<PAGE>
As filed with the Securities and Exchange Commission on August 16, 2000
Securities Act File No. 333-11283
Investment Company Act File Act No. 811-07797
============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO. 27 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 28
(Check appropriate box or boxes)
SUNAMERICA STYLE SELECT SERIES, INC.
(Exact Name of Registrant as Specified in Charter)
The SunAmerica Center
733 Third Avenue
New York, NY 10017
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (800) 858-8850
Robert M. Zakem, Esq.
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address for Agent for Service)
Copy to:
Margery K. Neale, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
It is proposed that this filing will become effective
(check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)(1)
|X| on August 16, 2000 pursuant to paragraph (a)(1)
|_| 75 days after filing pursuant to paragraph (a)(2)
|_| on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
|_| This post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
<PAGE>
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AUGUST 15, 2000 PROSPECTUS
SUNAMERICA STYLE SELECT SERIES(R)
l AGGRESSIVE GROWTH PORTFOLIO
l LARGE-CAP VALUE PORTFOLIO
l VALUE PORTFOLIO
l SMALL-CAP VALUE PORTFOLIO
l FOCUS PORTFOLIO
l FOCUSED TECHNET PORTFOLIO
l FOCUSED GROWTH AND INCOME PORTFOLIO
l INTERNATIONAL EQUITY PORTFOLIO
(CLASS Z SHARES)
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
FUND HIGHLIGHTS ........................................................... 2
FINANCIAL HIGHLIGHTS ...................................................... 14
SHAREHOLDER ACCOUNT INFORMATION ........................................... 17
MORE INFORMATION ABOUT THE PORTFOLIOS ..................................... 20
INVESTMENT STRATEGIES ................................................. 20
GLOSSARY .............................................................. 23
INVESTMENT TERMINOLOGY ........................................... 23
RISK TERMINOLOGY ................................................. 25
FUND MANAGEMENT ....................................................... 26
INFORMATION ABOUT ADVISERS ................................................ 27
</TABLE>
SUNAMERICA
MUTUAL
[logo] FUNDS
<PAGE>
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FUND HIGHLIGHTS
--------------------------------------------------------------------------------
The following questions and answers are designed to
give you an overview of the SunAmerica Style Select
Series, Inc. (the "Fund"), and to provide you with
information about six 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 16, and the glossary that follows on
page 20.
Q:WHAT ARE THE PORTFOLIOS' INVESTMENT GOALS,
STRATEGIES AND TECHNIQUES?
A:
<TABLE>
<CAPTION>
Principal
Investment Investment
Fund Goal Strategy Principal Investment Techniques
--------------- ------------ ------------- -------------------------------------------------
<S> <C> <C> <C>
AGGRESSIVE long-term growth active trading of equity securities selected on
GROWTH growth of the basis of growth criteria, issued by small-cap
PORTFOLIO capital or mid-cap companies
LARGE-CAP long-term value active trading of equity securities selected on
VALUE PORTFOLIO growth of the basis of value criteria, issued by large-cap
capital companies
VALUE PORTFOLIO long-term value active trading of equity securities selected on
growth of the basis of value criteria, issued by large-cap
capital or mid-cap companies
SMALL-CAP VALUE long-term value active trading of equity securities selected on
PORTFOLIO growth of the basis of value criteria, issued by small-cap
capital companies
FOCUS PORTFOLIO long-term focus and active trading of equity securities, without
growth of growth regard to market capitalization
capital
FOCUSED TECHNET long-term growth and active trading of equity securities of companies
PORTFOLIO growth of focus that demonstrate the potential for long-term
capital growth of capital and that the Advisers believe
will benefit significantly from technological
advances or improvements, without regard to
market capitalization
FOCUSED GROWTH long-term growth, value active trading of equity securities selected to
AND INCOME growth of and focus achieve a blend of growth companies, value
PORTFOLIO capital and companies and companies that the Advisers believe
current have elements of growth and value, issued by
income large-cap companies. Each Adviser may emphasize
either a growth orientation or a value
orientation at any particular time.
INTERNATIONAL long-term international active trading of equity securities and other
EQUITY growth of securities with equity characteristics of
PORTFOLIO capital 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>
ADDITIONAL INFORMATION ABOUT THE FOCUSED TECHNET
PORTFOLIO'S PRINCIPAL INVESTMENT TECHNIQUES
The Portfolio will invest in up to thirty companies
whose principal businesses the Advisers believe
will significantly benefit from advances or
improvements in technology ("technology companies").
Technology companies include companies in many
industries that rely extensively on technology in
their product development or operations, are
expected to benefit from technological advances and
improvements, or may be experiencing growth in sales
and earnings driven by technology related research,
products or services.
The broad industry categories in which technology
companies may be found include computer software and
hardware, network and capital broadcasting, internet
and internet-related businesses, the development,
production, sale, and distribution of goods or
services used in the broadcast and media industries,
communications services or equipment, the design,
manufacture, or sale of electric components, defense
and data storage and retrieval, healthcare and
biotechnology. The relative size of the Portfolio's
investment within these industries will vary from
time to time, and at times, one of these industries
may not be represented in the Portfolio's holdings.
Under normal market conditions, all of the
Portfolio's holdings will be in technology
companies. Among these, the Portfolio will
significantly invest in internet and internet-
related businesses. These companies include
e-commerce enterprises as well as those that develop
services and products for the internet. The Advisers
may rotate the Portfolio's holdings out of internet
or internet-related companies for temporary
defensive purposes or if market conditions warrant.
<PAGE>
When deemed appropriate by an Adviser, a Portfolio may engage in ACTIVE TRADING
when it frequently trades its portfolio securities to achieve its investment
goal.
A FOCUS strategy is one in which an Adviser actively invests in a small number
of holdings which constitute its favorite stock-picking ideas at any given
moment. A focus philosophy reflects the belief that, over time, the performance
of most investment managers' "highest confidence" stocks exceeds that of their
more diversified portfolios. Each FOCUS PORTFOLIO Adviser and FOCUSED TECHNET
PORTFOLIO Adviser will invest in up to ten securities, while each FOCUSED
GROWTH AND INCOME PORTFOLIO Adviser may invest in up to 30 securities. Each
Adviser may invest in additional financial instruments for the purpose of cash
management or to hedge a security in the Portfolio.
The "GROWTH" ORIENTED philosophy to which the Aggressive Growth and Focus
Portfolios subscribe--that of investing in securities which are 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 Large-Cap Value, Value and
Small-Cap Value Portfolios 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 and generous dividend yields that have low price-earnings
ratios and 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>
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--------------------------------------------------------------------------------
MARKET CAPITALIZATION RANGES
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. The Portfolios' market
capitalization ranges will change as the
Morningstar categories vary. Currently, these
market capitalization ranges are as follows: $1.5
billion or less for the Small-Cap category;
between $1.5 billion and $9.5 billion for the
Mid-Cap category; and $9.5 billion or more for the
Large-Cap category. Under normal circumstances, at
least 65% of the total assets of the Aggressive
Growth, Large-Cap Value, Value and Small-Cap
Value Portfolios 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.
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 16 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 rise or 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.
-------------------
3
<PAGE>
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FUND HIGHLIGHTS
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ADDITIONAL PRINCIPAL RISKS
Shares of the Portfolios are not bank deposits and
are not guaranteed or insured by any bank,
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.
RISKS OF INVESTING IN TECHNOLOGY COMPANIES
The Focused TechNet Portfolio will invest in
technology companies, which may react similarly to
certain market pressures and events. They may be
significantly affected by short product cycles,
aggressive pricing of products and services,
competition from new market entrants, and
obsolescence of existing technology. As a result,
the Portfolio's returns may be considerably more
volatile than a fund that does not invest in
technology companies.
RISKS OF INVESTING IN SMALL COMPANIES
The Aggressive Growth Portfolio and the Small-Cap
Value Portfolio will invest in stocks of smaller
companies, which may be more volatile than, and not
as readily marketable as, those of larger companies.
ADDITIONAL RISKS SPECIFIC TO INTERNATIONAL INVESTING
The International Equity Portfolio will invest in
stocks of non-U.S. issuers located in at least
three countries other than the U.S. 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.
-------------------
4
<PAGE>
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--------------------------------------------------------------------------------
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. Performance information for the Focused
TechNet Portfolio is not shown because it has not yet been in existence for one
full year.
AGGRESSIVE GROWTH PORTFOLIO (CLASS Z)
During the period shown in the bar chart, the highest return for a quarter was
50.69% (quarter ended 12/31/99) and the lowest return for a quarter was -3.34%
(quarter ended 9/30/99). The Portfolio's year-to-date return as of June 30, 2000
was 5.61%.
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended Past One Return Since
December 31, 1999) Year Inception****
<S> <C> <C>
Aggressive Growth Portfolio*
Class Z 73.68% 48.98%
Russell 2500 Growth Index** 55.50% 23.29%
Morningstar Aggressive Growth
Category*** 60.18% 33.50%
</TABLE>
* Includes sales charges.
** The Russell 2500(TM) Growth Index measures the performance of those Russell
2500 companies with higher than average price-to-book ratios and higher
forecasted growth rates. The Russell 2500 Index is composed of the 2,500
smallest companies in the Russell 3000 Index, which measures the performance
of the 3000 largest U.S. companies based on total market capitalization.
*** 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 Z shares commenced offering on April 1, 1998.
-------------------
5
<PAGE>
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FUND HIGHLIGHTS
--------------------------------------------------------------------------------
LARGE-CAP VALUE PORTFOLIO (CLASS Z)
During the period shown in the bar chart, the highest return for a quarter was
12.84% (quarter ended 6/30/99) and the lowest return for a quarter was -10.39
(quarter ended 9/30/99) The Portfolio's year-to-date return as of June 30, 2000
was 5.95%.
[BAR CHART APPEARS HERE]
'99
-----
8.63%
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended Past One Return Since
December 31, 1999) Year Inception*****
<S> <C> <C>
Large-Cap Value Portfolio*
Class Z 8.63% 2.84%
Russell 1000 Value Index** 7.35% 6.99%
Morningstar Large-Cap Value
Category*** 6.59% 4.30%
</TABLE>
* Includes sales charges.
** The Russell 1000(R)Value Index measures the performance of those Russell
1000 companies with lower price-to-book ratios and lower forecasted growth
rates.
*** 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 Z shares commenced offering on April 1, 1998.
-------------------
6
<PAGE>
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--------------------------------------------------------------------------------
VALUE PORTFOLIO (CLASS Z)
During the period shown in the bar chart, the highest return for a quarter was
12.43% (quarter ended 6/30/99) and the lowest return for a quarter was -9.78%
(quarter ended 9/30/99) The Portfolio's year-to-date return as of June 30, 2000
was 2.62%.
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended Past One Return Since
December 31, 1999) Year Inception*****
<S> <C> <C>
Value Portfolio*
Class Z 9.74% -0.17%
S&P 500 Index ** 21.04% 14.80%
Russell Midcap Value Index*** -0.11% -2.63%
Morningstar Mid-Cap Value
Category**** 6.72% -1.09%
</TABLE>
* Includes sales charges.
** The S&P 500(R) is the Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices.
*** The Russell Midcap(TM) Value Index measures the performance of those
Russell Midcap companies with lower price-to-book ratios and lower
forecasted growth rates. 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 Z shares commenced offering on April 1, 1998.
-------------------
7
<PAGE>
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FUND HIGHLIGHTS
--------------------------------------------------------------------------------
SMALL-CAP VALUE PORTFOLIO (CLASS Z)
During the period shown in the bar chart, the highest return for a quarter was
20.72% (quarter ended 6/30/99) and the lowest return for a quarter was -9.27%
(quarter ended 3/31/99) The Portfolio's year-to-date return as of June 30, 2000
was 6.02%.
[BAR CHART APPEARS HERE]
'99
-----
6.95%
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended Past One Return Since
December 31, 1999) Year Inception****
<S> <C> <C>
Small-Cap Value Portfolio*
Class Z 6.95% -4.95%
Russell 2000 Value Index** -1.49% -8.84%
Morningstar Small-Cap Value
Category*** 4.87% -6.63%
</TABLE>
* Includes sales charge.
** 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 2000 smallest companies
out of the 3000 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 Z shares commenced offering on April 1, 1998.
-------------------
8
<PAGE>
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--------------------------------------------------------------------------------
FOCUS PORTFOLIO (CLASS B)*
During the period shown in the bar chart, the highest return for a quarter ended
was 31.61% (quarter ended 12/31/99) and the lowest return for a quarter was
1.06% (quarter ended 9/30/99) The Portfolio's year-to-date return as of June 30,
2000 was 1.01%.
[BAR CHART APPEARS HERE]
'99
------
57.63%
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1999) Year Inception*****
<S> <C> <C>
Focus Portfolio**
Class B 53.63% 49.41%
S&P 500 Index*** 21.04% 22.22%
Morningstar Large-Cap Growth Category**** 38.63% 36.54%
</TABLE>
* The returns shown in the bar chart are for Class B shares, which are not
offered in this Prospectus. Class B shares were used in preparing the bar
chart because Class B has the largest asset base. Class Z shares
would have had substantially similar annual returns as those shown for
Class B shares because the shares are invested in the same portfolio of
securities as the Class Z shares. The annual returns of the Class Z shares
would differ from those of the Class B shares only to the extent that the
Classes do not have the same fees and expenses. The Class B sales charges
are not reflected in the bar chart and, if these amounts were reflected,
returns would be less than those shown.
** Includes sales charges.
*** The S&P 500(R) 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 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 B shares commenced offering on June 8, 1998. Class Z shares
commenced offering on June 7, 1999.
-------------------
9
<PAGE>
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FUND HIGHLIGHTS
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FOCUSED GROWTH AND INCOME PORTFOLIO (CLASS B)*
[BAR CHART APPEARS HERE]
'98 '99
------ ------
12.38% 57.18%
During the period shown in the bar chart, the highest return for a quarter was
45.62% (quarter ended 12/31/99) and the lowest return for a quarter was -13.91%
(quarter ended 9/30/98). The Portfolio's year-to-date return as of June 30, 2000
was -3.73%.
