As filed with the Securities and Exchange Commission on February 28, 2000
Securities Act File No. 333-69517
Investment Company Act File Act No. 811-0169
================================================================================
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. 2 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 3
(Check appropriate box or boxes)
SUNAMERICA STRATEGIC INVESTMENT 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
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
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)
|X| immediately upon filing pursuant to paragraph(b)
|_| on (date) pursuant to paragraph(b)
|_| 60 days after filing pursuant to paragraph(a)(1)
|_| on (date) 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>
- --------------------------------------------------------------------------------
February 28, 2000 PROSPECTUS
SUNAMERICA STRATEGIC INVESTMENT SERIES(R)
o Tax Managed Equity Fund
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 FUNDS LOGO]
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
FUND HIGHLIGHTS ........................................................... 2
Financial Highlights ...................................................... 5
MORE INFORMATION ABOUT THE FUND ........................................... 8
Investment Strategies ................................................ 8
Glossary ............................................................. 9
Investment Terminology ........................................... 9
Risk Terminology ................................................. 9
SHAREHOLDER ACCOUNT INFORMATION ........................................... 10
Fund Management ........................................................... 18
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Q&A
MARKET CAPITALIZATION represents the total market value of the outstanding
securities of a corporation. For specific market capitalization ranges, see
page 9.
When deemed appropriate by the Adviser, the Fund may engage in ACTIVE TRADING
when it frequently trades its portfolio securities to achieve its investment
goal.
A "VALUE" ORIENTED philosophy--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 large, well known companies with solid
financial strength and generous dividend yields that have low price-earnings
ratios and have generally been overlooked by the market.
A "GROWTH" ORIENTED philosophy--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 following questions and answers are designed to give you an overview of
SunAmerica Strategic Investment Series, Inc. and to provide you with information
about the Tax Managed Equity Fund (the "Fund") and its investment goal and
principal strategies. There can be no assurance that the Fund's investment goal
will be met or that the net return on an investment in the Fund 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 Fund," which is on page 8 and the glossary that follows on
page 9.
Q: WHAT IS THE FUND'S INVESTMENT GOAL?
A: The Tax Managed Equity Fund seeks high total return through active trading,
with a view towards minimizing the impact of capital gains taxes on
investors' returns.
Q: WHAT ARE THE FUND'S TECHNIQUES AND STRATEGIES?
A: The Tax Managed Equity Fund invests primarily in large and medium-sized
U.S. companies (based on market capitalization) which the Fund selects to
achieve a blend of growth companies, value companies and companies that
have elements of growth and value. The Fund's industry weightings are
similar to those of the Standard & Poor's 500 Stock Index (S&P500). The
Fund can moderately underweight or overweight industries when it believes
it will benefit performance.
The Tax Managed Equity Fund attempts to invest in a tax aware manner. This
is designed to reduce, but not eliminate, capital gains distributions to
shareholders. In doing so, the Fund sells securities when the anticipated
total return benefit justifies the resulting tax liability. This strategy
often includes holding securities long enough to avoid higher, short-term
capital gains taxes, selling shares with a higher cost basis first, and
offsetting gains realized on one security by selling another security at a
capital loss. You should realize, however, that the Fund's tax aware
strategy does not reduce the tax impact of dividends and other ordinary
income received by the Fund, which ultimately will be distributed to you,
or affect your potential tax liability if you sell or exchange shares of
the Fund. The Fund might not be an appropriate investment for a
tax-deferred or tax-exempt investor.
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
A: As with any equity fund, the value of your investment in the Fund 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, "growth" stocks may perform
well under circumstances in which "value" stocks in general have fallen.
Other principal risks include:
o individual stocks selected for the Fund may underperform the market
generally
o seeking to maximize after-tax returns may require trade-offs that
affect pre-tax returns
In addition, shares of the Fund are not bank deposits and are not
guaranteed or insured by any bank, government entity or the Federal Deposit
Insurance Corporation (FDIC). As with any mutual fund, there is no
guarantee that the Fund will be able to achieve its investment goals. If
the value of the assets of the Fund goes down, you could lose money.
2
<PAGE>
Q: WHAT ARE THE FUND'S EXPENSES?
A: The following table describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class II
------- ------- --------
<S> <C> <C> <C>
SHAREHOLDER FEES (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering
price)(1) 5.75% None 1.00%
Maximum Deferred Sales Charge (Load) (as a
percentage of amount redeemed)(2) None 4.00% 1.00%
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends None None None
Redemption Fee(3) None None None
Exchange Fee None None None
Maximum Account Fee None None None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
Management Fees 0.85% 0.85% 0.85%
Distribution (12b-1) Fees(4) 0.35% 1.00% 1.00%
Other Expenses 1.32% 1.09% 1.08%
------ ------ ------
Total Annual Fund Operating Expenses 2.52% 2.94% 2.93%
Expense Reimbursement 1.07% 0.84% 0.83%
------ ------ ------
Net Expenses(5) 1.45% 2.10% 2.10%
</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more.
(2) Purchases of Class A shares over $1 million will be subject to a contingent
deferred sales charge (CDSC) on redemptions made within two years of
purchase. The CDSC on Class B shares applies only if shares are redeemed
within six years of their purchase. The CDSC on Class II shares applies
only if shares are redeemed within eighteen months of their purchase. See
pages 10 and 11 for more information about the CDSCs.
(3) A $15.00 fee may be imposed on wire and overnight mail redemptions.
(4) Because these fees are paid out of the Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost
you more than paying other types of sales charges.
(5) The Board of Directors, including a majority of the Independent Directors,
approved the Investment Advisory and Management Agreement subject to the
net expense ratio set forth above. SunAmerica may not increase such ratios,
which are contractually required by agreement with the Board of Directors,
without the approval of the Directors, including a majority of the
Independent Directors. The expense waivers and fee reimbursements will
continue indefinitely, subject to termination by the Directors, including a
majority of the Independent Directors.
3
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated. The Example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions and the net
expenses shown in the fee table your costs would be:
If you redeem your investment at the end of the periods indicated:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
(Class A shares)......... $714 $1,007 $1,322 $2,210
(Class B shares)*........ $613 $ 958 $1,329 $2,188
(Class II shares)........ $411 $ 751 $1,218 $2,507
If you did not redeem your shares:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
(Class A shares)......... $714 $1,007 $1,322 $2,210
(Class B shares)*........ $213 $ 658 $1,129 $2,188
(Class II shares)........ $311 $ 751 $1,218 $2,507
* Class B shares convert to Class A shares approximately seven years after
purchase. Therefore, expense information for years 8, 9 and 10 is the same
for both Class A and B shares.
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
TAX MANAGED EQUITY FUND
The Financial Highlights table for the Fund is intended to help you understand
the Fund's financial performance since inception. Certain information reflects
financial results for a single Fund share. The total returns in each table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statement is included in the Fund's annual report to
shareholders, which is available upon request.
<TABLE>
<CAPTION>
NET GAIN
ON INVEST- TOTAL DIVIDENDS DISTRI-
NET ASSET MENTS (BOTH FROM FROM NET BUTIONS
VALUE NET INVEST- REALIZED INVEST- INVEST- FROM TOTAL
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI-
ENDED OF PERIOD LOSS(1) UNREALIZED OPERATIONS INCOME GAINS BUTIONS
- -------- ----------- ----------- ------------ ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
3/01/99-(3)
10/31/99.... $12.50 $ -- $1.15 $1.15 $-- $-- $--
CLASS B
-------
3/01/99-(3)
10/31/99 $12.50 $(0.06) $1.14 $1.08 $-- $-- $--
CLASS II
--------
3/01/99-(3)
10/31/99 $12.50 $(0.06) $1.16 $1.10 $-- $-- $--
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
VALUE, END OF EXPENSES LOSS
PERIOD END OF TOTAL PERIOD TO AVERAGE TO AVERAGE PORTFOLIO
ENDED PERIOD RETURN(2) (000'S) NET ASSETS NET ASSETS TURNOVER
- -------- --------- --------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
3/01/99-(3)
10/31/99...... $13.65 9.20% $25,067 1.45%(4)(5)B (0.02)%(4)(5) 9%
3/01/99-(3)... $13.58 8.64% $27,524 2.10%(4)(5) (0.74)%(4)(5) 9%
10/31/99
3/01/99-(3)... $13.60 8.80% $27,884 2.10%(4)(5) (0.75)%(4)(5) 9%
10/31/99
</TABLE>
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of operations
(4) Annualized
(5) Net of the following expense reimbursements (based on average net
assets):
10/31/99
--------
Tax Managed Equity Class A ............. 1.07%
Tax Managed Equity Class B ............. 0.84
Tax Managed Equity Class II............. 0.83
5
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Q: HOW HAS THE ADVISER PERFORMED IN MANAGING ACCOUNTS WITH SUBSTANTIALLY
SIMILAR INVESTMENT OBJECTIVES, POLICIES AND STRATEGIES TO THAT OF THE FUND?
A: J.P. Morgan Investment Management, Inc., the Fund's Adviser, has managed
such accounts since 1984. Set forth below is detailed information regarding
the composite performance of these accounts. Performance of the Fund itself
is not shown because it has not been in operation for a full year.
ADVISER'S HISTORICAL PERFORMANCE
Set forth below is historical performance data for all accounts managed by the
Fund's Adviser which have investment objectives and policies similar (although
not necessarily identical) to the Fund. The Adviser has managed the accounts
using investment styles and strategies substantially similar to those employed
in advising the Fund. THE PERFORMANCE INFORMATION SET FORTH BELOW DOES NOT
REPRESENT THE PERFORMANCE OF THE FUND. This information is not a prediction of
the Fund's future performance. The Fund's performance may be higher or lower
than the performance of the Adviser's other accounts as presented below.
We have calculated the information in the following manner:
o We have based all the information presented below on data supplied by
the Adviser or Morningstar, Inc. ("Morningstar") which we believe is
reliable.
o All of the Adviser's historical performance information reflects
ANNUALIZED TOTAL RETURN over the stated period of time. "Total return"
shows how much an investment has increased (decreased) and includes
capital appreciation and income. The term "annualized total return"
signifies that cumulative total returns for the stated period (i.e.,
1, 3, 5, or 10 years) have been adjusted to reflect a rate based on
one year.
o In order to present the total return information in a consistent
manner, we calculate all returns by linking quarterly total return
data on a compounded basis for the relevant number of quarters and
annualizing the result over the equivalent number of years.
o The Adviser's performance is based on composite performance
information of multiple accounts calculated in accordance with
Performance Presentation Standards of the Association for Investment
Management and Research ("AIMR"). AIMR's method of calculating
performance differs from that of the Securities and Exchange
Commission. Unless otherwise indicated, no one has independently
verified or audited the performance data.
o Performance figures for the Adviser do not reflect all of the
Adviser's assets under management and do not accurately reflect the
performance of all accounts managed by the Adviser.
o The composite performance return of the Adviser is reduced by the
highest annual investment management fee and expenses charged to any
account included in the composite.
o The private accounts contained in the composite are not subject to
certain investment limitations, diversification requirements, and
other restrictions imposed by the Investment Company Act of 1940, as
amended and the Internal Revenue Code, which, if applicable, may have
adversely affected the performance results of the private accounts.
o For each period presented, we compare the investment performance for
the Adviser to the average performance of a group of similar mutual
funds tracked by Morningstar. Morningstar calculates its group
averages by taking a mathematical average of the returns of the funds
included in the group.
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURN
---------------------------------------------------------------------
S&P 500
PERIOD ENDING DECEMBER 31, J.P. MORGAN TAX AWARE U.S. MORNINGSTAR LARGE COMPOSITE STOCK
1999 EQUITY COMPOSITE* BLEND CATEGORY PRICE INDEX**
-------------------------- ----------------- ----------------
<S> <C> <C> <C>
1 Year 22.45% 24.6% 21.0%
3 Years 29.08% 23.4% 27.6%
5 Years 28.83% 19.7% 28.6%
10 Years 19.38% 16.1% 18.2%
</TABLE>
* Returns reflect the deduction of the highest investment management fees and
expenses charged for any account in the composite.
** The S&P 500(R) is the Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices.
6
<PAGE>
- --------------------------------------------------------------------------------
NOTES
ADVISER PERFORMANCE
The Adviser's performance is presented as a composite of multiple accounts as
described above. The Fund's fees and expenses may be greater than those charged
by the Adviser. Accordingly, the Fund's actual performance results may be less.
The Adviser's historical performance data covers 10 years and reflects the
performance of the Composite (which includes two mutual funds, including the
Fund). The Composite includes all accounts with investment objectives, policies
and strategies substantially similar to those used by the Adviser in managing
the Fund. As of December 31, 1999, the Composite included 129 accounts with
aggregate assets of $919,973,978. The Composite returns were supplied to the
Fund by the Adviser gross of certain fees, but have been adjusted to reflect the
highest applicable investment management fees and expenses charged to any
account included in the Composite for the reporting period. The mutual fund
returns included in the Composite are load and expense adjusted.
MORNINGSTAR LARGE BLEND CATEGORY
Developed by Morningstar, the Morningstar Large Blend Category currently
reflects a group of 921 mutual funds which have portfolios with median market
capitalizations, price/earnings ratios, and price/book ratios similar to those
expected for the Fund.
GROWTH OF A $10,000 INVESTMENT
[LINE GRAPH OMITTED]
[THE TABLE BELOW REPRESENTS LINE GRAPH IN ITS PRINTED FORM.]
<TABLE>
<CAPTION>
Morningstar S&P 500 Composite
Large Blend Stock Price J.P. Morgan
Date Category Index Composite
- ---- ----------------- ----------------- ------------
<S> <C> <C> <C>
1989 $10000 $10000 $10000
1990 9953 9830 9690
1991 13084 13172 12646
1992 14047 14265 13607
1993 15539 15692 14981
1994 15326 15755 15176
1995 20197 21505 20882
1996 24350 25483 25684
1997 31194 33638 34263
1998 37929 44066 44062
1999 47260 53959 53315
</TABLE>
* Returns reflect the deduction of the highest investment management fee and
expenses charged for any account in the composite.
NOTE
GROWTH OF A $10,000 INVESTMENT
The "Growth of $10,000" chart reflects 10 years of performance data for the J.P.
Morgan Tax Aware U.S. Equity Composite. The returns for the J.P. Morgan Tax
Aware U.S. Equity Composite are net of highest applicable expenses.
7
<PAGE>
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
INVESTMENT
STRATEGIES
The Fund has its own investment goal and techniques for pursuing it. The chart
summarizes information about the Fund's investment approach. We have included a
glossary to define the investment and risk terminology used in the chart.
TAX MANAGED EQUITY FUND
<TABLE>
<S> <C>
What is the Fund's investment goal? High total return while minimizing
the impact of capital gains
- -----------------------------------------------------------------------------------------------------------------------------------
What principal investment strategies Growth and value
does the Fund use?
- -----------------------------------------------------------------------------------------------------------------------------------
What are the Fund's principal o Active trading of equity securities
investment techniques? of large and medium-sized U.S. companies
while attempting to minimize capital
gains distributions to shareholders.
- -----------------------------------------------------------------------------------------------------------------------------------
In what other types of securities may o Small companies
the Fund significantly invest? o Foreign securities
- -----------------------------------------------------------------------------------------------------------------------------------
In what type of securities may the Fund o Short-term investments
normally invest as part of efficient portfolio o Defensive instruments
management or for return enhancement purposes? o Special situations
- -----------------------------------------------------------------------------------------------------------------------------------
What risks normally may affect the Fund? o Stock market volatility
o Securities selection
o Tax managed strategy may
affect pre-tax returns
o Small market capitalization
o Foreign exposure
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
GLOSSARY
LARGE COMPANIES and MEDIUM-SIZED COMPANIES generally have a substantial record
of operations (i.e., in business for at least five years) and are listed for
trading on the New York Stock Exchange or another national or international
stock exchange or, in some cases, are traded over the counter. SMALL COMPANIES
generally will be companies that have been in business for a shorter period of
time.
INVESTMENT TERMINOLOGY
TOTAL RETURN is achieved through both growth of capital and income.
ACTIVE TRADING means that the Fund may engage in frequent trading of portfolio
securities to achieve its investment goal, which may result in high portfolio
turnover. High turnover involves correspondingly greater brokerage commissions
and other transaction costs, which will be borne directly by the Fund. The Fund
does not expect turnover to be high.
EQUITY SECURITIES include common and preferred stocks, convertible securities,
warrants and rights.
LARGE COMPANIES have market capitalizations of over $8 billion.
MEDIUM-SIZED COMPANIES have market capitalizations ranging from $2 billion to $8
billion, although there may be some overlap among capitalization categories.
SMALL COMPANIES have market capitalizations of $2 billion or less, although
there may be some overlap among capitalization categories. The Adviser may
consider an issuer that has a market capitalization in excess of $2 billion to
be "small" if it meets certain relevant criteria.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, commercial paper, bankers' acceptances and certificates
of deposit. These securities provide the Fund with sufficient liquidity to meet
redemptions and cover expenses.
DEFENSIVE INVESTMENTS include high quality fixed income securities and money
market instruments. The Fund will make temporary defensive investments in
response to adverse market, economic, political or other conditions. When the
Fund takes a defensive position, it may miss out on investment opportunities
that could have resulted from investing in accordance with its principal
investment strategy. As a result, the Fund 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 Depository
Receipts (ADRs) or other similar securities that convert into foreign securities
such as European Depository Receipts (EDRs) and Global Depository Receipts
(GDRs).
A SPECIAL SITUATION may arise 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.
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
Fund's portfolio.
SECURITIES SELECTION: A strategy used by a Fund, or securities selected by its
Adviser, may fail to produce the intended return.
