements in
individual securities or Futures. When a Portfolio buys a call on a securities
index, it pays a premium. During the call period, upon exercise of a call by a
Portfolio, a seller of a corresponding call on the same investment will pay the
Portfolio an amount of cash to settle the call if the closing level of the
securities index upon which the call is based is greater than the exercise
price of the call. That cash payment is equal to the difference between the
closing price of the index and the exercise price of the call times a specified
multiple (the "multiplier") which determines the total dollar value for each
point of difference. When a Portfolio buys a put on a securities index, it pays
a premium and has the right during the put period to require a seller of a
corresponding put, upon the Portfolio's exercise of its put, to deliver to the
Portfolio an amount of cash to settle the put if the closing level of the
securities index upon which the put is based is less than the exercise price of
the put. That cash payment is determined by the multiplier, in the same manner
as described above as to calls.
Futures and Options on Futures
Futures. Upon entering into a Futures transaction, a Portfolio will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). The initial margin will be deposited with the
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 a
Portfolio elects to close out its position by taking an opposite position, a
final determination of variation margin is made, additional cash is required to
be paid by or released to the Portfolio, and any loss or gain is realized for
tax purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
a Portfolio's current or intended investments in fixed-income securities. For
example, if a Portfolio owned long-term bonds and interest rates were expected
to increase, that Portfolio might sell interest rate futures contracts. Such a
sale would have much the same effect as selling some of the long-term bonds in
that Portfolio's portfolio. However, since the Futures market is more liquid
than the cash market, the use of interest rate futures contracts as a hedging
technique allows a Portfolio to hedge its interest rate risk without having to
sell its portfolio securities. If interest rates did increase, the value of the
debt securities in the portfolio would decline, but the value of that
Portfolio's interest rate futures contracts would be expected to increase at
approximately the same rate, thereby keeping the net asset value of that
Portfolio from declining as much as it otherwise would have. On the other hand,
if interest rates were expected to decline, interest rate futures contracts may
be purchased to hedge in anticipation of subsequent purchases of long-term
bonds at higher prices. Since the fluctuations in the value of the interest
rate futures contracts should be similar to that of long-term bonds, a
Portfolio could protect itself against the effects of the anticipated rise in
the value of long-term bonds without actually buying them until the necessary
cash became available or the market had stabilized. At that time, the interest
rate futures contracts could be liquidated and that Portfolio's cash reserves
could then be used to buy long-term bonds on the cash market.
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Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Portfolio's current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Portfolio may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
the Portfolio's securities portfolio that might otherwise result. If such
decline occurs, the loss in value of portfolio securities may be offset, in
whole or part, by gains on the Futures position. When a Portfolio is not fully
invested in the securities market and anticipates a significant market advance,
it may purchase stock or bond index futures contracts in order to gain rapid
market exposure that may, in part or entirely, offset increases in the cost of
securities that the Portfolio intends to purchase. As such purchases are made,
the corresponding positions in stock or bond index futures contracts will be
closed out.
As noted above, each Portfolio except the Focus Portfolio may purchase
and sell foreign currency futures contracts for hedging to attempt to protect
its current or intended investments from fluctuations in currency exchange
rates. Such fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities in the
currencies in which they are denominated remains constant. A Portfolio may sell
futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the
resulting adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the Futures contracts. However, if the
value of the foreign currency increases relative to the dollar, the Portfolio's
loss on the foreign currency futures contract may or may not be offset by an
increase in the value of the securities since a decline in the price of the
security stated in terms of the foreign currency may be greater than the
increase in value as a result of the change in exchange rates.
Conversely, a Portfolio could protect against a rise in the dollar
cost of foreign-denominated securities to be acquired by purchasing Futures
contracts on the relevant currency, which could offset, in whole or in part,
the increased cost of such securities resulting from a rise in the dollar value
of the underlying currencies. When a Portfolio purchases futures contracts
under such circumstances, however, and the price of securities to be acquired
instead declines as a result of appreciation of the dollar, the Portfolio will
sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
Options on Futures. As noted above, Portfolios may purchase and write
options on interest rate futures contracts, stock and bond index futures
contracts, forward contracts and foreign currency futures contracts, except
that the Focus Portfolio will not purchase or write options on foreign currency
futures contracts. (Unless otherwise specified, options on interest rate
futures contracts, options on stock and bond index futures contracts and
options on foreign currency futures contracts are collectively referred to as
"Options on Futures.")
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The writing of a call option on a Futures contract constitutes a
partial hedge against declining prices of the securities in the portfolio. If
the Futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the portfolio
holdings. The writing of a put option on a Futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments
required to be delivered under the terms of the Futures contract. If the
Futures price at expiration of the put option is higher than the exercise
price, a Portfolio will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of securities the
Portfolio intends to purchase. If a put or call option a 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, a Portfolio's losses from exercised
Options on Futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
A Portfolio may purchase Options on Futures for hedging purposes,
instead of purchasing or selling the underlying Futures contract. For example,
where a decrease in the value of portfolio securities is anticipated as a
result of a projected market-wide decline or changes in interest or exchange
rates, a Portfolio could, in lieu of selling a Futures contract, purchase put
options thereon. In the event that such decrease occurs, it may be offset, in
whole or part, by a profit on the option. If the market decline does not occur,
the Portfolio will suffer a loss equal to the price of the put. Where it is
projected that the value of securities to be acquired by a Portfolio will
increase prior to acquisition, due to a market advance or changes in interest
or exchange rates, a Portfolio could purchase call Options on Futures, rather
than purchasing the underlying Futures contract. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Portfolio will suffer a loss equal
to the price of the call but the securities the Portfolio intends to purchase
may be less expensive.
Forward contracts on foreign currencies
A forward contract on foreign currencies involves bilateral
obligations of one party to purchase, and another party to sell, a specific
currency at a future date (which may be any fixed number of days from the date
of the contract agreed upon by the parties), at a price set at the time the
contract is entered into. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. No price is paid or received upon the purchase or sale of
a forward contract on foreign currencies. The Focus Portfolio does not utilize
forward contracts on foreign currencies.
A Portfolio may use forward contracts on foreign currencies to protect
against uncertainty in the level of future exchange rates. The use of forward
contracts on foreign currencies does not eliminate fluctuations in the prices
of the underlying securities a Portfolio owns or intends to acquire, but it
does fix a rate of exchange in advance. In addition, although forward contracts
on foreign
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currencies limit the risk of loss due to a decline in the value of the hedged
currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
A Portfolio may enter into forward contracts on foreign currencies
with respect to specific transactions. For example, when a Portfolio enters
into a contract for the purchase or sale of a security denominated in a foreign
currency, or when a Portfolio anticipates receipt of dividend payments in a
foreign currency, the Portfolio may desire to "lock-in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such payment by entering into
a forward contract on foreign currencies, for a fixed amount of U.S. dollars
per unit of foreign currency, for the purchase or sale of the amount of foreign
currency involved in the underlying transaction. A Portfolio will thereby be
able to protect itself against a possible loss resulting from an adverse change
in the relationship between the currency exchange rates during the period
between the date on which the security is purchased or sold, or on which the
payment is declared and the date on which such payments are made or received.
A Portfolio may also use forward contracts on foreign currencies to
lock in the U.S. dollar value of portfolio positions ("position hedge"). In a
position hedge, for example, when a Portfolio believes that foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract on foreign currencies to sell an amount of that foreign
currency approximating the value of some or all of the portfolio securities
denominated in (or affected by fluctuations in, in the case of ADRs) such
foreign currency, or when a Portfolio believes that the U.S. dollar may suffer
a substantial decline against a foreign currency, it may enter into a forward
contract on foreign currencies to buy that foreign currency for a fixed dollar
amount. In this situation a Portfolio may, in the alternative, enter into a
forward contract on foreign currencies to sell a different foreign currency for
a fixed U.S. dollar amount where the Portfolio believes that the U.S. dollar
value of the currency to be sold pursuant to the forward contract will fall
whenever there is a decline in the U.S. dollar value of the currency in which
portfolio securities of the Portfolio are denominated ("cross-hedged"). A
Portfolio may also hedge investments denominated in a foreign currency by
entering into forward currency contracts with respect to a foreign currency
that is expected to correlate to the currency in which the investments are
denominated ("proxy hedging").
The Portfolio will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency underlying
the forward contract or the currency being hedged. To the extent that a
Portfolio is not able to cover its forward currency positions with underlying
portfolio securities, the Portfolio will segregate cash or liquid securities
having a value equal to the aggregate amount of the Portfolio's commitments
under forward contracts on foreign currencies entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated assets will equal the amount of the
Portfolio's commitments with respect to such contracts. As an alternative to
segregating assets, a Portfolio may purchase a call option permitting the
Portfolio to purchase the amount of foreign currency being hedged by a forward
sale contract at a price no higher than the forward contract on foreign
currencies price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to
B-25
<PAGE>
a forward purchase contract at a price as high or higher than the forward
contract on foreign currencies price. Unanticipated changes in currency prices
may result in poorer overall performance for a Portfolio than if it had not
entered into such contracts.
The precise matching of the forward contract on foreign currencies
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change
as a consequence of market movements in the value of these securities between
the date the forward contract on foreign currencies is entered into and the
date it is sold. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot (i.e., cash) market (and bear the
expense of such purchase), if the market value of the security is less than the
amount of foreign currency a Portfolio is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency a Portfolio is obligated to
deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts on foreign currencies involve the risk that
anticipated currency movements will not be accurately predicted, causing a
Portfolio to sustain losses on these contracts and transactions costs.