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year Past One Return Since
ended December 31, 1999) Year Inception*****
<S> <C> <C>
Focused Growth and Income Portfolio**
Class B 53.18% 28.97%
S&P 500 Index*** 21.04% 23.27%
Morningstar Large-Cap Blend Category**** 19.47% 18.50%
</TABLE>
* The returns shown in the bar chart are for Class B shares, which are not
offered in this Prospectus. Class B shares were used in preparing the bar
chart because Class B has the largest asset base. Class Z shares
would have had substantially similar annual returns as those shown for
Class B shares because the shares are invested in the same portfolio of
securities as the Class Z shares. The annual returns of the Class Z shares
would differ from those of the Class B shares only to the extent that the
Classes do not have the same fees and expenses. The Class B sales charges
are not reflected in the bar chart and, if these amounts were reflected,
returns would be less than those shown.
** Includes sales charges.
*** The S&P 500(R) 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>
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--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO (CLASS Z)
During the period shown in the bar chart, the highest return for a quarter was
28.38% (quarter ended 12/31/99) and the lowest return for a quarter was -0.53%
(quarter ended 3/31/99) The Portfolio's year-to-date return as of June 30, 2000
was -5.74%.
[BAR CHART APPEARS HERE]
'99
------
34.39%
<TABLE>
<CAPTION>
Average Annual Total Returns
(as of the calendar year ended Past One Return Since
December 31, 1999) Year Inception****
<S> <C> <C>
International Equity Portfolio*
Class Z 34.39% 15.65%
MSCI EAFE Index** 26.96% 17.93%
Morningstar Foreign Stock
Category*** 44.31% 24.55%
</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 Z shares commenced offering on April 1, 1998.
-------------------
11
<PAGE>
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--------------------------------------------------------------------------------
Q: WHAT ARE THE PORTFOLIOS' EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold Class Z shares of the Portfolios.
<TABLE>
<CAPTION>
Aggressive Large-Cap Small-Cap Focused Focused Growth
Growth Value Value Value Focus TechNet and Income
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
----------- ---------- ---------- ---------- ---------- ------- --------------
<S> <C> <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)..... None None None None None None None
Maximum Deferred
Sales Charge (Load)
(as a percentage of
amount redeemed).... None None None None None None None
Maximum Sales Charge
(Load) Imposed on
Reinvested
Dividends........... None None None None None None None
Redemption Fee...... None None None None None None None
Exchange Fee........ None None 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% 0.85% 1.25% 1.00%
Distribution (12b-1)
Fees................ None None None None None None None
Other Expenses...... 4.92% 12.07% 23.48% 21.11% 2.26% 0.72% 0.87%
Total Annual Fund
Operating Expenses..... 5.92% 13.07% 24.48% 22.11% 3.11% 1.97%(2) 1.87%(2)
Expense Reimbursement.. 4.71% 11.86% 23.27% 20.90% 2.23% 0.57% 0.99%
Net Expenses(1) ....... 1.21% 1.21% 1.21% 1.21% 0.88% 1.40% 0.88%
<CAPTION>
International
Equity
Portfolio
--------------
<S> <C>
Shareholder Fees (fees
paid directly from your
investment)
Maximum Sales Charge
(Load) Imposed on
Purchases (as a
percentage of
offering price)..... None
Maximum Deferred
Sales Charge (Load)
(as a percentage of
amount redeemed).... None
Maximum Sales Charge
(Load) Imposed on
Reinvested
Dividends........... None
Redemption Fee...... None
Exchange Fee........ None
Annual Fund Operating
Expenses (expenses that
are deducted from Fund
assets)
Management Fees..... 1.10%
Distribution (12b-1)
Fees................ None
Other Expenses...... 26.71%
Total Annual Fund
Operating Expenses..... 27.81%
Expense Reimbursement.. 26.35%
Net Expenses(1) ....... 1.46%
</TABLE>
------------------
(1) 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. The Adviser may not increase such net expense
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.
(2) Estimated
-------------------
12
<PAGE>
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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:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO
(Class Z shares).................................... $ 123 $ 384 $ 665 $ 1,466
LARGE CAP VALUE PORTFOLIO
(Class Z shares).................................... $ 123 $ 384 $ 665 $ 1,466
VALUE PORTFOLIO
(Class Z shares).................................... $ 123 $ 384 $ 665 $ 1,466
SMALL-CAP VALUE PORTFOLIO
(Class Z shares).................................... $ 123 $ 384 $ 665 $ 1,466
FOCUS PORTFOLIO
(Class Z shares).................................... $ 90 $ 281 $ 488 $ 1,084
FOCUSED TECHNET PORTFOLIO
(Class Z shares).................................... $ 143 $ 443 $ 766 $ 1,680
FOCUSED GROWTH AND INCOME PORTFOLIO
(Class Z shares).................................... $ 90 $ 281 $ 488 $ 1,084
INTERNATIONAL EQUITY PORTFOLIO
(Class Z shares).................................... $ 149 $ 462 $ 797 $ 1,746
</TABLE>
-------------------
13
<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.
AGGRESSIVE GROWTH PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH FROM NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
04/03/98-
10/31/98....... $ 18.30 $(0.03) $(1.70) $ (1.73) $ -- $ -- $ -- $16.57 (9.45)%
10/31/99....... 16.57 (0.10) 9.91 9.81 -- -- -- 26.38 59.20
04/30/00(6).... 26.38 (0.10) 10.01 9.91 -- (3.24) (3.24) 33.05 39.19
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
---------------
04/03/98-
10/31/98....... $ 346 1.21%(3) (0.36)%(3) 142%
10/31/99....... 624 1.21 (0.45) 126
04/30/00(6).... 1,893 1.21(3) (0.56)(3)(5) 61
</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 10/31/99 4/30/00
-------- -------- --------
<S> <C> <C> <C>
Aggressive Growth Z.......................... 7.62% 4.71% 2.14%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
--------------------------------------------------------------------------------
LARGE-CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH FROM NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
04/16/98-
10/31/98....... $ 13.86 $0.06 $(1.27) $ (1.21) $ (.01) $ -- $(0.01) $12.64 (8.72)%
10/31/99....... 12.64 0.13 1.49 1.62 -- (0.08) (0.08) 14.18 12.87
04/30/00(6).... 14.18 0.04 0.94 0.98 -- (0.32) (0.32) 14.84 7.08
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
---------------
04/16/98-
10/31/98....... $ 207 1.21%(3) 0.97%(3) 37%
10/31/99....... 241 1.21 0.89 42
04/30/00(6).... 674 1.21(3) 0.56(3)(5) 60
</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 10/31/99 4/30/00
-------- -------- --------
<S> <C> <C> <C>
Large-Cap Value Z............................ 11.77% 11.86% 8.18%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
-------------------
14
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH FROM NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
04/03/98-10/31/98.. $17.62 $0.05 $(2.63) $ (2.58) $ -- $ -- $ -- $15.04 (14.64)%
10/31/99....... 15.04 0.17 1.76 1.93 -- -- -- 16.97 12.83
04/30/00(6).... 16.97 0.05 1.02 1.07 -- (0.77) (0.77) 17.27 6.62
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4)(5) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
---------------
04/03/98-10/31/ $ 101 1.21%(3) 0.62%(3) 69%
10/31/99....... 74 1.21 0.98 118
04/30/00(6).... 373 1.21(3) 0.63(3)(5) 48
</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 10/31/99 4/30/00
-------- -------- --------
<S> <C> <C> <C>
Value Z...................................... 28.83% 23.27% 14.77%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
--------------------------------------------------------------------------------
SMALL-CAP VALUE PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH FROM NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
04/03/98-
10/31/98....... $ 13.63 $0.04 $(2.80) $ (2.76) $(0.02) $ -- $(0.02) $10.85 (20.30)%
10/31/99....... 10.85 0.11 0.83 0.94 -- -- -- 11.79 8.66
04/30/00(6).... 11.79 0.88 1.19 2.07 -- -- -- 13.86 10.77
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
---------------
04/03/98-
10/31/98....... $ 142 1.21%(3) 0.70%(3) 50%
10/31/99....... 78 1.21 0.96 102
04/30/00(6).... 346 1.21(3) 1.28(3)(5) 35
</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 10/31/99 4/30/00
-------- -------- --------
<S> <C> <C> <C>
Small-Cap Value Z........................ 20.37% 20.90% 16.31%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
--------------------------------------------------------------------------------
FOCUSED GROWTH AND INCOME PORTFOLIO (CLASS B)
<TABLE>
<CAPTION>
NET
GAIN (LOSS) TOTAL
NET ON INVEST- FROM DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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
--------------- --------- ---------- ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
10/31/99....... 12.96 (0.13) 4.25 4.12 -- (0.18) (0.18) 16.90 32.21
4/30/00........ 16.90 (0.13) 4.14 4.01 -- (0.98) (0.98) 19.93 24.08
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (2) (000'S) NET ASSETS (4) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
---------------
10/15/97-
10/31/97....... $ 941 2.43%(3) 0.29%(3) 2%
10/31/98....... 16,157 2.43 (0.52) 98
10/31/99....... 39,636 2.20 (0.87) 165
4/30/00........ 74,662 2.10(3) 1.31(3) 61
</TABLE>
---------
The financial highlights shown are for Class B shares which are not
offered in this Prospectus. The financial highlights of the Class Z shares
would differ from those of Class B shares in that the classes have
different fees, expenses and asset levels.
(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 10/31/99
-------- -------- --------
<S> <C> <C> <C>
Focused Growth and Income B.................. 1.26% 0.67% 0.44%
</TABLE>
(5) Unaudited
-------------------
15
<PAGE>
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
FOCUS PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS) TOTAL
NET ON INVEST- FROM DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH INVEST- FROM NET BUTIONS ASSET
VALUE, MENT REALIZED MENT INVEST- FROM TOTAL VALUE,
PERIOD BEGINNING INCOME AND OPERA- MENT CAPITAL DISTRI- END OF TOTAL
ENDED OF PERIOD (LOSS) (1) UNREALIZED) TIONS INCOME GAINS BUTIONS PERIOD RETURN (2)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
07/09/99-
10/31/99....... $ 18.18 -- $ 1.09 $ 1.09 -- -- -- $ 19.27 6.00%
04/30/00(6).... 19.27 (0.01) 5.22 5.21 -- (0.09) (0.09) 24.39 27.11
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
---------------
07/09/99-
10/31/99....... $ 2,522 0.93%(3) (0.09)%(3) 161%
04/30/00(6).... 11,946 0.88(3) (0.10)(3)(5) 105
</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>
10/31/99 4/30/00
-------- --------
<S> <C> <C>
Focus Z...................................... 2.23% 0.33%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
--------------------------------------------------------------------------------
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
NET ON INVEST- TOTAL DIVIDENDS DISTRI- NET
NET ASSET INVEST- MENTS (BOTH FROM NET FROM NET BUTIONS ASSET
VALUE, MENT REALIZED 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)
--------------- --------- ------ ------------ ----------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Z
---------------------------------------------------------------------------------------------------------------------------------
04/06/98-
10/31/98....... $ 13.87 $ 0.03 $(1.63) $(1.60) $ -- $ -- $ -- $12.27 (11.54)%
10/31/99....... 12.27 0.03 2.16 2.19 -- (0.05) (0.05) 14.41 17.90
04/30/00(6).... 14.41 0.01 2.14 2.15 -- -- -- 16.56 14.92
<CAPTION>
RATIO OF NET
NET INVESTMENT
ASSETS RATIO OF INCOME
END OF EXPENSES (LOSS)
PERIOD PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED (000'S) NET ASSETS (4)(5) NET ASSETS (4) TURNOVER
--------------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
---------------
04/06/98-
10/31/98....... $ 145 1.46%(3) 0.40%(3) 114%
10/31/99....... 32 1.46 0.19 102
04/30/00(6).... 326 1.46(3) 0.13(3) 41
</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 10/31/99 4/30/00
-------- -------- --------
<S> <C> <C> <C>
International Equity Z....................... 16.25% 26.35% 23.65%
</TABLE>
(5) The expense ratio includes custody expense credits
(6) Unaudited
-------------------
16
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
--------------------------------------------------------------------------------
SELECTING A SHARE CLASS
Each Portfolio offers Class Z shares through this prospectus. Class Z shares are
offered exclusively for sale to participants in the SunAmerica Profit Sharing
and Retirement Plan, an employee benefit plan sponsored by Fidelity Investments
(the "401(k) Plan" or the "Plan").
OPENING AN ACCOUNT
Class Z shares of the Portfolio are offered exclusively for sale to participants
in the 401(k) Plan. Such shares may be purchased or redeemed only by the 401(k)
Plan on behalf of individual Plan participants at net asset value without any
sales or redemption charge. Class Z shares are not subject to any minimum
investment requirements. The Plan purchases and redeems shares to implement the
investment choices of individual Plan participants with respect to their
contributions in the Plan. All purchases of Portfolio shares through the Plan
will be of Class Z shares.
Inquiries regarding the purchase, redemption or exchange of Class Z shares or
the making or changing of investment choices in the 401(k) Plan should be
directed to the Fidelity Participant Center at (800) 835-5098.
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.
Because Class Z shares are not subject to any distribution or service fees, the
net asset value per share of the Class Z shares will generally be higher than
the net asset value per share of each of Class A, Class B and Class II shares of
each Portfolio, except following the payment of dividends and distributions.
BUY AND SELL PRICES. When you buy Class Z shares, you pay the NAV. When you sell
Class Z shares, you receive the NAV.
EXECUTION OF REQUESTS. The net asset value per share at which shares of the
Funds are purchased or redeemed by the Plan for the accounts of individual Plan
participants might be more or less than the net asset value per share prevailing
at the time that such participants made thier investment choices or made their
contributions to the Plan. Each Portfolio is open on those days when the New
York Stock Exchange is open for regular trading. Buy and sell requests are
executed at the next NAV to be calculated after the Fund receives your request
in good order. If your order is received by the Fund or the Distributor before
the Portfolio's close of business (generally 4:00 p.m., Eastern time), you will
receive that day's closing price. If your order is received after that time, you
will receive the next business day's closing price. The Fund and the Distributor
reserve the right to reject any order to buy shares.