TAX MANAGED STRATEGY: A strategy to maximize after-tax returns may entail
certain investment techniques that will affect pre-tax returns. For example, the
Fund may not sell an appreciated security to avoid recognizing a capital gain
only to experience a subsequent decline in value of the security. Thus, the Fund
could miss out on opportunities to sell, and, because its cash may be otherwise
invested, opportunities to make new investments. Moreover, a tax managed
strategy will not eliminate all capital gains. The tax managed strategy does not
reduce the tax impact of dividends and other ordinary income received by the
Fund which ultimately will be distributed to you, or affect the potential tax
liability if an investor sells or exchanges shares. In addition, excessive
redemption activity could compromise the ability to pursue the tax managed
strategy.
SMALL MARKET CAPITALIZATION: Companies with smaller market capitalizations
(particularly under $2 billion) tend to be at early stages of development with
limited product lines, market access for products, financial resources, access
to new capital, or depth in management. It may be difficult to obtain reliable
information and financial data about these companies. Consequently, the
securities of smaller companies may not be as readily marketable and may be
subject to more abrupt or erratic market movements.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as the U.S.
government. Foreign investments will also be affected by local, political or
economic developments and governmental actions. Consequently, foreign securities
may be less liquid, more volatile and more difficult to price than U.S.
securities. These risks are heightened when the issuer is in an emerging market.
9
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
SELECTING A SHARE CLASS
The Fund offers three classes of shares through this Prospectus: Class A, Class
B and Class II shares.
Each class of shares has its own cost structure, so you can choose the one best
suited to your investment needs. Your broker or financial advisor can help you
determine which class is right for you.
CLASS A
o Front-end sales charges, as described below. There are several ways to
reduce these charges, also described below.
o Lower annual expenses than Class B or Class II shares.
CLASS B
o No front-end sales charge; all your money goes to work for you right
away.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within six years of purchase,
as described below.
o Automatic conversion to Class A shares approximately one year after
such time that no CDSC would be payable upon redemption, as described
below, thus reducing future annual expenses.
CLASS II
o Front-end sales charge, as described below.
o Higher annual expenses than Class A shares.
o Deferred sales charge on shares you sell within eighteen months of
purchase, as described below.
o No conversion to Class A.
CALCULATION OF SALES CHARGES
CLASS A. Sales Charges are as follows:
<TABLE>
<CAPTION>
Sales Charge Concession to Dealers
- -----------------------------------------------------------------------------------------------------------------------------------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
YOUR INVESTMENT PRICE INVESTED PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000........................ 4.75% 4.99% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000....................... 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000..................... 2.10% 2.15% 1.35%
$1,000,000 or more.................................... None None 1.00%
</TABLE>
INVESTMENTS OF $1 MILLION OR MORE: Class A shares are available with no
front-end sales charge. However, a 1% CDSC is imposed on shares you sell within
one year of purchase and a 0.50% CDSC is charged on any shares you sell after
the first year and within the second year after purchase.
CLASS B. Shares are offered at their net asset value per share, without any
initial sales charge. However, there is a CDSC on shares you sell within six
years of buying them. The longer the time between the purchase and the sale of
shares, the lower the rate of the CDSC:
Class B deferred charges:
Years after purchase CDSC on shares being sold
1st or 2nd year..................... 4.00%
3rd or 4th year..................... 3.00%
5th year............................ 2.00%
6th year............................ 1.00%
7th year and thereafter............. None
10
<PAGE>
CLASS II. Sales Charges are as follows:
Sales Charge Concession to Dealers
- --------------------------------------------------------------------------------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
PRICE INVESTED PRICE
- --------------------------------------------------------------------------------
1.00% 1.01% 1.00%
There is also a CDSC of 1% on shares you sell within 18 months after you buy
them.
DETERMINATION OF CDSC: Each CDSC is based on the original purchase cost or the
current market value of the shares being sold, whichever is less. There is no
CDSC on shares you purchase through reinvestment of dividends. To keep your CDSC
as low as possible, each time you place a request to sell shares we will first
sell any shares in your account that are not subject to a CDSC. If there are not
enough of these shares available, we will sell shares that have the lowest CDSC.
For purposes of the CDSC, we count all purchases you make during a calendar
month as having been made on the FIRST day of that month.
SALES CHARGE REDUCTIONS AND WAIVERS
WAIVERS FOR CERTAIN INVESTORS. Various individuals and institutions may purchase
Class A shares without front-end sales charges, including:
o financial planners, institutions, broker-dealer representatives or
registered investment advisers utilizing Fund shares in fee-based
investment products under an agreement with the Distributor (this
waiver may also apply to front-end sales charges of Class II shares)
o participants in certain retirement plans that meet applicable
conditions, as described in the Statement of Additional Information
o Fund Directors and other individuals, and their families, who are
affiliated with the Fund or any Fund distributed by SunAmerica Capital
Services, Inc.
o selling brokers and their employees and sales representatives and
their families
o participants in "Net Asset Value Transfer Program"
We will generally waive the CDSC for CLASS B or CLASS II shares in the following
cases:
o within one year of the shareholder's death or becoming disabled
o taxable distributions or loans to participants made by qualified
retirement plans or retirement accounts (not including rollovers) for
which SunAmerica Fund Services, Inc. serves as fiduciary
o Fund Directors and other individuals, and their families, who are
affiliated with the Fund or any Fund distributed by SunAmerica Capital
Services, Inc.
o to make payments through the Systematic Withdrawal Plan (subject to
certain conditions)
o participants in "Net Asset Value Transfer Program"
REDUCING YOUR CLASS A SALES CHARGES. There are several special purchase plans
that allow you to combine multiple purchases of Class A shares of any Fund
distributed by SunAmerica Capital Services, Inc. to take advantage of the
breakpoints in the sales charge schedule. For information about the "Rights of
Accumulation," "Letter of Intent," "Combined Purchase Privilege," and "Reduced
Sales Charges for Group Purchases," contact your broker or financial advisor, or
consult the Statement of Additional Information.
To utilize: If you think you may be eligible for a sales charge reduction or
CDSC waiver, contact your broker or financial advisor.
REINSTATEMENT PRIVILEGE. If you sell shares of the Fund, within one year after
the sale, you may invest some or all of the proceeds of the sale in the same
share class of the Fund without a sales charge. A shareholder may use their
reinstatement privilege only one time after selling such shares. If you paid a
CDSC when you sold your shares, we will credit your account with the dollar
amount of the CDSC at the time of sale. This may impact the amount of gain or
loss you recognized on the previous sale for tax purposes. All accounts involved
must be registered in the same name(s).
11
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE (12B-1) FEES
Each class of shares of the Fund has its own 12b-1 plan that provides for
distribution and account maintenance and service fees (payable to the
Distributor) based on a percentage of average daily net assets, as follows:
ACCOUNT MAINTENANCE
CLASS DISTRIBUTION FEE AND SERVICE FEE
A 0.10% 0.25%
B 0.75% 0.25%
II 0.75% 0.25%
Because 12b-1 fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
OPENING AN ACCOUNT
1. Read this prospectus carefully.
2. Determine how much you want to invest. The minimum initial investment for
the Fund is as follows:
o non-retirement account: $500
o retirement account: $250
o dollar cost averaging: $500 to open; you must invest at least $25 a
month
The minimum subsequent investments for the Fund is as follows:
o non-retirement account: $100
o retirement account: $25
3. Complete the appropriate parts of the Account Application, carefully
following the instructions. If you have questions, please contact your
broker or financial advisor or call Shareholder/Dealer Services at
1-800-858-8850, extension 5125.
4. Complete the appropriate parts of the Supplemental Account Application. By
applying for additional investor services now, you can avoid the delay and
inconvenience of having to submit an additional application if you want to
add services later.
5. Make your initial investment using the chart on the next page. You can
initiate any purchase, exchange or sale of shares through your broker or
financial advisor.
12
<PAGE>
BUYING SHARES
OPENING AN ACCOUNT
BY CHECK
- --------------------------------------------------------------------------------
o Make out a check for the investment amount, payable to the Fund or
SunAmerica Funds.
o Deliver the check and your completed Account Application (and
Supplemental Account Application, if applicable) to your broker or
financial advisor, or mail them to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204.
o All purchases must be in U.S. dollars. Cash will not be accepted. A
$25.00 fee will be charged for all checks returned due to insufficient
funds.
ADDING TO AN ACCOUNT
o Make out a check for the investment amount payable to the Fund or
SunAmerica Funds.
o Include the stub from your Fund statement or a note specifying the
Fund name, your share class, your account number and the name(s) in
which the account is registered.
o Indicate the Fund and account number in the memo section of your
check.
o Deliver the check and your note to your broker or financial advisor,
or mail them to
NON-RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
c/o NFDS
P.O. Box 419373
Kansas City, Missouri 64141-6373
RETIREMENT ACCOUNTS:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
BY WIRE
- --------------------------------------------------------------------------------
o Deliver your completed application to your broker or financial advisor
or fax it to SunAmerica Fund Services, Inc. at 212-551-5585.
o Obtain your account number by referring to your statement or by
calling your broker or financial advisor or Shareholder/Dealer
Services at 1-800-858-8850, ext. 5125.
o Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Fund name, your choice of share class, your new Fund number and
account number and the name(s) in which the account is registered. Your bank may
charge a fee to wire funds.
ADDING TO AN ACCOUNT
o Instruct your bank to wire the amount of your investment to:
State Street Bank & Trust Company
Boston, MA
ABA #0110-00028
DDA # 99029712
Specify the Fund name, your share class, your Fund number, account number and
the name(s) in which the account is registered. Your bank may charge a fee to
wire funds.
To open or add to an account using dollar cost averaging, see "Additional
Investor Services."
13
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
SELLING SHARES
HOW
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
- ----------------------------------------
o Accounts of any type.
o Sales of any amount.
BY MAIL
- -------
o Accounts of any type.
o Include all signatures and any additional documents that may be
required (see next page).
o Mail the materials to:
SunAmerica Fund Services, Inc.
Mutual Fund Operations, 3rd Floor
The SunAmerica Center
733 Third Avenue
New York, New York
10017-3204
BY PHONE
- --------
o Most accounts.
o Sales of less than $100,000.
BY WIRE
- -------
o Request by mail to sell any amount (accounts of any type).
o Request by phone to sell less than $100,000.
REQUIREMENTS
THROUGH YOUR BROKER OR FINANCIAL ADVISOR
- ----------------------------------------
o Call your broker or financial advisor to place your order to sell
shares.
BY MAIL
- -------
o Write a letter of instruction indicating the Tax Managed Equity Fund,
your share class, your account number, the name(s) in which the
account is registered and the dollar value or number of shares you
wish to sell.
o Sales of $100,000 or more require the letter of instruction to have a
signature guarantee.
o A check will normally be mailed on the next business day to the
name(s) and address in which the account is registered, or otherwise
according to your letter of instructions.
BY PHONE
- --------
o Call Shareholder/Dealer Services at 1-800-858-8850 extension 5125
between 8:30 a.m. and 7:00 p.m. (Eastern time) on most business days.
State the Fund name, the name of the person requesting the redemption,
your share class, your account number, the name(s) in which the
account is registered and the dollar value or number of shares you
wish to sell.
o A check will be mailed to the name(s) and address in which the account
is registered, or to a different address indicated in a written
authorization previously provided to the Fund by the shareholder(s) on
the account.
BY WIRE
- -------
o Proceeds will normally be wired on the next business day. A $15 fee
will be deducted from your account.
To sell shares through a systematic withdrawal plan, see "Additional Investor
Services."
14
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES IN WRITING. In certain circumstances, you will need to make your
request to sell shares in writing. Corporations, executors, administrators,
trustees or guardians may need to include additional items with a request to
sell shares. You may also need to include a signature guarantee, which protects
you against fraudulent orders. You will need a signature guarantee if:
o your address of record has changed within the past 30 days
o you are selling shares worth $100,000 or more
o you are requesting payment other than by a check mailed to the address
of record and payable to the registered owner(s)
You can generally obtain a signature guarantee from the following sources:
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public CANNOT provide a signature guarantee.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the Fund and each
class is determined each business day at the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m., Eastern time) by dividing the net
assets of each class by the number of its shares outstanding. 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.
BUY AND SELL PRICES. When you buy shares, you pay the NAV plus any applicable
sales charges, as described earlier. When you sell shares, you receive the NAV
minus any applicable CDSCs.
EXECUTION OF REQUESTS. The Fund is open on those days when the New York Stock
Exchange is open for regular trading. We execute buy and sell requests at the
next NAV to be calculated after the Fund receives your request in good order. If
your order is received by the Fund or the Distributor before the Fund'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. If you place your order through a broker or
financial advisor, you should make sure the order is transmitted to the Fund
before its close of business. The Fund and the Distributor reserve the right to
reject any order to buy shares.
During periods of extreme volatility or market crisis, the Fund may temporarily
suspend the processing of sell requests, or may postpone payment of proceeds for
up to three business days or longer, as allowed by federal securities laws.
The Fund may invest to a small 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 the Fund'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.
At various times, the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purpose of such shares, which will not exceed 15 days.
15
<PAGE>
TRANSACTION POLICIES (cont.)
TELEPHONE TRANSACTIONS. For your protection, telephone requests are recorded in
order to verify their accuracy. In addition, Shareholder/Dealer Services will
take measures to verify the identity of the caller, such as asking for name,
account number, social security or other taxpayer ID number and other relevant
information. If appropriate measures are not taken, the Fund is responsible for
any losses that may occur to any account due to an unauthorized telephone call.
Also for your protection, telephone transactions are not permitted on accounts
whose names or addresses have changed within the past 30 days. At times of peak
activity, it may be difficult to place requests by phone. During these times,
consider sending your request in writing.
EXCHANGES. You may exchange shares of the Fund for shares of the same class of
any other fund distributed by SunAmerica Capital Services, Inc. Before making an
exchange, you should review a copy of the prospectus of the Fund or the fund
into which you would like to exchange. All exchanges are subject to applicable
minimum investment requirements. A Systematic Exchange Program is described
under "Additional Investor Services."
If you exchange shares that were purchased subject to a CDSC, the CDSC will
continue to apply following the exchange. In determining the CDSC applicable to
shares being sold after an exchange, we will take into account the length of
time you held those shares prior to the exchange.
To protect the interests of other shareholders, we may cancel the exchange
privileges of any investors that, in the opinion of the Fund, are using market
timing strategies or making excessive exchanges. The Fund may change or cancel
its exchange privilege at any time, upon 60 days' written notice to its
shareholders. The Fund may also refuse any exchange order.
CERTIFICATED SHARES. Most shares are electronically recorded. If you wish to
have certificates for your shares, please call Shareholder/Dealer Services at
1-800-858-8850, extension 5125 for further information. You may sell or exchange
certificated shares only by returning the certificates to the Fund, along with a
letter of instruction and a signature guarantee. The Fund does not issue
certificates for fractional shares.
MULTI-PARTY CHECKS. The Fund may agree to accept a "multi-party check" in
payment for Fund shares. This is a check made payable to the investor by another
party and then endorsed over to the Fund by the investor. If you use a
multi-party check to purchase shares, you may experience processing delays. In
addition, the Fund is not responsible for verifying the authenticity of any
endorsement and assumes no liability for any losses resulting from a fraudulent
endorsement.
ADDITIONAL INVESTOR SERVICES
To select one or more of these additional services, complete the relevant
part(s) of the Supplemental Account Application. To add a service to an existing
account, contact your broker or financial advisor, or call Shareholder/Dealer
Services at 1-800-858-8850, extension 5125.
DOLLAR COST AVERAGING lets you make regular investments from your bank account
to the Fund or any other fund of your choice distributed by SunAmerica Capital
Services, Inc. You determine the frequency and amount of your investments, and
you can terminate your participation at any time.
SYSTEMATIC WITHDRAWAL Plan may be used for routine bill payment or periodic
withdrawals from your account. To use:
o Make sure you have at least $5,000 worth of shares in your account.
o Make sure you are not planning to invest more money in this account
(buying shares during a period when you are also selling shares of the
same Fund is not advantageous to you, because of sales charges).
o Specify the payee(s) and amount(s). The payee may be yourself or any
other party, (which may require a signature guarantee) and there is no
limit to the number of payees you may have, as long as they are all on
the same payment schedule. Each withdrawal must be at least $50.
o Determine the schedule: monthly, quarterly, semi-annually, annually or
in certain selected months.
o Make sure your dividends and capital gains are being reinvested.
You cannot elect the systematic withdrawal plan if you have requested
certificates for your shares.
16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ASSET PROTECTION PLAN (optional) Anchor National Life Insurance Company offers
an Asset Protection Plan to certain investors in the Fund. The benefits of this
optional coverage payable at death will be related to the amounts paid to
purchase Fund shares and to the value of the Fund shares held for the benefit of
the insured persons. However, to the extent the purchased shares are redeemed
prior to death, coverage with respect to these shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Fund shares to pay the premiums for this coverage. These
redemptions will not be subject to CDSCs, but will have the same tax
consequences as any other Fund redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in the Fund are initially
purchased or transferred. In addition, coverage cannot be made available unless
Anchor National knows for whose benefit shares are purchased. For instance,
coverage cannot be made available for shares registered in the name of your
broker unless the broker provides Anchor National with information regarding the
beneficial owners of the shares. In addition, coverage is available only to
shares purchased on behalf of natural persons between 21 and 75 years of age;
coverage is not available with respect to shares purchased for a retirement
account. Other restrictions on the coverage apply. This coverage may not be
available in all states and may be subject to additional restrictions or
limitations. Purchasers of shares should also make themselves familiar with the
impact on the Asset Protection Plan coverage of purchasing additional shares,
reinvestment of dividends and capital gains distributions and redemptions.
Anchor National is a SunAmerica company.
Please call 1-800-858-8850, extension 5660 for more information, including the
cost of the Asset Protection Plan option.
RETIREMENT PLANS. SunAmerica Mutual Funds offer a range of qualified retirement
plans, including IRAs, Roth IRAs, Simple IRAs, SEPs, SARSEPs, 401(k) plans,
403(b) plans and other pension, educational and profit-sharing plans. Using
these plans, you can invest in any funds distributed by SunAmerica Capital
Services, Inc. with a low minimum investment of $250 or, for some group plans,
no minimum investment at all. To find out more, call Retirement Plans at
1-800-858-8850, extension 5134.