At or before the maturity of a forward contract on foreign currencies
requiring a Portfolio to sell a currency, the Portfolio may either sell a
portfolio security and use the sale proceeds to make delivery of the currency
or retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract pursuant to which the Portfolio will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, a Portfolio may close out a forward contract
on foreign currencies, requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. A Portfolio would
realize a gain or loss as a result of entering into such an offsetting forward
contract on foreign currencies under either circumstance to the extent the
exchange rate or rates between the currencies involved moved between the
execution dates of the first contract and offsetting contract.
The cost to a Portfolio of engaging in forward contracts on foreign
currencies varies with factors such as the currencies involved, the length of
the contract period and the market conditions then prevailing. Because forward
contracts on foreign currencies are usually entered into on a principal basis,
no fees or commissions are involved. Because such contracts are not traded on
an exchange, a Portfolio must evaluate the credit and performance risk of each
particular counterparty under a forward contract on foreign currencies.
Although a Portfolio values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. A Portfolio may convert foreign currency from time to
time, and investors should be aware of the costs of currency conversion.
Foreign exchange dealers do not charge a fee for conversion, but they do seek
to realize a profit based on the difference between the prices at which they
buy and sell various currencies.
B-26
<PAGE>
Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate,
while offering a lesser rate of exchange should the Portfolio desire to resell
that currency to the dealer.
Additional Information About 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 a 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. A
Portfolio's option activities may affect its turnover rate and brokerage
commissions. The exercise by a Portfolio of puts on securities will result in
the sale of related investments, increasing portfolio turnover. Although such
exercise is within a Portfolio's control, holding a put might cause the
Portfolio to sell the related investments for reasons that would not exist in
the absence of the put. A Portfolio will pay a brokerage commission each time
it buys a put or call, sells a call, or buys or sells an underlying investment
in connection with the exercise of a put or call. Such commissions may be
higher than those 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 a Portfolio's net asset value being more sensitive to changes
in the value of the underlying investments.
In the future, each Portfolio may employ strategies that are not
presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Portfolio's investment objectives,
legally permissible and adequately disclosed.
Regulatory Aspects of Derivatives
Each Portfolio must operate within certain restrictions as to its long
and short positions in Futures and options thereon under a rule (the "CFTC
Rule") adopted by the Commodity Futures Trading Commission (the "CFTC") under
the Commodity Exchange Act (the "CEA"), which excludes the Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined in the
CEA) if it complies with the CFTC Rule. In particular, the Portfolio may (i)
purchase and sell Futures and options thereon for bona fide hedging purposes,
as defined under CFTC regulations, without regard to the percentage of the
Portfolio's assets committed to margin and option premiums, and (ii) enter into
non-hedging transactions, provided that the Portfolio may not enter into such
non-hedging transactions if, immediately thereafter, the sum of the amount of
initial margin deposits on the Portfolio's existing Futures positions and
option premiums would exceed 5% of the fair value of its portfolio, after
taking into account unrealized profits and unrealized losses on any such
B-27
<PAGE>
transactions. Margin deposits may consist of cash or securities acceptable to
the broker and the relevant contract market.
Transactions in options by a Portfolio are subject to limitations
established by each of the exchanges governing the maximum number of options
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 a Portfolio may write
or hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a 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 and in currency
exchange transactions involves investment risks and transaction costs to which
a Portfolio would not be subject absent the use of these strategies. If the
Adviser's predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
a Portfolio may leave the Portfolio in a worse position than if such strategies
were not used. 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 onerous than margin requirements
in the securities markets. Therefore, increased participation by speculators in
the Futures markets may cause temporary price distortions.
If a Portfolio 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.
B-28
<PAGE>
Illiquid and Restricted Securities. No more than 15% of the value of a
Portfolio's net assets determined as of the date of purchase may be invested in
illiquid securities, including repurchase agreements 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, each of the Portfolios will seek to obtain the right of
registration at the expense of the issuer (except in the case of Rule 144A
securities, 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 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
B-29
<PAGE>
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, a Portfolio may acquire securities issued by the U.S. government,
its agencies or instrumentalities in a private placement.
Commercial paper issues in which a Portfolio's net assets may be
invested include securities issued by major corporations without registration
under the Securities Act in reliance on the exemption from such registration
afforded by Section 3(a)(3) thereof, and commercial paper issued in reliance on
the so-called private placement exemption from registration afforded by Section
4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper is
restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Portfolio's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Adviser has determined to be liquid
pursuant to guidelines established by the Directors. The Directors have
delegated to the Advisers the function of making day-to-day determinations of
liquidity with respect to Section 4(2) paper, pursuant to guidelines approved
by the Directors that require the Advisers to take into account the same
factors described above for other restricted securities and require the
Advisers to perform the same monitoring and reporting functions.
Short Sales. Each 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, a 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 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. A 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. A 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
B-30
<PAGE>
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.
Each Portfolio may make "short sales against the box." A short sale is
against the box to the extent that the Portfolio contemporaneously owns, or has
the right to obtain without payment, securities identical to those sold short.
A Portfolio may not enter into a short sale, including a short sale against the
box, if, as a result, more than 25% of its net assets would be subject to such
short sales.
Hybrid Instruments; Indexed/Structured Securities. Hybrid Instruments,
including indexed or structured securities, combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument. The Focus Portfolio will not invest in Hybrid Instruments.
Generally, a Hybrid Instrument will be a debt security, preferred stock,
depository share, trust certificate, certificate of deposit or other evidence
of indebtedness on which a portion of or all interest payments, and/or the
principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Portfolio may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transactions costs associated with buying and currency-hedging the foreign bond
positions. One solution would be to purchase a U.S. dollar-denominated Hybrid
Instrument whose redemption price is linked to the average three year interest
rate in a designated group of countries. The redemption price formula would
provide for payoffs of greater than par if the average interest rate was lower
than a specified level, and payoffs of less than par if rates were above the
specified level. Furthermore, the Portfolio could limit the downside risk of
the security by establishing a minimum redemption price so that the principal
paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a
structured security with an embedded put option, would be to give the Portfolio
the desired European bond exposure while avoiding currency risk, limiting
downside market risk, and lowering transactions costs. Of course, there is no
guarantee that the strategy will be successful and the Portfolio could lose
money if, for example, interest rates do not move as anticipated or credit
problems develop with the issuer of the Hybrid.
B-31
<PAGE>
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has
a fixed principal amount, is denominated in U.S. dollars or bears interest
either at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors unrelated to the operations or credit quality of
the issuer of the Hybrid Instrument and which may not be readily foreseen by
the purchaser, such as economic and political events, the supply and demand for
the Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion
of the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by
the terms of the Hybrid Instrument and have an even more dramatic and
substantial effect upon the value of the Hybrid Instrument. Also, the prices of
the Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor,
and, therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. Under certain conditions, the redemption (or sale)
value of such an investment could be zero. In addition, because the purchase
and sale of Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a transaction
between the Portfolio and the issuer of the Hybrid Instrument, the
creditworthiness of the counterparty or issuer of the Hybrid Instrument would
be an additional risk factor the Portfolio would have to consider and monitor.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, the
Securities and Exchange Commission (the "SEC"), which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental regulatory
authority.
B-32
<PAGE>
The various risks discussed above, particularly the market risk of
such instruments, may in turn cause significant fluctuations in the net asset
value of the Portfolio. Accordingly, each Portfolio will limit its investments
in Hybrid Instruments to 10% of total assets at the time of purchase. However,
because of their volatility, it is possible that a Portfolio's investment in
Hybrid Instruments will account for more than 10% of the Portfolio's return
(positive or negative).
When-Issued Securities and Firm Commitment Agreements. Each Portfolio
except the Focus Portfolio may purchase or sell securities on a "when-issued"
or "delayed delivery" basis and may purchase securities on a firm commitment
basis. Although a Portfolio will enter into such transactions for the purpose
of acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Portfolio may dispose of a commitment prior
to settlement. "When-issued" or "delayed delivery" refers to securities whose
terms and indenture are available and for which a market exists, but which are
not available for immediate delivery. When such transactions are negotiated,
the price (which is generally expressed in yield terms) is fixed at the time
the commitment is made, but delivery and payment for the securities take place
at a later date. During the period between commitment by a Portfolio and
settlement (generally within two months but not to exceed 120 days), no payment
is made for the securities purchased by the purchaser, and no interest accrues
to the purchaser from the transaction. Such securities are subject to market
fluctuation, and the value at delivery may be less than the purchase price. A
Portfolio will maintain a segregated account with its Custodian, consisting of
cash or liquid securities at least equal to the value of purchase commitments
until payment is made. A Portfolio will likewise segregate liquid assets in
respect of securities sold on a delayed delivery basis.
A Portfolio will engage in when-issued transactions in order to secure
what is considered to be an advantageous price and yield at the time of
entering into the obligation. When a Portfolio engages in when-issued or
delayed delivery transactions, it relies on the buyer or seller, as the case
may be, to consummate the transaction. Failure to do so may result in a
Portfolio losing the opportunity to obtain a price and yield considered to be
advantageous. If a Portfolio chooses to (i) dispose of the right to acquire a
when-issued security prior to its acquisition or (ii) dispose of its right to
deliver or receive against a firm commitment, it may incur a gain or loss. (At
the time a Portfolio makes a commitment to purchase or sell a security on a
when-issued or firm commitment basis, it records the transaction and reflects
the value of the security purchased, or if a sale, the proceeds to be received
in determining its net asset value.)
To the extent a Portfolio engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Portfolio enters into such transactions only with the
intention of actually receiving or delivering the securities, although
when-issued securities and firm commitments may be sold prior to the settlement
date. In addition, changes in interest rates in a direction other than that
expected by the Adviser before settlement of a purchase will affect the value
of such securities and may cause a loss to a Portfolio.