The net asset value per share at which shares of the Portfolio are purchased or
redeemed by the Plan for the accounts of individual Plan participants might be
more or less than the net asset value per share prevailing at the time that such
participants made their investment choices or made their contributions to the
Plan.
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 each
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.
EXCHANGES. Class Z shareholders of one Portfolio may exchange their shares for
Class Z shares of another SunAmerica Mutual Fund on the basis of relative net
asset value per share.
-------------------
17
<PAGE>
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
--------------------------------------------------------------------------------
TAX, DIVIDEND AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, a shareholder will receive account statements as
follows:
[logo] after every transaction that affects your account balance (except a
dividend reinvestment)
[logo] after any changes of name or address of the registered owner(s)
[logo] 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 and capital gains distributions, if
any, are paid at least 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 that offers Class Z. 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.
The per share dividends on Class Z shares will generally be higher than the per
share dividends on Class A, Class B and Class II of the same Portfolio shares as
a result of the fact that Class Z shares are not subject to any distribution or
service fee.
TAXES. As a qualified plan, the 401(k) Plan generally pays no federal income
tax. Individual participants in the 401(k) Plan should consult Plan documents
and their own tax advisers for information on the tax consequences associated
with participating in the 401(k) Plan.
-------------------
18
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[This page intentionally left blank]
-------------------
19
<PAGE>
--------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE PORTFOLIOS
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FOCUSED GROWTH
AND INCOME FOCUS
PORTFOLIO PORTFOLIO
What is the Fund's investment goal? Long-term growth of capital Long-term growth of capital
--------------------------------------------------------------------------------------------------
What principal investment strategies focus, growth and value focus and growth
does the Fund use to implement its
principal investment strategies?
--------------------------------------------------------------------------------------------------
What are the Fund's principal active trading of large-cap active trading of equity
investment techniques? companies that offer the securities, without regard to
potential for long-term market capitalization
growth of capital and
reasonable level of current
income
--------------------------------------------------------------------------------------------------
What are the Portfolio's other o Foreign securities o Foreign securities
significant (non-principal)
investment techniques?
--------------------------------------------------------------------------------------------------
What other types of securities may o Short-term investments o Short-term investments
the Fund normally invest as part of o Defensive instruments o Defensive instruments
efficient portfolio management o Options and futures o Options and futures
or for return enhancement purposes? o Special situations o Special situations
--------------------------------------------------------------------------------------------------
What principal risks normally may o Stock market volatility o Stock market volatility
affect the Fund? o Securities selection o Securities selection
o Non-diversification o Non-diversification
--------------------------------------------------------------------------------------------------
What other risks may affect the o Foreign exposure o Foreign exposure
Portfolio? o Derivatives o Derivatives
o Hedging o Hedging
--------------------------------------------------------------------------------------------------
</TABLE>
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.
-------------------
20
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AGGRESSIVE LARGE-CAP
GROWTH VALUE VALUE
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C>
Long-term growth of capital Long-term growth of capital Long-term growth of capital
-------------------------------------------------------------------------------------------------------------------------------
growth value value
-------------------------------------------------------------------------------------------------------------------------------
active trading of stocks of small-cap and active trading of stocks of large-cap active trading of stocks of large-cap and
mid-cap companies that offer the companies that offer the potential for mid-cap companies that offer the
potential for long-term growth of capital long-term growth of capital potential for long-term growth of capital
-------------------------------------------------------------------------------------------------------------------------------
o Foreign securities o Mid-cap companies o Foreign securities
o Foreign securities
-------------------------------------------------------------------------------------------------------------------------------
o Short-term investments o Short-term investments o Short-term investments
o Defensive instruments o Defensive instruments o Defensive instruments
o Options and futures o Options and futures o Options and futures
o Special situations o Special situations o Special situations
-------------------------------------------------------------------------------------------------------------------------------
o Stock market volatility o Stock market volatility o Stock market volatility
o Securities selection o Securities selection o Securities selection
o Small market capitalization o Non-diversification o Non-diversification
o Non-diversification
-------------------------------------------------------------------------------------------------------------------------------
o Foreign exposure o Foreign exposure o Foreign exposure
o Derivatives o Derivatives o Derivatives
o Hedging o Hedging o Hedging
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------
21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL-CAP FOCUSED INTERNATIONAL
VALUE TECHNET EQUITY
PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C>
Long-term growth of capital Long-term growth of capital Long-term growth of capital
-------------------------------------------------------------------------------------------------------------------------------
value Growth and focus international
-------------------------------------------------------------------------------------------------------------------------------
active trading of stocks of small-cap o Active trading of up to thirty equity active trading of foreign securities that
companies that offer the potential for securities of companies that offer the offer the potential for long-term growth
long-term growth of capital potential for long-term growth of of capital
capital and that the Advisers believe
will benefit significantly from
technological advances or improvements,
without regard to market capitalization
-------------------------------------------------------------------------------------------------------------------------------
o Mid-cap companies o Trading of foreign securities o Foreign investment companies
o Foreign companies
-------------------------------------------------------------------------------------------------------------------------------
o Short-term investments o Short-term investments o Short-term investments
o Defensive instruments o Defensive instruments o Defensive instruments
o Options and futures o Options and futures o Options and futures
o Special situations o Special situations o Special situations
o Currency transactions
-------------------------------------------------------------------------------------------------------------------------------
o Stock market volatility o Stock market volatility o foreign exposure
o Securities selection o Securities selection o small market capitalization
o Small market capitalization o Non-diversification o emerging markets
o Non-diversification o Small market capitalization
o Technology company
-------------------------------------------------------------------------------------------------------------------------------
o Foreign exposure o Foreign exposure o Derivatives
o Derivatives o Derivatives o Hedging
o Hedging o Hedging
o Emerging markets
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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INVESTMENT TERMINOLOGY
GROWTH OF CAPITAL is growth of the value of an
investment.
ACTIVE TRADING means that a Portfolio may engage 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-CAP COMPANIES are those with market caps within
the Morningstar, Inc. Large-Cap category, as described
on page 2. Currently, this range is $9.5 billion or
higher.
MID-CAP COMPANIES are those with market caps within
the Morningstar, Inc. Mid-Cap category, as described
on page 2. Currently, this range is $1.5 billion and
$9.5 billion.
SMALL-CAP COMPANIES are those with market caps within
the Morningstar, Inc. Small-Cap category, as described
on page 2. Currently, this range is $1.5 billion or
less.
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.
GLOSSARY
LARGE-CAP COMPANIES and MID-CAP 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-CAP COMPANIES generally will be companies that have been in business
for a shorter period of time.
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23
<PAGE>
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--------------------------------------------------------------------------------
A DERIVATIVE instrument is a contract, such as an
option or a future, whose value is based on the
performance of an underlying asset.
OPTIONS AND FUTURES are contracts involving the right
to receive or obligation to deliver assets or money
depending on the performance of one or more underlying
assets or a market or economic index.
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.
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MORE INFORMATION ABOUT THE PORTFOLIOS
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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 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.
TECHNOLOGY COMPANIES: The industries in which technology companies may be found
can be significantly affected by short product cycles, aggressive pricing of
products and services, competition from new market entrants, worldwide
scientific and technological developments and changes in governmental regulation
and policies.
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.
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.
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.
DERIVATIVES: Derivatives are subject to general risks relating to heightened
sensitivity to market volatility, interest rate fluctuations, illiquidity and
creditworthiness of the counterparty to the derivatives transactions.
HEDGING: Hedging is a strategy in which the Adviser uses a derivative security
to reduce certain risk characteristics of an underlying security or portfolio of
securities. While hedging strategies can be very useful and inexpensive ways of
reducing risk, they are sometimes ineffective due to unexpected changes in the
market. Moreover, while hedging can reduce or eliminate losses, it can also
reduce or eliminate gains.
EMERGING MARKETS: An emerging market country is one that the World Bank, the
International Finance Corporation or the United Nations or its authorities has
determined to have a low or middle income economy. Historical experience
indicates that the markets of emerging market countries have been more volatile
than more developed markets; however, such markets can provide higher rates of
return to investors.
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25
<PAGE>
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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, 1999, 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. The annual rate of the investment advisory
fee payable by the Focused TechNet Portfolio to SunAmerica is 1.25% of average
daily net assets. Payments to subadvisers for their services are made by
SunAmerica, not by the Portfolios.
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 $27 billion as of December 31, 1999.
In addition to managing the Portfolios, SunAmerica serves as adviser, manager
and/or administrator for Anchor Pathway Fund, Anchor Series Trust, Brazos Mutual
Funds Seasons Series Trust, SunAmerica Income Funds, SunAmerica Money Market
Funds, Inc., SunAmerica Strategic Investment Series, Inc. and SunAmerica Series
Trust.
ADDITIONAL INFORMATION ABOUT THE SUBADVISERS
With the exception of the International Equity Portfolio and the Focused Growth
and Income Portfolio, each of which has two different Advisers, each 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 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.
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26
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INFORMATION ABOUT ADVISERS
--------------------------------------------------------------------------------
The Advisers and Portfolio Managers for each Portfolio are described below:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGEMENT ALLOCATED AMONG THE FOLLOWING ADVISERS
------------------------------- -------------------------------------------------------------
<S> <C>
Aggressive Growth Portfolio Janus Capital Corporation ("Janus")
SunAmerica
Credit Suisse Asset Management, LLC
("CSAM")
Large-Cap Value Portfolio David L. Babson & Co., Inc. ("Babson")
Davis Selected Advisers, L.P. ("Davis")
Wellington Management Company
("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")
EQSF Advisers, Inc. (investment adviser to the Third Avenue
Funds and referred to as "Third Avenue")
Focused TechNet Portfolio Dresdner RCM Global Investors LLC ("Dresdner")
SunAmerica
Van Wagoner Capital Management, Inc.
("Van Wagoner")
Focused Growth and Income
Portfolio SunAmerica
Marsico
International Equity Portfolio Bankers Trust Company ("BT")
Rowe Price-Fleming International, Inc. ("Rowe-Fleming")
</TABLE>
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DESCRIPTION OF THE ADVISERS
AMERICAN CENTURY INVESTMENT, INC. American Century is a Delaware corporation
with principal offices at the American Century Tower, 4500 Main Street, Kansas
City, Missouri 64111. As of December 31, 1999, American Century had
approximately $109 billion in total 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, 1999, BT managed approximately
$244 billion in assets globally.
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.
CREDIT SUISSE ASSET MANAGEMENT, LLC. CSAM is a professional investment advisory
firm which provides investment services to investment companies, employee
benefit plans, endowment funds, foundations and other institutions and
individuals. CSAM is a member of Credit Suisse Asset Management, the
institutional arm of Credit Suisse Group (Credit Suisse), one of the world's
leading banks. As of December 31, 1998, CSAM managed approximately $203 billion
in assets. CSAM is located at 466 Lexington Avenue, New York, NY 10017-3147.
DAVIS SELECTED ADVISERS, L.P. Davis is a Colorado limited partnership, located
at 124 East Marcy Street, Santa Fe, New Mexico 87501. As of December 31, 1999,
Davis had assets under management of approximately $27.7 billion.
EQSF ADVISERS, INC. Third Avenue is located at 767 Third Avenue, New York, New
York 10017. Third Avenue has been an investment adviser and manager for mutual
funds since its organization in 1986. As of December 31, 1999, Third Avenue has
in excess of $1.5 billion in assets under management.
FRED ALGER MANAGEMENT, INC. Alger is a New York corporation wholly owned by its
principals and located at 1 World Trade Center, New York, New York 10048. Since
1964, Alger has provided investment management services to large corporate
pension plans, state and local governments, insurance companies, mutual funds
and high net-worth individuals. As of December 31, 1999, Alger had approximately
$17.4 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, 1999, Janus had under management
approximately $248.8 billion.
JENNISON ASSOCIATES LLC. Jennison is a Delaware limited liability company
located at 466 Lexington Avenue, New York, NY 10017. As of December 31, 1999,
Jennison had approximately $59.1 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 December 31, 1999, Lazard and its affiliated
companies managed client discretionary accounts with assets totaling
approximately $75 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.
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 December 31, 1999,
Neuberger Berman and its affiliates had assets under management of approximately
$54.4 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 December 31, 1999, PWM had assets under management of
approximately $1.4 billion.
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, 1999, Rowe-Fleming managed over
$42.5 billion of foreign assets.
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28
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INFORMATION ABOUT ADVISERS
--------------------------------------------------------------------------------
SUNAMERICA ASSET MANAGEMENT CORP.
THORNBURG INVESTMENT MANAGEMENT, INC. Thornburg is a Delaware corporation with
principal offices at 119 East Marcy Street, Santa Fe, New Mexico 87501, and has
been in the investment management business since 1982. As of December 31, 1999,
Thornburg had approximately $2.7 billion in assets under management.
VAN WAGONER CAPITAL MANAGEMENT, INC. Van Wagoner is a privately owned company
located at 345 California Street, San Franciso, California 94104. As of March
31, 2000, Van Wagoner had approximately $4.5 billion in assets under management.
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, 1999, Wellington Management had investment management authority
with respect to approximately $235 billion of assets.
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29
<PAGE>
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<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Aggressive Growth Portfolio Scott W. Schoelzel Mr. Schoelzel joined Janus
Executive Vice President and Capital in January 1994.
Portfolio Manager (Janus) He has managed the Janus
Twenty Fund since August 1997
and the Janus Aspen Capital
Appreciation Fund since its
inception.
Donna Calder (Domestic Prior to joining SunAmerica
Equity Investment Team) as a Portfolio Manager in
Portfolio Manager February 1998, Ms. Calder
(SunAmerica) served as a General Partner
of Manhattan Capital
Partners, L.P.
Elizabeth B. Dater Ms. Dater has been with CSAM
Managing Director (CSAM) since 1999, and with its
predecessor, Warburg Pincus
Asset Management, Inc., since
1978.
Stephen J. Lurito Mr. Lurito has been with CSAM
Managing Director (CSAM) since 1999, and with its
predecessor, Warburg Pincus
Asset Management, Inc., since
1987.