TAX, DIVIDEND DISTRIBUTIONS AND ACCOUNT POLICIES
ACCOUNT STATEMENTS. In general, you will receive account statements as follows:
o after every transaction that affects your account balance (except a
dividend reinvestment or automatic purchase from or automatic
redemption to your bank account)
o after any changes of name or address of the registered owner(s)
o in all other circumstances, annually
Every year you should also receive, if applicable, a Form 1099 tax information
statement, mailed by January 31.
DIVIDENDS. The Fund generally distributes most or all of its net earnings in the
form of dividends. Income dividends, if any, are paid annually by the Fund.
Capital gains distributions, if any, are paid at least annually by the Fund.
DIVIDEND REINVESTMENTS. Your dividends and distributions, if any, will be
automatically reinvested in additional shares of the same share class of the
Fund on which they were paid. Alternatively, dividends and distributions may be
reinvested in any fund distributed by SunAmerica Capital Services, Inc. or paid
in cash (if more than $10). You will need to complete the relevant part of the
Account Application to elect one of these other options. For existing accounts,
contact your broker or financial advisor or call Shareholder/Dealer Services at
1-800-858-8850, extension 5125 to change dividend and distribution payment
options.
TAXABILITY OF DIVIDENDS. As long as the Fund meets the requirements for being a
tax-qualified regulated investment company, as the Fund intends, it pays no
Federal income tax on the earnings it distributes to shareholders.
Consequently, dividends you receive from the Fund, whether reinvested or taken
as cash, are generally considered taxable. Distributions of the Fund's long-term
capital gains are taxable as capital gains regardless of how long you held the
Fund's shares; dividends from other sources are generally taxable as ordinary
income.
Some dividends paid in January, which were declared in a previous quarter, will
be taxable as if they had been paid the previous December. Corporations may be
entitled to take a dividends-received deduction for a portion of certain
dividends they receive.
The Form 1099 that is mailed to you every January details your dividends and
their federal tax category, although you should verify your tax liability with
your tax professional.
"BUYING INTO A DIVIDEND." You should note that if you purchase shares just
before a distribution, you will be taxed for that distribution like other
shareholders, even though that distribution represents simply a return of part
of your investment. You may wish to defer your purchase until after the record
date for the distribution, so as to avoid this tax impact.
TAXABILITY OF TRANSACTIONS. Any time you sell or exchange shares, it is
considered a taxable event for you. Depending on the purchase price and the sale
price of the shares you sell or exchange, you may have a gain or a loss on the
transaction. You are responsible for any tax liabilities generated by your
transactions. If you hold Class B shares, you will not have a taxable event when
they convert into Class A shares.
OTHER TAX CONSIDERATIONS. If you are not a lawful permanent resident or a
citizen of the U.S., or if you are a foreign entity, ordinary income dividends
paid to you (which includes distributions of net short-term capital gains) will
generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
17
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.
This section summarizes some of the consequences under current Federal tax law
of an investment in the Fund. It is not a substitute for professional tax
advice. Consult your tax advisor about the potential tax consequences of an
investment in the Fund under all applicable laws.
SMALL ACCOUNTS. If you draw down an account so that its total value is less than
$500 ($250 for retirement plan accounts), you may be asked to purchase more
shares within 60 days. If you do not take action, the Fund may close out your
account and mail you the proceeds. Alternatively, you may be charged a $2.00
monthly charge to maintain your account. Your account will not be closed if its
drop in value is due to Fund performance or the effects of sales charges.
FUND MANAGEMENT
Manager: SunAmerica Asset Management Corp., which was organized in 1982 under
the laws of Delaware, serves as investment manager and selects the Adviser for
the Fund, provides various administrative services, and supervises the daily
business affairs of the Fund. In addition to managing the Fund, SunAmerica Asset
Management Corp. serves as adviser, manager and/or administrator for Anchor
Pathway Fund, Anchor Series Trust, SunAmerica Style Select Series, Inc., Seasons
Series Trust, SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money
Market Funds, Inc., SunAmerica Series Trust, and Brazos Mutual Funds. SunAmerica
managed, advised or administered assets in excess of $27 billion as of December
31, 1999. The Adviser is responsible for decisions to buy and sell securities
for the Fund, selection of broker-dealers and negotiation of commission rates.
SunAmerica may terminate the agreement with the 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 one or more
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 of the
Fund have the right to terminate an agreement with the Adviser for that Fund at
any time by a vote of the majority of the outstanding voting securities of the
Fund. Shareholders will be notified of any Adviser changes. The order also
permits the Fund to disclose to shareholders the Advisers' fees only in the
aggregate for the Fund.
The Fund pays SunAmerica a fee equal to 0.85% of average daily net assets.
The Adviser and Portfolio Managers for the Fund are described below.
INFORMATION ABOUT THE ADVISER
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan") is a Delaware
corporation, located at 522 Fifth Avenue, New York, New York 10036. J.P. Morgan
provides investment advisory services to a substantial number of institutional
and other investors, including other registered investment companies. As of
December 31, 1999, J.P. Morgan, together with its affiliated companies, had
approximately $349 billion in assets under management.
18
<PAGE>
<TABLE>
<CAPTION>
NAME, TITLE AND AFFILIATION OF
PORTFOLIO MANAGER EXPERIENCE
------------------------------ ----------
<S> <C>
Terry Banet, Ms. Banet is a senior portfolio manager for private equity and balanced
Vice President (J.P. Morgan) accounts for J.P. Morgan's high net worth clients. In addition, Ms. Banet
manages the JP Morgan Tax Aware Equity Fund. In her 12 years at J.P. Morgan,
Ms. Banet has done extensive work in product development for both U.S. and
international clients and was key in helping develop J.P. Morgan's Tax Aware
equity process. She joined J.P. Morgan in 1985 after two years at Coopers &
Lybrand. Ms. Banet earned her B.S. degree from Lehigh University and holds an
M.B.A. from Wharton.
Louise P. Sclafani Ms. Sclafani is a portfolio manager in J.P. Morgan's U.S. Equity group. In
Vice President (J.P. Morgan) particular, she manages tax-aware portfolios for private clients and mutual
funds. She began her investment career at J.P. Morgan in equity research in
1983. She left to join Brundage, Story and Rose where she was an equity
analyst and portfolio manager and returned to J.P. Morgan in 1994. She is a
Chartered Financial Analyst.
</TABLE>
DISTRIBUTOR:. SunAmerica Capital Services, Inc. distributes the Fund's shares.
The Distributor, a SunAmerica company, receives the initial and deferred sales
charges, all or a portion of which may be re-allowed to other broker-dealers. In
addition, the Distributor receives fees under the Fund's 12b-1 plans.
The Distributor, at its expense, may from time to time provide additional
compensation to broker-dealers (including in some instances, affiliates of the
Distributor) in connection with sales of shares of the Fund. This compensation
may include (i) full re-allowance of the front-end sales charge on Class A
shares; (ii) additional compensation with respect to the sale of Class A, Class
B or Class II shares; or (iii) financial assistance to broker-dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding the Fund, and/or other
broker-dealer sponsored special events. In some instances, this compensation
will be made available only to certain broker-dealers whose representatives have
sold a significant number of shares of the Fund. Compensation may also include
payment for travel expenses, including lodging, incurred in connection with
trips taken by invited registered representatives for meetings or seminars of a
business nature. In addition, the following types of non-cash compensation may
be offered through sales contests: (i) travel mileage on major air carriers;
(ii) tickets for entertainment events (such as concerts or sporting events); or
(iii) merchandise (such as clothing, trophies, clocks, pens or other electronic
equipment). Broker-dealers may not use sales of the Fund's shares to qualify for
this compensation to the extent receipt of such compensation may be prohibited
by applicable law or the rules of any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. Dealers who receive bonuses or
other incentives may be deemed to be underwriters under the Securities Act of
1933.
19
<PAGE>
- --------------------------------------------------------------------------------
FUND MANAGEMENT
- --------------------------------------------------------------------------------
ADMINISTRATOR. SunAmerica Fund Services, Inc. assists the Fund's transfer agent
in providing shareholder services. The Administrator, a SunAmerica company, is
paid a monthly fee by the Fund for its services at the annual rate of 0.22% of
average daily net assets. This fee represents the full cost of providing
shareholder and transfer agency services to the Fund.
The Manager, Distributor and Administrator are all located in The SunAmerica
Center, 733 Third Avenue, New York, New York 10017.
YEAR 2000. The Fund's management has recognized the importance of the Year 2000
("Y2K") Issue and since 1998 has designated it as a top priority to which
management has committed significant resources. The Fund made a successful
transition into the new millennium without any Y2K related problems. The Fund's
management will continue to monitor the Y2K Issue and although there can be no
assurances that the Fund or the companies in which the Fund invests will avoid
being negatively impacted, we do not anticipate that the Fund will experience
any material negative impact as a result of the Y2K Issue.
20
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
The following documents contain more information about the Fund and are
available free of charge upon request:
ANNUAL AND SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on portfolio holdings. The annual reports also contain
a written analysis of market conditions and investment strategies that
significantly affected the Fund's performance during the applicable period.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional information
about the Fund's policies, investment restrictions and business structure.
This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Fund by
contacting:
SunAmerica Fund Services, Inc.
Mutual Fund Operations
The SunAmerica Center
733 Third Avenue
New York, New York 10017-3204
1-800-858-8850, extension 5125
or
by calling your broker or financial advisor.
Information about the Fund (including the SAI) can be reviewed and copied at the
Public Reference Room of the Securities and Exchange Commission, Washington,
D.C. Call (202) 942-8090 for information on the operation of the Public
Reference Room. Information about the Fund 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 electronic request at the
following e-mail address: [email protected], or 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.
[SUN AMERICA
MUTUAL FUNDs
LOGO]
DISTRIBUTOR: SunAmerica Capital Services
INVESTMENT COMPANY ACT
File No. 811-0169
21
<PAGE>
SUNAMERICA STRATEGIC INVESTMENT SERIES, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 28, 2000
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
SunAmerica Strategic Investment Series, Inc. (the "Corporation") is a
mutual fund consisting of one investment series, the Tax Managed Equity Fund
(the "Fund"). The Fund seeks high total return while being sensitive to the
impact of capital gains taxes on investors' returns.
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Corporation's Prospectus dated February
28, 2000. To obtain a Prospectus free of charge, please call the Corporation at
(800) 858-8850. The Prospectus is incorporated by reference into this Statement
of Additional Information. Capitalized terms used herein but not defined have
the meanings assigned to them in the Prospectus.
TABLE OF CONTENTS
PAGE
HISTORY OF THE FUND B-2
INVESTMENT OBJECTIVE AND POLICIES B-2
INVESTMENT RESTRICTIONS B-23
DIRECTORS AND OFFICERS B-25
MANAGER, ADVISER, PERSONAL TRADING, DISTRIBUTOR AND ADMINISTRATOR B-30
PORTFOLIO TRANSACTIONS AND BROKERAGE B-35
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES B-37
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES B-43
EXCHANGE PRIVILEGE B-44
DETERMINATION OF NET ASSET VALUE B-45
PERFORMANCE DATA B-46
DIVIDENDS, DISTRIBUTIONS AND TAXES B-50
RETIREMENT PLANS B-54
DESCRIPTION OF SHARES B-55
ADDITIONAL INFORMATION B-57
FINANCIAL STATEMENTS B-58
APPENDIX APPENDIX-1
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Corporation, SunAmerica Asset Management Corp. ("SunAmerica")
or 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.
HISTORY OF THE FUND
The Corporation, an open-end, diversified management investment
company registered under the Investment Company Act of 1940 (the "1940 Act"),
was organized as a Maryland corporation on December 16, 1998. The Corporation
currently consists of one series, the Tax Managed Equity Fund.
SunAmerica serves as investment manager for the Fund. As described in
the Prospectus, SunAmerica retains J.P. Morgan Investment Management, Inc. (the
"Adviser") to assist in the management of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Fund are described in the
Prospectus. Certain types of securities in which the Fund may invest and certain
investment practices that the Fund may employ, are described under "More
Information About the Fund -- Investment Strategies" in the Prospectus and are
discussed more fully below. Unless otherwise specified, the Fund may invest in
the following securities. The stated percentage limitations and quality
requirements are applied to an investment at the time of purchase unless
indicated otherwise.
CONVERTIBLE SECURITIES AND PREFERRED STOCKS. Convertible securities may
be debt securities or preferred stock with a conversion feature. Traditionally,
convertible securities have paid dividends or interest at rates higher than
common stocks but lower than non-convertible securities. They generally
participate in the appreciation or depreciation of the underlying stock into
which they are convertible, but to a lesser degree. In recent years,
convertibles have been developed that combine higher or lower current income
with options and other features. Generally, preferred stock has a specified
dividend and ranks after bonds and before common stocks in its claim on income
for dividend payments and on assets should the company be liquidated. While most
preferred stocks pay a dividend, the Fund 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.
There are no specific quality requirements for convertible debt securities.
B-2
<PAGE>
ILLIQUID AND RESTRICTED SECURITIES. No more than 15% of the value of
the Fund'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 other securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Repurchase agreements subject to
demand are deemed to have a maturity equal to the notice period. Securities that
have not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them, resulting in
additional expense and delay. There will generally be a lapse of time between a
mutual fund's decision to sell an unregistered security and the registration of
such security promoting sale. Adverse market conditions could impede a public
offering of such securities. When purchasing unregistered securities, the Fund
will generally seek to obtain the right of registration at the expense of the
issuer (except in the case of Rule 144A securities, discussed 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 resale 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 Fund 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
B-3
<PAGE>
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 (I.E., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer). Subject to the applicable
limitation on illiquid securities investments, the Fund may acquire securities
issued by the U.S. government, its agencies or instrumentalities in a private
placement.
Commercial paper issues in which the Fund'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 issued by a company that files reports under the
Securities Exchange Act of 1934, as amended, is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. The Fund's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Adviser has determined to be liquid
pursuant to guidelines established by the Directors. The Directors have
delegated to the Adviser 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 Adviser to take into account the same factors
described above for other restricted securities and require the Adviser to
perform the same monitoring and reporting functions.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements
with selected banks and securities dealers whose financial condition is
monitored by the Adviser, subject to the guidance of the Directors. In such
agreements, the seller agrees to repurchase the security at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
either overnight or a few days, although it may extend over a number of months.
The repurchase price is in excess of the purchase price by an amount that
reflects an agreed-upon rate of return effective for the period of time the
Fund's money is invested in the security. Whenever the Fund 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 Fund will require additional
collateral. If the seller under the repurchase agreement defaults, the Fund may
incur a loss if the value of the collateral securing the repurchase agreement
has declined and may incur disposition costs in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization of the collateral by the Fund may be
delayed or limited. The Directors have established guidelines to be used by the
Adviser in connection with transactions in repurchase agreements and will
regularly monitor the Fund's use of repurchase agreements. The Fund 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.
B-4
<PAGE>
However, there is no limit on the amount of the Fund's net assets that may be
subject to repurchase agreements having a maturity of seven days or less for
temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund 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. The Fund
then invests the proceeds from the transaction in another obligation in which
the Fund is authorized to invest. The Fund's investment of the proceeds of a
reverse repurchase agreement is the speculative factor known as leverage. A Fund
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. In order to minimize any risk involved, the Fund will
segregate cash or liquid securities in an amount at least equal in value 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 Fund's
repurchase obligation, and the Fund'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."
FIXED INCOME SECURITIES. The Fund may invest, under normal
circumstances, up to 35% of total assets, subject to the percentage and credit
quality limitations stated herein, in debt securities, including corporate
obligations issued by domestic and foreign corporations and governments and
money market instruments, without regard to the maturities of such securities.
Fixed income securities are broadly characterized as those that provide
for periodic payments to the holder of the security at a stated rate. Most fixed
income securities, such as bonds, represent indebtedness of the issuer and
provide for repayment of principal at a stated time in the future. Others do not
provide for repayment of a principal amount, although they may represent a
priority over common stockholders in the event of the issuer's liquidation. Many
fixed income securities are subject to scheduled retirement, or may be retired
or "called" by the issuer prior to their maturity dates. The interest rate on
certain fixed income securities, known as "variable rate obligations," is
determined by reference to or is a percentage of an objective standard, such as
a bank's prime rate, the 90-day Treasury bill rate, or the rate of return on
commercial paper or bank certificates of deposit, and is periodically adjusted.
Certain variable rate obligations may have a demand feature entitling the holder
to resell the securities at a predetermined amount. The interest rate on certain
fixed income securities, called "floating rate instruments," changes whenever
there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely
with the level of interest rates-when interest rates rise, their values will
tend to decline; when interest rates decline, their values generally will tend
to rise. The potential for capital appreciation with respect to variable rate
obligations or floating rate instruments will be less than with respect to
fixed-rate
B-5
<PAGE>
obligations. Long-term instruments are generally more sensitive to these changes
than short-term instruments. The market value of fixed income securities and
therefore their yield is also affected by the perceived ability of the issuer to
make timely payments of principal and interest.
The Fund generally will not invest in debt securities in the lowest
rating categories ("CC" or lower for Standard & Poor's Ratings Services, a
Division of the McGraw-Hill Companies, Inc. ("Standard & Poor's") or "Ca" or
lower for Moody's Investors Service, Inc. ("Moody's") unless the Adviser
believes that the financial condition of the issuer or the protection afforded
the particular securities is stronger than would otherwise be indicated by such
low ratings. In the event the rating of a debt security is down-graded below the
lowest rating category deemed by the Adviser to be acceptable for the Fund's
investments, the Adviser will determine on a case by case basis the appropriate
action to serve the interest of shareholders, including disposition of the
security.