B-33
<PAGE>
When-issued transactions and firm commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Portfolio might sell securities in
its portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Portfolio might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields. One form of when-issued
or delayed delivery security that each Portfolio may purchase is a "to be
announced" or "TBA" mortgage-backed security. A TBA mortgage-backed security
transaction arises when a mortgage-backed security is purchased or sold with
the specific pools to be announced on a future settlement date.
Borrowing. As a matter of fundamental policy each Portfolio is authorized to
borrow up to 331/3% of its total assets for temporary or emergency purposes. In
seeking to enhance investment performance, each Portfolio (except the Focus
Portfolio, notwithstanding Fundamental Investment Restriction number 5) 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 a 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. Each 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 a
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, each Portfolio except
the Focus 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 respective 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 each 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 a 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 a Portfolio's assets
fluctuate in value, but borrowing obligations are fixed when the Portfolio has
outstanding borrowings, the net asset value per share of a Portfolio
B-34
<PAGE>
correspondingly will tend to increase and decrease more when the Portfolio's
assets increase or decrease in value than would otherwise be the case. A
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, each 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, a Portfolio receives income while retaining the securities'
potential for capital appreciation. The advantage of such loans is that a
Portfolio continues to receive the interest and dividends on the loaned
securities while at the same time earning interest on the collateral, which
will be invested in 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 a Portfolio at any time. If the borrower fails to maintain
the requisite amount of collateral, the loan automatically terminates, and the
Portfolio could use the collateral to replace the securities while holding the
borrower liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities
fail financially. However, these loans of portfolio securities will 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 a Portfolio; and any
gain or loss in the market price of the loaned security during the loan would
inure to the Portfolio. Each Portfolio will pay reasonable finders',
administrative and custodial fees in connection with a loan of its 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, each Portfolio will follow the policy of calling the loan, in
whole or in part as may be appropriate, to permit the exercise of such rights
if the matters involved would have a material effect on the Portfolio's
investment in the securities that are the subject of the loan.
Reverse Repurchase Agreements. A Portfolio may enter into reverse
repurchase agreements with brokers, dealers, domestic and foreign banks or
other financial institutions that have been determined by the Adviser to be
creditworthy. In a reverse repurchase agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a reverse repurchase agreement is the speculative
factor known as leverage. A Portfolio will enter into a reverse repurchase
agreement only if the interest income from investment of the proceeds is
expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement.
The Portfolio will maintain with the Custodian a separate account with a
segregated portfolio of cash or liquid securities in an amount at least equal
to its purchase obligations under these agreements (including accrued
interest). In the event that the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the
B-35
<PAGE>
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Portfolio's repurchase obligation, and the Portfolio's
use of proceeds of the agreement may effectively be restricted pending such
decision. Reverse repurchase agreements are considered to be borrowings and are
subject to the percentage limitations on borrowings. See "Investment
Restrictions."
Dollar Rolls. Each Portfolio may enter into "dollar rolls" in which a
Portfolio sells mortgage or other asset-backed securities ("Roll Securities")
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a
specified future date. During the roll period, the Portfolio foregoes principal
and interest paid on the Roll Securities. The Portfolio is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Portfolio also could be
compensated through the receipt of fee income equivalent to a lower forward
price. A "covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position that matures on
or before the forward settlement date of the dollar roll transaction. A
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. A Portfolio may acquire standby commitments to enhance the liquidity
of portfolio securities, but only when the issuers of the commitments present
minimal risk of default. Ordinarily, the Portfolio may not transfer a standby
commitment to a third party, although it could sell the underlying municipal
security to a third party at any time. A Portfolio may purchase standby
commitments separate from or in conjunction with the purchase of securities
subject to such commitments. In the latter case, the Portfolio would pay a
higher price for the securities acquired, thus reducing their yield to
maturity. Standby commitments will not affect the dollar-weighted average
maturity of the Portfolio, or the valuation of the securities underlying the
commitments. Issuers or financial intermediaries may obtain letters of credit
or other guarantees to support their ability to buy securities on demand. The
Adviser may rely upon its evaluation of a bank's credit in determining whether
to support an instrument supported by a letter of credit. Standby commitments
are subject to certain risks, including the ability of issuers of standby
commitments to pay for securities at the time the commitments are exercised;
the fact that standby commitments are not marketable by the Portfolio; and the
possibility that the maturities of the underlying securities may be different
from those of the commitments.
B-36
<PAGE>
Interest-Rate Swaps, Mortgage Swaps, Caps, Collars and Floors. In
order to protect the value of portfolios from interest rate fluctuations and to
hedge against fluctuations in the fixed income market in which certain of the
Portfolios' investments are traded, the Portfolio may enter into interest-rate
swaps and mortgage swaps or purchase or sell interest-rate caps, floors or
collars. The Portfolio will enter into these hedging transactions primarily to
preserve a return or spread on a particular investment or portion of the
portfolio and to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio may also enter
into interest-rate swaps for non-hedging purposes. Interest-rate swaps are
individually negotiated, and the Portfolio expects to achieve an acceptable
degree of correlation between its portfolio investments and interest-rate
positions. A Portfolio will 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.
A Portfolio will enter into these transactions only with banks and
recognized securities dealers believed by the Adviser to present minimal credit
risk in accordance with guidelines established by the Board of Directors. If
there is a default by the other party to such a transaction, the Portfolio will
have to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
Mortgage swaps are similar to interest-rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, upon which the value of the interest payments is based, is tied to a
reference pool or pools of mortgages.
B-37
<PAGE>
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. Each 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 each Portfolio certain investment
restrictions that are fundamental policies and cannot be changed without the
approval of the holders of a majority of that Portfolio's outstanding shares.
Such majority is defined as the vote of the lesser of (i) 67% or more of the
outstanding shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present in person or by proxy or (ii) more than 50% of
the outstanding shares. All percentage limitations expressed in the following
investment restrictions are measured immediately after the relevant transaction
is made. Each Portfolio may not:
1. 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 a 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. Any Portfolio may engage in transactions in put and
call options on securities, indices and currencies, spread transactions,
forward and futures contracts on securities, indices and currencies, put and
call options on such futures contracts, forward commitment transactions,
forward foreign currency exchange contracts, interest
B-38
<PAGE>
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) each Portfolio may borrow in amounts
up to 33 1/3% of its total assets for temporary or emergency purposes, (ii) each
Portfolio may borrow for investment purposes to the maximum extent permissible
under the 1940 Act (i.e., presently 50% of net assets), and (iii) a Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities. This policy shall not prohibit a
Portfolio's engaging in reverse repurchase agreements, dollar rolls and similar
investment strategies described in the Prospectus and Statement of Additional
Information, as they may be amended from time to time.
6. Issue senior securities as defined in the 1940 Act, except that
each Portfolio may enter into repurchase agreements, reverse repurchase
agreements, dollar rolls, lend its portfolio securities and borrow money, as
described above, and engage in similar investment strategies described in the
Prospectus and Statement of Additional Information, as they may be amended from
time to time.
7. Engage in underwriting of securities issued by others, except to
the extent that the Portfolio may be deemed to be an underwriter in connection
with the disposition of portfolio securities of the Portfolio.
The following additional restrictions are not fundamental policies and
may be changed by the Directors without a vote of shareholders. Each 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, a Portfolio may pledge assets in
reverse repurchase agreements, dollar rolls and similar investment strategies
described in the Prospectus and Statement of Additional Information, as they
may be amended from time to time.
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.
B-39
<PAGE>
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 a Portfolio's net assets would be so invested. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act that have a
readily available market, and commercial paper exempted from registration under
the Securities Act pursuant to Section 4(2) of that Act that may be offered and
sold to "qualified institutional buyers" as defined in Rule 144A, which the
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. and the
Fund. An asterisk indicates those Directors who are interested persons of the
Fund within the meaning of the 1940 Act.
<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; Of Counsel,
430 East 86th Street Board Kramer, Levin, Naftalis & Frankel;
New York, NY 10028 Chairman of the Boards of
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.
</TABLE>
B-40
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
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.
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.
</TABLE>
B-41
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
Robert M. Zakem, 41 Secretary and Chief Senior Vice President and General
The SunAmerica Center Compliance Officer 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" of the Trust 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 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
B-42
<PAGE>
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.
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 five 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 February 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.