Large-Cap Value Portfolio William V. Fries, CFA Mr. Fries has been a Managing
Managing Director and Director and Portfolio
Portfolio Manager Manager at Thornburg since
(Thornburg) 1995. Previously he had been
affiliated with USAA
Investment Management Company
for over 20 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 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>
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30
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INFORMATION ABOUT ADVISERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO 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.
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 Mr. Gullquist has been with
(Investment Team) Vice Lazard since 1982. He is a
Chairman (Lazard) Managing Director, a Vice-
Chairman and the Chief
Investment Officer.
Eileen D. Alexanderson Ms. Alexanderson is a
(Investment Team) Managing Managing Director of Lazard
Director, responsible for U.S./global
Portfolio Manager (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.
</TABLE>
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31
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Small-Cap Value Portfolio Martin J. Whitman Chairman, Mr. Whitman has been Chief
(continued) CEO and Investment Officer of Third
Portfolio Manager (Third Avenue since 1991 and
Avenue) Chairman and CEO since 1986.
Mr. Whitman also has been
Chairman and CEO of Third
Avenue Trust (and its
predecessors) since 1990 and
was President from 1991 to
1998.
Curtis Jensen Mr. Jensen has been Co-
Portfolio Manager Portfolio Manager of Third
(Third Avenue) Avenue Small-Cap Value Fund
since 1997. Mr. Jensen has
been a Senior Research
Analyst at Third Avenue since
1995.
Focus Portfolio David D. Alger Mr. Alger joined Alger in
President and Portfolio 1971 and has been President
Manager (Alger) and Director since 1995.
Prior to 1995, Mr. Alger was
Executive Vice President and
Director of Research with the
firm.
Spiros "Sig" Segalas Mr. Segalas is a founding
Portfolio Manager (Jennison) member 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 1973,
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 TechNet Portfolio Walter C. Price, Jr. Mr. Price joined Dresdner in
Portfolio Manager (Dresdner) 1974 as a Senior Portfolio
Securities Analyst and became
a principal in 1978. He has
been a Managing Director and
Portfolio Manager with the
firm since 1985. Mr. Price
has analytical responsibility
for much of Dresdner's
technology area.
</TABLE>
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32
<PAGE>
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INFORMATION ABOUT ADVISERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Focused TechNet Portfolio Huachen Chen Mr. Chen joined Dresdner in
(continued) Portfolio Manager (Dresdner) 1985 as a Securities Analyst.
He became a principal in 1994
and currently has research
and money management
responsibilities for the
technology area.
Donna Calder Ms. Calder joined SunAmerica
Portfolio Manager as a Portfolio Manager in
(SunAmerica) February 1998. Ms. Calder
served as a General Partner
of Manhattan Capital
Partners, L.P. from November
1991 through August 1995. She
also has served as a
Portfolio Manager
with Oppenheimer Management
and
E.F. Hutton & Company.
Soohwan Kim, CFA Soohwan Kim joined SunAmerica
Senior Technology Analyst as a Senior Research Analyst
(SunAmerica) in July of 1999. Previously,
he was Vice President,
Analyst at Citibank Global
Asset Management. From 1992
to 1993, he served as an
Economist with the Union Bank
of Switzerland.
Garrett R. Van Wagoner, CFA Mr. Van Wagoner is Portfolio
Portfolio Manager (Van Manager and President of the
Wagoner) Van Wagoner Funds. Prior to
founding Van Wagoner Capital
Management, Inc. in 1995, Mr.
Van Wagoner managed the
Govett Smaller Companies Fund
for three years. He also
worked with Bessemer Trust,
N.A. and has over 20 years
experience of equity
portfolio management.
Raiford Garrabrant, CFA Mr. Garrabrant is a Research
Portfolio Manager and Analyst and Portfolio Manager
Research Analyst for Van Wagoner Capital
(Van Wagoner) Management, Inc. responsible
for covering companies with
market capitalizations of
$500 million and below. Prior
to joining Van Wagoner
Capital Management, Inc., he
was the Assistant Portfolio
Manager for the Govett
Smaller Companies Fund and
assisted Mr. Van Wagoner in
managing this fund in 1994
and 1995. Mr. Garrabrant also
worked with First Citizen's
Bank and Trust as a Financial
Analyst and has over eight
years of research and
portfolio management
experience.
</TABLE>
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33
<PAGE>
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION
OF
PORTFOLIO PORTFOLIO MANAGER EXPERIENCE
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Focused Growth and Income Thomas F. Marsico See above
Portfolio Portfolio Manager
(Marsico)
Francis Gannon Mr. Gannon has been a Vice
Portfolio Manager(SunAmerica) President and Portfolio
Manager with the firm since
1996. He joined SunAmerica as
an equity analyst in 1993.
International Equity Michael Levy (International Mr. Levy's experience prior
Portfolio Equity Team) Managing to joining BT includes
Director of Bankers Trust investment banking and equity
Funds Management, Head of analysis with Oppenheimer &
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.
Robert L. Reiner Mr. Reiner has 16 years of
(International Equity Team) investment industry
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.
Mark C. J. Bickford-Smith Mr. Bickford-Smith joined
Portfolio Manager (Rowe- Rowe-Fleming in 1995 and has
Fleming) 15 years of experience in
equity research and portfolio
management.
John R. Ford Mr. Ford joined Rowe- Fleming
Portfolio Manager (Rowe- in 1982 and has 20 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) 13 years of experience in
portfolio management.
David J. L. Warren Mr. Warren joined Rowe-
Portfolio Manager (Rowe- Fleming in 1984 and has
Fleming) 19 years of experience in
equity research, fixed income
research, and portfolio
management.
</TABLE>
DISTRIBUTOR SunAmerica Capital Services, Inc. serves as the Distributor of Class
Z shares and incurs the expenses of distributing the Portfolios' Class Z shares
under a Distribution Agreement with respect to the Portfolios, none of which are
reimbursed by or paid for by the Portfolios. There is no distribution plan in
effect for the Class Z shares.
ADMINISTRATOR SunAmerica Fund Services, Inc., serves as the Administrator for
Class Z shares and receives reimbursement from the Fund of its costs, which
include all direct transfer agency fees and out-of-pocket expenses allocated to
providing services to Class Z shares.
-------------------
34
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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 1-202-942-8090 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
SunAmerica
DISTRIBUTOR: Capital Services
INVESTMENT COMPANY ACT
File No. 811-07797
<PAGE>
SUNAMERICA STYLE SELECT SERIES, INC.
Statement of Additional Information
dated August 15, 2000
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
SunAmerica Style Select Series, Inc. (the "Fund") is a mutual fund
consisting of eleven 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 TechNet Portfolio, the Focused Growth and
Income Portfolio, the Focused Value 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 Prospectus dated August 15, 2000.
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. Capitalized terms used herein but not defined
have the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Fund..........................................................................B-3
Investment Objectives and Policies................................................B-3
Investment Restrictions..........................................................B-38
Directors and Officers...........................................................B-39
Advisers, Distributor and Administrator..........................................B-44
Portfolio Transactions and Brokerage.............................................B-53
Additional Information Regarding Purchase of Shares..............................B-57
Additional Information Regarding Redemption of Shares............................B-66
Exchange Privilege...............................................................B-67
Determination of Net Asset Value.................................................B-68
Performance Data.................................................................B-69
Dividends, Distributions And Taxes...............................................B-75
Retirement Plans.................................................................B-80
Description of Shares............................................................B-81
Additional Information...........................................................B-83
Financial Statements.............................................................B-91
Appendix...................................................................Appendix-1
</TABLE>
<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.
On October 19, 1999, the Directors approved the creation of the Focused
Value Portfolio, which commenced offering on November 1, 1999.
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.
B-3
<PAGE>
Convertible Securities and Preferred Stocks. Convertible securities may
be debt securities or preferred stock with a conversion feature. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than non-convertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed that combine higher or lower current income
with options and other features. Generally, preferred stock has a specified
dividend and ranks after bonds and before common stocks in its claim on income
for dividend payments and on assets should the company be liquidated. While most
preferred stocks pay a dividend, 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-Cap companies.
While such companies may realize more substantial growth than larger, more
established companies, they may also be subject to some additional risks. It may
be difficult to obtain reliable information and financial data on such companies
and the securities of these small companies may 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.
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
B-4
<PAGE>
issuer of the underlying security. An unsponsored ADR may be issued by any
number of U.S. depositories. Holders of unsponsored ADRs generally bear all the
costs associated with establishing the unsponsored ADR. The depository of an
unsponsored ADR is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored ADR voting rights with respect to the deposited securities or pool
of securities. A Portfolio may invest in either type of ADR. Although the U.S.
investor holds a substitute receipt of ownership rather than direct stock
certificates, the use of the depository receipts in the United States can reduce
costs and delays as well as potential currency exchange and other difficulties.
The Portfolio may purchase securities in local markets and direct delivery of
these ordinary shares to the local depository of an ADR agent bank in the
foreign country. Simultaneously, the ADR agents create a certificate 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
B-5
<PAGE>
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
and the Focused Value 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
amount. The interest
B-6
<PAGE>
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 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.
B-7
<PAGE>
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 U.S.
government, 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 U.S. government 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 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
B-8
<PAGE>
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 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
B-9
<PAGE>
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.
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
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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.
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
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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 U.S. 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 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
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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. 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
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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, 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
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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 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.
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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 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.
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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.
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
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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 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
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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 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
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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 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,
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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 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.
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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.
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
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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.")
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
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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 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
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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 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.
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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. 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
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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 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,
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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.
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.
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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 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
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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 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,
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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.
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
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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.
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 designate
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cash or liquid securities at least equal to the value of purchase commitments
until payment is made. A Portfolio will likewise designate 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.
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 33 1/3% 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
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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 Portfolio'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 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
33 1/3% of total assets to brokers, dealers and other financial institutions,
provided, that such loans are callable at any time by the Portfolio and are at
all times secured by cash or equivalent collateral. In lending its portfolio
securities, a Portfolio receives income while retaining the securities'
potential for capital appreciation. The advantage of such loans is that a
Portfolio continues to receive the interest and dividends on the loaned
securities while at the same time earning interest on the collateral, which will
be invested in 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
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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 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.
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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.
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,
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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.
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.
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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 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
331/3% 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.
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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.
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.
B-39
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
--------------------- ------------- -------------------
<S> <C> <C>
S. James Coppersmith, 66 Director Retired; formerly, President and General Manager, 7
Elmwood Road WCVB-TV, a division of the Hearst
Corporation, Marblehead, MA 01945 (1982 to 1994);
Director/ Trustee of SAMF and Anchor Series Trust
("AST").
Samuel M. Eisenstat, 58 Chairman of the Board Attorney, solo practitioner; Of Counsel, Kramer, 430
East 86th Street Levin, Naftalis & Frankel; Chairman
of the Boards New York, NY 10028 of
Directors/Trustees of SAMF and AST.
Stephen J. Gutman, 55 Director Partner and Managing Member of B.B. Associates LLC
515 East 79th Street (menswear specialty retailing
and other New York, NY 10021 activities) since June
1988; Director/Trustee of SAMF and AST.
Peter A. Harbeck,*45 Director and President Director and President, SunAmerica Asset Management
The SunAmerica Center Corp. ("SunAmerica"); Director, SunAmerica Capital
733 Third Avenue Services, Inc. ("SACS"), since August 1993; Director
New York, NY 10017-3204 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 Sterpa
73473 Mariposa Drive Group (real estate) since 1962; Director, Real
Palm Desert, CA 92260 Estate Business Service and Countrywide Financial;
Director/ Trustee of SAMF.
J. Steven Neamtz,* 38 Vice President Executive Vice President, SunAmerica, since April
The SunAmerica Center 1996; Director and President, SACS, since April
733 Third Avenue 1996; formerly, Executive Vice President, New
New York, NY 10017-3204 England Funds, L.P. from July 1990 to April 1996.
</TABLE>
B-40
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
--------------------- ------------- -------------------
<S> <C> <C>
Peter C. Sutton, *34 Treasurer Senior Vice President, SunAmerica, since April 1997;
The SunAmerica Center Treasurer, SAMF and AST, since February 1996; Vice
733 Third Avenue President and Assistant Treasurer of SAST and APF,
New York, NY 10017-3204 since 1994; Vice President, Seasons, since April
1997; formerly, Vice President, SunAmerica, from
1994 to 1997; Controller, SAMF and AST, from March
1993 to February 1996; Assistant Controller, SAMF
and AST, from 1990 to 1993.
Robert M. Zakem, 41 Secretary and Chief Senior Vice President and General Counsel,
The SunAmerica Center Compliance Officer SunAmerica, since April 1993; Executive Vice
733 Third Avenue President, General Counsel and Director, SACS, since
New York, NY 10017-3204 August 1993; Vice President, General Counsel and
Assistant Secretary, SAFS, since January 1994; Vice
President, SunAmerica Series Trust, Anchor Pathway
and Seasons Series Trust; Assistant Secretary,
SunAmerica Series Trust and Anchor Pathway Fund,
since September 1993; Assistant Secretary, Seasons
Series Trust, since April 1997; formerly, Vice
President and Associate General Counsel, SunAmerica,
from March 1992 to April 1993.
</TABLE>
*A trustee who may be deemed to be an interested person as that term is defined
in the 1940 Act.
The Directors of the Fund are responsible for the overall supervision of
the operation of the Fund and each Portfolio and perform various duties imposed
on directors of investment companies by the 1940 Act and under the Fund's
articles of incorporation. Directors and officers of the Fund are also Directors
and officers of some or all of the other investment companies managed,
administered or 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.
B-41
<PAGE>
In addition, each Disinterested Director also serves on the Audit Committee
of the Board of Directors. The Audit Committee is charged with recommending to
the full Board the engagement or discharge of the Fund's independent
accountants; directing investigations into matters within the scope of the
independent accountants' duties; reviewing with the independent accountants the
audit plan and results of the audit; approving professional services provided by
the independent accountants and other accounting firms prior to the performance
of such services; reviewing the independence of the independent accountants;
considering the range of audit and non-audit fees; and preparing and submitting
Committee minutes to the full Board. Each member of the Audit Committee receives
an aggregate of up to $5,000 in annual compensation for serving on the Audit
Committees of SAMF and/or AST, a pro rata portion of which, based on relative
net assets, is borne by the Fund. The Fund also has a Nominating Committee,
comprised solely of Disinterested Directors, which recommends to the Directors
those persons to be nominated for election as Directors by shareholders and
selects and proposes nominees for election by Directors between shareholders'
meetings. Members of the Nominating Committee serve without compensation.