RISKS OF INVESTING IN LOWER RATED BONDS. As described above, debt
securities in which the Fund may invest may be in the lower rating categories of
recognized rating agencies (that is, ratings of Ba or lower by Moody's or BB or
lower by Standard & Poor's (and comparable unrated securities) (commonly known
as "junk bonds"). For a description of these and other rating categories, see
the Appendix. No minimum rating standard is required for a purchase by the Fund.
Such high yield bonds can be expected to provide higher yields, but may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated fixed income securities. High yield bonds may
be issued by less creditworthy companies or by larger, highly leveraged
companies. It should be noted that lower-rated securities are subject to risk
factors such as (a) vulnerability to economic downturns and changes in interest
rates; (b) sensitivity to adverse economic changes and corporate developments;
(c) redemption or call provisions that may be exercised at inopportune times;
(d) difficulty in accurately valuing or disposing of such securities; (e)
federal legislation that could affect the market for such securities; and (f)
special adverse tax consequences associated with investments in certain
high-yield, high-risk bonds.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest rate
market, the Fund would have to replace the security with a lower yielding
security, resulting in lower return for investors. Conversely, a high yield
bond's value will decrease in a rising interest rate market.
There is a thinly traded market for high yield bonds, and recent market
quotations may not be available for some of these bonds. Market quotations are
generally available only from a limited number of dealers and may not represent
firm bids from such dealers or prices for actual sales. As a result, the Fund
may have difficulty valuing the high yield bonds in their portfolios accurately
and disposing of these bonds at the time or price desired. Under such
conditions, judgment may play a greater role in valuing certain of the Fund's
portfolio securities than in the case of securities trading in a more liquid
market.
B-6
<PAGE>
Ratings assigned by Moody's and Standard & Poor's to high yield bonds,
like other bonds, attempt to evaluate the safety of principal and interest
payments on those bonds. However, such ratings do not assess the risk of a
decline in the market value of those bonds. In addition, ratings may fail to
reflect recent events in a timely manner and are subject to change. If a rating
with respect to a portfolio security is changed, the Adviser will determine
whether the security will be retained based upon the factors the Adviser
considers in acquiring or holding other securities in the portfolio. Investment
in high yield bonds may make achievement of the Fund's objective more dependent
on the Adviser's own credit analysis than is the case for higher-rated bonds.
Market prices for high yield bonds tend to be more sensitive than those
for higher-rated securities due to many of the factors described above,
including the credit-worthiness of the issuer, redemption or call provisions,
the liquidity of the secondary trading market and changes in credit ratings, as
well as interest rate movements and general economic conditions. In addition,
yields on such bonds will fluctuate over time. An economic downturn could
severely disrupt the market for high yield bonds. In addition, legislation
impacting high yield bonds may have a materially adverse effect on the market
for such bonds. For example, federally insured savings and loan associations
have been required to divest their investments in high yield bonds.
The risk of default in payment of principal and interest on high yield
bonds is significantly greater than with higher-rated debt securities because
high yield bonds are generally unsecured and are often subordinated to other
obligations of the issuer, and because the issuers of high yield bonds usually
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates. Upon a default,
bondholders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of the Fund, to
the extent it invests in high yield bonds, is expected to be more volatile than
the net asset value of funds that invest solely in higher-rated debt securities.
This volatility may result in an increased number of redemptions from time to
time. High levels of redemptions in turn may cause the Fund to sell its
portfolio securities at inopportune times and decrease the asset base upon which
expenses can be spread.
DEFERRED INTEREST BONDS AND PIK BONDS. Fixed income securities in which
the Fund may invest also include deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Deferred interest bonds are debt
obligations issued or purchased at a significant discount from face value. PIK
bonds are debt obligations that provide that the issuer thereof may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater volatility in market value
due to changes in interest rates and other factors than debt obligations that
make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
B-7
<PAGE>
may require the liquidation of other portfolio securities under disadvantageous
circumstances to satisfy the Fund's distribution obligations.
SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. In addition to its
primary investments, the Fund, except as described below, may also invest up to
35% of its total assets in money market instruments for liquidity purposes (to
meet redemptions and expenses) or to generate a return on idle cash held by the
Fund during periods when the Adviser is unable to locate favorable investment
opportunities. For temporary defensive purposes, the Fund 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. When the Fund invests
in any commercial paper, bank obligations or repurchase agreement, the issuer
must have outstanding debt rated A or higher by Moody's or Standard & Poor's and
the issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Adviser's
opinion. At the time the Fund invests in any other short-term debt securities
except corporate debt obligations, they must be rated A or higher by Moody's or
Standard & Poor's, or if unrated, the investment must be of comparable quality
in the Adviser's opinion. A description of securities ratings is contained in
the Appendix to this Statement of Additional Information.
Subject to the limitations described above and below, the following is
a description of the types of money market and fixed income securities in which
the Fund may invest:
U.S. GOVERNMENT SECURITIES: See the section entitled "U.S. Government
Securities" below.
COMMERCIAL PAPER: Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by entities in order to finance
their current operations. The Fund's commercial paper investments may include
variable amount master demand notes and floating rate or variable rate notes.
Variable amount master demand notes and variable amount floating rate notes are
obligations that permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the borrower. Master demand notes permit daily fluctuations in the
interest rates while the interest rate under variable amount floating rate notes
fluctuates on a weekly basis. These notes permit daily changes in the amounts
borrowed. The Fund has the right to increase the amount under these notes at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Because these types of notes are direct lending arrangements between
the lender and the borrower, it is not generally contemplated that such
instruments will be traded, and there is no secondary market for these notes.
Master demand notes are redeemable (and, thus, immediately repayable by the
borrower) at face value, plus accrued interest, at any time. Variable amount
floating rate notes are subject to next-day redemption 14 days after the initial
investment therein. With both types of notes, therefore, the Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with both types of note arrangements, the Fund considers
earning power, cash flow and other liquidity ratios of the issuer. These notes,
as such, are not typically rated by credit rating agencies. Unless they are so
B-8
<PAGE>
rated, the Fund may invest in them only if at the time of an investment the
issuer has an outstanding issue of unsecured debt rated in one of the two
highest categories by a nationally recognized statistical rating organization.
The Fund will generally purchase commercial paper only of companies of medium to
large capitalizations (I.E., $1 billion or more).
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCE: Certificates of
deposit are receipts issued by a bank in exchange for the deposit of funds. The
issuer agrees to pay the amount deposited plus interest to the bearer of the
receipt on the date specified on the certificate. The certificate usually can be
traded in the secondary market prior to maturity. Bankers' acceptances typically
arise from short-term credit arrangements designed to enable businesses to
obtain funds to finance commercial transactions. Generally, an acceptance is a
time draft drawn on a bank by an exporter or an importer to obtain a stated
amount of funds to pay for specific merchandise. The draft is then "accepted" by
another bank that, in effect, unconditionally guarantees to pay the face value
of the instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary market at
the going rate of discount for a specific maturity. Although maturities for
acceptances can be as long as 270 days, most maturities are six months or less.
The Fund may invest in bankers' acceptances from (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
and are organized under the laws of the United States or any state, (ii) foreign
branches of these banks or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). The Fund will not
invest in obligations for which J.P. Morgan Investment Management, Inc., the
Fund's investment adviser, or any of its affiliated persons, is the ultimate
obligor or accepting bank. The Fund may also invest in obligations of
international banking institutions designed or supported by national governments
to promote economic reconstruction, development or trade between nations (E.G.,
the European Investment Bank, the Inter-American Development Bank, or the World
Bank).
CORPORATE OBLIGATIONS: Corporate debt obligations (including master
demand notes). For a further description of variable amount master demand notes,
see the section entitled "Commercial Paper" above.
REPURCHASE AGREEMENTS: See the section entitled "Repurchase Agreements"
above.
U.S. GOVERNMENT SECURITIES. The Fund 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.
B-9
<PAGE>
The Fund 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 Farmer's Home
Administration ("FMHA") and the Export-Import Bank are backed by the full faith
and credit of the United States.
The Fund may also invest in securities issued by U.S. government
instrumentalities and certain federal agencies that are neither direct
obligations of, nor are they guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; and others are
supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), the Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Land Banks, Central Bank for
Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan Banks. In
the case of securities not backed by the full faith and credit of the United
States, the Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States if the agency or instrumentality does not meet its
commitments.
INVESTMENT IN SMALL, UNSEASONED COMPANIES. The Fund may invest, in the
securities of small companies having market capitalizations under $1 billion.
These securities may have a limited trading market, which may adversely affect
their disposition and can result in their being priced lower than might
otherwise be the case. 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 the Fund attempts to dispose of its
holdings, the Fund may receive lower prices than might otherwise be obtained.
While smaller companies may be subject to these additional risks, they may also
realize more substantial growth than larger, more established companies.
Companies with market capitalization of $1 billion to $5 billion
("Medium-sized company stocks") may also suffer more significant losses as well
as realize more substantial growth than larger, more established issuers. Thus,
B-10
<PAGE>
investments in such companies tend to be more volatile and somewhat speculative.
The Fund may invest in the securities of Medium-sized company stocks.
WARRANTS AND RIGHTS. The Fund 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 (generally two or more
years). 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.
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. Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of deposit or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption or retirement, is
determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively "Underlying Assets") or by another objective index, economic
factor or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, the Fund 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 Fund 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
B-11
<PAGE>
with an embedded put option, would be to give the Fund 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 Fund 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, which may not be readily foreseen by the
purchaser, such as economic and political events, the supply and demand for the
Underlying Assets and interest rate movements. In recent years, various
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments
are often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. Under certain conditions, the redemption (or sale)
value of such an investment could be zero. In addition, because the purchase and
sale of Hybrid Instruments could take place in an over-the-counter market
without the guarantee of a central clearing organization or in a transaction
between the Fund and the issuer of the Hybrid Instrument, the creditworthiness
B-12
<PAGE>
of the counter party or issuer of the Hybrid Instrument would be an additional
risk factor the Fund would have to consider and monitor. Hybrid Instruments also
may not be subject to regulation of the Commodity Futures Trading Commission,
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 Fund. Accordingly, the Fund 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 the Fund's investment in Hybrid
Instruments will account for more than 10% of the Fund's return (positive or
negative).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase or
sell such securities on a "when-issued" or "delayed delivery" basis. Although
the Fund 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 Fund 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 the Fund 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. The
Fund will maintain a segregated account with the custodian, consisting of cash,
or liquid securities at least equal to the value of purchase commitments until
payment is made. With respect to securities sold on a delayed-delivery basis,
the Fund will either segregate the securities sold or liquidate assets of a
comparable value.
The Fund 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 the Fund 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 the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If the
Fund 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
forward commitment, it may incur a gain or loss. (At the time the Fund makes a
commitment to purchase or sell a security on a when-issued or forward 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 the Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objective and policies and not for the purposes
of investment leverage. The Fund will enter into such transactions only with the
B-13
<PAGE>
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and forward 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 will affect the value of
such securities and may cause a loss to the Fund.
When-issued transactions and forward commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, the Fund 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, the Fund 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.
FOREIGN SECURITIES. The Fund may invest up to 20% of its total assets
in equity securities of foreign companies in the S&P Composite Stock Price Index
or listed on a U.S. stock exchange. Investments in foreign securities offer
potential benefits not available from investments solely in securities of
domestic issuers by offering the opportunity to invest in foreign issuers that
appear to offer growth potential, or in foreign countries with economic policies
or business cycles different from those of the U.S., or to reduce fluctuations
in portfolio value by taking advantage of foreign stock markets that do not move
in a manner parallel to U.S. markets.
The Fund may invest in securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are securities, typically issued by a U.S. financial
institution, that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer and deposited with the depository. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository that
has an exclusive relationship with the issuer of the underlying security. An
unsponsored ADR may be issued by any number of U.S. depositories. Holders of
unsponsored ADRs generally bear all the costs associated with establishing the
unsponsored ADR. The depository of an unsponsored ADR is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored ADR voting rights with respect to
the deposited securities or pool of securities. The Fund 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 Fund 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 five days. The Fund 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
B-14
<PAGE>
the United States as a domestic issuer. Accordingly the information available to
a U.S. investor will be limited to the information the foreign issuer is
required to disclose in its own country and the market value of an ADR may not
reflect undisclosed material information concerning the issuer of the underlying
security. For purposes of the Fund's investment policies, the Fund's investments
in these types of securities will be deemed to be investments in the underlying
securities. Generally ADRs, in registered form, are dollar denominated
securities designed for use in the U.S. securities markets, which represent and
may be converted into the underlying foreign security. EDRs, in bearer form, are
designed for use in the European securities markets.
Investments in foreign securities, including securities of 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 (I.E.,
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. 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.
The performance of investments in securities denominated in a foreign currency
("non-dollar securities") will depend on, among other things, the strength of
the foreign currency against the dollar and the interest rate environment in the
country issuing the foreign currency. Absent other events that could otherwise
affect the value of non-dollar securities (such as a change in the political
climate or an issuer's credit quality), appreciation in the value of the foreign
currency generally can be expected to increase the value of the Fund's
non-dollar securities in terms of U.S. dollars. A rise in foreign interest rates
or decline in the value of foreign currencies relative to the U.S. dollar
generally can be expected to depress the value of the Fund'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. Effective January 1, 1999, several European countries
irrevocably fixed their existing national currencies to a new single European
currency unit, the "euro." Certain European investments may be subject to
additional risks as a result of this conversion. These risks include adverse tax
and accounting consequences, as well as difficulty in processing transactions.
The Adviser is aware of such potential problems and is coordinating efforts to
prevent or alleviate their adverse impact on the Fund. There can be no assurance
B-15
<PAGE>
that the Fund will not suffer any adverse consequences as a result of the euro
conversion.
Because the Fund may invest in securities that are primarily listed on
foreign exchanges that trade on weekends or other days when the Fund does not
price its shares, the value of these shares may change on days when a
shareholder will not be able to purchase or redeem shares.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund 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 Fund and are at all times secured by
cash or equivalent collateral. In lending its portfolio securities, the Fund
receives income while retaining the securities' potential for capital
appreciation. The advantage of such loans is that the Fund continues to receive
the interest and dividends on the loaned securities while at the same time
earning interest on the collateral, which will be invested in short-term debt
securities, including repurchase agreements. A loan may be terminated by the
borrower on one business day's notice or by the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will be made only to firms deemed by the Adviser to be creditworthy.
On termination of the loan, the borrower is required to return the securities to
the Fund; and any gain or loss in the market price of the loaned security during
the loan would inure to the Fund. The Fund will pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
Since voting or consent rights that accompany loaned securities pass to
the borrower, the Fund 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 Fund's investment in the
securities that are the subject of the loan.
INCOME ENHANCEMENT STRATEGIES. The Fund may write (I.E., sell) call
options ("calls") on securities traded on U.S. and foreign securities exchanges
and over-the-counter markets for hedging and risk management purposes and to
enhance income through the receipt of premiums from expired calls and any net
profits from closing purchase transactions. After any such sale up to 100% of
the Fund's total assets may be subject to calls. The Fund is required, for all
such calls written by a Fund to deposit cash or securities or a letter of credit
as margin and to make mark to market payments of variation margin as the
position becomes unprofitable. If a call written by the Fund is exercised, the
Fund forgoes any profit from any increase in the market price above the call
price of the underlying investment on which the call was written.
B-16
<PAGE>
The Fund also may write put options ("puts"), which give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. The Fund will receive a premium for writing a put option that
increases the Fund's return. The Fund is required, for all such puts written by
a Fund to deposit cash or securities or a letter of credit as margin and to make
mark to market payments of variation margin as the position becomes
unprofitable.
HEDGING STRATEGIES. For hedging purposes as a temporary defensive
maneuver, the Fund, except as described below, may also use stock index futures
contracts ("Futures"); and call and put options on Futures (the foregoing
referred to as "Hedging Instruments"). The Fund is required for these techniques
to deposit cash or securities or a letter of credit as margin and to make mark
to market payments of variation margin as the position becomes unprofitable. All
puts and calls on securities or stock index Futures or options on such Futures
purchased or sold by the Fund will be listed on a national securities or
commodities exchange or on U.S. over-the-counter markets. Hedging instruments
may be used to attempt to: (i) protect against possible declines in the market
value of the Fund's portfolio resulting from downward trends in the equity
securities markets (generally due to a rise in interest rates); (ii) protect the
Fund's unrealized gains if the value of its equity securities have appreciated;
(iii) facilitate selling securities for investment reasons; or (iv) establish a
position in the equity securities markets as a temporary substitute for
purchasing particular equity securities.
The Fund's strategy of hedging with Futures and options on Futures will
be incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in the market value of the Fund's portfolio,
to permit the Fund to retain unrealized gains in the value of portfolio
securities that have appreciated, or to facilitate selling securities for
investment reasons, the Fund could: (i) sell Futures; (ii) purchase puts on such
Futures or securities; or (iii) write calls on securities held by it or on
Futures. When hedging to attempt to protect against the possibility that
portfolio securities are not fully included in a rise in value of the debt
securities market, the Fund could: (i) purchase Futures; or (ii) purchase calls
on such Futures or on securities. Additional information about the Hedging
Instruments the Fund may use is provided below.
OPTIONS
OPTIONS ON SECURITIES. The Fund may write and purchase call and put
options on equity securities.
When the Fund 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. In such instance, the
Fund retains 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.
B-17
<PAGE>
To terminate its obligation on a call it has written, the Fund may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether the net of the amount of the
option transaction costs and the premium received on the call written was more
or less than the price of the call subsequently purchased. A profit may also be
realized if the call expires unexercised, because the Fund retains the
underlying security and the premium received. If the Fund could not effect a
closing purchase transaction due to lack of a market, it would hold the callable
securities until the call expired or was exercised.