B-43
<PAGE>
The following shareholders owned of record or beneficially 5% or more of
the indicated Portfolio Class' shares outstanding as of December 31, 1998:
Value Portfolio-Class B-Merrill, Lynch, Pierce, Fenner & Smith, Inc. ("Merrill
Lynch"), Jacksonville, FL 32246-owned of record 8%; Class II, Merrill Lynch,
Jacksonville, FL 32246-owned of record 21%; Class Z-Fidelity Investments
Institutional Operations Co. ("FIIOC") As Agent for Certain employee benefit
Plans, Covington, KY 41015-owned of record 91%; FIIOC As Agent for Certain
Non-Qualified Employee Benefit Plans, Covington, KY 41015-owned of record 8%;
Aggressive Growth Portfolio-Class B-Merrill Lynch, Jacksonville, FL 32246-owned
of record 9%; Class II-Merrill Lynch, Jacksonville, FL 32246-owned of record
35%; Class Z-FIIOC As Agent for Certain Employee Benefit Plans, Covington, KY
41015-owned of record 61%; FIIOC As Agent for Certain Non-Qualified Employee
Benefit Plans, Covington, KY 41015-owned of record 38%; Mid-Cap Growth
Portfolio-Class B-Merrill Lynch, Jacksonville, FL 32246-owned of record 9%;
Class II-Merrill Lynch, Jacksonville, FL 32246-owned of record 29%;
International Equity Portfolio-Class A-SunAmerica Inc., Account B, Los Angeles,
CA 90067-owned beneficially 5%; Class B-Merrill Lynch, Jacksonville FL
32246-owned of record 6%; Class II-Merrill Lynch, Jacksonville, FL 32246-owned
of record 23%; Class Z-FIIOC As Agent for Certain Employee Benefit Plans,
Covington, KY 41015-owned of record 47%; FIIOC As Agent for Certain
Non-Qualified Employee Benefit Plans, Covington, KY 41015-owned of record 52%;
Small Cap Value Portfolio-Class B-Merrill Lynch, Jacksonville, FL 32246-owned
of record 9%; Class II-Merrill Lynch, Jacksonville, FL 32246-owned of record
20%; Class Z-FIIOC As Agent for Certain Employee Benefit Plans, Covington KY
41015-owned of record 43%; FIIOC As Agent for Certain Non-Qualified Employee
Benefit Plans, Covington, KY 41015-owned of record 56%; Large-Cap Value
Portfolio-Class B-Merrill Lynch, Jacksonville, FL 32246-owned of record 7%;
Class II-Merrill Lynch, Jacksonville, Fl 33246-owned of record 17%; Class
Z-FIIOC As Agent for certain Employee Benefit Plans, Covington, KY 41015-owned
of record 37%; FIIOC As Agent for Certain Non-Qualified Employee Benefit Plans,
Covington KY 41015-owned of record 62%; Large-Cap Growth Portfolio-Class
B-Merrill Lynch, Jacksonville, FL 32246-owned of record 9%; Class II-Merrill
Lynch, Jacksonville, FL 32246-owned of record 15%; Focus Portfolio-Class
B-Merrill Lynch, Jacksonville, FL 32246-owned of record 6%. A shareholder who
owns beneficially, directly or indirectly, 25% or more of a Portfolio's
outstanding voting securities may be deemed to "control" (as defined in the
1940 Act) that Portfolio.
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 each of the
Portfolios pursuant to the Investment Advisory and Management Agreement (the
"Management Agreement") with the Fund, on behalf of each 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 March 25, 1999, SunAmerica managed more
than $16 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 each
B-44
<PAGE>
Portfolio and obtains and evaluates economic, statistical and financial
information to formulate and implement investment policies for each Portfolio.
Any investment program undertaken by SunAmerica will at all times be subject to
the policies and control of the Directors. SunAmerica also provides certain
administrative services to each Portfolio.
Except to the extent otherwise specified in the Management Agreement,
each Portfolio pays, or causes to be paid, all other expenses of the Fund and
each of the Portfolios, including, without limitation, charges and expenses of
any registrar, custodian, transfer and dividend disbursing agent; brokerage
commissions; taxes; engraving and printing of share certificates; registration
costs of the Portfolios 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
Portfolios, and supplements thereto, to the shareholders of the Portfolios; all
expenses of shareholders' and Directors' meetings and of preparing, printing
and mailing proxy statements and reports to shareholders; all expenses incident
to any dividend, withdrawal or redemption options; fees and expenses of legal
counsel and independent accountants; membership dues of industry associations;
interest on borrowings of the Portfolios; postage; insurance premiums on
property or personnel (including Officers and Directors) of the Fund 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 fees that apply to each
Portfolio are set forth in the Prospectus.
SunAmerica has agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate of 1.78% of the
assets of Class A shares and 2.43% of the assets of Class B and Class II shares
for each such Portfolio (other than the International Equity Portfolio) and
2.03% of the assets of Class A shares and 2.68% of the assets of Class B and
Class II shares for the International Equity Portfolio. With respect to the
Focus Portfolio, SunAmerica has agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate of 1.45% of the
assets of Class A shares and 2.10% of the assets of Class B and Class II shares
for the Portfolio. SunAmerica also may voluntarily waive or reimburse additional
amounts to increase the investment return to a Portfolio's investors. Further,
any waivers or reimbursements made by SunAmerica with respect to a Portfolio are
subject to recoupment from that Portfolio within the following two years,
provided that the Portfolio is able to effect such payment to 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 a Portfolio until collection is probable, but
appear as footnote disclosure to each Portfolio's financial statements. At such
time as it appears probable that a 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 each
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 respective Portfolio's outstanding voting securities. Any such
continuation also requires approval by
B-45
<PAGE>
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 a Portfolio at any time, without penalty, on 60 days' written notice by the
Directors, by the holders of a majority of the respective Portfolio's
outstanding voting securities or by SunAmerica. The Management Agreement
automatically terminates with respect to each 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 Portfolios, or their shareholders, for any act or omission by it or for
any losses sustained by the Portfolios or their 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"), Bankers Trust
Company ("BT"), Berger Associates, Inc. ("Berger"), David L. Babson & Co., Inc.
("Babson"), Davis Selected Advisers, L.P. ("Davis"), Bramwell Capital
Management, Inc. ("Bramwell"), The Glenmede Trust Company ("Glenmede"), Janus
Capital Corporation ("Janus"), Jennison Associates LLC ("Jennison"), Lazard
Asset Management ("Lazard"), L. Roy Papp & Associates ("Papp"), Marsico Capital
Management, LLC ("Marsico"), Miller Anderson & Sherrerd, LLP ("MAS"), Montag &
Caldwell, Inc. ("Montag & Caldwell"), Neuberger Berman, LLC ("Neuberger
Berman"), Rowe Price-Fleming International, Inc. ("Rowe-Fleming"), T. Rowe Price
Associates, Inc. ("T. Rowe Price"), Warburg Pincus Asset Management, Inc.
("Warburg"), and Wellington Management Company, LLP ("Wellington Management")
act as Advisers to certain of the ^ Portfolios pursuant to various subadvisory
agreements with SunAmerica. SunAmerica advises a portion of the Aggressive
Growth Portfolio and the Focused Growth and Income Portfolio.
B-46
<PAGE>
STYLE-BASED PORTFOLIOS
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGEMENT ALLOCATED
--------- ------------------------------
AMONG THE FOLLOWING ADVISERS
----------------------------
<S> <C>
Large-Cap Growth Portfolio Janus
Papp
Montag & Caldwell
Mid-Cap Growth Portfolio MAS
T. Rowe Price
Wellington Management
Aggressive Growth Portfolio Janus
SunAmerica
Warburg
Large-Cap Value Portfolio Babson
Davis
Wellington Management
Value Portfolio American Century
Davis
Neuberger Berman
Small-Cap Value Portfolio Berger*
Lazard
Glenmede
</TABLE>
* Pursuant to an agreement between Berger and Perkins, Wolf, McDonnell &
Company ("PWM"), PWM manages Berger's portion of the Small Cap Value
Portfolio.
STYLIZED PORTFOLIOS
<TABLE>
<CAPTION>
<S> <C>
Focus Portfolio Bramwell
Jennison
Marsico
International Equity Portfolio BT
Rowe-Fleming
Focused Growth and Income SunAmerica
Portfolio Marsico
</TABLE>
Each of the other Advisers is independent of SunAmerica and discharges its
responsibilities subject to the policies of the Directors and the supervision
of SunAmerica, which pays the other Advisers' fees.
B-47
<PAGE>
American Century is a wholly-owned subsidiary of American Century Companies,
Inc. Babson is a wholly-owned subsidiary of DLB Acquisition Corp., a holding
company controlled by MassMutual Holding Company, a holding company, and
wholly-owned subsidiary of Massachusetts Mutual Life Insurance, a mutual life
insurance company. Berger is a wholly-owned subsidiary of Kansas City Southern
Industries, Inc. ("KCSI"). BT is a wholly-owned subsidiary of Bankers Trust New
York Corporation. Bramwell is wholly-owned by Elizabeth R. Bramwell who owns
all of the outstanding capital stock. Davis' sole general partner is Venture
Advisers, Inc. Shelby M.C. Davis is the controlling shareholder of the general
partner. Glenmede is a wholly-owned subsidiary of The Glenmede Corporation.
Janus is controlled by KCSI, which owns approximately 83% of the outstanding
voting stock of Janus. KCSI is a publicly traded holding company with principal
operations in rail transportation and financial asset management businesses.
Thomas H. Bailey, President and Chairman of the Board of Janus owns
approximately 12% of its voting stock and, by agreement with KCSI, selects a
majority of Janus' Board. Jennison is wholly-owned by The Prudential Insurance
Company of America. Lazard is a division of Lazard Freres & Co. LLC, a New York
limited liability company. Papp is controlled by its partners, L. Roy Papp and
Rosellen C. Papp. Thomas F. Marsico owns 50% of Marsico's voting stock and Bank
of America owns 50% of Marsico's voting stock. MAS is a wholly-owned indirect
subsidiary of Morgan Stanley Dean Witter & Co., a financial services company. ^
Montag & Caldwell is an indirect wholly-owned subsidiary of Alleghany
Corporation. Robert H. Perkins owns 49% of PWM's outstanding common stock.
Rowe-Fleming is owned by T. Rowe Price, Flemings and Jardine Fleming Group
Limited. T. Rowe Price is a publicly traded company. Warburg is indirectly
controlled by Warburg, Pincus & Co., which has no businesses other than being a
holding company of Warburg and its affiliates. The following persons are
managing partners of Wellington Management: Robert W. Doran, Duncan M.
McFarland and John R. Ryan.
As described in the Prospectus, SunAmerica will initially allocate the
assets of each Portfolio equally among the Advisers for that Portfolio, and
subsequently allocations of new cash flow and of redemption requests will be
made equally among the Advisers of each Portfolio unless SunAmerica determines,
subject to the review of the Directors, that a different allocation of assets
would be in the best interests of a Portfolio and its shareholders. The Fund
expects that differences in investment returns among the portions of a
Portfolio managed by different Advisers will cause the actual percentage of a
Portfolio's assets managed by each Adviser to vary over time. In general, a
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 a Portfolio
and its shareholders including when the assets managed by an Adviser exceed
that portion managed by any other Adviser to the Portfolio. In some instances,
where a reallocation results in any rebalancing of the Portfolio from a
previous allocation, the effect of the reallocation will be to shift assets
from a better performing Adviser to a portion of the Portfolio with a
relatively lower total return.