The Directors (and Trustees) of SAMF and AST have adopted the SunAmerica
Disinterested Trustees' and Directors' Retirement Plan (the "Retirement Plan")
effective January 1, 1993 for the Disinterested Directors. The Retirement Plan
provides generally that if a Disinterested Director who has at least 10 years of
consecutive service as a Disinterested Director of any of SAMF or AST (an
"Eligible Director") retires after reaching age 60 but before age 70 or dies
while a Director, such person will be eligible to receive a retirement or death
benefit from each SunAmerica Mutual Fund with respect to which he or she is an
Eligible Director. With respect to Sebastiano Sterpa, the Disinterested
Directors have determined to make an exception to existing policy and allow Mr.
Sterpa to remain on the Board past age 70, until he has served for ten years.
Mr. Sterpa will cease accruing retirement benefits upon reaching age 70,
although such benefits will continue to accrue interest as provided for in the
Retirement Plan. As of each birthday, prior to the 70th birthday, each Eligible
Director will be credited with an amount equal to (i) 50% of his or her regular
fees (excluding committee fees) for services as a Disinterested Director of each
SunAmerica mutual fund for the calendar year in which such birthday occurs, plus
(ii) 8.5% of any amounts credited under clause (i) during prior years. An
Eligible Director may receive any benefits payable under the Retirement Plan, at
his or her election, either in one lump sum or in up to fifteen annual
installments.
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, 1999. The Directors who are interested persons
of the Fund receive no compensation.
B-42
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation from
Aggregate Retirement Benefits Estimated Annual Registrant and
Compensation Accrued as Part of Benefits Upon Fund Complex Paid
Director from Fund Fund Expenses* Retirement*+ to Directors*
<S> <C> <C> <C> <C>
S. James Coppersmith $13,416 $44,520 $29,670 $65,000
Samuel M. Eisenstat** 14,037 39,203 46,083 69,000
Stephen J. Gutman 13,416 40,593 60,912 65,000
Sebastiano Sterpa*** 13,537 19,734 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 18, 2000, the Directors and officers of the Fund owned in
the aggregate less than 1% of each Portfolio's total outstanding shares.
The following shareholders owned of record or beneficially 5% or more of
the indicated Portfolio Class' shares outstanding as of February 18, 2000:
Focused Value Portfolio - Class A-SunAmerica Inc., Los Angeles, CA 90067 - owned
of record 7%; PaineWebber for the Benefit of the William Soroka 1989 Trust, San
Diego, CA 92108 - owned of record 9%; Class B - Merrill Lynch, Pierce, Fenner &
Smith, Inc.("Merrill Lynch"), Jacksonville, FL 32246 - owned of record 11%;
Focus Portfolio - Class B- Merrill Lynch, Jacksonville, FL 32246 - owned of
record 8%; Class Z - Fidelity Investment Institutional Operations Co. ("FIIOC")
as Agent for Certain Employee Benefit Plans, Covington, KY 41015 - owned of
record 18%; FIIOC as Agent for Certain Non-Qualified Employee Benefit Plans,
Covington, KY 41015 - owned of record 16%; Aggressive Growth Portfolio - Class B
- Merrill Lynch, Jacksonville, FL 32246 - owned of record 6%; Merrill Lynch,
Jacksonville, FL 32246 - owned of record 14%; Mid-Cap Growth Portfolio - Class A
- SunAmerica, Inc., Los Angeles, CA 90067 - owned of record 5%; Class B -
Merrill Lynch, Jacksonville, FL 32246 - owned of record 8%; Class II - Merrill
Lynch, Jacksonville, FL 32246 - owned of record 18%; International Equity
Portfolio - Class A - SunAmerica, Inc., Los Angeles, CA 90067 - owned of record
7%; Class B - Merrill Lynch, Jacksonville, FL 32246 - owned of record 5%; Class
II - Merrill Lynch, Jacksonville, FL 32246 - owned of record 9%; Class Z - FIIOC
as Agent for Certain Employee Benefit Plans, Covington KY 41015 - owned of
record 100%; Value Portfolio - Class B - Merrill Lynch, Jacksonville, FL 32246 -
owned of record 8%; Class II - Merrill Lynch, Jacksonville, FL 32246 - owned of
record 14%; Class Z - FIIOC as Agent for Certain Employee Benefit Plans,
Covington, KY 41015 - owned of record 81%; FIIOC as Agent for Certain
Non-Qualified Employee Benefit Plans, Covington, KY 41015 - owned of record 14%;
Small-Cap Value Portfolio -Class B - Merrill Lynch, Jacksonville, FL 32246 -
owned of record 12%; Class II - Merrill Lynch, Jacksonville, FL 32246 - owned
of record 12%; Class Z - FIIOC as Agent for Certain Employee
Benefit Plans, Covington, KY 41015 - owned of record 77%; FIIOC as Agent for
Certain Non-Qualified Employee Benefit Plans, Covington, KY 41015 - owned of
record 22%; Large-Cap Value Portfolio -Class A - SunAmerica, Inc., Los Angeles,
CA 90067 - owned of record 5%; Class B - Merrill Lynch, Jacksonville, FL 32246 -
owned of record 7%; Class II - Merrill Lynch, Jacksonville, FL 32246 - owned
B-43
<PAGE>
of record 6%; Class Z - FIIOC as Agent for Certain Employee Benefit Plans,
Covington, KY 41015 -owned of record 29%; FIIOC as Agent for Certain
Non-Qualified Employee Benefit Plans, Covington, KY 41015 - owned of record 70%;
Large-Cap Growth Portfolio - Class B - Merrill Lynch, Jacksonville, FL 32246 -
owned of record 8%; Class II - 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 December 31, 1999, SunAmerica managed more
than $27 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 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.
B-44
<PAGE>
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 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. Fred Alger Management, Inc. ("Alger"), American Century Investment
Management, Inc. ("American Century"), Bankers Trust Company ("BT"), Berger, LLC
("Berger"), Credit Suisse Asset Management, LLC ("CSAM"), Davis Selected
Advisers, L.P. ("Davis"), EQSF Advisers, Inc. ("Third Avenue"), Janus Capital
Corporation ("Janus"), Jennison Associates LLC ("Jennison"), Lazard Asset
Management ("Lazard"), 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"),
Thornburg Investment Management, Inc. ("Thornburg"), 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, Mid-Cap Growth
and the Focused Growth and Income Portfolio.
B-45
<PAGE>
STYLE-BASED PORTFOLIOS
----------------------
PORTFOLIO PORTFOLIO MANAGEMENT ALLOCATED
--------- ------------------------------
AMONG THE FOLLOWING ADVISERS
----------------------------
Large-Cap Growth Portfolio Janus
Jennison
Montag & Caldwell
Mid-Cap Growth Portfolio MAS
T. Rowe Price
SunAmerica
Aggressive Growth Portfolio Janus
SunAmerica
CSAM
Large-Cap Value Portfolio Thornburg
Davis
Wellington Management
Value Portfolio American Century
Davis
Neuberger Berman
Small-Cap Value Portfolio Berger*
Lazard
Third Avenue
* 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
-------------------
Focus Portfolio Alger
Jennison
Marsico
International Equity Portfolio BT
Rowe-Fleming
Focused Growth and Income Portfolio SunAmerica
Marsico
B-46
<PAGE>
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. Alger is wholly-owned by its
principals. American Century is a wholly-owned subsidiary of American Century
Companies, Inc. Berger is an indirect subsidiary (more than 80% of its
outstanding shares) of Kansas City Southern Industries, Inc. ("KCSI"). BT is a
wholly-owned subsidiary of Bankers Trust New York Corporation. CSAM is a member
of Credit Suisse Asset Management, the institutional arm of Credit Suisse Group.
Davis' sole general partner is Venture Advisers, Inc. Shelby M.C. Davis is the
controlling shareholder of the general partner. 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.
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. Thornburg is a privately held company. 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, 1999, SunAmerica paid fees to
the Advisers equal to the following aggregate annual rates, expressed as a
percentage of the assets of
B-47
<PAGE>
each Portfolio: Large-Cap Growth Portfolio, 0.47%; Mid-Cap Growth Portfolio,
0.47%; Aggressive Growth Portfolio, 0.36%; Large-Cap Value Portfolio, 0.43%;
Value Portfolio, 0.49%; Small-Cap Value Portfolio, 0.55%; Focus Portfolio 0.40%;
Focused Growth and Income Portfolio, 0.28%; and International Equity Portfolio,
0.70%.
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
ADVISORY FEES
ADVISORY FEES WAIVED
PORTFOLIO ADVISORY FEES*
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Large-Cap Growth Portfolio $ 785,224 $ 332,529 $ 11,611 $ 203,579 $ 241,841 $ 6,846
Mid-Cap Growth Portfolio $1,172,218 $ 839,531 $ 390,221 $ 130,821 $ 251,561 $ 132,696
Aggressive Growth Portfolio $2,151,676 $1,251,124 $ 533,055 $ 130,458 $ 332,668 $ 136,500
Large-Cap Value Portfolio $ 555,008 $ 353,448 $ 11,729 $ 88,200 $ 212,042 $ 6,854
Value Portfolio $1,856,050 $1,934,440 $ 671,560 $ 30,057 $ 319,914 $ 188,985
Small-Cap Value Portfolio $ 471,171 $ 393,742 $ 12,079 $ 131,671 $ 242,130 $ 6,891
Focus Portfolio** $3,073,664 $ 238,994 - $ 569,111 $ 89,221 -
Focused Growth and Income Portfolio
(previously known as the Large-Cap
Blend Portfolio) $ 450,966 $ 287,134 $ 11,730 $ 165,213 $ 172,983 $ 6,854
International Equity Portfolio $ 945,209 $ 877,072 $ 440,671 $ 195,923 $ 344,811 $ 147,973
</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
B-48
<PAGE>
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,
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, 1999, 1998 and 1997.
SUBADVISORY FEES
<TABLE>
<CAPTION>
PORTFOLIO SUBADVISORY FEES
1999 1998 1997
<S> <C> <C> <C>
Large-Cap Growth Portfolio $ 369,324 $ 160,671 $ 5,613
Mid-Cap Growth Portfolio $ 555,329 $ 399,530 $ 195,077
Aggressive Growth Portfolio $ 783,872 $ 481,178 $ 199,051
Large-Cap Value Portfolio $ 240,450 $ 147,744 $ 4,769
Value Portfolio $ 909,450 $ 959,440 $ 333,308
Small-Cap Value Portfolio $ 258,986 $ 216,474 $ 6,649
Focus Portfolio* $1,448,979 $ 112,346 --
Focused Growth and Income Portfolio (previously known
as the Large-Cap Blend Portfolio) $ 128,079 $ 119,228 $ 3,714
International Equity Portfolio $ 554,455 $ 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
B-49
<PAGE>
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 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 SunAmerica Capital
Services, Inc. (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
B-50
<PAGE>
Alliance Associates, SunAmerica Securities, Inc., Koegler Morgan & Company,
Financial Service Corporation and Advantage Capital Corporation, affiliates of
the Distributor, that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Portfolios, or of other funds
underwritten by the Distributor. In addition, the terms and conditions of any
given promotional incentive may differ from firm to firm. Such differences will,
nevertheless, be fair and equitable, and based on such factors as size,
geographic location, or other reasonable determinants, and will in no way affect
the amount paid to any investor.
Distribution Plans. As indicated in the Prospectus, the Directors of the Fund
have adopted Distribution Plans (the "Class A Plan," the "Class B Plan" and the
"Class II Plan" and collectively, the "Distribution Plans") pursuant to Rule
12b-1 under the 1940 Act. 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-51
<PAGE>
DISTRIBUTION AND ACCOUNT MAINTENANCE AND SERVICE FEES
PORTFOLIO
<TABLE>
<CAPTION>
1999 1998 1997
Class A Class B Class II* Class A Class B Class II* Class A Class B Class C*
------- ------- ---------- ------- ------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap Growth
Portfolio $77,434 $421,059 $142,925 $55,924 $139,218 $33,528 $3,983 $173 $59
Mid-Cap Growth
Portfolio $132,141 $680,834 $113,839 $93,555 $499,157 $73,073 $73,691 $164,888 $14,787
Aggressive Growth
Portfolio $289,200 $1,142,751 $177,291 $175,991 $660,563 $86,457 $106,377 $209,795 $19,327
Large-Cap Value
Portfolio $51,738 $319,565 $85,348 $47,457 $182,997 $34,082 $3,986 $281 $60
Value Portfolio $229,141 $1,057,857 $142,408 $251,405 $1,072,774 $143,031 $116,913 $309,027 $28,306
Small-Cap Value
Portfolio $54,357 $246,745 $67,918 $51,869 $202,927 $42,055 $3,849 $900 $184
Focus Portfolio** $334,465 $1,443,431 $1,214,056 $29,757 $107,744 $88,405 -- -- --
Focused Growth and
Income Portfolio $52,419 $237,408 $63,787 $58,296 $106,640 $13,933 $4,000 $239 $63
International
Equity Portfolio $100,842 $474,505 $95,731 $90,504 $474,411 $63,753 $77,057 $162,796 $17,650
-------------------
</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
B-52
<PAGE>
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.
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, 1999, the total amount paid to the Administrator by the Fund
was $2,618,850. 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
B-53
<PAGE>
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 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-54
<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, 1999,
1998 and 1997.
BROKERAGE COMMISSIONS
1999
<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 Broker-
PORTFOLIO Commissions Broker-Dealers Broker-Dealers Dealers
----------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Large-Cap Growth
Portfolio $ 95,625 -- -- --
Mid-Cap Growth Portfolio $260,747 -- -- --
Aggressive Growth Portfolio $371,184 -- -- --
Large-Cap Value Portfolio $ 62,910 $ 36 0.06% 0.07%
Value Portfolio $554,672 $ 5,100 0.92% 0.83%
Small-Cap Value Portfolio $194,004 -- -- --
Focus Portfolio* $689,632 $ 2,019 0.29% 0.29%
Focused Growth and Income
Portfolio (previously known as
the Large-Cap Blend Portfolio) $106,935 -- -- --
International Equity Portfolio $417,746 $ 11,980 2.87% 1.71%
* From date of inception of June 1, 1998.