When the Fund purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. The Fund benefits only if the call is
sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the call price plus the transaction
costs and the premium paid and the call is exercised. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and the Fund will lose its premium payment and the right to
purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and
the writer the obligation to buy, the underlying investment at the exercise
price during the option period. Writing a put covered by segregated liquid
assets equal to the exercise price of the put has the same economic effect to
the Fund as writing a covered call. The premium the Fund receives from writing a
put option represents a profit as long as the price of the underlying investment
remains above the exercise price. However, the Fund has also assumed the
obligation during the option period to buy the underlying investment from the
buyer of the put at the exercise price, even though the value of the investment
may fall below the exercise price. If the put expires unexercised, the Fund (as
the writer of the put) realizes a gain in the amount of the premium. If the put
is exercised, the Fund must fulfill its obligation to purchase the underlying
investment at the exercise price, which will usually exceed the market value of
the investment at that time. In that case, the Fund may incur a loss, equal to
the sum of the sale price of the underlying investment and the premium received
minus the sum of the exercise price and any transaction costs incurred.
The Fund may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit the Fund 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 Fund. The Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
When the Fund purchases a put, it pays a premium and has the right to
sell the underlying investment to a seller of a corresponding put on the same
investment during the put period at a fixed exercise price. Buying a put on an
investment the Fund owns enables the Fund to protect itself during the put
B-18
<PAGE>
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 Fund
will lose its premium payment and the right to sell the underlying investment
pursuant to the put. The put may, however, be sold prior to expiration (whether
or not at a profit).
Buying a put on an investment the Fund does not own permits the Fund
either to resell the put or buy the underlying investment and sell it at the
exercise price. The resale price of the put will vary inversely with the price
of the underlying investment. If the market price of the underlying investment
is above the exercise price and as a result the put is not exercised, the put
will become worthless on its expiration date. In the event of a decline in the
stock market, the Fund could exercise or sell the put at a profit to attempt to
offset some or all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to
pay for the underlying security, the Fund will deposit cash or securities or a
letter of credit as margin and make mark to market payments of variation margin
as the position becomes unprofitable. The Fund therefore forgoes the opportunity
of investing the segregated assets or writing calls against those assets. As
long as the obligation of the Fund as the put writer continues, it may be
assigned an exercise notice by the broker-dealer through whom such option was
sold, requiring the Fund to take delivery of the underlying security against
payment of the exercise price. The Fund has no control over when it may be
required to purchase the underlying security, since it may be assigned an
exercise notice at any time prior to the termination of its obligation as the
writer of the put. This obligation terminates upon expiration of the put, or
such earlier time at which the Fund effects a closing purchase transaction by
purchasing a put of the same series as that previously sold. Once the Fund has
been assigned an exercise notice, it is thereafter not allowed to effect a
closing purchase transaction.
OPTIONS ON SECURITIES INDICES. As noted above, the Fund 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. When the
Fund buys a call on a securities index, it pays a premium. During the call
period, upon exercise of a call by the Fund, a seller of a corresponding call on
the same investment will pay the Fund an amount of cash to settle the call if
the closing level of the securities index upon which the call is based is
greater than the exercise price of the call. That cash payment is equal to the
difference between the closing price of the index and the exercise price of the
call times a specified multiple (the "multiplier") which determines the total
dollar value for each point of difference. When the Fund 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 Fund's exercise of its put, to
deliver to the Fund 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
B-19
<PAGE>
of the put. That cash payment is determined by the multiplier, in the same
manner as described above as to calls.
FUTURES AND OPTIONS ON FUTURES
FUTURES. Upon entering into a Futures transaction, the Fund will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). The initial margin will be deposited with the
Fund's custodian in an account registered in the futures broker's name; however,
the futures broker can gain access to that account only under specified
conditions. As the Future is marked-to-market to reflect changes in its market
value, subsequent margin payments, called variation margin, will be paid to or
by the futures broker on a daily basis. Prior to expiration of the Future, if
the Fund 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 Fund, 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.
Purchases or sales of stock index futures contracts are used for
hedging purposes to attempt to protect the Fund's current or intended
investments from broad fluctuations in stock prices. For example, the Fund may
sell stock index futures contracts in anticipation of or during a market decline
to attempt to offset the decrease in market value of the Fund's securities
portfolio that might otherwise result. If such decline occurs, the loss in value
of portfolio securities may be offset, in whole or part, by gains on the Futures
position. When the Fund is not fully invested in the securities market and
anticipates a significant market advance, it may purchase stock 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 Fund intends to purchase. As
such purchases are made, the corresponding positions in stock index futures
contracts will be closed out.
OPTIONS ON FUTURES. As noted above, the Fund may purchase and write
options on stock index futures contracts ("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 Fund's
portfolio. If the Futures price at expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium,
which provides a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings. The writing of a put option on a Futures contract
constitutes a partial hedge against increasing prices of the securities or other
instruments required to be delivered under the terms of the Futures contract. If
the Futures price at expiration of the put option is higher than the exercise
price, the Fund will retain the full amount of the option premium, which
provides a partial hedge against any increase in the price of securities the
Fund intends to purchase. If a put or call option the Fund has written is
exercised, the Fund will incur a loss that will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between changes in
the value of its portfolio securities and changes in the value of its Options on
Futures positions, the Fund's losses from exercised Options on Futures may to
B-20
<PAGE>
some extent be reduced or increased by changes in the value of portfolio
securities.
The Fund may purchase Options on Futures for hedging purposes instead
of purchasing or selling the underlying Futures contract. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, the Fund
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 Fund will suffer
a loss equal to the price of the put. Where it is projected that the value of
securities to be acquired by the Fund will increase prior to acquisition, due to
a market advance or changes in interest or exchange rates, the Fund 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 Fund will suffer a loss equal to the price of the call, but the
securities that the Fund intends to purchase may be less expensive.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE
The Fund's custodian, or a securities depository acting for the
custodian, will act as the Fund's escrow agent, through the facilities of the
Options Clearing Corporation ("OCC"), as to the securities on which the Fund has
written options or as to other acceptable escrow securities, so that no margin
will be required for such transaction. OCC will release the securities on the
expiration of the option or upon the Fund's entering into a closing transaction.
An option position may be closed out only on a market that provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund's
option activities may affect its turnover rate and brokerage commissions. The
exercise by the Fund of puts on securities will cause the sale of related
investments, increasing portfolio turnover. Although such exercise is within the
Fund's control, holding a put might cause the Fund to sell the related
investments for reasons that would not exist in the absence of the put. The Fund
will pay a brokerage commission each time it buys a put or call, sells a call,
or buys or sells an underlying investment in connection with the exercise of a
put or call. Such commissions may be higher than those that would apply to
direct purchases or sales of such underlying investments. Premiums paid for
options are small in relation to the market value of the related investments,
and consequently, put and call options offer large amounts of leverage. The
leverage offered by trading in options could result in the Fund's net asset
value being more sensitive to changes in the value of the underlying
investments.
In the future, the Fund may employ Hedging Instruments and strategies
that are not presently contemplated but which may be developed, to the extent
such investment methods are consistent with the Fund's investment objective,
legally permissible and adequately disclosed.
B-21
<PAGE>
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
The Fund 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 Fund 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 Fund 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 Fund's assets
committed to margin and option premiums, and (ii) enter into non-hedging
transactions, provided, that the Fund may not enter into such non-hedging
transactions if, immediately thereafter, the sum of the amount of initial margin
deposits on the Fund'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. The Fund
intends to engage in Futures transactions and options thereon only for hedging
purposes. Margin deposits may consist of cash or securities acceptable to the
broker and the relevant contract market.
Transactions in options by the Fund are subject to limitations
established by each of the exchanges governing the maximum number of options
that may be written or held by a single investor or group of investors acting in
concert, regardless of whether the options were written or purchased on the same
or different exchanges or are held in one or more accounts or through one or
more exchanges or brokers. Thus, the number of options the Fund may write or
hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when the Fund purchases a
Future, the Fund will segregate cash or liquid securities in an amount equal to
the market value of the securities underlying such Future, less the margin
deposit applicable to it.
POSSIBLE RISK FACTORS IN HEDGING
Participation in the options or Futures markets involves investment
risks and transaction costs to which the Fund would not be subject absent the
use of these strategies. If the Adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used.
In addition to the risks discussed above, there is also a risk in using
short hedging by selling Futures to attempt to protect against decline in value
of the Fund's 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 Fund'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
B-22
<PAGE>
relationship between the cash and Futures markets. Second, the liquidity of the
Futures markets depend on participants entering into offsetting transactions
rather than making or taking delivery. To the extent participants decide to make
or take delivery, liquidity in the Futures markets could be reduced, thus
producing distortion. Third, from the point-of-view of speculators, the deposit
requirements in the Futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
Futures markets may cause temporary price distortions.
If the Fund uses Hedging Instruments to establish a position in the
debt securities markets as a temporary substitute for the purchase of individual
debt securities (long hedging) by buying Futures and/or calls on such Futures or
on debt securities, it is possible that the market may decline; if the Adviser
then determines not to invest in such securities at that time because of
concerns as to possible further market decline or for other reasons, the Fund
will realize a loss on the Hedging Instruments that is not offset by a reduction
in the price of the debt securities purchased.
SHORT SALES. The Fund may make "short sales against the box." A short
sale is effected by selling a security that the Fund does not own. A short sale
is against the box to the extent that the Fund contemporaneously owns, or has
the right to obtain without payment, securities identical to those sold short.
The Fund may not enter into a short sale, including a short sale against the
box, if, as a result, more than 25% of its total assets would be subject to such
short sales. The Fund generally will recognize any gain (but not loss) for
federal income tax purposes at the time that it makes a short sale against the
box.
LEVERAGE. In seeking to enhance investment performance, the Fund may
increase its ownership of securities by borrowing at fixed rates of interest up
to the maximum extent permitted under the 1940 Act (presently 50% of net assets)
and investing the borrowed funds, subject to the restrictions stated in the
Prospectus. Any such borrowing will be made only pursuant to the requirements of
the 1940 Act and will be made only to the extent that the value of the Fund's
assets less its liabilities, other than borrowings, is equal to at least 300% of
all borrowings including the proposed borrowing. If the value of the Fund's
assets, so computed, should fail to meet the 300% asset coverage requirement,
the Fund 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 Fund would not otherwise
incur, so that it may have little or no net investment income during periods of
substantial borrowings. Since substantially all of the Fund's assets fluctuate
in value, but borrowing obligations are fixed when the Fund has outstanding
borrowings, the net asset value per share of the Fund correspondingly will tend
to increase and decrease more when the Fund's assets increase or decrease in
value than would otherwise be the case. The Fund's policy regarding use of
leverage is a fundamental policy, which may not be changed without approval of
the shareholders of the Fund.
B-23
<PAGE>
SPECIAL SITUATIONS. A "special situation" arises when, in the opinion
of the Adviser, the securities of a particular issuer will be recognized and
appreciate in value due to a specific development with respect to that issuer.
Developments creating a special situation might include, among others, a new
product or process, a technological breakthrough, a management change or other
extraordinary corporate event, or differences in market supply of and demand for
the security. Investment in special situations may carry an additional risk of
loss in the event that the anticipated development does not occur or does not
attract the expected attention.
FUTURE DEVELOPMENTS. The Fund 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 Fund's investment
objective, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Fund's Prospectus and Statement of Additional
Information will be amended or supplemented as appropriate to discuss any such
new investments.
REAL ESTATE INVESTMENT TRUSTS ("REITs"). The Fund may invest in REITs.
REITs are trusts that invest primarily in commercial real estate or real estate
related loans. The value of an interest in a REIT may be affected by the value
and the cash flows of the properties owned or the quality of the mortgages held
by the trust.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of investment restrictions that are
fundamental policies and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. A "majority of the
outstanding voting securities" of the Fund for this purpose means the lesser of
(i) 67% of the shares of the Fund represented at a meeting at which more than
50% of the outstanding shares are present in person or represented by proxy or
(ii) more than 50% of the outstanding shares. Unless otherwise indicated, all
percentage limitations apply only at the time the investment is made; any
subsequent change in any applicable percentage resulting from fluctuations in
value will not be deemed an investment contrary to these restrictions.
Under the following fundamental restrictions the Fund may not:
(1) With respect to 75% of its total assets, invest more
than 5% of its total assets (taken at market value at the time
of each investment) in the securities of any one issuer or
purchase more than 10% of the outstanding voting securities of
any one company or more than 10% of any class of a company's
outstanding securities, except that these restrictions shall
not apply to securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities ("U.S.
government securities").
B-24
<PAGE>
(2) Invest more than 25% of the Fund's assets in the
securities of issuers engaged in the same industry.
(3) Borrow money, except that (i) the Fund may borrow in
amounts up to 33 1/3% of its total assets for temporary or
emergency purposes, (ii) the Fund may borrow for investment
purposes to the maximum extent permissible under the 1940 Act
(I.E., presently 50% of net assets), and (iii) the Fund may
obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities. This
policy shall not prohibit the Fund's engaging in reverse
repurchase agreements and similar investment strategies
described in the Prospectus and Statement of Additional
Information, as they may be amended from time to time.
(4) Invest in real estate (including limited partnership
interests but excluding securities of companies, such as real
estate investment trusts, which deal in real estate or
interests therein); provided that the Fund may hold or sell
real estate acquired as a result of the ownership of
securities.
(5) Purchase or sell commodities or commodity contracts,
except to the extent that the Fund may do so in accordance
with applicable law and the Prospectus and Statement of
Additional Information, as they may be amended from time to
time, and without registering as a commodity pool operator
under the Commodity Exchange Act. The Fund may engage in
transactions in put and call options on securities, indices,
futures contracts on securities and indices, put and call
options on such futures contracts, and may purchase hybrid
instruments.
(6) Engage in underwriting of securities issued by others,
except to the extent that the Fund may be deemed to be an
underwriter in connection with the disposition of portfolio
securities of the Fund.
(7) 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.
(8) Issue senior securities as defined in the 1940 Act,
except that the Fund may enter into repurchase agreements,
reverse repurchase agreements, 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.
The following additional restrictions are not fundamental policies and
may be changed by the Directors without a vote of shareholders. The Fund may
not:
B-25
<PAGE>
(9) 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.
(10) 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 on a delayed- delivery basis and
collateral and initial or variation margin arrangements with
respect to options, futures contracts and options on futures
contracts. In addition, a Portfolio may pledge assets in
reverse repurchase agreements and similar investment
strategies described in the Prospectus and Statement of
Additional Information, as they may be amended from time to
time.
(11) Enter into any repurchase agreement maturing in more
than seven days or invest in any other illiquid security if,
as a result, more than 15% of the Fund'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.
(12) 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.
DIRECTORS AND OFFICERS
The following table lists the Directors and executive officers of the
Corporation, their ages, business addresses, and principal occupations during
the past five years. For the purposes of this Statement of Additional
Information, the SunAmerica Mutual Funds ("SAMF") consist of SunAmerica Equity
Funds, SunAmerica Income Funds, SunAmerica Money Market Funds, Inc., Style
Select Series, Inc. and SunAmerica Strategic Investment Series, Inc. An asterisk
indicates those Directors who are interested persons of the Corporation within
the meaning of the 1940 Act.
B-26
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Name, Age and Address Position With the Corporation Principal Occupations
During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C
S. James Coppersmith, 67 Director Retired; formerly, President and
7 Elmwood Road General Manager, WCVB-TV, a
Marblehead, MA 01945 division of the Hearst Corp. (1982
to 1994); Director/Trustee of SAMF
and Anchor Series Trust ("AST")
- --------------------------------------------------------------------------------------------------------------------
Samuel M. Eisenstat, 60 Chairman of the Board Attorney, sole practitioner,
430 East 86th Street Of Counsel, Kramer, Levin, Naftalis
New York, NY 10028 & Frankel; Chairman of the Boards
of Directors/ Trustees of SAMF and
AST.
- --------------------------------------------------------------------------------------------------------------------
Stephen J. Gutman, 56 Director Partner and Managing Member of B.B.
515 East 79th Street Associates LLC (menswear specialty
New York, NY 10021 retailing and other activities)
since June 1988; Director/Trustee
of SAMF and AST.
- --------------------------------------------------------------------------------------------------------------------
Peter A. Harbeck*, 46 Director and President Director and President, SunAmerica;
The SunAmerica Center Director, SunAmerica Capital
733 Third Avenue Services, Inc. ("SACS"), since
New York, NY 10017-3204 August 1993; Director and
President, SunAmerica Fund Services,
Inc.("SAFS"), since May 1988;
President, SAMF and AST; Executive
Vice President and Chief Operating
Officer, SunAmerica, from May 1988 to
August 1995; Executive Vice President,
SACS, from November 1991 to August
1995; Director, Resources Trust
Company.
- --------------------------------------------------------------------------------------------------------------------
Sebastiano Sterpa, 70 Director Founder and Chairman of the Board
73473 Mariposa Drive of the Sterpa Group (real estate),
Palm Desert, CA 92260 since 1962; Director, Real Estate
Business Service and Countrywide
Financial; Director/Trustee of SAMF.
</TABLE>
B-27
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Name, Age and Address Position With the Corporation Principal Occupations
During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C
- --------------------------------------------------------------------------------------------------------------------
J. Steven Neamtz*, 41 Vice President Executive Vice President of
The SunAmerica Center SunAmerica, since April 1996;
733 Third Avenue Director and President, SACS, since
New York, NY 10017-3204 April 1996; formerly, Executive
Vice President, New England Funds,
L.P. from July 1990 to April 1996.