Each Adviser is paid monthly by SunAmerica a fee equal to a percentage
of the average daily net assets of the Portfolio allocated to the Adviser. In
addition, with respect to the Focus Portfolio, SunAmerica has agreed to pay an
additional $50,000 to the Adviser with the highest total return for its portion
of the Portfolio for each calendar year. The aggregate annual rates, as a
percentage of daily net assets, of the fees payable by SunAmerica to the
Advisers for each Portfolio may vary according to the level of assets of each
Portfolio. For the fiscal year ended October 31, 1998, SunAmerica paid fees to
B-48
<PAGE>
the Advisers equal to the following aggregate annual rates, expressed as a
percentage of the assets of each Portfolio: Large-Cap Growth Portfolio, 0.48%;
Mid-Cap Growth Portfolio, 0.48%; Aggressive Growth Portfolio, 0.38%; Large-Cap
^ Value Portfolio, 0.42%; Value Portfolio, 0.50%; Small-Cap Value Portfolio,
0.55%; Focus Portfolio 0.40%; Focused Growth and Income Portfolio, 0.42%; and
International Equity Portfolio, 0.66% ^.
The following table sets forth the total advisory fees incurred by
each Portfolio pursuant to the Management Agreement, or waived by the Adviser,
for the fiscal years ended October 31, 1998 and 1997.
ADVISORY FEES
<TABLE>
<CAPTION>
ADVISORY FEES
PORTFOLIO ADVISORY FEES* WAIVED
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Large-Cap Growth Portfolio $ 332529 $ 11611 $ 248687 $ 6846
Mid-Cap Growth Portfolio $ 839531 $ 390221 $ 384257 $ 132696
Aggressive Growth Portfolio $ 1251124 $ 533055 $ 469168 $ 136500
Large-Cap Value Portfolio $ 353448 $ 11729 $ 218896 $ 6854
Value Portfolio $ 1934440 $ 671560 $ 508899 $ 188985
Small-Cap Value Portfolio $ 393742 $ 12079 $ 249021 $ 6891
Focus Portfolio** $ 238994 - $ 89221 -
Focused Growth and $ 287134 $ 11730 $ 179837 $ 6854
Income Portfolio
(previously known as the
Large-Cap Blend Portfolio)
International Equity Portfolio $ 877072 $ 440671 $ 492784 $ 147973
========= ======== ========= ========
</TABLE>
- ----------------------
* Without giving effect to fee waivers.
** From date of inception of June 1, 1998.
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 Portfolios, or their shareholders, for any act or omission by it or for
any losses sustained by the Portfolios or their 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-49
<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.
The following table sets forth the total subadvisory fees incurred by
each Portfolio pursuant to the Subadvisory Agreements, for the fiscal years
ended October 31, 1998 and 1997.
SUBADVISORY FEES
<TABLE>
<CAPTION>
PORTFOLIO SUBADVISORY FEES
1998 1997
<S> <C> <C>
Large-Cap Growth Portfolio $160,671 $5,613
Mid-Cap Growth Portfolio $399,530 $195,077
Aggressive Growth Portfolio $481,178 $199,051
Large-Cap ^ Value Portfolio $147,744 $4,769
Value Portfolio $959,440 $333,308
Small-Cap Value Portfolio $216,474 $6,649
Focus Portfolio* $112,346 -
Focused Growth and Income Portfolio (previously
known as the Large-Cap Blend Portfolio) $119,228 $3,714
International Equity Portfolio $527,676 $259,404
</TABLE>
- ----------------------
* From date of inception of June 1, 1998.
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 as 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 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
B-50
<PAGE>
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).
SACS serves as Distributor of Class Z shares, with respect to the
Aggressive Growth Portfolio, Large-Cap Value Portfolio, Value Portfolio,
Small-Cap Value Portfolio, Focus Portfolio and International Equity Portfolio ^
and incurs the expenses of distributing the Portfolios' Class Z shares under
the Distribution Agreement, none of which are reimbursed or paid by the Fund.
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 a Portfolio on 60 days' written notice, without
penalty. The Distribution Agreement will terminate automatically in the event
of its assignment as defined in the 1940 Act and the rules thereunder.
The Distributor may, from time to time, pay additional commissions or
promotional incentives to brokers, dealers or other financial services firms
that sell shares of the 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.
B-51
<PAGE>
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. There is no Distribution Plan in effect for Class Z
shares. 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 a
Portfolio at an annual rate of up to 0.10% of average daily net assets of such
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 a Portfolio at the annual rate of up to 0.75% of the
average daily net assets of such 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 each 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. In this regard, some payments are used to
compensate broker-dealers with trail commissions or account maintenance and
service fees in an amount up to 0.25% per year of the assets maintained in a
Portfolio by their customers.
B-52
<PAGE>
DISTRIBUTION AND ACCOUNT MAINTENANCE AND SERVICE FEES
<TABLE>
<CAPTION>
PORTFOLIO 1998 1997
Class A Class B Class II* Class A Class B Class C*
------- ------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Large-Cap Growth Portfolio $55,924 $139,218 $33,528 $3,983 $173 $59
Mid-Cap Growth Portfolio $93,555 $499,157 $73,073 $73,691 $164,888 $14,787
Aggressive Growth Portfolio $175,991 $660,563 $86,457 $106,377 $209,795 $19,327
Large-Cap ^ Value Portfolio $47,457 $182,997 $34,082 $3,986 $281 $60
Value Portfolio $251,405 $1,072,774 $143,031 $116,913 $309,027 $28,306
Small-Cap Value Portfolio $51,869 $202,927 $42,055 $3,849 $900 $184
Focus Portfolio** $29,757 $107,744 $88,405 -- -- --
Focused Growth and $58,296 $106,640 $13,933 $4,000 $239 $63
Income Portfolio
International Equity $90,504 $474,411 $63,753 $77,057 $162,796 $17,650
Portfolio
</TABLE>
- -------------------
* Class II shares of all Portfolios except the Focus Portfolio were
previously designated as Class C until December 1, 1998.
** From date of inception of June 1, 1998.
Continuance of the Distribution Plans with respect to each 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 a 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 a
Portfolio without payment of any penalty by vote of a majority of the
Independent Directors or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the affected class of shares of the
Portfolio. So long as the Distribution Plans are in effect, the election and
nomination of the Independent Directors of the Fund shall be committed to the
discretion of the Independent Directors. In the Directors' quarterly review of
the Distribution Plans, they will consider the continued appropriateness of,
and the level of, compensation provided in the Distribution Plans. In their
consideration of the Distribution Plans with respect to a 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.
B-53
<PAGE>
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 each of the Portfolios. 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 each 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). No
portion of such fee is paid or reimbursed by Class Z shares. Class Z shares,
however, will pay all direct transfer agency fees and out-of-pocket expenses.
For the fiscal year ending October 31, 1998, the total amount paid to the
Administrator by the Fund was $1,449,722. 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 a 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 or economic sector. Certain research services
furnished by brokers may be useful to the Adviser with
B-54
<PAGE>
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 a Portfolio as
a factor in the selection of brokers for transactions effected on behalf of a
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 one or
more of the Portfolios 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 one or more of the Portfolios 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 a 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 each 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 same Portfolio, resulting in
higher brokerage commissions for the Portfolio.
B-55
<PAGE>
The following tables set forth the brokerage commissions paid by the
Portfolios and the amounts of the brokerage commissions paid to affiliated
broker-dealers by the Portfolios for the fiscal years ended October 31, 1998
and 1997.
BROKERAGE COMMISSIONS
1998
<TABLE>
<CAPTION>
Percentage of
Amount of
Transactions
Percentage of Involving
Commissions Payment of
Aggregate Amount Paid to Paid to Commissions to
Brokerage Affiliated Affiliated Affiliated
PORTFOLIO Commissions Broker-Dealers Broker-Dealers Broker-Dealers
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Large-Cap Growth
Portfolio $32,602 - - -
Mid-Cap Growth Portfolio $193,828 $9,497 4.90% 1.70%
Aggressive Growth
Portfolio $289,798 - - -
Large-Cap Value $46,791 $54 0.10% 0.10%
Portfolio
Value Portfolio $443,420 $165,995 37.40% 18.10%
Small-Cap Value Portfolio $116,577 - - -
Focus Portfolio* $175,114 $13,770 7.90% 2.10%
Focused Growth and
Income Portfolio
(previously known as the
Large-Cap Blend
Portfolio) $53,489 $1,140 2.10% 0.70%
International Equity
Portfolio $776,510 $24,201 3.10% 2.90%
</TABLE>
* From date of inception of June 1, 1998.
B-56
<PAGE>
1997
<TABLE>
<CAPTION>
Percentage Paid
Aggregate Amount Paid to to Affiliated
PORTFOLIO Brokerage Affiliated Broker-Dealers
Commissions Broker-Dealers
<S> <C> <C> <C>
Large-Cap Growth Portfolio $14,945 -- --
Mid-Cap Growth Portfolio $86,452 -- --
Aggressive Growth Portfolio $128,678 -- --
Large-Cap ^ Value Portfolio $20,352 -- --
Value Portfolio $218,608 $47,675 21.80%
Small-Cap Value Portfolio $30,356 -- --
Focused Growth and Income
Portfolio (previously known
as the Large-Cap Blend
Portfolio) $17,998 -- --
International Equity Portfolio $338,366 $61,259 18.10%
</TABLE>
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Upon making an investment in shares of a Portfolio, an open account
will be established under which shares of such 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 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 Portfolios 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).