</TABLE>
B-55
<PAGE>
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 Broker-
PORTFOLIO Commissions Broker-Dealers Broker-Dealers 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 Portfolio $ 46,791 $ 54 0.10% 0.10%
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%
* From date of inception of June 1, 1998.
</TABLE>
B-56
<PAGE>
1997
<TABLE>
<CAPTION>
Aggregate Percentage Paid to
Brokerage Amount Paid to Affiliated
PORTFOLIO Commissions Affiliated Broker-Dealers 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.
B-57
<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,
1999, 1998 and 1997.
1999
<TABLE>
<CAPTION>
Amount
Amount Reallowed Contingent
Front-End Reallowed to Contingent Deferred
Sales to Affiliated Non-Affiliated Deferred Sales Sales Charge-
Concessions- Broker-Dealers Broker-Dealers Charge- Class II
Portfolio Class A Shares Class A Shares Class A Shares Class B Shares Shares**
<S> <C> <C> <C> <C> <C>
Large-Cap Growth
Portfolio $352,678 $185,923 $114,752 $100,616 $5,744
Mid-Cap Growth
Portfolio $235,325 $121,020 $78,503 $184,653 $5,412
Aggressive Growth
Portfolio $790,791 $414,832 $265,913 $251,688 $7,355
Large-Cap Value
Portfolio $167,072 $64,666 $76,475 $111,113 $7,864
Value Portfolio $336,497 $197,732 $89,839 $436,047 $8,419
Small-Cap Value
Portfolio $153,347 $61,804 $69,318 $117,463 $4,415
Focus Portfolio*** $4,320,016 $1,424,165 $2,317,951 $257,008 $83,161
Focused Growth and
Income Portfolio
(previously known
as the Large-Cap
Blend Portfolio) $854,672 $350,064 $392,985 $57,901 $2,060
International
Equity Portfolio $189,597 $99,868 $60,337 $200,374 $3,583
</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).
B-58
<PAGE>
<TABLE>
<CAPTION>
Amount
Front-End Reallowed
Sales Amount Reallowed to
Concessions- to Affiliated Non-Affiliated
Class II Broker-Dealers Broker-Dealers
Portfolio Shares* Class II Shares Class II Shares
<S> <C> <C> <C>
Large-Cap Growth
Portfolio $125,657 $59,637 $66,020
Mid-Cap Growth
Portfolio $51,885 $23,130 $28,755
Aggressive Growth
Portfolio $121,470 $60,242 $61,228
Large-Cap Value
Portfolio $73,656 $29,484 $44,172
Value Portfolio $46,521 $20,504 $26,017
Small-Cap Value
Portfolio $37,989 $17,089 $20,900
Focus Portfolio*** $2,363,391 $413,746 $1,949,645
Focused Growth and
Income Portfolio
(previously known
as the Large-Cap
Blend Portfolio) $133,119 $104,107 $29,012
International
Equity Portfolio $49,633 $22,939 $26,694
</TABLE>
B-59
<PAGE>
1998
<TABLE>
<CAPTION>
Amount
Front-End Amount Reallowed Contingent
Front-End Sales Reallowed to Contingent Deferred
Sales Concessions- to Affiliated Non-Affiliated Deferred Sales Sales Charge-
Concessions- Class II Broker-Dealers Broker-Dealers Charge- Class II
Portfolio Class A Shares 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*** $1,250,948 $513,213 $191,346 $884,979 $10,686 $7,401
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 Portfolio $341,296 - $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-60
<PAGE>
1997
<TABLE>
<CAPTION>
Front-End Contingent
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
B-61
<PAGE>
of business will be executed at the offering price determined at the close
of regular trading on the New York Stock Exchange (the "NYSE") that day. Orders
received by the Distributor after the close of business will be executed at the
offering price determined after the close of regular trading of the NYSE on the
next trading day. The Distributor reserves the right to cancel any purchase
order for which payment has not been received by the fifth business day
following the investment. 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:
B-62
<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.
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:
B-63
<PAGE>
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 $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
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<PAGE>
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 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
B-65
<PAGE>
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 Mutual Fund with a similar load structure to the respective
SunAmerica Mutual Fund share class. With respect to sales of Class A shares
through the program, the Distributor will pay a 0.50% commission and 0.25%
service fee to any dealer who initiates or is responsible for such an
investment. With respect to sales of Class B shares through the program, they
will receive 0.50% of the amount invested as commission and 0.25% as a service
fee, payable beginning the 13th month following the purchase of such shares.
(Class B shares will convert to Class A shares as provided in the prospectus.).
These payments are subject, however, to forfeiture in the event of a redemption
during the first year from the date of purchase. No commission shall be paid on
sales of Class II shares, but dealers will receive a 1% service fee, commencing
immediately and paid quarterly. In addition, it is essential that a NAV Transfer
Program Form accompany the New Account Application to indicate that the
investment is intended to participate in the Net Asset Value Transfer Program
(formerly, Exchange Program for Investment Company Shares). This program may be
revised or terminated without notice by the Distributor. For current
information, contact Shareholder/Dealer Services at (800) 858-8850.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Shareholder Account Information" in the
Prospectus for certain information as to the redemption of Portfolio shares.
B-66
<PAGE>
If the Directors determine that it would be detrimental to the best
interests of the remaining shareholders of a Portfolio to make payment wholly or
partly in cash, the Fund, having filed with the SEC a notification of election
pursuant to Rule 18f-1 on behalf of each of the Portfolios, may pay the
redemption price in whole, or in part, by a distribution in kind of securities
from a Portfolio in lieu of cash. In conformity with applicable rules of the
SEC, the 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.
B-67
<PAGE>
A shareholder who acquires Class B or Class II shares through an
exchange from another SunAmerica Mutual Fund will retain liability for any
deferred sales charge outstanding on the date of the exchange. In such event,
the period for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining what, if any, CDSC is applicable upon a redemption of
any of such shares and the timing of conversion of Class B shares to Class A. A
shareholder's CDSC schedule will not change if such shareholder exchanges Class
C or Class II shares purchased prior to December 1, 1998 for Class II shares
(which currently have a longer CDSC schedule).
Because excessive trading (including short-term "market timing"
trading) can hurt 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.
B-68
<PAGE>
Short-term securities with 60 days or less to maturity are amortized to maturity
based on their cost to the Fund if acquired within 60 days of maturity or, if
already held by the Fund on the 60th day, are amortized to maturity based on the
value determined on the 61st day. Options traded on national securities
exchanges are valued as of the close of the exchange on which they are traded.
Futures and options traded on commodities exchanges are valued at their last
sale price as of the close of such exchange. Other securities are valued on the
basis of last sale or bid price (if a last sale price is not available) in what
is, in the opinion of the Adviser, the broadest and most representative market,
that may be either a securities exchange or the over-the-counter market. Where
quotations are not readily available, securities are valued at fair value as
determined in good faith in accordance with procedures adopted by the Board of
Directors. The fair value of all other assets is added to the value of
securities to arrive at the 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:
n
P(1 + T) = ERV
P = a hypothetical initial purchase payment of $1,000
T = average nnual 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
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<PAGE>
of the Class B or Class II shares) is deducted from the
initial $1,000 purchase payment;
(b) All dividends and distributions are reinvested at net
asset value; and
(c) Complete redemption occurs at the end of the 1-, 5-, or
10- year periods or fractional portion thereof with all
nonrecurring charges deducted accordingly.
Each Portfolios' average annual total return for the 1-, 5- and 10-year
periods (or from date of inception, if sooner) ended October 31, 1999 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 16.91%(1) 25.23% N/A N/A
Mid-Cap Growth Portfolio 12.61%(3) 22.37% N/A N/A
Aggressive Growth Portfolio 26.18%(3) 49.26% N/A N/A
Large-Cap Value Portfolio 3.20%(1) 5.82% N/A N/A
Value Portfolio 9.76%(3) 5.76% N/A N/A
Small-Cap Value Portfolio (5.91)%(1) 1.92% N/A N/A
Focus Portfolio 30.46%(2) 43.84% N/A N/A
Focused Growth and Income Portfolio
(previously known as the Large-Cap
Blend Portfolio) 14.12%(1) 25.44% N/A N/A
International Equity Portfolio 3.27%(3) 10.42% N/A N/A
</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 18.25%(1) 28.01% N/A N/A
Mid-Cap Growth Portfolio 13.65%(3) 24.92% N/A N/A
Aggressive Growth Portfolio 27.02%(3) 53.21% N/A N/A
Large-Cap Value Portfolio 4.16%(1) 7.55% N/A 'N/A
Value Portfolio 10.46%(3) 7.48% N/A N/A
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Small-Cap Value Portfolio (5.22)%(1) 3.45% N/A N/A
Focus Portfolio 32.65%(2) 47.67% N/A N/A
Focused Growth and Income Portfolio
(previously known as the Large-Cap
Blend Portfolio) 15.47%(1) 28.21% N/A N/A
International Equity Portfolio 3.73%(3) 12.29% N/A N/A
</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 II Shares 1 Inception Year Years Years
<S> <C> <C> <C> <C>
Large-Cap Growth Portfolio 18.86%(2) 29.62% N/A N/A
Mid-Cap Growth Portfolio 17.79% 26.68% N/A N/A
Aggressive Growth Portfolio 27.56% 54.48% N/A N/A
Large-Cap Value Portfolio 5.04%(2) 9.44% N/A N/A
Value Portfolio 8.81% 9.36% N/A N/A
Small-Cap Value Portfolio (4.70)%(2) 5.47% N/A N/A
Focus Portfolio 33.59%(3) 49.16% N/A N/A
Focused Growth and Income Portfolio
(previously known as Large-Cap Blend
Portfolio) 16.12%(2) 29.91% N/A N/A
International Equity Portfolio 4.52% 14.20% N/A N/A
</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
B-71
<PAGE>
Average), 15 utilities company stocks (Dow Jones
Utilities Average), and 20 transportation company
stocks (Dow Jones Transportation Average). Comparisons
of performance assume reinvestment of dividends.
b) Standard & Poor's 500 Composite Stock Price Index or
its component indices -- an unmanaged index composed of
400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of
dividends.
c) Standard & Poor's 100 Stock Index -- an unmanaged index
based on the prices of 100 blue chip stocks, including
92 industrials, one utility, two transportation
companies, and five financial institutions. The
Standard & Poor's 100 Stock Index is a smaller, more
flexible index for options trading.
d) The NYSE composite or component indices -- unmanaged
indices of all industrial, utilities, transportation,
and finance stocks listed on the NYSE.
e) Wilshire 5000 Equity Index or its component indices --
represents the return on the market value of all common
equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of
dividends.
f) Lipper: Mutual Fund Performance Analysis, Fixed Income
Analysis, and Mutual Fund Indices -- measures total
return and average current yield for the mutual fund
industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all
distributions, exclusive of sales charges.
g) CDA Mutual Fund Report, published by CDA Investment
Technologies, analyzes price, current yield, risk,
total return, and average rate of return (average
annual compounded growth rate) over specified time
periods for the mutual fund industry.
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.
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<PAGE>
l) Savings and Loan Historical Interest Rates as published
in the U.S. Savings & Loan League Fact Book.
m) Shearson-Lehman Municipal Bond Index and
Government/Corporate Bond Index -- unmanaged indices
that track a basket of intermediate and long-term
bonds. Reflect total return and yield and assume
dividend reinvestment.
n) Salomon GNMA Index published by Salomon Brothers Inc.
-- Market value of all outstanding 30-year GNMA
Mortgage Pass-Through Securities that includes single
family and graduated payment mortgages.
o) Salomon Mortgage Pass-Through Index published by
Salomon Brothers Inc. --Market value of all outstanding
agency mortgage pass-through securities that includes
15- and 30-year FNMA, FHLMC and GNMA Securities.
p) Value Line Geometric Index -- broad based index made up
of approximately 1700 stocks each of which have an
equal weighting.
q) Morgan Stanley Capital International EAFE Index -- an
arithmetic, market value-weighted average of the
performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far
East.
r) Goldman Sachs 100 Convertible Bond Index -- currently
includes 67 bonds and 33 preferred stocks. The original
list of names was generated by screening for
convertible issues of $100 million or more in market
capitalization. The index is priced monthly.
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
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countries: Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, The Netherlands, Spain, Sweden,
the United Kingdom, and the United States.
w) Shearson Lehman Long-Term Treasury Bond Index -- is
comprised of all bonds covered by the Shearson Lehman
Hutton Treasury Bond Index with maturities of 10 years
or greater.
x) NASDAQ Industrial Index -- is comprised of more than
3,000 industrial issues. It is a value-weighted index
calculated on pure change only and does not include
income.
y) The MSCI Combined Far East Free ex Japan Index -- a
market capitalization weighted index comprised of
stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included
in this index at 20% of its market capitalization.
z) First Boston High Yield Index -- generally includes
over 180 issues with an average maturity range of seven
to ten years with a minimum capitalization of $100
million. All issues are individually trader-priced
monthly.
aa) Morgan Stanley Capital International World Index -- An
arithmetic, market value-weighted average of the
performance of over 1,470 securities listed on 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
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short-term capital gains, if any, in excess of 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
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following year will be taxable to shareholders as of such December 31, rather
than the date on which the distributions are received.
Distributions of net investment income and short-term capital gains are
taxable to the shareholder as ordinary dividend income regardless of whether the
shareholder receives such distributions in additional shares or in cash. The
portion of such dividends received from 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
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of the Portfolio's total assets at the close of its taxable year consists of
securities of foreign corporations, the Portfolio will be eligible, and intends,
to file an election with the Internal Revenue Service pursuant to which
shareholders of the Portfolio will be required to include their proportionate
share of such foreign taxes in their U.S. income tax returns as gross income,
treat such proportionate share as taxes paid by them, and deduct such
proportionate share in computing their taxable incomes or, alternatively,
subject to certain limitations and the Portfolio and the shareholders satisfying
certain holding period requirements, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by non-corporate shareholders who do not itemize deductions. Of course,
certain retirement accounts which are not subject to tax cannot claim foreign
tax credits on investments in foreign securities held in the Portfolio. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Portfolio's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time 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.