- --------------------------------------------------------------------------------------------------------------------
Peter C. Sutton*, 35 Treasurer Senior Vice President, SunAmerica,
The SunAmerica Center since April 1997; Treasurer, SAMF
733 Third Avenue and AST, since February 1996; Vice
New York, NY 10017-3204 President and Assistant Treasurer
of SAST and APF since 1994; Vice
President, Seasons Series Trust, since
April 1997; formerly, Vice President,
SunAmerica, from 1994 to 1997;
Controller, SAMF and AST, from March
1993 to February 1996; Assistant
Controller, SAMF and AST, from 1990 to
1993, and Vice President and Assistant
Treasurer, Brazos Mutual Funds since
May, 1999
- --------------------------------------------------------------------------------------------------------------------
Robert M. Zakem, 42 Secretary and Chief Compliance Senior Vice President and General
The SunAmerica Center Officer Counsel, SunAmerica, since April
733 Third Avenue 1993; Executive Vice President,
New York, NY 10017-3204 General Counsel and Director, SACS,
since August 1993; Vice President,
General Counsel and Assistant
Secretary, SAFS, since January 1994;
Vice President, SunAmerica Series
Trust, Anchor Pathway and Seasons
Series Trust; Assistant Secretary,
SunAmerica Series Trust and Anchor
Pathway Fund, since September 1993;
Assistant Secretary, Seasons Series
Trust, since April 1997; formerly,
Vice President and Associate General
Counsel, SunAmerica, from March 1992
to April 1993, and Vice President and
Assistant Secretary of Brazos Mutual
Funds, since May, 1999
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
B-28
<PAGE>
The Directors of the Corporation are responsible for the overall
supervision of the operation of the Corporation and the Fund and perform various
duties imposed on directors of investment companies by the 1940 Act and under
the Corporation's Articles of Incorporation. Directors and officers of the
Corporation 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, Inc. ("SACS" or the "Distributor")
and other affiliates.
The Corporation pays each Director who is not an interested person of
the Corporation or SunAmerica (each a "disinterested Director") annual
compensation, in addition to reimbursement of out-of-pocket expenses in
connection with attendance at meetings of the Directors. Specifically, each
disinterested Director will receive a pro rata portion (based upon the
Corporation's net assets) of an aggregate of $40,000 in annual compensation for
acting as director or trustee to the SunAmerica Mutual Funds and/or AST. In
addition, Mr. Eisenstat receives an aggregate of $2,000 in annual compensation
for serving as Chairman of the Boards of the retail funds of SAMF. Officers of
the Corporation receive no direct remuneration in such capacity from the
Corporation or the Fund.
In addition, each disinterested Director also serves on the Audit
Committee of the Board of Directors. The Audit Committee is charged with
recommending to the full Board the engagement or discharge of the Corporation'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 $5,000 in annual compensation for
serving on the Audit Committees of SAMF and AST. With respect to the
Corporation, each member of the committee will receive a pro rata portion of the
$5,000 annual compensation, based on the relative net assets of the Corporation.
The Corporation also has a Nominating Committee which will be 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 will serve without compensation.
B-29
<PAGE>
The Directors (and Trustees) of the 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
the SAMF (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 SAMF, 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 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.
As of December 31, 1999, the Directors and officers of the Corporation
owned in the aggregate, less than 1% of each Class of the Corporation's total
outstanding shares.
As of February 18, 2000, no shareholders owned of record or
beneficially 5% or more of the outstanding shares of any Class of the Fund.
The following table sets forth information summarizing the aggregate
compensation paid by the fund complex to the disinterested Director for the year
B-30
<PAGE>
ended October 31, 1999. Neither the Directors who are interested persons of the
Corporation nor any officers of the Corporation receive any compensation.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
DIRECTORS AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM RETIREMENT BENEFITS BENEFITS UPON FROM REGISTRANT AND
REGISTRANT ACCRUED AS PART OF RETIREMENT FUND COMPLEX PAID TO
CORPORATION EXPENSES DIRECTORS*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S. James Coppersmith $237 $476 $29,670 $65,000
- --------------------------------------------------------------------------------------------------------------------
Samuel M. Eisenstat $249 $410 $46,083 $69,000
- --------------------------------------------------------------------------------------------------------------------
Stephen J. Gutman $237 $414 $60,912 $65,000
- --------------------------------------------------------------------------------------------------------------------
Sebastiano Sterpa** $239 $293 $ 7,900 $43,333
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Information is as of October 31, 1999 for the six investment companies in
the complex that pay fees to these directors/trustees. The complex
consists of SAMF and AST.
** Mr. Sterpa is not a trustee of AST.
MANAGER, ADVISER, PERSONAL TRADING,
DISTRIBUTOR AND ADMINISTRATOR
SUNAMERICA ASSET MANAGEMENT CORP. SunAmerica Asset Management Corp.,
which was organized as a Delaware corporation in 1982, is located at The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, and acts as the
Investment Manager to the Fund pursuant to the Investment Advisory and
Management Agreement dated February 18, 1999 (the "Management Agreement"), with
the Corporation, on behalf of the Fund. 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. As of December 31, 1999, SunAmerica managed more than
$27 billion of assets. 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.
Under the Management Agreement, SunAmerica manages the affairs of the
Fund including, but not limited to, continuously providing the Fund with
investment management, including investment research, advice and supervision,
determining which securities shall be purchased or sold by the Fund, making
purchases and sales of securities on behalf of the Fund and determining how
B-31
<PAGE>
voting and other rights with respect to securities owned by the Fund shall be
exercised, subject to general review by the Directors.
In carrying out its responsibilities, SunAmerica may employ, retain or
otherwise avail itself of the services of other persons or entities such as the
Adviser, on such terms as SunAmerica shall determine to be necessary, desirable
or appropriate. SunAmerica may retain one or more advisers to manage all or a
portion of the investment portfolio of the Fund, at SunAmerica's own cost and
expense. Retention of one or more advisers, or the employment or retention of
other persons or entities to perform services, shall in no way reduce the
responsibilities or obligations of SunAmerica under the Management Agreement and
SunAmerica shall be responsible for all acts and omissions of such advisers, or
other persons or entities, in connection with the performance of SunAmerica's
duties.
SunAmerica shall pay all of its expenses arising from the performance
of its obligations under the Management Agreement and shall pay any salaries,
fees and expenses of the Corporation's Directors and Officers who are employees
of SunAmerica. SunAmerica shall not be required to pay any other expenses of the
Fund, including, but not limited to, direct charges relating to the purchase and
sale of portfolio securities, interest charges, fees and expenses of independent
attorneys and auditors, taxes and governmental fees, cost of share certificates
and any other expenses (including clerical expenses) of issue, sale, repurchase
or redemption of shares, expenses of registering and qualifying shares for sale,
expenses of printing and distributing reports, notices and proxy materials to
shareholders, expenses of data processing and related services, shareholder
recordkeeping and shareholder account service, expenses of printing and filing
reports and other documents filed with governmental agencies, expenses of
printing and distributing prospectuses, expenses of annual and special
shareholders meetings, fees and disbursements of transfer agents and custodians,
expenses of disbursing dividends and distributions, fees and expenses of
Directors who are not employees of SunAmerica or its affiliates, membership dues
in the Investment Company Institute, insurance premiums and extraordinary
expenses such as litigation expenses.
For the fiscal year ended October 31, 1999, the Fund paid SunAmerica
advisory fees in the amount of 0.85% of the Fund's average daily net assets, or
$257,412. 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 Fund. Further, any waivers or reimbursements made by SunAmerica are
subject to recoupment from the Fund within the following two years, provided
that the Fund is able to effect such payment to SunAmerica and remain in
compliance with the foregoing expense limitations. The potential reimbursements
are accounted for as possible contingent liabilities that are not recordable on
the balance sheet of the Fund until collection is probable, but appear as
footnote disclosure to the Fund's financial statements. At such time as it
appears probable that the Fund 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 Fund for that current period.
B-32
<PAGE>
The Management Agreement continues in effect with respect to the Fund
after an initial two-year term from year to year provided that such continuance
is specifically approved at least annually by (i) the Board of Directors, or by
the vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Fund, and (ii) the vote of a majority of Directors who are not
parties to the Management Agreement or interested persons (as defined in the
1940 Act) of any such party, cast in person, at a meeting called for the purpose
of voting on such approval. The Management Agreement may be terminated with
respect to the Fund at any time, without penalty, on 60 days' written notice
prior to the anniversary date of the previous continuance by SunAmerica or on 60
days' written notice prior to the anniversary date of the previous continuance
by SunAmerica or on 60 days' written notice by the Directors or by the holders
of a majority of the Fund's outstanding voting securities. The Management
Agreement automatically terminates in the event of its assignment (as defined in
the 1940 Act and the rules thereunder).
In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties ("disabling conduct") hereunder on
the part of SunAmerica (and its officers, directors, agents, employees,
controlling persons, shareholders and any other person or entity affiliated with
SunAmerica) SunAmerica shall not be subject to liability to the Corporation or
to any shareholder of the Corporation for any act or omission in the course of,
or connected with, rendering services hereunder, including without limitation,
any error of judgment or mistake of law or for any loss suffered by any of them
in connection with the matters to which the Management Agreement relates, except
to the extent specified in Section 36(b) of the 1940 Act concerning loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services. Except for such disabling conduct, the Corporation
shall indemnify SunAmerica (and its officers, directors, partners, agents,
employees, controlling persons, shareholders and any other person or entity
affiliated with SunAmerica) from any liability arising from SunAmerica's conduct
under the Management Agreement.
THE ADVISER. J.P. Morgan Investment Management, Inc. ("J.P. Morgan"),
acts as Adviser to the Fund pursuant to a subadvisory agreement with SunAmerica
(the "Subadvisory Agreement"). SunAmerica may terminate any agreement with an
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 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 Adviser is independent of SunAmerica and discharges its
responsibilities subject to the policies of the Directors and the oversight and
supervision of SunAmerica, which pays the Adviser's fees. J.P. Morgan is a
wholly-owned subsidiary of J.P Morgan & Co. Incorporated, a bank holding company
organized under the laws of Delaware.
B-33
<PAGE>
The annual rate of fees paid by SunAmerica to the Adviser through
October 31, 1999 was 0.40%, as a percentage of the average daily net assets of
the Fund. Subsequent to December 31, 1999, the highest possible annual rate of
fees payable by SunAmerica to the Adviser is 0.45%. For the fiscal year ended
October 31, 1999, SunAmerica paid the Adviser subadvisory fees in the amount of
$121,105. The Adviser waived $15,142 of subadvisory fees.
The Subadvisory Agreement will continue in effect for a period of two
years from the date of its execution, unless terminated sooner. Thereafter, it
may be renewed from year to year, so long as continuance is specifically
approved at least annually in accordance with the requirements of the 1940 Act.
The Subadvisory Agreement provides that it 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 Agreement, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties ("disabling conduct") on the part of the Adviser (and its
officers, directors, agents, employees, controlling persons, shareholders and
any other person or entity affiliated with the Adviser) the Adviser shall not be
subject to liability to the Corporation or to any shareholder of the Corporation
for any act or omission in the course of, or connected with, rendering services
hereunder, including without limitation, any error of judgment or mistake of law
or for any loss suffered by any of them in connection with the matters to which
the Subadvisory Agreement relates, except to the extent specified in Section
36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services. Except for such
disabling conduct, SunAmerica shall indemnify the Adviser (and its officers,
directors, partners, agents, employees, controlling persons, shareholders and
any other person or entity affiliated with the Adviser) from any liability
arising from the Adviser's conduct under the Subadvisory Agreement.
PERSONAL TRADING. The Corporation and SunAmerica have adopted a written
Code of Ethics (the "Code"), which prescribes general rules of conduct and sets
forth guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code is an individual who is a
trustee, director, officer, general partner or advisory person of the
Corporation 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 Code by Access Persons of the
Corporation or SunAmerica during the quarter.
The Adviser has adopted a written Code of Ethics, and has represented
that the provisions of such Code of Ethics are substantially similar to those in
the Code. Further, the Adviser reports 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 Code by Access Persons of the Fund or SunAmerica.
B-34
<PAGE>
THE DISTRIBUTOR. The Corporation, on behalf of each class of the Fund,
has entered into a distribution agreement (the "Distribution Agreement") with
SunAmerica Capital Services, Inc. ("SACS" or the "Distributor"), a registered
broker-dealer and an indirect wholly owned subsidiary of AIG, to act as the
principal underwriter of the shares of the Fund. 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 Fund through its registered representatives and
authorized broker-dealers. The Distribution Agreement also provides that the
Distributor will pay the promotional expenses, including the incremental cost of
printing Prospectuses, annual reports and other periodic reports respecting the
Fund, for distribution to persons who are not shareholders of the Fund and the
costs of preparing and distributing any other supplemental sales literature.
However, certain promotional expenses may be borne by the Fund (see
"Distribution Plans" below).
Continuance of the Distribution Agreement with respect to the Fund is
in effect for the period of two years from the date of its execution, unless
terminated sooner. Thereafter, it shall continue in full force and effect from
year to year thereafter if such continuance is approved in accordance with the
requirements of the 1940 Act. The Corporation and the Distributor each has the
right to terminate the Distribution Agreement on 60 days' written notice prior
to the anniversary date of the previous continuance, 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 Fund. In some instances, such additional commissions,
fees or other incentives may be offered only to certain firms, including Royal
Alliance Associates, Inc., SunAmerica Securities, Inc., Keogler 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 Fund, 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. Rule 12b-1 under the 1940 Act permits an investment
company directly or indirectly to pay expenses associated with the distribution
of its shares in accordance with a plan adopted by the investment company's
board of directors. Pursuant to such rule, the Fund adopted Distribution Plans
for Class A, Class B and Class II shares (hereinafter referred to as the "Class
A Plan," the "Class B Plan" and the "Class II Plan" and collectively as the
"Distribution Plans").
B-35
<PAGE>
The sales charge and distribution fees of a particular class will not
be used to subsidize the sale of shares of any other class. Reference is made to
"Shareholder Account Information" in the Prospectus for certain information with
respect to the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from the
Fund at an annual rate of up to 0.10% of average daily net assets of the Fund's
Class A shares to compensate the Distributor and certain securities firms for
providing sales and promotional activities for distributing that class of
shares. Under the Class B and Class II Plans, the Distributor may receive
payments from the Fund at the annual rate of up to 0.75% of the average daily
net assets of the Fund's Class B or Class II shares to compensate the
Distributor and certain securities firms for providing sales and promotional
activities for distributing that 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 Fund shares, commissions and other
expenses such as sales literature, prospectus printing and distribution and
compensation to wholesalers.
The Distribution Plans provide that each class of shares of the Fund
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 the Fund by their customers.
It is possible that in any given year the amount paid to the
Distributor under any of the Distribution Plans will exceed the Distributor's
distribution costs as described above.
Set forth are the distribution and account maintenance and service fees
the Distributor received from the Fund for the fiscal year ended October 31,
1999: $42,765 for Class A; $90,071 for Class B; and $90,581 for Class II Shares.
Continuance of the Distribution Plans with respect to the Fund is
subject to annual approval by vote of the Directors, including a majority of the
disinterested Directors. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of the Fund, without approval of the shareholders of the affected
class of shares of the Fund. In addition, all material amendments to the
Distribution Plans must be approved by the Directors in the manner described
above. A Distribution Plan may be terminated at any time without payment of any
penalty by vote of a majority of the disinterested 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 Fund. So long as the Distribution Plans are
in effect, the election and nomination of the Independent Directors of the
Corporation shall be committed to the discretion of the disinterested Directors.
In the Directors' quarterly review of the Distribution Plans, they will consider
the continued appropriateness of, and the level of, compensation provided in the
Distribution Plans. In their consideration of the Distribution Plans with
respect to the Fund, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Fund and the shareholders of the
relevant class of the Fund.
B-36
<PAGE>
THE ADMINISTRATOR. The Corporation has entered into a Service
Agreement, under the terms of which SunAmerica Fund Services, Inc. ("SAFS"), an
indirect wholly owned subsidiary of AIG, acts as a servicing agent assisting
State Street Bank and Trust Company ("State Street") in connection with certain
services offered to the shareholders of the Fund. 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.
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
Corporation. 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 of the Transfer Agent which are paid
by the Corporation). For further information regarding the Transfer Agent, see
the section entitled "Additional Information" below.
The Service Agreement dated February 18, 1999 continues in effect from
year to year provided that such continuance is approved annually by vote of a
majority of the Directors including a majority of the disinterested Directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for
the Fund, 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
the 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 that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
The Adviser's primary consideration in effecting a security transaction
is to obtain the best net price and the most favorable execution of the order.
However, the Adviser may select broker-dealers that provide it with research
services -- analyses and reports concerning issuers, industries, securities,
economic factors and trends -- and may cause the Fund 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
B-37
<PAGE>
brokerage and/or research services provided by the broker-dealer. Certain
research services furnished by brokers may be useful to the Adviser with clients
other than the Corporation and may not be used in connection with the
Corporation. No specific value can be determined for research services furnished
without cost to the Adviser by a broker. The Adviser is 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 Fund by
improving the quality of the Adviser's investment advice. The investment
advisory fee paid by the Fund is not reduced because the Adviser receives such
services. When making purchases of underwritten issues with fixed underwriting
fees, the Adviser may designate the use of broker-dealers who have agreed to
provide the Adviser with certain statistical, research and other information.
Subject to applicable law and regulations, consideration may also be
given to the willingness of particular brokers to sell shares of the Fund as a
factor in the selection of brokers for transactions effected on behalf of the
Fund, subject to the requirement of best price and execution.
The Adviser may effect portfolio transactions through an affiliated
broker-dealer, acting as an agent and not as principal, in accordance with Rule
17e-1 under the 1940 Act and other applicable securities laws.
Although the objectives of other accounts or investment companies that
the Adviser manages may differ from those of the Fund, it is possible that, at
times, identical securities will be acceptable for purchase by the Fund and one
or more other accounts or investment companies that the Adviser manages.
However, the position of each account or company in the securities of the same
issue may vary with the length of the time that each account or company may
choose to hold its investment in those securities. The timing and amount of
purchase by each account and company will also be determined by its cash
position. If the purchase or sale of a security is consistent with the
investment policies of the Fund 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, where the size of the transaction would enable it to negotiate a
better price or reduced commission. However, simultaneous transactions could
adversely affect the ability of the Fund to obtain or dispose of the full amount
of a security that it seeks to purchase or sell, or the price at which such
security can be purchased or sold.
Brokerage commission paid by the Fund for the fiscal year ended October
31, 1999 is $13,100. There were no brokerage commissions paid to affiliated
broker-dealers by the Fund.