Class C shares, now designated as Class II shares, had sales charges imposed on
a deferred basis with no front-end sales load prior to their redesignation.
Reference is made to "Shareholder Account Information" in the Prospectus for
certain information as to the purchase of Portfolio shares.
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<PAGE>
The following table sets forth the front-end sales concessions with
respect to Class A shares of each Portfolio, the amount of the front-end sales
concessions that was reallowed to affiliated broker-dealers, and the contingent
deferred sales charges with respect to Class B and Class II shares of each
Portfolio, received by the Distributor for the fiscal years ended October 31,
1998 and 1997.
1998
<TABLE>
<CAPTION>
Amount Amount Contingent
Reallowed Reallowed Contingent Deferred
Front-End Sales Front-End Sales to Affiliated to Non-Affiliated Deferred Sales Sales Charge-
Concessions- Concessions- Broker-Dealers Broker-Dealers Charge- Class II
Portfolio Class A Shares Class II Shares* Class A Shares Class A Shares Class B Shares Shares**
<S> <C> <C> <C> <C> <C> <C>
Large-Cap Growth
Portfolio $490,037 - $146,344 $277,561 $44,805 $3,460
Mid-Cap Growth
Portfolio $642,963 - $192,696 $358,628 $117-430 $5,824
Aggressive Growth
Portfolio $781,470 - $327,106 $350,450 $175,664 $6,360
Large-Cap Value
Portfolio $592,150 - $148,306 $378,394 $42,369 $3,839
Value Portfolio $2,704,806 - $641,893 $1,340,011 $236,910 $11,291
Small-Cap Value
Portfolio $834,323 - $192,150 $534,751 $68,098 $6,021
Focus Portfolio*** $513,213 $191,346 $884,979 $10,686 $7,401
$1,250,948
Focused Growth and
Income Portfolio
(previously known as
the Large-Cap Blend
Portfolio) $426,981 - $117,550 $254,379 $41,902 $1,995
International Equity $341,296
Portfolio - $145,456 $150,191 $128,111 $6,227
</TABLE>
* Prior to December 1, 1998, only Focus Portfolio's Class II shares
carried a front-end sales charge, while Class II shares with respect
to the other Portfolios (then designated as Class C shares) carried
no such charge.
** Previously designated as Class C shares other than for the Focus
Portfolio.
*** For the period from June 1, 1998 (commencement of offering of shares
of Focus Portfolio).
Affiliated Broker Non-Affiliated Broker
Dealers Dealers
Class II Class II
Focus Portfolio $48,486 $464,727
B-58
<PAGE>
<TABLE>
<CAPTION>
1997
Contingent
Front-End Sales Amount Reallowed Amount Reallowed Contingent Deferred Deferred
Concessions- to Affiliated to Non-Affiliated Sales Charge- Sales Charge-
Portfolio Class A Shares Broker-Dealers Broker-Dealers Class B Shares Class C Shares
<S> <C> <C> <C> <C> <C>
Large-Cap Growth Portfolio $15,599 $2,885 $10,059 -- --
Mid-Cap Growth Portfolio $802,237 $257,754 $440,666 $25,643 $268
Aggressive Growth Portfolio $1,394,623 $545,170 $668,387 $26,249 $937
Large-Cap Value Portfolio $38,564 $6,352 $25,006 -- --
Value Portfolio $1,925,092 $715,034 $949,290 $30,795 $945
Small-Cap Value Portfolio $59,419 $18,399 $32,100 -- --
Focused Growth and
Income Portfolio
(previously known as the
Large-Cap Blend Portfolio) $22,528 $9,732 $9,440 -- --
International Equity
Portfolio $699,157 $225,890 $383,626 $18,872 $426
</TABLE>
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 a
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
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<PAGE>
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. A Portfolio will not be responsible for delays caused by dealers.
PURCHASE BY CHECK. Checks should be made payable to the specific Portfolio or
to "SunAmerica Funds." If the payment is for a retirement plan account for
which SunAmerica serves as fiduciary, please note on the check that payment is
for such an account. In the case of a new account, purchase orders by check
must be submitted directly by mail to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204, together with payment for the purchase price of such shares and a
completed New Account Application. Payment for subsequent purchases should be
mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas
City, Missouri 64141-6373 and the shareholder's Portfolio account number should
appear on the check. For fiduciary retirement plan accounts, both initial and
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204. Certified checks are not necessary but checks are accepted subject
to collection at full face value in United States funds and must be drawn on a
bank located in the United States. Upon receipt of the completed New Account
Application and payment check, the Transfer Agent will purchase full and
fractional shares of the applicable Portfolio at the net asset value next
computed after the check is received, plus the applicable sales charge.
Subsequent purchases of shares of each 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:
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<PAGE>
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 [name of Portfolio, Class __] (include shareholder name
and account number).
WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A SHARES. To
the extent that sales are made for personal investment purposes, the sales
charge is waived as to Class A shares purchased by current or retired officers,
directors, and other full-time employees of SunAmerica and its affiliates, as
well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by
certain qualified retirement plans or employee benefit plans (other than IRAs),
sponsored or administered by SunAmerica or an affiliate thereof. Such plans may
include certain employee benefit plans qualified under Sections 401 or 457 of
the Code, or employee benefit plans created pursuant to Section 403(b) of the
Code and sponsored by nonprofit organizations defined under Section 501(c)(3)
of the Code (collectively, "Plans"). A Plan will qualify for purchases at net
asset value provided that (a) the initial amount invested in one or more of the
Portfolios (or in combination with the shares of other SAMF) is at least
$1,000,000, (b) the sponsor signs a $1,000,000 Letter of Intent, (c) such
shares are purchased by an employer-sponsored plan with at least 100 eligible
employees, or (d) the purchases are by trustees or other fiduciaries for
certain employer-sponsored plans, the trustee, fiduciary or administrator 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 a
Portfolio may be entitled to reduced sales charges pursuant to the following
special purchase plans made available by the Fund.
B-61
<PAGE>
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);
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 particular Portfolio that were previously
purchased, shares of the other classes of the same Portfolio, as well as shares
of any class of any other Portfolio or of any of the other Portfolios advised
by SunAmerica, as long as such shares were sold with a sales charge or acquired
in exchange for shares purchased with such a sales charge.
The shareholder's dealer, if any, or the shareholder, must notify the
Distributor at the time an order is placed of the applicability of the reduced
charge under the Right of Accumulation. Such notification must be in writing by
the dealer or shareholder when such an order is placed by mail. The reduced
sales charge will not be granted if: (a) such information is not furnished at
the time of the order; or (b) a review of the Distributor's or the Transfer
Agent's records fails to confirm the investor's represented holdings.
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
B-62
<PAGE>
$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 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 Portfolios under the combined purchase
privilege as described above.
To receive a rate based on combined purchases, group members must
purchase Class A shares of a 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 a
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
B-63
<PAGE>
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 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 a 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 a
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 Mututal 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 .50% of the amount invested as commission and .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 payable 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 a Portfolio to make payment wholly
or partly in cash, the Fund, having filed with
B-64
<PAGE>
the SEC a notification of election pursuant to Rule 18f-1 on behalf of each of
the Portfolios, may pay the redemption price in whole, or in part, by a
distribution in kind of securities from a Portfolio in lieu of cash. In
conformity with applicable rules of the SEC, the Portfolios are 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 applicable 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.
The Distributor is authorized, as agent for the Portfolios, 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 a 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 Portfolios nor the Distributor imposes any such
charge. The offer to repurchase may be suspended at any time.
EXCHANGE PRIVILEGE
Shareholders in any of the Portfolios 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 $25 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 1% CDSC, if
any, applicable to such redemptions. In such event, the period for which the
original shares were held prior to the exchange will be "tacked" with the
holding period of the shares acquired in the exchange for purposes of
determining whether the 1% CDSC is applicable upon a redemption of any of such
shares.
A shareholder who acquires Class B or Class II shares through an
exchange from another SunAmerica Mutual Fund will retain liability for any
deferred sales charge outstanding on the date
B-65
<PAGE>
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 a Portfolio's performance, each Portfolio may refuse any
exchange sell order (1) if it appears to be a market timing transaction
involving a significant portion of a Portfolio's assets or (2) from any
shareholder account if previous use of the exchange privilege is considered
excessive. Accounts under common ownership or control, including, but not
limited to, those with the same taxpayer identification number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indications, will be considered one account for this purpose.
In addition, a 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). Each 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, a 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
B-66
<PAGE>
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
respective Portfolio's total assets.
A Portfolio's liabilities, including proper accruals of expense items,
are deducted from total assets.
PERFORMANCE DATA
Each Portfolio may advertise performance data that reflects various
measures of total return and each 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.
A 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, Class II and Class Z 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:
P(1 + T)n = 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-67
<PAGE>
(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.
B-68
<PAGE>
Each Portfolios' average annual total return for the 1-, 5- and
10-year periods (or from date of inception, if sooner) ended October 31, 1998
is as follows:
<TABLE>
<CAPTION>
Since One Five Ten
Class A Shares Inception Year Years Years
- -------------- --------- ---- ----- -----
<S> <C> <C> <C> <C>
Large-Cap Growth Portfolio 3.35%1 9.73% N/A N/A
Mid-Cap Growth Portfolio 5.06%3 0.37% N/A N/A
Aggressive Growth Portfolio 12.29%3 (1.46)% N/A N/A
Large-Cap ^ Value Portfolio (4.81)%1 0.11% N/A N/A
Value Portfolio 8.53%3 (8.88)% N/A N/A
Small-Cap Value Portfolio (7.64)%1 (15.92)% N/A N/A
Focus Portfolio N/A2 N/A N/A N/A
Focused Growth and Income
Portfolio (previously known
as the Large-Cap Blend
Portfolio) (1.53)%1 2.69% N/A N/A
International Equity (3.20)%3 (5.84)% N/A N/A
Portfolio
</TABLE>
- ----------------
(1) From date of inception of October 15, 1997.