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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
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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 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.
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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.
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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, the
Focused Value Portfolio and the International Equity Portfolio. The Large-Cap
Growth Portfolio, the Mid-Cap Growth Portfolio, the Focused Growth and Income
Portfolio and the Focused Value Portfolio are divided into three classes of
shares, designated as Class A, Class B and Class II. The Aggressive Growth
Portfolio, Large-Cap Value Portfolio, Value Portfolio, Small-Cap Value
Portfolio, Focus Portfolio and International Equity Portfolio are divided into
four classes of shares, designated as Class A, Class B, Class II and Class Z.
The Directors may authorize the creation of additional Portfolios of shares so
as to be able to offer to investors additional investment portfolios within the
Fund that would operate independently from the Fund's present Portfolios, or to
distinguish among shareholders, as may be necessary, to comply with future
regulations or other unforeseen circumstances. Each Portfolio of the Fund's
shares represents the interests of the shareholders of that Portfolio in a
particular portfolio of Fund assets. In addition, the Directors may authorize
the creation of additional classes of shares in the future, which may have fee
structures different from those of existing classes and/or may be offered only
to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The
Directors have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Directors, and appoint
their own successors, provided that at all times at least a majority of the
Directors have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting can,
if they choose, elect all Directors being elected, while the 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
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an initial sales charge, a distribution fee, an ongoing account maintenance and
service fee and a CDSC, (vi) each class has voting rights on matters that
pertain to the Rule 12b-1 plan adopted with respect to such class, except that
under certain circumstances, the holders of Class B shares may be entitled to
vote on material changes to the Class A Rule 12b-1 plan, (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-82
<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, 1999.
<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............. $28,050,043 $51,691,023 $18,659,081 $38,990,712 $70,476,599 $13,396,122
Number of Shares
Outstanding............ 1,538,779 2,875,474 1,038,447 2,145,717 3,956,453 751,217
Net Asset Value Per
Share (net assets
divided by number of
shares) ............... $18.23 $17.98 $17.97 $18.17 $17.81 $17.83
Sales charge for Class A
Shares:
5.75% of offering price
(6.10% of net asset value
per share)*............ $1.11 ** - $1.11 ** -
Sales charge for Class
II Shares:
1.00% of offering price
(1.01% of net asset value
per share)* - ** $0.18 - ** $ 0.18
Offering Price......... $19.34 - $18.15 $19.28 - $18.01
</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>
Aggressive Growth Portfolio Focused Growth and Income 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 ....... $100,467,975 $140,508,402 $25,330,968 $624,388 $29,280,845 $39,635,931 $15,619,302
Number of Shares
Outstanding ...... 2,145,717 5,486,552 989,494 23,670 1,710,287 2,345,144 925,037
Net Asset Value
Per Share (net
assets divided
by number of
shares) .......... $26.13 $25.61 $25.60 $26.38 $17.12 $16.90 $16.89
Sales charge for
Class A Shares:
5.75% of
offering price
(6.10% of net
asset value per
share)* .......... $1.59 ** - - $1.04 ** -
Sales charge for
Class II Shares:
1.00% of
offering price
(1.01% of net
asset value per
share)* .......... - ** $0.26 - - ** $0.17
Offering Price ... $27.72 - $25.86 $26.38 $18.16 - $17.06
</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>
Large-Cap Value Portfolio
-------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets........... $15,996,203 $31,422,544 $10,663,661 $240,743
Number of Shares
Outstanding ......... 1,138,533 2,265,899 768,841 16,973
Net Asset Value Per
Share (net assets
divided by number of
shares) ............. $14.05 $13.87 $13.87 $14.18
Sales charge for
Class A Shares:
5.75% of offering price
(6.10% of net asset
value per share)* ... $0.86 ** - -
Sales charge for
Class II Shares:
1.00% of offering
price (1.01% of net
asset value per
share)* - ** $0.14 -
Offering Price....... $14.91 - $14.01 $14.18
</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>
Value Portfolio
---------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets............. $58,581,052 $95,111,535 $12,976,420 $73,719
Number of Shares
Outstanding ........... 3,482,688 5,760,311 786,093 4,345
Net Asset Value Per
Share (net assets
divided by number of
shares) ............... $16.82 $16.51 $16.51 $16.97
Sales charge for Class
A Shares:
5.75% of offering price
(6.10% of net asset value
per share)* ........... $1.03 ** - -
Sales charge for Class
II Shares:
1.00% of offering price
(1.01% of net asset value
per share)* - ** $0.17 -
Offering Price......... $17.85 - $16.68 $16.97
</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>
Small-Cap Value Portfolio
-------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
Net Assets............. $15,473,271 $22,600,723 $7,230,375 $78,406
Number of Shares
Outstanding ........... 1,322,315 1,957,731 626,090 6,649
Net Asset Value Per
Share (net assets
divided by number of
shares) ............... $11.70 $11.54 $11.55 $11.79
Sales charge for Class A
Shares:
5.75% of offering price
(6.10% of net asset value
per share)* ........... $0.71 ** - -
Sales charge for Class
II Shares:
1.00% of offering price
(1.01% of net asset value
per share)* - ** $0.12 -
Offering Price......... $12.41 - $11.67 $11.79
-----------------------
* 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>
International Equity Portfolio
------------------------------
Class A Class B Class II+ Class Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Net Assets.............. $29,323,709 $47,341,531 $11,708,616 $31,668
Number of Shares
Outstanding............. 2,055,964 3,385,281 837,167 2,198
Net Asset Value Per
Share (net assets divided
by number of shares) ... $14.26 $13.98 $13.99 $14.41
Sales charge for Class A
Shares: 5.75% of offering
price (6.10% of net asset
value per share)* ...... $0.87 ** - -
Sales charge for Class II
Shares: 1.00% of offering
price (1.01% of net asset
value per share)* - ** $0.14 -
Offering Price.......... $15.13 - $14.13 $14.41
</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-88
<PAGE>
<TABLE>
<CAPTION>
Focus Portfolio
---------------
Class A Class B Class II+ Class Z++
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Net Assets............. $169,733,685 $271,531,337 $261,536,364 $2,521,789
Number of Shares
Outstanding ........... 8,825,047 14,251,366 13,727,738 130,882
Net Asset Value Per
Share (net assets
divided by number of
shares) ............... $19.23 $19.05 $19.05 $19.27
Sales charge for Class A
Shares:
5.75% of offering price
(6.10% of net asset value
per share)* ........... $1.17 ** -- --
Sales charge for Class
II Shares:
1.00% of offering price
(1.01% of net asset value
per share)* - ** $0.19 --
Offering Price......... $20.40 - $19.24 $19.27
</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 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.
B-89
<PAGE>
<TABLE>
<CAPTION>
Focus Value Portfolio
---------------------
Class A Class B Class II
------- ------- --------
<S> <C> <C> <C>
Net Assets............. $12,500 $12,500 $12,500
Number of Shares
Outstanding ........... 1000 1000 1000
Net Asset Value Per
Share (net assets
divided by number of
shares) ............... $12.50 $12.50 $12.50
Sales charge for Class A
Shares:
5.75% of offering price
(6.10% of net asset value
per share)* ........... $0.76 -- --
Sales charge for Class
II Shares:
1.00% of offering price
(1.01% of net asset value
per share)* - -- $0.13
Offering Price......... $13.26 - $12.63
</TABLE>
--------------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is
applicable.
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-90
<PAGE>
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1999 annual and 2000
semi-annual reports to shareholders. You may request copies of the annual and
semi-annual reports 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-91
<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.
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.
Appendix-1
<PAGE>
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.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Appendix-2
<PAGE>
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks 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.
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.
Appendix-3
<PAGE>
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 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
Appendix-4
<PAGE>
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.
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.
Appendix-5
<PAGE>
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.
D This rating indicates that the issue is either in default or
is expected to be in default upon maturity.
Appendix-6
<PAGE>
The commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix-7
<PAGE>
PART C
OTHER INFORMATION
Item 23: Exhibits.
(a) (i) Articles of Incorporation, as Amended. Incorporated herein
by reference to Exhibit 1(A) of the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on August
30, 1996.
(ii) Articles Supplementary dated August 1, 1996. Incorporated
herein by reference to Exhibit 1(B) of the Registrant's
Registration Statement on Form N-1A (File No. 333- 11283)
filed on August 30, 1996.
(iii) Articles of Amendment dated August 19, 1996. Incorporated
herein by reference to Exhibit 1(C) of the Registrant's
Registration Statement on Form N-1A (File No. 333- 11283)
filed on August 30, 1996.
(iv) Articles of Amendment dated November 13, 1996. Incorporated
herein by reference to Exhibit 1(D) of Pre-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on November 14, 1996.
(b) By-Laws. Incorporated herein by reference to Exhibit 2 of the
Registrant's Registration Statement on Form N-1A (File No. 333-11283)
filed on August 30, 1996.
(c) Instruments Defining Rights of Shareholders. Incorporated herein by
reference to Exhibits (a) and (b) above.
(d) (i) Investment Advisory Agreement. Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No. 25 to the Registrant's
Registration Statement on Form N-1A (File No. 333-11283) filed
on April 28, 2000.
(ii) Subadvisory Agreement between SunAmerica Asset
Management Corp. ("SunAmerica") and American Century
Investment Management, Inc. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on October 29, 1999.
(iii) Subadvisory Agreement between SunAmerica and Bankers
Trust Company. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(iv) Subadvisory Agreement between SunAmerica and Berger
Associates, Inc. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(v) Subadvisory Agreement between SunAmerica and Credit
Suisse Asset Management, LLC (formerly known as Warburg
Pincus Asset Management, Inc.) Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No. 333-11283)
filed on February 26, 1999.
(vi) Subadvisory Agreement between SunAmerica and Davis
Selected Advisers, L.P. Incorporated herein by
reference to the identically numbered Exhibit of
Post-Effective Amendment No.13 to the Registrant's
Registration Statement on Form N-1A (File No.
333-11283) filed on February 26, 1999.
(vii) Subadvisory Agreement between SunAmerica and EQSF
Advisers, Inc. Incorporated herein by reference to the
identically numbered Exhibit of Post-Effective Amendment No.
18 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on October 29, 1999.
(viii) Subadvisory Agreement between SunAmerica and Fred Alger
Management, Inc. Incorporated herein by reference to the
identically numbered Exhibit of Post-Effective Amendment No.
21 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 28, 2000.
(ix) Subadvisory Agreement between SunAmerica and Janus
Capital Corporation. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(x) Subadvisory Agreement between SunAmerica and Jennison
Associates LLC. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xi) Subadvisory Agreement between SunAmerica and Lazard
Asset Management. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
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<PAGE>
(xii) Subadvisory Agreement between SunAmerica and Marsico
Capital Management, LLC. Incorporated herein by
reference to Exhibit (d)(xiii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed
on February 26, 1999.
(xiii) Subadvisory Agreement between SunAmerica and Miller
Anderson & Sherrerd, LLP. Incorporated herein by reference
to Exhibit (d)(iv) of Post-Effective Amendment No.13 to
the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 26, 1999.
(xiv) Subadvisory Agreement between SunAmerica and Montag &
Caldwell, Inc. Incorporated herein by reference to
Exhibit (d)(xv) of Post-Effective Amendment No.13
to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 26, 1999.
(xv) Subadvisory Agreement between SunAmerica and
Neuberger Berman, LLC. Incorporated herein by
reference to Exhibit (d)(xvii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xvi) Subadvisory Agreement between SunAmerica and Rowe
Price-Fleming International, Inc. Incorporated herein
by reference to Exhibit (d)(xviii) of Post-Effective
Amendment No.13 to the Registrant's Registration
Statement on Form N-1A (File No. 333-11283) filed on
February 26, 1999.
(xvii) Subadvisory Agreement between SunAmerica and T. Rowe
Price Associates, Inc. Incorporated herein by
reference to Exhibit (d)(xix) of Post-Effective Amendment
No.13 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on February 26, 1999.
(xviii) Subadvisory Agreement between SunAmerica and Thornburg
Investment Management, Inc. Incorporated herein by reference
to the identically numbered Exhibit of Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on
Form N-1A (File No. 333-11283) filed on October 29, 1999.
(xix) Subadvisory Agreement between SunAmerica and Wellington
Management Company, LLP. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective Amendment
No.13 to the Registrant's Registration Statement on Form N-1A
(File No. 333-11283) filed on February 26, 1999.
(xx) Subadvisory Agreement between SunAmerica and Van Wagoner
Capital Management, Inc. [Incorporated herein by reference
to the indentically numbered Exhibit of Post-Effective
Amendment No. 25 to the Registrant's Registration Statement
on Form N-1A (File No. 333-11283) filed an April 28, 2000.]
Subadvisory Agreement between SunAmerica and Dresdner RCM
Global Investors LLC.
(e) (i) Distribution Agreement. Incorporated herein by reference to
the identically numbered Exhibit of Post-Effective Amendment
No. 13 to the Registrant's Registration Statement on Form
N-1A (File No. 333-11283) filed on February 26, 1999.
(ii) Form of Selling Agreement. Incorporated herein by reference
to Exhibit (e)(ii) of Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on December 30, 1998.
(f) Disinterested Trustees and Directors' Retirement Plan. Incorporated
herein by reference to Exhibit 7 of Pre-Effective Amendment No. 1 to
the Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
(g) Custodian Agreement. Incorporated herein by reference to Exhibit 8 of
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form N-1A (File No. 333- 11283) filed on November 14,
1996.
(h) (i) Service Agreement. Incorporated herein by reference to
Exhibit 9(a) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
(ii) Transfer Agency Agreement. Incorporated herein by reference
to Exhibit 9(b) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A
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<PAGE>
(File No. 333-11283) filed on November 14, 1996.
(i) Opinion of Counsel to the Registrant. Filed herewith
(j) Consent of Independent Accountants. Filed herewith
(k) Not applicable.
(l) Not applicable.