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Upon making an investment in shares of the Fund, an open account will
be established under which shares of the Fund 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
B-38
<PAGE>
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 Fund'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 Fund are sold at the respective net asset value next
determined after receipt of a purchase order, plus a sales charge, which, at the
election of the investor, may be imposed (i) at the time of purchase (Class A
shares), (ii) on a deferred basis (Class B and certain Class A shares), or (iii)
may contain certain elements of a sales charge that is imposed at the time of
purchase and that is deferred (Class II shares).
The following table sets forth the front-end sales concessions with
respect to Class A and Class II shares of the Fund, the amount of the front-end
sales concessions reallowed to affiliated broker-dealers, and the contingent
deferred sales charges with respect to Class B and Class II shares of the Fund,
received by the Distributor for the fiscal year ended October 31, 1999.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS II
-----------------------------------------------------------------------------------------------------------------------------
Non-affiliated Contingent Non-affiliatedContingent
Sales Charge Affiliated Broker-dealers Deferred Sales Charges Affiliated Broker-dealersDeferred
Broker-dealers Sales Charges Broker-dealers Sales Charges
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$854,755 $509,061 $232,251 $10,344 $296,559 $151,987 $144,572 $2,111
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
WAIVER OF CDSC. As discussed under "Shareholder Account Information" in
the Prospectus, CDSCs 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
B-39
<PAGE>
the Class B or Class II shares are not redeemed within one year of the death,
they will remain Class B or Class II shares, as applicable, and be subject to
the applicable CDSC, when redeemed.
DISABILITY. CDSCs may be waived on redemptions occurring within one
year after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of
the Code). To be eligible for such waiver, (i) the disability must arise after
the purchase of shares and (ii) the disabled shareholder must have been under
age 65 at the time of the initial determination of disability. If the account is
transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of
the Fund through dealers that 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 Fund. Orders received by the Distributor before the
Fund's close of business will be executed at the offering price determined at
the close of regular trading on the New York Stock Exchange ("NYSE") that day.
Orders received by the Distributor after the Fund's close of business will be
executed at the offering price determined after the close of regular trading of
the NYSE on the next trading day. The Distributor reserves the right to cancel
any purchase order for which payment has not been received by the fifth business
day following the investment. The Fund will not be responsible for delays caused
by dealers.
PURCHASE BY CHECK. Checks should be made payable to the Fund 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 anew 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 Fund 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 Fund at the net asset value next computed after the
check is received, plus the applicable sales charge. Subsequent purchases of
shares of the Fund 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
B-40
<PAGE>
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.
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 Transfer Agent. Federal funds
purchase orders will be accepted only on a day on which the Corporation and the
Transfer Agent are open for business. In order to insure prompt receipt of a
federal funds wire, it is important that these steps be followed:
(1) You must have an existing SunAmerica Fund Account before
wiring funds. To establish an account, complete the New
Account Application and send it via facsimile to SunAmerica
Fund Services, Inc. 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 & Trust Company, Boston,
MA, ABA# 0110-00028; DDA# 99029712, Tax Managed Equity Fund
[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 the Adviser and its
affiliates, as well as members of the selling group and family members of the
foregoing. In addition, the sales charge is waived with respect to shares
purchased by certain qualified retirement plans or employee benefit plans (other
than IRAs), which are sponsored or administered by the Adviser 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, the "Plans"). A Plan will
qualify for purchases at net asset value provided that (a) the initial amount
invested in one or more of the Funds (or in combination with the shares of other
SunAmerica Mutual Funds) is at least $750,000, (b) the sponsor signs a $750,000
Letter of Intent, (c) such shares are purchased by an employer-sponsored plan
B-41
<PAGE>
with at least 75 eligible employees, or (d) the purchases are by trustees or
other fiduciaries for certain employer-sponsored plans, the trustee, fiduciary
or administrator 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 or 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 Funds may be purchased by clients at net asset
value. Shares purchased under this waiver may not be resold except to the Fund.
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 Fund may be entitled to reduced sales charges pursuant to the following
special purchase plans made available by the Corporation.
COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the
sales charge reductions or eliminations by combining purchases of Fund shares
into a single transaction:
(i) an individual, or a "company" as defined in
Section 2(a)(8) of the 1940 Act (which includes corporations
that are corporate affiliates of each other);
(ii) an individual, his or her spouse and their
minor children, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a
pension, profit-sharing, or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the
Code);
(iv) tax-exempt organizations qualifying under
Section 501(c)(3) of the Code (not including 403(b) plans);
B-42
<PAGE>
(v) employee benefit plans of a single employer or
of affiliated employers, other than 403(b) plans; and
(vi) group purchases as described below.
A combined purchase currently may also include shares of other funds in
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 Fund 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 fund that were previously purchased, shares of the
other classes of the same fund, as well as shares of any class of any other fund
or of any of the other funds distributed by SunAmerica Capital Services, Inc.,
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 set forth in the New
Account Application in the Prospectus, establishes a total investment goal in
Class A shares of the Fund to be achieved through any number of investments over
a thirteen-month period, of $50,000 or more. Each investment in the Fund 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 the Fund, 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 Corporation 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
B-43
<PAGE>
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 Fund 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 the Fund 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 Fund under the combined purchase privilege as
described above.
To receive a rate based on combined purchases, group members must
purchase Class A shares of the Fund through a single investment dealer
designated by the group. The designated dealer must transmit each member's
initial purchase to the Distributor, together with payment and completed New
Account Application. After the initial purchase, a member may send funds for the
purchase of Class A shares directly to the Transfer Agent. Purchases of the
Fund'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 to its
designated investment dealer at least annually access to the group's membership
by means of written communication or direct presentation to the membership at a
meeting; (vi) the group or its investment dealer will provide annual
certification, in form satisfactory to the Transfer Agent, that the group then
has at least 25 members and that at least ten members participated in group
purchases during the immediately preceding 12 calendar months; and (vii) the
group or its investment dealer will provide periodic certification, in form
satisfactory to the Transfer Agent, as to the eligibility of the purchasing
members of the group.
Members of a qualified group include: (i) any group that meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is carried
on the records of the group or on the records of any constituent member of the
group as being a good standing employee, partner, member or person of like
status of the group or constituent member; or (iii) any fiduciary purchasing
shares for the account of a member of a qualified group or a member's
B-44
<PAGE>
beneficiary. For example, a qualified group could consist of a trade
association, which would have as its members individuals, sole proprietors,
partnerships and corporations. The members of the group would then consist of
the individuals, the sole proprietors and their employees, the members of the
partnership and their employees, and the corporations and their employees, as
well as the trustees of employee benefit trusts acquiring the Fund's shares for
the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Corporation reserves the right to revise the terms of or to
suspend or discontinue group sales with respect to shares of the Fund at any
time.
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase shares of the
Fund 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 1.0% service fee,
commencing immediately and paid quarterly. In addition, it is essential that a
Net Asset Value Transfer Program Form accompany the New Account Application to
indicate that the investment is intended to participate in the Net Asset Value
Transfer Program. 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 Fund shares.
If the Directors determine that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Corporation may pay the redemption price in whole, or in
part, by a distribution in kind of securities from the Fund in lieu of cash. In
conformity with applicable rules of the SEC, the Funds 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 Fund 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
B-45
<PAGE>
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 Fund, to offer to
repurchase shares that are presented by telephone to the Distributor by
investment dealers. Orders received by dealers must be at least $500. The
repurchase price is the net asset value per share of the applicable class of
shares of the Fund next-determined after the repurchase order is received, less
any applicable CDSC. Repurchase orders received by the Distributor after the
Fund'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 Fund nor the Distributor imposes any such charge. The offer to
repurchase may be suspended at any time.
EXCHANGE PRIVILEGE
Shareholders in the Fund may exchange their shares for the same class
of shares of other funds in the 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 CDSC, if any,
as described in the Prospectus, applicable to such redemptions. In such event,
the period for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining whether the CDSC is applicable upon a redemption of any
of such shares.
A shareholder who acquires Class B or Class II shares through an
exchange from another SunAmerica Mutual Fund will retain liability for any
deferred sales charge outstanding on the date of the exchange. In such event,
the period for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining what, if any, CDSC is applicable upon a redemption of
any of such shares and the timing of conversion of Class B shares to Class A.
B-46
<PAGE>
Because excessive trading (including short-term "market timing"
trading) can hurt the Fund's performance, the Fund may refuse any exchange sell
order (1) if it appears to be a market timing transaction involving a
significant portion of the Fund's assets or (2) from any shareholder account if
previous use of the exchange privilege is considered excessive. Accounts under
common ownership or control, including, but not limited to, those with the same
taxpayer identification number and those administered so as to redeem or
purchase shares based upon certain predetermined market indications, will be
considered one account for this purpose.
In addition, the Fund reserves the right to refuse any exchange
purchase order if, in the judgment of SunAmerica, the Fund 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 Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincide with a "market timing" strategy
may be disruptive to the Fund and may therefore be refused.
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally, 4:00 p.m., Eastern time). The Fund 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 NYSE for the day. All other securities and
assets are valued at fair value following procedures approved by the Directors.
Stocks are stated at value based upon closing sales prices reported on
recognized securities exchanges or, for listed securities having no sales
reported and for unlisted securities, upon last reported bid prices.
Non-convertible bonds, debentures, other long-term debt securities and
short-term securities with original or remaining maturities in excess of 60
days, are normally valued at prices obtained for the day of valuation from a
bond pricing service of a major dealer in bonds, when such prices are available;
however, in circumstances in which the Adviser deems it appropriate to do so, an
over-the-counter or exchange quotation at the mean of representative bid or
asked prices may be used. Securities traded primarily on securities exchanges
outside the United States are valued at the last sale price on such exchanges on
the day of valuation, or if there is no sale on the day of valuation, at the
last-reported bid price. If a security's price is available from more than one
foreign exchange, the Fund uses the exchange that is the primary market for the
security. Short-term securities with 60 days or less to maturity are amortized
to maturity based on their cost to the Fund if acquired within 60 days of
maturity or, if already held by the Fund on the 60th day, are amortized to
maturity based on the value determined on the 61st day. Options traded on
national securities exchanges are valued as of the close of the exchange on
which they are traded. Futures and options traded on commodities exchanges are
valued at their last sale price as of the close of such exchange. Other
securities are valued on the basis of last sale or bid price (if a last sale
price is not available) in what is, in the opinion of the Adviser, the broadest
B-47
<PAGE>
and most representative market, which 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 Fund's total assets.
The Fund's liabilities, including proper accruals of expense items, are
deducted from total assets.
PERFORMANCE DATA
The Fund may advertise performance data that reflects various measures
of total return. An explanation of the data presented and the methods of
computation that will be used are as follows.
The Fund's performance may be compared to the historical returns of
various investments, performance indices of those investments or economic
indicators, including, but not limited to, stocks, bonds, certificates of
deposit, money market funds and U.S. Treasury Bills. Certain of these
alternative investments may offer fixed rates of return and guaranteed principal
and may be insured.
Average annual total return is determined separately for Class A, Class
B and Class II shares in accordance with a formula specified by the SEC. Average
annual total return is computed by finding the average annual compounded rates
of return for the 1-, 5-, and 10-year periods or for the lesser included periods
of effectiveness. The formula used is as follows:
P(1 + T)n = ERV
P = a hypothetical initial purchase payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-
year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion thereof).
The above formula assumes that:
1. The maximum sales load (I.E., either the front-end sales load
in the case of the Class A shares or Class II shares or the
deferred sales load that would be applicable to a complete
B-48
<PAGE>
redemption of the investment at the end of the specified
period in the case of the Class B or Class II shares) is
deducted from the initial $1,000 purchase payment;
2. All dividends and distributions are reinvested at net asset
value; and
3. Complete redemption occurs at the end of the 1-, 5-, or 10-
year periods or fractional portion thereof with all
nonrecurring charges deducted accordingly.
The Fund's average annual total return from date of inception to
October 31, 1999 is as follows:
--------------------------------------------------------------
SHARE CLASS RETURN SINCE INCEPTION*
--------------------------------------------------------------
Class A 2.92%
--------------------------------------------------------------
Class B 4.64%
--------------------------------------------------------------
Class II 7.71%
--------------------------------------------------------------
* Not Annualized. The Fund commenced operations on March 1, 1999.
The Fund 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
The Fund may compare its total return or yield to similar measures as
calculated by various publications, services, indices, or averages. Such
comparisons are made to assist in evaluating an investment in the Fund. The
following references may be used:
(a) Dow Jones Composite Average or its component averages -- an
unmanaged index composed of 30 blue-chip industrial corporation
stocks (Dow Jones Industrial Average), 15 utilities company
stocks (Dow Jones Utilities Average), and 20 transportation
company stocks (Dow Jones Transportation Average). Comparisons of
performance assume reinvestment of dividends.
(b) S&P 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
B-49
<PAGE>
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,
Inc., analyzes price, current yield, risk, total return, and
average rate of return (average annual compounded growth rate)
over specified time periods for the mutual fund industry.
(h) Mutual Fund Source Book, Principia, and other publications and
information services provided by Morningstar, Inc. -- analyzes
price, risk and total return for the mutual fund industry.
(i) Financial publications: Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, Money, Pension
and Investment Age, United Mutual Fund Selector, and Wiesenberger
Investment Companies Service, and other publications containing
financial analyses that rate mutual fund performance over
specified time periods.
(j) Consumer Price Index (or Cost of Living Index), published by the
U.S. Bureau of Labor Statistics -- a statistical measure of
periodic change in the price of goods and services in major
expenditure groups.
(k) Stocks, Bonds, Bills, and Inflation, published by Ibbotson
Associates -- historical measure of yield, price, and total
return for common and small company stock, long-term government
bonds, treasury bills, and inflation.
(l) Savings and Loan Historical Interest Rates as published in the
U.S. Savings & Loan League Fact Book.
(m) Shearson-Lehman Municipal Bond Index and Government/Corporate
Bond Index -- unmanaged indices that track a basket of
intermediate and long-term bonds. Reflect total return and yield
and assume dividend reinvestment.
B-50
<PAGE>
(n) Salomon GNMA Index published by Salomon Brothers Inc. -- Market
value of all outstanding 30-year GNMA Mortgage Pass-Through
Securities that includes single family and graduated payment
mortgages.
(o) Salomon Mortgage Pass-Through Index published by Salomon Brothers
Inc. -- Market value of all outstanding agency mortgage
pass-through securities that includes 15- and 30-year FNMA, FHLMC
and GNMA Securities.
(p) Value Line Geometric Index -- broad based index made up of
approximately 1700 stocks each of which have an equal weighting.
(q) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900
securities on the stock exchanges of countries in Europe,
Australia and the Far East.
(r) Goldman Sachs 100 Convertible Bond Index -- currently includes 67
bonds and 33 preferred stocks. The original list of names was
generated by screening for convertible issues of $100 million or
more in market capitalization. The index is priced monthly.
(s) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated "AA" or
"AAA." It is a value-weighted, total return index, including
approximately 800 issues.
(t) Salomon Brothers Broad Investment Grade Bond Index -- is a
market-weighted index that contains approximately 4700
individually priced investment grade corporate bonds rated "BBB"
or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
(u) Salomon Brothers World Bond Index -- measures the total return
performance of high-quality securities in major sectors of the
international bond market. The index covers approximately 600
bonds from 10 currencies:
Australian Dollars Netherlands Guilders
Canadian Dollars Swiss Francs
European Currency Units UK Pound Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
B-51
<PAGE>
(v) V.P. Morgan Global Government Bond Index -- a total return,
market capitalization-weighted index, rebalanced monthly,
consisting of the following countries: Australia, Belgium,
Canada, Denmark, France, Germany, Italy, Japan, The Netherlands,
Spain, Sweden, the United Kingdom, and the United States.
(w) Shearson Lehman Long-Term Treasury Bond Index -- is comprised of
all bonds covered by the Shearson Lehman Hutton Treasury Bond
Index with maturities of 10 years or greater.
(x) NASDAQ Industrial Index -- is comprised of more than 3,000
industrial issues. It is a value-weighted index calculated on
pure change only and does not include income.
(y) The MSCI Combined Far East Free ex Japan Index -- a market
capitalization weighted index comprised of stocks in Hong Kong,
Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand.
Korea is included in this index at 20% of its market
capitalization.
(z) First Boston High Yield Index -- generally includes over 180
issues with an average maturity range of seven to ten years with
a minimum capitalization of $100 million. All issues are
individually trader-priced monthly.
(aa) Morgan Stanley Capital International World Index -- An
arithmetic, market value-weighted average of the performance of
over 1,470 securities listed on the stock exchanges of countries
in Europe, Australia, the Far East, Canada and the United States.
(bb) Russell 3000 and 2000 Index -- represents the top 3,000 and the
next 2,000 stocks, respectively, traded on the NYSE, American
Stock Exchange and National Association of Securities Dealers
Automated Quotations, by market capitalizations.
(cc) Russell Midcap Growth Index -- contains those Russell Midcap
securities with a greater-than-average growth orientation. The
stocks are also members of the Russell 1000 Growth Index, the
securities in which tend to exhibit higher price-to-book and
price earnings ratios, lower dividend yields and higher
forecasted growth values than the Value universe.
In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolio, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
B-52
<PAGE>
figures. Specifically, the Fund may compare its performance to that of certain
indices that include securities with government guarantees. However, the Fund's
shares do not contain any such guarantees. In addition, there can be no
assurance that the Fund will continue its performance as compared to such other
standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if
any, and the excess of net realized long-term capital gains over net capital
losses ("capital gain distributions"), if any, will be distributed to the
registered holders at least annually. With respect to capital gain
distributions, the Fund's policy is to offset any prior year capital loss carry
forward against any realized capital gains, and accordingly, no distribution of
capital gains will be made until gains have been realized in excess of any such
loss carry forward.
Dividends and distributions will be paid in additional Fund shares
based on the net asset value at the Fund's close of business on the dividend
date or, unless the shareholder notifies the Fund at least five business days
prior to the payment date to receive such distributions in excess of $10 in
cash.