(2) From date of inception of June 1, 1998.
(3) From date of inception of November 19, 1996.
<TABLE>
<CAPTION>
Since One Five Ten
Class B Shares Inception Year Years Years
- -------------- --------- ---- ----- -----
<S> <C> <C> <C> <C>
Large-Cap Growth Portfolio 4.77%1 11.54% N/A N/A
Mid-Cap Growth Portfolio 5.68%3 1.80% N/A N/A
Aggressive Growth Portfolio 13.19%3 (0.13)% N/A N/A
Large-Cap ^ Value Portfolio (3.73)%1 1.52% N/A N/A
Value Portfolio 9.33%3 (7.77)% N/A N/A
Small-Cap Value Portfolio (17.46)%1 (14.95)% N/A N/A
Focus Portfolio N/A2 N/A N/A N/A
Focused Growth and Income
Portfolio (previously known
as the Large-Cap Blend
Portfolio) (0.24)%1 4.43% N/A N/A
International Equity (5.55)%3 (4.64)% N/A N/A
Portfolio
</TABLE>
(1) From date of inception of October 15, 1997.
(2) From date of inception of June 1, 1998.
(3) From date of inception of November 19, 1996.
B-69
<PAGE>
<TABLE>
<CAPTION>
Since One Five Ten
Class II Shares 1 Inception Year Years Years
- --------------- --------- ---- ----- -----
<S> <C> <C> <C> <C>
Large-Cap Growth Portfolio 8.59%2 14.64% N/A N/A
Mid-Cap Growth Portfolio 12.19% 4.79% N/A N/A
Aggressive Growth Portfolio 13.18% 2.94% N/A N/A
Large-Cap ^ Value Portfolio 0.11%2 4.52% N/A N/A
Value Portfolio 7.88% (4.88)% N/A N/A
Small-Cap Value Portfolio 13.48%2 (12.36)% N/A N/A
Focus Portfolio3 N/A3 N/A N/A N/A
Focused Growth and Income
Portfolio (previously known
as Large-Cap Blend
Portfolio) 3.51%2 7.26% N/A N/A
International Equity (1.46)% (1.66)% N/A N/A
Portfolio
</TABLE>
- ----------------
(1) Previously designated as Class C shares other than for the Focus Portfolio.
(2) From date of inception of October 15, 1997.
(3) From date of inception of June 1, 1998.
Each Portfolio may advertise cumulative, rather than average return,
for each class of its shares for periods of time other than the 1-, 5-, and
10-year periods or fractions thereof, as discussed above. Such return data will
be computed in the same manner as that of average annual total return, except
that the actual cumulative return will be computed.
COMPARISONS
Each 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 a 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.
B-70
<PAGE>
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.
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.
B-71
<PAGE>
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.
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.
B-72
<PAGE>
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 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 a 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 a Portfolio to calculate
its figures. Specifically, a Portfolio may compare its performance to that of
certain indices that include securities with government guarantees. However, a
Portfolio's shares do not contain any such guarantees. In addition, there can
be no assurance that a Portfolio will continue its performance as compared to
such other standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. Each 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
B-73
<PAGE>
any net long-term capital losses. Each 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 each Portfolio other
than the ^ Focused Growth and Income Portfolio, is to pay investment income
dividends, if any, at least annually. ^ Focused Growth and Income Portfolio's
current policy is to pay investment income dividends, if any, on a quarterly
basis. Each 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. Each Portfolio intends to qualify and elect to be taxed as a regulated
investment company under Subchapter M of the Code for each taxable year. In
order to be qualified as a regulated investment company, each 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 each 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 each 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, each 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. Each 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, each 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, each 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 a Portfolio in
October, November or December of such year, payable to shareholders of record
on a date in such month and paid by such Portfolio during January of the
following year. Any such distributions paid during January of the following
year will be taxable to shareholders as of such December 31, rather than the
date on which the distributions are received.
B-74
<PAGE>
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 each Portfolio that will be
eligible for the dividends received deduction for corporations will be
determined on the basis of the amount of each 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. It is not anticipated that the dividends paid by
the International Equity Portfolio will be eligible for the dividends-received
deduction. 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.
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 a Fund
will be disallowed if other shares of such Fund 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 a 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 a Portfolio will be subject, since the amount of
that Portfolio's assets to be invested in various countries is not known. Only
the International Equity Portfolio is anticipated to qualify to pass through to
its shareholders the ability to claim as a foreign tax credit their respective
shares of foreign taxes paid by such Portfolio. If more than 50% in value of
the Portfolio's total assets at the close of its taxable year consists of
securities of foreign corporations, the Portfolio will be eligible, and
intends, to file an election with the Internal Revenue
B-75
<PAGE>
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 a Portfolio accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time such Portfolio actually collects such receivables
or pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses on forward foreign currency exchange contracts,
foreign currency gains or losses from futures contracts that are not "regulated
futures contracts" and from unlisted non-equity options, gains or losses from
sale of currencies or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition
generally also are treated as ordinary gain or loss. These gains, referred to
under the Code as "Section 988" gains or losses, increase or decrease the
amount of each 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, a 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, a 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 a
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 a 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 a 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 a 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.
B-76
<PAGE>
A substantial portion of each 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 a Portfolio when offsetting positions are established and
which may convert certain losses from short-term to long-term, and (iv)
"conversion transaction" rules which recharacterize capital gains as ordinary
income. The Code provides that certain elections may be made for mixed
straddles that can alter the character of the capital gain or loss recognized
upon disposition of positions which form part of a straddle. Certain other
elections also are provided in the Code; no determination has been reached to
make any of these elections.
Code Section 1259 requires the recognition of gain (but not loss) if a
Portfolio makes a "constructive sale" of an appreciated financial position
(e.g., stock). A 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.
Each 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 a 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.
A 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).
Each of the Large-Cap Growth Portfolio, Aggressive Growth Portfolio
and International Equity Portfolio may, from time to time, invest in "passive
foreign investment companies" (PFICs). A PFIC is a foreign corporation that, in
general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If any such Portfolio acquires
and holds stock in a PFIC beyond the end of the year of its acquisition, the
Portfolio will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Portfolio
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the
B-77
<PAGE>
Portfolio's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. A
Portfolio may make a "mark-to-market" election with respect to any stock it
holds of a PFIC. If the election is in effect, at the end of the Fund's taxable
year, the Portfolio will recognize the amount of gains, if any, with respect to
PFIC stock. Any gains resulting from such elections will be treated as ordinary
income. No loss will be recognized on PFIC stock. Alternatively, the Portfolio
may elect to treat any PFIC in which it invests as a "qualified electing fund,"
in which case, in lieu of the foregoing tax and interest obligation, the
Portfolio will be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain,
even if they are not distributed to the Portfolio; those amounts would be
subject to the distribution requirements applicable to the Portfolio described
above. It may be very difficult, if not impossible, to make this election
because of certain requirements thereof.
Each of the ^ Focused Growth and Income and Value Portfolios may
invest in real estate investment trusts ("REITs") that hold residual interests
in ^ REMICs. Under Treasury regulations that have not yet been issued, but may
apply retroactively, a portion of the Portfolio's income from a REIT that is
attributable to the REIT's residual interest in a REMIC (referred to in the
Code as an "excess inclusion") will be subject to federal income tax. These
regulations are also expected to provide that excess inclusion income of a
regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends
received by such shareholders, with the same consequences as if the
shareholders held the related REMIC residual interest directly. In general,
excess inclusion income allocated to shareholders (i) cannot be offset by net
operating losses (subject to a limited exception for certain thrift
institutions), (ii) will constitute unrelated business taxable income to
entities (including a qualified pension plan, an individual retirement account,
a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on
unrelated business income, thereby potentially requiring such an entity that is
allocated excess inclusion income, and otherwise might not be required to file
a tax return, to file a tax return and pay tax on such income, and (iii) in the
case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
"disqualified organization" (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in each Portfolio. Qualification as a
regulated investment company under the Code for tax purposes does not entail
government supervision of management and investment policies.
RETIREMENT PLANS
Shares of each 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 a Portfolio by establishing any of the retirement plans described
below may be
B-78
<PAGE>
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 a 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 a Portfolio and, subject to certain limitations, exclude the
amount of purchase payments from gross income for tax purposes.
Individual Retirement Accounts (IRA). Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program, including
Simplified Employee Pension Plans, commonly referred to as SEP-IRA. Section
408A of the Code treats Roth IRAs as IRAs subject to certain special rules
applicable thereto. IRAs are subject to limitations with respect to the amount
that may be contributed, the eligibility of individuals to make contributions,
the amount if any, entitled to be contributed on a deductible basis, and the
time in which distributions would be allowed to commence. In addition, certain
distributions from some other types of retirement plans may be placed on a
tax-deferred basis in an IRA.
Salary Reduction Simplified Employee Pension (SARSEP). This plan was introduced
by a provision of the Tax Reform Act of 1986 as a unique way for small
employers to provide the benefit of retirement planning for their employees.
Contributions are deducted from the employee's paycheck before tax deductions
and are deposited into an IRA by the employer. These contributions are not
included in the employee's income and therefore are not reported or deducted on
his or her tax return.
Savings Incentive Match Plan for Employees ("SIMPLE IRA"). This plan was
introduced by a provision of the Small Business Job Protection Act of 1996 to
provide small employers with a simplified tax-favored retirement plan.