(m) Distribution Plans. Incorporated herein by reference to the
identically numbered Exhibit of Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on Form N-1A (File No. 333-11283)
filed on October 29, 1999.
(n) Not applicable.
(o) (i) 18f-3 Plan. Incorporated herein by reference to Exhibit
5(b)(15) of Post-Effective Amendment No. 11 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on June 15, 1998.
(ii) Powers of Attorney. Incorporated herein by reference to
Exhibit 17(a) of Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File No.
333-11283) filed on November 14, 1996.
Item 24. Persons Controlled by or Under Common Control with Registrant
There are no persons controlled by or under common control with
Registrant.
Item 25. Indemnification
5.01 Indemnification of Directors and Officers. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than a proceeding by or
in the right of the Corporation in which such person shall have been adjudged to
be liable to the Corporation), by reason of being or having been a director or
officer of the Corporation, or serving or having served at the request of the
Corporation as a director, officer, partner, trustee, employee or agent of
another entity in which the Corporation has an interest as a shareholder,
creditor or otherwise (a "Covered Person"), against all liabilities, including
but not limited to amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and reasonable expenses (including attorney's fees)
actually incurred by the Covered Person in connection with any such action, suit
or proceeding, except (i) liability in connection with any proceeding in which
it is determined that (A) the act or omission of the Covered Person was material
to the matter giving rise to the proceeding, and was committed in bad faith or
was the result of active and deliberate dishonesty, or (B) the Covered Person
actually received an improper personal benefit in money, property or services,
or (C) in the case of any criminal proceeding, the Covered Person had reasonable
cause to believe that the act or omission was unlawful, and (ii) liability to
the Corporation or its security holders to which the Covered Person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office (any or all of the conduct referred to in clauses (i) and (ii) being
hereinafter referred to as "Disabling Conduct").
5.02 Procedure for Indemnification. Any indemnification under Section
5.01 shall (unless ordered by a court) be made by the Corporation only as
authorized for a specific proceeding by (i) a final decision on the merits by a
court or other body before whom the proceeding was brought that the Covered
Person to be indemnified was
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<PAGE>
not liable by reason of Disabling Conduct, (ii) dismissal of the proceeding
against the Covered Person for insufficiency of evidence of any Disabling
Conduct, or (iii) a reasonable determination, based upon a review of the facts,
by a majority of a quorum of the directors who are neither "interested persons"
of the Corporation as defined in the Investment Company Act of 1940 nor parties
to the proceeding ("Disinterested Non-Party Directors"), or an independent legal
counsel in a written opinion, that the Covered Person was not liable by reason
of Disabling Conduct. The termination of any proceeding by judgment, order or
settlement shall not create a presumption that the Covered Person did not meet
the required standard of conduct; the termination of any proceeding by
conviction, or a plea of nolo contendere or its equivalent, or an entry of an
order of probation prior to judgment, shall create a rebuttable presumption that
the Covered Person did not meet the required standard of conduct. Any
determination pursuant to this Section 5.02 shall not prevent recovery from any
Covered Person of any amount paid to him in accordance with this By-Law as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction to be liable by reason of Disabling Conduct.
5.03 Advance Payment of Expenses. Reasonable expenses (including
attorneys' fees) incurred by a Covered Person may be paid or reimbursed by the
Corporation in advance of the final disposition of an action, suit or proceeding
upon receipt by the Corporation of (i) a written affirmation by the Covered
Person of his good faith belief that the standard of conduct necessary for
indemnification under this By-Law has been met and (ii) a written undertaking by
or on behalf of the Covered Person to repay the amount if it is ultimately
determined that such standard of conduct has not been met, so long as either (A)
the Covered Person has provided a security for his undertaking, (B) the
Corporation is insured against losses arising by reason of any lawful advances,
or (C) a majority of a quorum of the Disinterested Non-Party Directors, or an
independent legal counsel in a written opinion, has determined, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
5.04 Exclusivity, Etc. The indemnification and advance of expenses
provided by this By-Law shall not be deemed exclusive of any other rights to
which a Covered Person seeking indemnification or advance or expenses may be
entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors, or other provision that is consistent
with law, both as to action in an official capacity and as to action in another
capacity while holding office or while employed by or acting as agent for the
Corporation, shall continue in respect of all events occurring while the Covered
Person was a director or officer after such Covered Person has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such Covered Person. The Corporation shall not
be liable for any payment under this By-Law in connection with a claim made by a
director or officer to the extent such director or officer has otherwise
actually received payment, under an insurance policy, agreement, vote or
otherwise, of the amounts otherwise indemnifiable hereunder. All rights to
indemnification and advance of expenses under the Charter and hereunder shall be
deemed to be a contract between the Corporation and each director or officer of
the Corporation who serves or served in such capacity at any time while this
By-Law is in effect. Nothing herein shall prevent the amendment of this By-Law,
provided that no such amendment shall diminish the rights of any Covered Person
hereunder with respect to events occurring or claims made before its adoption or
as to claims made after its adoption in respect of events occurring before its
adoption. Any repeal or modification of this By-Law shall not in any way
diminish any rights to indemnification or advance of expenses of a Covered
Person or the obligations of the Corporation arising hereunder with respect to
events occurring, or claims made, while this By-Law or any provision hereof is
in force.
5.05 Insurance. The Corporation may purchase and maintain insurance on
behalf of any Covered Person against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such;
provided, however, that the Corporation shall not purchase insurance to
indemnify any Covered Person against liability for Disabling Conduct.
5.06 Severability: Definitions. The invalidity or unenforceability of
any provision of this Article V shall not affect the validity or enforceability
of any other provision hereof. The phrase "this By-Law" in this Article V means
this Article V in its entirety.
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<PAGE>
Section 8 of the Article of Incorporation provides as follows:
(5) The Corporation shall indemnify (i) its directors and
officers, whether serving the Corporation or at its request any other entity, to
the full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses under the
procedures and to the full extent permitted by law, and (ii) other employees and
agents to such extent as shall be authorized by the Board of Directors or the
By-Laws of the Corporation and as permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such By-Laws,
resolutions or contracts implementing such provisions or such further
indemnification arrangements as may be permitted by law. The right of
indemnification provided hereunder shall not be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
Corporation shall be personally liable to the Corporation or its stockholders
for money damages; provided, however, that this provision shall not be construed
to protect any director or officer against any liability to the Corporation or
its security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. No amendment, modification or repeal of
this provision shall adversely affect any right or protection provided hereunder
that exists at the time of such amendment, modification or repeal.
Item 26. Business and other Connections of Investment Adviser
SunAmerica is primarily in the business of providing investment
management, advisory and administrative services. Reference is made to
the most recent Form ADV and schedules thereto of SunAmerica on file
with the Commission (File No. 801-19813) for a description of the names
and employment of the directors and officers of SunAmerica and other
required information.
American Century Investment Management, Inc.; Bankers Trust Company
("BT"); Berger Associates, Inc.; Credit Suisse Asset Management, LLC;
Davis Selected Advisers, L.P.; EQSF Advisers, Inc.; Fred Alger
Management, Inc.; Janus Capital Corporation; Jennison Associates LLC;
Lazard Asset Management; Marsico Capital Management, LLC; Miller
Anderson & Sherrerd, LLP; Montag & Caldwell, Inc.; Neuberger Berman,
LLC; Perkins, Wolf, McDonnell & Company; Rowe-Price Fleming
International, Inc.; T. Rowe Price Associates, Inc.; and Wellington
Management Company, LLP; the Advisers of certain of the Portfolios of
the Registrant, are primarily engaged in the business of rendering
investment advisory services. Reference is made to the recent Form ADV
and schedules thereto on file with the Commission for a description of
the names and employment of the directors and officers of the following
Advisers, and other required information:
<TABLE>
<CAPTION>
File No.
<S> <C>
American Century Investment Management, Inc. 801-08174
Berger, LLC 801-09451
Credit Suisse Asset Management, LLC 801-37170
Davis Selected Advisers, L.P. 801-31648
Dresdner RCM Global Investors LLC 801-06709
EQSF Advisers, Inc. 801-27792
Fred Alger Management, Inc. 801-06709
Janus Capital Corporation 801-13991
Jennison Associates LLC 801-05608
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Lazard Asset Management 801-6568
Marsico Capital Management, LLC 801-54914
Miller Anderson & Sherrerd, LLP 801-10437
Montag & Caldwell, Inc. 801-15398
Neuberger Berman, LLC 801-03908
Perkins, Wolf, McDonnell & Company 801-19974
Rowe-Price Fleming International, Inc 801-14713
T. Rowe Price Associates, Inc. 801-00856
Thornburg Investment Management, Inc. 801-17853
Wellington Management Company, LLP 801-15908
Van Wagoner Capital Management, Inc. 801-50676
</TABLE>
Reference is made to Post-Effective Amendment No. 26 to BT Investment
Funds' Registration Statement on Form N-1A (File No. 33-07404) filed
on October 26, 1998 for a description of the names and employment of
the directors and officers of Bankers Trust Company.
Item 27. Principal Underwriters
(a) The principal underwriter of the Registrant also acts as principal
underwriter for:
Brazos Mutual Funds
SunAmerica Income Funds
SunAmerica Money Market Funds, Inc.
SunAmerica Equity Funds
SunAmerica Strategic Investment Series, Inc.
(b) The following persons are the officers and directors of
SunAmerica Capital Services, Inc., the principal underwriter
of Registrant's Shares:
<TABLE>
<CAPTION>
Name and Principal
Business Address Position With Underwriter Position with the Registrant
------------------ ------------------------- ----------------------------
<S> <C> <C>
Peter A. Harbeck Director Director and President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
J. Steven Neamtz President and Director Vice President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Robert M. Zakem Executive Vice President, General Secretary and Chief Compliance
The SunAmerica Center Counsel and Director Officer
733 Third Avenue
New York, NY 10017-3204
Susan L. Harris Secretary None
SunAmerica, Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Debbie Potash-Turner Chief Financial Officer and None
The SunAmerica Center Controller
733 Third Avenue
New York, NY 10017-3204
</TABLE>
(c) Not applicable.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, and its affiliate, National Financial Data
Services, collectively, act as custodian, transfer agent and dividend
paying agent. They maintain books, records and accounts pursuant to the
instructions of the Fund.
SunAmerica is located at The SunAmerica Center, 733 Third Avenue, New
York, New York 10017-3204. SunAmerica has contracted with Callan
Associates, Inc. ("Callan") to compile historical performance data
relating to the Advisers, both individually and on a composite basis.
Registrant's records relating thereto are maintained by Callan. Callan
is located at 71 Stevenson Street, Suite 1300, San Francisco, CA 94105.
American Century Investment Management, Inc. is located at the
American Century Tower, 4500 Main Street, Kansas City, Missouri 64111.
Bankers Trust Company is located at 130 Liberty Street (One Bankers
Trust Plaza), New York 10006.
Berger, LLC is located at 210 University Boulevard, Suite
900, Denver, Colorado 80206.
Credit Suisse Asset Management, LLC is located at 466 Lexington Avenue,
New York, New York 10017-3147.
Davis Selected Advisers, L.P. is located at 124 East Marcy Street,
Santa Fe, New Mexico 87501.
Dresdner RCM Global Investors LLC is located at Four Embarcadero
Center, San Francisco, California 9511.
Dresdner RCM Global Investors LLC is located at Four Embarcadero
Center San Francisco, California 94111.
EQSF Advisers, Inc. is located at 767 Third Avenue, New York, New York
10017.
Fred Alger Management, Inc. is located at 1 World Trade Center, 93rd
Floor, New York, New York 10048
Janus Capital Corporation is located at 100 Fillmore Street, Denver,
Colorado 80206-4923.
Jennison Associates LLC is located at 466 Lexington Avenue, New York,
NY 10017.
Lazard Asset Management is located at 30 Rockefeller Plaza, New York,
New York 10112.
Marsico Capital Management, LLC is located at 1200 17th Street, Suite
1300, Denver, CO 80202.
Miller Anderson & Sherrerd, LLP is located at One Tower Bridge, West
Conshohocken, Pennsylvania 19428.
Montag & Caldwell, Inc. is located at 3343 Peachtree Road, NE, Suite
1100, Atlanta, Georgia 30326-1022.
Neuberger Berman, LLC is located at 605 Third Avenue, New York, New
York 10158-0180.
Perkins, Wolf, McDonnell & Company is located at 53 West Jackson
Boulevard, Suite 818, Chicago, Illinois 60604.
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<PAGE>
Rowe Price-Fleming International, Inc. is located at 100 East Pratt
Street, Baltimore, Maryland 21202.
Thornburg Investment Management, Inc. is located at 119 East Marcy
Street, Santa Fe, New Mexico 87501.
T. Rowe Price Associates, Inc. is located at 100 East Pratt Street,
Baltimore, Maryland 21202.
Wellington Management Company, LLP is located at 75 State Street,
Boston, Massachusetts 02109.
Van Wagoner Capital Management, Inc. is located at 345 California
Street, San Francisco, California 94104
Each of the Advisers maintains the books, accounts and records required to be
maintained pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
(the "1933 Act") and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 27 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 16th day
of August, 2000.
SunAmerica Style Select Series, Inc.
By: /s/ Peter C. Sutton
-------------------------
Peter C. Sutton
Treasurer
Pursuant to the requirements of the 1933 Act, the Post-Effective
Amendment No. 27 to the Registrant's Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated:
<TABLE>
<S> <C> <C>
* President and Director
------------------------------------ (Principal Executive Officer)
Peter A. Harbeck
/s/ Peter C. Sutton Treasurer August 16, 2000
------------------------------------ (Principal Financial and
Peter C. Sutton Accounting Officer)
* Director
------------------------------------
S. James Coppersmith
* Director
------------------------------------
Samuel M. Eisenstat
* Director
------------------------------------
Stephen J. Gutman
* Director
------------------------------------
Sebastiano Sterpa
*By: /s/ Robert M. Zakem August 16, 2000
-----------------------------------
Attorney-in-Fact
Robert M. Zakem
</TABLE>
<PAGE>
Exhibit Index
Exhibit No. Name
----------- ----
(i) Opinion and Consent of Counsel
(j) Consent of Independent Accountants