TAXES. The Fund intends to qualify and elect to be treated as a
regulated investment company ("RIC") under the Code. As long as the Fund so
qualifies, the Fund (but not its shareholders) will not be subject to federal
income tax on the part of its net ordinary income and net realized capital gains
that it distributes to shareholders. The Fund intends to distribute
substantially all of such income.
In order to be qualified as a RIC, the Fund generally must, among other
things, (a) derive at least 90% of its gross income from dividends, interest,
proceeds from loans of stock or securities, or from the sale or other
disposition of stocks or securities and certain other related income; and (b)
diversify its holdings so that, at the end of each fiscal quarter, (i) 50% of
the market value of the Fund's assets is represented by cash, government
securities, securities of other RICs and other securities limited, in respect of
any one issuer, to an amount no greater than 5% of the Fund'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 RIC, the Fund will not be subject to U.S. Federal income tax on
its income and capital gains that it distributes provided that it distributes to
shareholders at least 90% of its investment company taxable income for the
taxable year. The Fund intends to distribute sufficient income to meet this
qualification requirement.
B-53
<PAGE>
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, the Fund must distribute during each calendar year
(1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses for the 12-month period ending on October 31 of the
calendar year, and (3) all ordinary income and net capital gains for the
previous years that were not distributed during such years. To avoid application
of the excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid
on December 31 of the calendar year if declared by the Fund in October, November
or December of such year, payable to shareholders of record on a date in such
month and paid by the Fund during January of the following year. Any such
distributions paid during January of the following year will be taxable to
shareholders as of such December 31, rather than the date on which the
distributions are received.
Dividends paid by the Fund from its ordinary income and distributions
of the Fund's net realized short-term capital gains (together referred to
hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income, whether or not reinvested. The portion of such dividends
received from the Fund that will be eligible for the dividends received
deduction for corporations will be determined on the basis of the amount of the
Fund's gross income, exclusive of capital gains from the 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.
Any 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)
distributed to shareholders will be 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.
B-54
<PAGE>
Generally, any loss realized on a sale or exchange of shares of the
Fund will be disallowed if other shares of the 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 the Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known. It is not anticipated
that the Fund will qualify to pass through to its shareholders the ability to
claim as a foreign tax credit their respective shares of foreign taxes paid by
the Fund.
Under the Code, gains or losses attributable to fluctuations in
exchange rates that occur between the time the Fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund 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, sale of currencies or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition generally also are
treated as ordinary gain or loss. These gains, referred to under the Code as
"Section 988" gains or losses, increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to its
shareholders as ordinary income.
The Code includes special rules applicable to the listed non-equity
options, regulated futures contracts, and options on futures contracts that the
Fund may write, purchase or sell. Such options and contracts are classified as
Section 1256 contracts under the Code. The character of gain or loss resulting
from the sale, disposition, closing out, expiration or other termination of
Section 1256 contracts, except forward foreign currency exchange contracts, is
generally treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. When call
options written, or put options purchased, by the Fund 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
B-55
<PAGE>
premium paid for the puts or increased by the premium received for calls.
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle consisting of
a listed option, futures contract, or option on a futures contract and of U.S.
Government securities would constitute a "mixed straddle" under the Code. The
Code generally provides with respect to straddles (i) "loss deferral" rules
which may postpone recognition for tax purposes of losses from certain closing
purchase transactions or other dispositions of a position in the straddle to the
extent of unrealized gains in the offsetting position, (ii) "wash sale" rules
which may postpone recognition for tax purposes of losses where a position is
sold and a new offsetting position is acquired within a prescribed period, (iii)
"short sale" rules which may terminate the holding period of securities owned by
the Fund 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
the Fund makes a "constructive sale" of an appreciated financial position (E.G.,
stock). The Fund 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
identical property short, or enters into other similar transactions.
The Fund may purchase debt securities (such as pay-in-kind securities)
that contain original issue discount. Original issue discount that accrues in a
taxable year is treated as earned by the Fund and therefore is subject to the
distribution requirements of the Code. Because the original issue discount
earned by the Fund in a taxable year may not be represented by cash income, the
Fund may have to dispose of other securities and use the proceeds to make
distributions to shareholders.
The Fund 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.
Foreign shareholders generally will be subject to a withholding tax at
the rate of 30% (or lower treaty rate) on any ordinary income dividends paid by
the Fund to shareholders who are non-resident aliens or foreign entities
generally will be subject to a 30% United States withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
B-56
<PAGE>
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in the Fund. Qualification as a regulated
investment company under the Code for tax purposes does not entail government
supervision of management and investment policies.
RETIREMENT PLANS
Shares of the Fund are eligible to be purchased in conjunction with
various types of qualified retirement plans. The summary below is only a brief
description of the Federal income tax laws for each plan and does not purport to
be complete. Further information or an application to invest in shares of the
Fund by establishing any of the retirement plans described below may be obtained
by calling Retirement Plans at (800) 858-8850. However, it is recommended that a
shareholder considering any retirement plan consult a tax adviser before
participating.
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the
Code permit business employers and certain associations to establish pension and
profit sharing plans for employees. Shares of the Fund may be purchased by those
who would have been covered under the rules governing old H.R. 10 (Keogh) Plans,
as well as by corporate plans. Each business retirement plan provides tax
advantages for owners and participants. Contributions made by the employer are
tax-deductible, and participants do not pay taxes on contributions or earnings
until withdrawn.
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits
public school employees and employees of certain types of charitable,
educational and scientific organizations specified in Section 501(c)(3) of the
Code, to purchase shares of the Fund 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.
These IRAs are subject to limitations with respect to the amount that may be
contributed, the eligibility of individuals, 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.
B-57
<PAGE>
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION. 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.
DESCRIPTION OF SHARES
Ownership of the Corporation is represented by transferable shares of
common stock. The total number of shares of which the Fund has authority to
issue is one billion (1,000,000,000) shares of common stock (par value $0.0001
per share), amounting in aggregate par value to one hundred thousand dollars
($100,000.00).
Currently, one series of shares of the Corporation has been authorized
pursuant to the Articles of Incorporation of the Corporation (the "Articles"):
the Tax Managed Equity Fund has been divided into three classes of shares,
designated as Class A, Class B and Class II shares. The Directors may authorize
the creation of additional series of shares so as to be able to offer to
investors additional investment portfolios within the Corporation that would
operate independently from the Corporation's present portfolio, or to
distinguish among shareholders, as may be necessary, to comply with future
regulations or other unforeseen circumstances. Each series of the Corporation's
shares represents the interests of the shareholders of that series in a
particular portfolio of Corporation 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.
B-58
<PAGE>
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
Corporation 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.
In addition, the Directors may be removed by the affirmative vote of a
majority of all the votes entitled to be cast for the election of directors.
All classes of shares 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 II shares are subject to an initial sales charge, a CDSC, a
distribution fee and an ongoing account maintenance and service fee; (v) 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, (vi) each class has
voting rights on matters that pertain to the Rule 12b-1 plan adopted with
respect to such class, except that under certain circumstances, the holders of
Class B shares may be entitled to vote on material changes to the Class A Rule
12b-1 plan, and (vii) each class of shares will be exchangeable only into the
same class of shares of any of the other SunAmerica Mutual Funds that offers
that class. All shares of the Corporation 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 Corporation. In addition, shares have no conversion rights,
except as described above.
The Articles provides, 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 Corporation shall be personally liable
to the Corporation or to stockholders for money damages. The Articles provides
that the Corporation shall indemnify (i) the 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 (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 Corporation's By-Laws and be permitted by law. The duration of
the Corporation shall be perpetual.
B-59
<PAGE>
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE
The following is the offering price calculation for each Class of
shares of the Fund, based on the value of the Fund's net assets as of October
31, 1999.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS II
<S> <C> <C> <C>
Net Assets $25,066,895 $27,524,429 $27,884,152
Number of shares outstanding 1,835,974 2,026,103 2,050,672
Net Asset Value Per Share
(net assets divided by number of shares) $13.65 $13.58 $13.60
Sales Charge for Class A shares: 5.75% of offering
price (6.10% of net asset value per share)* 0.83 --** --
Sales Charge for Class II shares: 1.00% of offering
price (1.01% of net asset value per share)* -- -- 0.14
Offering Price $14.48 $13.58 $13.74
</TABLE>
* Rounded to nearest one-hundreth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial charge. Class B shares may
be subject to a CDSC on redemption of shares within six years of
purchase.
REPORTS TO SHAREHOLDERS. The Corporation sends audited annual and
unaudited semi-annual reports to shareholders of the Fund. In addition, the
Transfer Agent sends a statement to each shareholder having an account directly
with the Corporation 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 as Transfer
Agent for the Fund and in those capacities maintains certain financial and
accounting books and records pursuant to agreements with the Corporation.
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 Corporation's independent accountants and in that capacity examines the
annual financial statements of the Corporation. The firm of Swidler Berlin
B-60
<PAGE>
Shereff Friedman, LLP, The Chrysler Building, 405 Lexington Avenue, New York, NY
10174, has been selected as legal counsel to the Corporation.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 858-8850 or writing the Fund at SunAmerica Fund Services, Inc.,
Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New
York 10017-3204.
B-61
<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.
CA Bonds rated Ca represent obligations that are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings.
Appendix-1
<PAGE>
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
Appendix-3
<PAGE>
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or for other reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation: (2) nature of and provisions of the
obligation; and (3) protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions that
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or 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.
Appendix-4
<PAGE>
CCC Debt rated CCC has a current identifiable vulnerability to default and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
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) Articles of Incorporation of Registrant. Incorporated by
reference to Exhibit (a) to the Registrant's initial
Registration Statement on Form N-1A, filed on December 22,
1998.
(b) By-Laws of Registrant.*
(c) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibits (a) and (b) above.
(d) (1) Investment Advisory and Management Agreement between the
Registrant and SunAmerica Asset Management Corp.*
(2) Subadvisory Agreement between the Registrant and J.P.
Morgan Investment Management, Inc.*
(e) (1) Distribution Agreement between the Registrant and
SunAmerica Capital Services, Inc.*
(2) [Form of] Selling Agreement*
(f) Disinterested Directors Retirement Plan*
(g) Custodian Contract between the Registrant and State Street
Bank and Trust Company.*
(h) (1) Transfer Agency and Service Agreement between the
Registrant and State Street Bank and Trust Company.*
(2) Service Agreement between the Registrant and SunAmerica
Fund Services, Inc.*
(i) Opinion and Consent of Counsel. Filed herewith
(j) Consent of PricewaterhouseCoopers LLP, independent auditors
for the Registrant.*
(k) Not Applicable
(l) Not Applicable
(m) (1) Distribution Plan pursuant to Rule 12b-1 (Class A
Shares).*
(2) Distribution Plan pursuant to Rule 12b-1 (Class B
Shares).*
(3) Distribution Plan pursuant to Rule 12b-1 (Class II
Shares).*
(n) Not applicable.
(o) (1) Rule 18f-3 Plan.*
(2) Power of Attorney*
- ----------------------
*Incorporated herein by reference to identically numbered Exhibit of the
Registrant's Registration Statement on Form N-1A (File No. 333-69517), filed on
February 26, 1999.
C-1
<PAGE>
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
Article VII of the Registrant's By-Laws relating to the indemnification
of officers and trustees is quoted below:
ARTICLE VII
INDEMNIFICATION
SECTION 7.01. 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 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").
SECTION 7.02. PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Section 7.01 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 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 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
C-2
<PAGE>
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 7.02 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.
SECTION 7.03. ADVANCE PAYMENT OF EXPENSES. Reasonable expenses
(including attorney's 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.
SECTION 7.04. 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 of 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. 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.
SECTION 7.05. 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.
C-3
<PAGE>
SECTION 7.06. SEVERABILITY: DEFINITIONS. The invalidity or
unenforceability of any provision of this Article VII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
By-Law" in this Article VII means this Article VII in its entirety.
* * * * * * * * * * * * * *
Section 8 of the Articles of Incorporation provide 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 (as limited by the Investment Company Act), including the
advance of expenses under the procedures and to the full extent as shall be
authorized by the Board of Directors or the Corporation's By-Laws and be
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 bylaws, resolutions or contract implementing such
provisions or such further indemnification arrangements as may be permitted by
law. No amendment of the Charter of the Corporation or repeal of any of its
provisions shall limit or eliminate the right of indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
(6) To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted (as limited by the Investment Company Act), no
director or officer of the Corporation shall be personally liable to the
Corporation or its stockholders for money damages. No amendment of the Charter
of the Corporation or repeal of any of its provisions shall limit or eliminate
the limitation of liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment or repeal.
The Investment Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties ("disabling conduct") on the part of the Investment
Adviser (and its officers, directors, agents, employees, controlling persons,
shareholders and any other person or entity affiliated with the Investment
Adviser, the Investment Adviser shall not be subject to liability to the
Corporation or to any shareholder of the Corporation for any act or omission in
the course of, or connected with, rendering services, including without
limitation, any error of judgment or mistake or law or for any loss suffered by
any of them in connection with the matters to which the Investment Advisory
Agreement relates, except to the extent specified in Section 36(b) of the
Investment Company Act of 1940 concerning loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services. Except
for such disabling conduct, the Corporation shall indemnify the Investment
Adviser (and its officers, directors, partners, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Investment Adviser) from any liability arising from the Investment Adviser's
conduct under the Investment Advisory Agreement.
C-4
<PAGE>
Item 26. Business and other Connections of Investment Adviser
Information concerning the business and other connections of SunAmerica
Asset Management Corp. is incorporated herein by reference to SunAmerica Asset
Management Corp.'s Form ADV (File No. 801-19813), which is currently on file
with the Securities and Exchange Commission. Reference is also made to the
caption "Fund Management" in the Prospectus constituting Part A of the
Registration Statement and "Manager, Adviser, Personal Trading, Distributor and
Administrator" and "Directors and Officers" constituting Part B of the
Registration Statement.
J.P. Morgan Investment Management, Inc., the Adviser, is primarily
engaged in the business of rendering investment advisory services. Reference is
made to the recent Form ADV (File No. 801-21011), which is currently on file
with the Securities and Exchange Commission for a description of the names and
employment of the directors and officers, and other required information.
Item 27. Principal Underwriters
(a) The principal underwriter of the Registrant also acts as principal
underwriter for:
Brazos Mutual Funds
SunAmerica Equity Funds
SunAmerica Income Funds
SunAmerica Money Market Funds, Inc.
SunAmerica Style Select 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 President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
J. Steven Neamtz President and Director None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Robert M. Zakem Executive Vice President, General Director, Secretary and Chief
The SunAmerica Center Counsel and Director Compliance Officer
733 Third Avenue
New York, NY 10017-3204
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Name and Principal
Business Address Position With Underwriter Position With the Registrant
- ------------------ ------------------------- ----------------------------
<S> <C> <C>
Susan L. Harris Secretary None
SunAmerica, Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
Debbie Potash-Turner Controller None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
</TABLE>
(c) Inapplicable.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, MA
02171, and its affiliate, National Financial Data Services, P.O. Box 419572,
Kansas City, MO 64141-6572, serve as custodian and as Transfer Agent for the
Fund and in those capacities maintain certain financial and accounting books and
records pursuant to agreements with the Corporation.
SunAmerica Asset Management Corp. is located at 733 Third Avenue, New York, New
York 10017. It 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.
J.P. Morgan Investment Management, Inc. is located at 60 Wall Street, New York,
New York 10260. It 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.
C-6
<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 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 25th day of February, 2000.
SunAmerica Strategic Investment Series, Inc.
By: /s/ PETER A. HARBECK
---------------------------------------------
Peter A. Harbeck President
Pursuant to the requirements of the 1933 Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
<TABLE>
<S> <C>
* Treasurer
- --------------------------------- (Principal Financial and Accounting Officer)
Peter C. Sutton
* Director
- ----------------------------------
S. James Coppersmith
* Director
- ----------------------------------
Samuel M. Eisenstat
/s/ PETER A. HARBECK President and Director (Principal and February 25, 2000
- ---------------------------------- Executive Officer)
Peter A. Harbeck
* Director
- ----------------------------------
Stephen J. Gutman
* Director
- ----------------------------------
Sebastiano Sterpa
BY: /s/ ROBERT M. ZAKEM February 25, 2000
- -----------------------
Robert M. Zakem
Attorney-in-Fact
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
(i) Opinion and Consent of Counsel
(j) Consent of Independent Accountants
February 28, 2000
SunAmerica Strategic Investment Series, Inc.
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Ladies and Gentlemen:
This opinion is being furnished in connection with the filing by SunAmerica
Strategic Investment Series, Inc. (the "Corporation"), a Maryland corporation,
of Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(the "Amendment") which definitely registers 100,000,000 shares of beneficial
interest, $.0001 par value (the "Shares").
I am familiar with the proceedings taken by the Corporation in connection
with the authorization, issuance and sale of the Shares. In addition, I have
examined the Corporation's Articles of Incorporation, its By-Laws and such other
documents that have been deemed relevant to the matters referred to in this
opinion.
Based upon the foregoing, I am of the opinion that the Shares registered by
the Amendment are legally issued, fully paid and non-assessable shares of
beneficial interest of the Corporation.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Amendment of the Corporation, and to
the filing of this opinion under the securities laws of any state
Very truly yours,
SUNAMERICA ASSET MANAGEMENT CORP.
By: /s/ Robert M. Zakem
-------------------
Robert M. Zakem
Senior Vice President and
General Counsel
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this Post-Effective Amendment No. 2
to the registration statement on Form N-1A ("Registration Statement) of our
report dated December 13, 1999, relating to the financial statements and
financial highlights appearing in the October 31, 1999 Annual Report to
Shareholders of SunAmerica Strategic Investment Series, Inc. - Tax Managed
Equity Fund, which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the heading "Financial
Highlights" in the Prospectus and under the heading "Additional Information -
Independent Accountants and Legal Counsel" in the Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
February 24, 2000