Contributions are deducted from the employee's paycheck before taxes and are
deposited into a SIMPLE IRA by the employer, who must make either matching
contributions or non-elective contributions. Contributions are tax-deductible
for the employer and participants do not pay taxes on contributions on earnings
until they are withdrawn.
Roth IRA. This plan, introduced by Section 302 of the Taxpayer Relief Act of
1997, generally permits individuals with adjusted gross income of up to
$95,000, and married couples with joint adjusted gross income of up to
$150,000, to contribute to a "Roth IRA." Contributions are not
tax-deductible, but distribution of assets (contributions and earnings) held in
the account for at least five years may be distributed tax-free under certain
qualifying conditions.
Education IRA. Established by the Taxpayer Relief Act of 1997, under Section
530 of the Code, this plan permits individuals to contribute to an IRA on
behalf of any child under the age of 18. Contributions are not tax-deductible
but distributions are tax-free if used for qualified educational expenses.
B-79
<PAGE>
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, nine Portfolios of shares 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
and the International Equity Portfolio. The Large-Cap Growth Portfolio, the
Mid-Cap Growth Portfolio and the ^ Focused Growth and Income 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 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 a
Portfolio's policies, only shareholders of the Portfolios affected by the
matter may be entitled to vote.
The classes of shares of a given 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
B-80
<PAGE>
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, (vii) Class Z shares are not subject to
any sales charge or any distribution, account maintenance or service fee, and
(viii) 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.
B-81
<PAGE>
ADDITIONAL INFORMATION
Computation of Offering Price per Share
The following is the offering price calculation for each Class of
shares of the Portfolios. The Class A, Class B, Class II and Class Z
calculations are based on the value of each Portfolio's net assets and number
of shares outstanding on October 31, 1998.
<TABLE>
<CAPTION>
Large-Cap Growth Portfolio Mid-Cap Growth Portfolio
Class A Class B Class II + Class A Class B Class II +
<S> <C> <C> <C> <C> <C> <C>
Net Assets............... $14,390,066 $26,124,601 $7,316,912 $32,115,106 $58,554,908 $9,481,717
Number of Shares
Outstanding.............. 1,048,668 1,917,807 537,327 2,199,202 4,061,345 656,930
Net Asset Value Per
Share (net assets
divided by number of
shares) ................. $13.72 $13.62 $13.62 $14.60 $14.42 $14.43
Sales charge for
Class A Shares:
5.75% of offering
price (6.10% of net
asset value per
share)*.................. $0.84 ** - $0.89 ** -
Sales charge for
Class II Shares:
1.00% of offering
price (1.01% of net
asset value per
share)* - ** - - ** -
Offering Price........... $14.56 -- - $15.49 - --
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales
charge is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than
for the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-82
<PAGE>
<TABLE>
<CAPTION>
Focused Growth and Income
Aggressive Growth Portfolio Portfolio
----------------------------- ---------
Class A Class B Class II+ Class Z Class A Class B Class II+
------- ------- --------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Assets...... $55,925,401 $74,997,930 $10,567,839 $345,813 $9,798,860 $16,156,670 $2,490,676
Number of
Shares
Outstanding
................ 3,388,419 4,602,575 648,532 $20,866 751,202 1,246,409 192,271
Net Asset
Value Per
Share (net
assets
divided by
number of
shares) ........ $16.50 $16.29 $16.30 $16.57 $13.04 $12.96 $12.95
Sales charge
for Class A
Shares:
5.75% of
offering
price
(6.10% of
net asset
value per
share)* ........ $1.01 ** -- -- $0.80 ** --
Sales charge
for Class II
Shares:
1.00% of
offering
price
(1.01% of
net asset
value per
share)* -- ** -- -- -- ** --
Offering $17.51 -- -- $16.57 $13.84 -- --
Price...........
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than for
the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-83
<PAGE>
<TABLE>
<CAPTION>
Large-Cap Value Portfolio
-------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets............ $12,921,581 $28,149,561 $5,822,783 $206,982
Number of Shares
Outstanding .......... 1,026,206 2,250,172 465,494 16,377
Net Asset Value
Per
Share (net assets
divided by number
of shares) ........... $12.59 $12.51 $12.51 $12.64
Sales charge for
Class A Shares:
5.75% of offering
price (6.10% of net
asset value per
share)* .............. $0.77 ** -- --
Sales charge for
Class II Shares:
1.00% of offering
price (1.01% of net
asset value per
share)* -- ** -- --
Offering Price........ $13.36 -- -- $12.64
- -----------------------
</TABLE>
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than for
the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-84
<PAGE>
<TABLE>
<CAPTION>
Value Portfolio
---------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets $71,155,953 $111,030,100 $15,260,248 $100,434
Number of
Shares
Outstanding 4,743,248 7,498,100 1,030,596 6,680
Net Asset Value
Per
Share (net assets
divided by
number of
shares) $14.99 $14.81 $14.81 $15.04
Sales charge for
Class A Shares:
5.75% of
offering price
(6.10% of net
asset value per
share)* $0.91 ** -- --
Sales charge for
Class II Shares:
1.00% of
offering price
(1.01% of net
asset value per
share)* -- ** -- --
Offering Price $15.90 -- -- $15.04
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than
for the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-85
<PAGE>
<TABLE>
<CAPTION>
Small-Cap Value Portfolio
-------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets............... $15,051,048 $25,953,780 $5,968,570 $144,837
Number of Shares
Outstanding ............. 1,391,561 2,417,534 555,667 13,801
Net Asset Value Per
Share (net assets
divided by number of
shares) ................. $10.82 $10.74 $10.74 $10.85
Sales charge for
Class A Shares:
5.75% of offering
price (6.10% of net
asset value per
share)* ................. $0.66 ** -- --
Sales charge for
Class II Shares:
1.00% of offering
price (1.01% of net
asset value per
share)* -- ** -- --
Offering Price........... $11.48 -- -- $10.85
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than
for the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-86
<PAGE>
<TABLE>
<CAPTION>
International Equity Portfolio
------------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets $28,417,391 $44,817,267 $7,982,198 $144,837
Number of Shares
Outstanding 2,324,757 3,962,716 661,550 11,801
Net Asset Value Per
Share (net assets
divided by number of
shares) $12.22 $12.07 $12.07 $12.27
Sales charge for Class
A Shares: 5.75% of
offering price (6.10%
of net asset value per
share)* $0.75 ** -- --
Sales charge for Class
II Shares: 1.00% of
offering price (1.01%
of net asset value per
share)* -- ** -- --
Offering Price $12.97 -- -- $12.27
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares (previously designated as Class C shares other than
for the Focus Portfolio) may be subject to a contingent deferred sales
charge on redemption of shares within eighteen months of purchase.
B-87
<PAGE>
<TABLE>
<CAPTION>
Focus Portfolio
---------------
Class A Class B Class II+ Class Z++
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net Assets............... $29,770,444 $45,816,809 $35,386,676 --
Number of Shares
Outstanding ............. 2,362,782 3,647,704 2,817,537 --
Net Asset Value Per
Share (net assets
divided by number of
shares) ................. $12.60 $12.56 $12.56 --
Sales charge for
Class A Shares:
5.75% of offering
price (6.10% of net
asset value per
share)* ................. $0.77 ** $0.13 --
Sales charge for
Class II Shares:
1.00% of offering
price (1.01% of net
asset value per
share)* -- ** -- --
Offering Price........... $13.37 -- $12.69 --
</TABLE>
- -----------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge but may be subject
to a contingent deferred sales charge on redemption of shares within
six years of purchase.
+ Class II shares may be subject to a contingent deferred sales charge on
redemption of shares within eighteen months of purchase.
++ Class Z shares with respect to the Focus Portfolio commenced offering
on ^ April 1, 1999.
Reports to Shareholders. The Fund sends audited annual and unaudited
semi-annual reports to shareholders of each of the Portfolios. In addition, the
Transfer Agent sends a statement to each shareholder having an account directly
with the Fund to confirm transactions in the account.
Custodian and Transfer Agency. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent
for the Portfolios 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.
B-88
<PAGE>
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, Inc.,
Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204.
B-89
<PAGE>
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
Description of Moody's Corporate Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present that make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds rated A possess many favorable investment attributes
and are considered as upper medium grade obligations. Factors
giving security to principal and interest are considered
adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa Bonds rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Appendix-1
<PAGE>
Caa Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of the generic
rating category.
Description of Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
-- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Appendix-2
<PAGE>
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring
the reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion
on the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular
support arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks that may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships that exist with the issuer; and (8) recognition by management of
obligations that may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Description of Standard & Poor's Corporate Debt Ratings
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
Appendix-3
<PAGE>
The ratings are based on current information furnished by the issuer
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and provisions of
the obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated
categories.
Debt rated BB, B, CCC, CC and C are regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates
the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default
than other speculative grade debt. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions that could lead to
inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
presently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or
Appendix-4
<PAGE>
economic conditions would likely impair capacity or
willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to
default, and is dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayments of principal. In the event of adverse
business, financial or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or B-
rating.
CC The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where a
bankruptcy petition has been filed but debt service payments
are continued.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default. The D rating is assigned on the
day an interest or principal payment is missed. The D rating
also will be used upon the filing of a bankruptcy petition if
debt service payments are jeopardized.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within
these ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is insured by the Federal
Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash flows.
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<PAGE>
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that
Standard & Poor's does not rate a particular type of
obligation as a matter of policy.
Debt Obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the credit-worthiness of the obligor but do not
take into account currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," "BBB," commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Description of Standard & Poor's Commercial Paper Ratings.
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of not
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Those issues designated "A-1" that are determined to
possess overwhelming safety characteristics are denoted with
a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effect of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
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D This rating indicates that the issue is either in default or
is expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information. 216220.1 o 01751.29 o 3/25/99
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Appendix-7
