<PAGE>
As filed with the Securities and Exchange Commission on July 25, 1997
File Nos. 33-6502; 811-4708
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
---
Post-Effective Amendment No. 22 X
---
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY
ACT OF 1940
---
Amendment No. 19 X
---
(Check appropriate box or boxes)
SUNAMERICA INCOME FUNDS
(Exact Name of Registrant as Specified in Charter)
The SunAmerica Center
733 Third Avenue - Third Floor
New York, NY 10017-3204
(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, Third Floor
New York, NY 10017-3204
(Name and Address of Agent for Service)
Copy to:
Margery K. Neale, Esq.
Shereff, Friedman, Hoffman, & Goodman, LLP
919 Third Avenue
New York, NY 10022
It is proposed that the filing will become effective (check appropriate box)
immediately upon filing pursuant X on July 28, 1997 pursuant
- --- ---
to paragraph (b) to paragraph (b)
60 days after filing pursuant on (date) pursuant to paragraph
- --- ---
to paragraph (a) (a) of Rule 485
-------------------------
<PAGE>
The Registrant has previously elected to register an indefinite number of
shares of beneficial interest, par value $.01 per share under the Securities Act
of 1933, pursuant to Rule 24f-2 under the Investment Company Act 1940.
Registrant filed an amended Rule 24f-2 Notice for its fiscal year ended March
31, 1997 on May 27, 1997.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title Amount Proposed Proposed
of of Maximum Maximum Amount
Securities Shares Offering Aggregate of
Being Being Price Offering Registration
Registered Registered Per Share Price Fee
<S> <C> <C> <C> <C>
Beneficial 27,846,564 $7.48 $208,334,571 $0*
Interest
$.01 Par Value
</TABLE>
* This calculation has been made pursuant to Rule 24e-2 under the
Investment Company Act of 1940, as amended, Registrant, during its fiscal year
ended March 31, 1997 redeemed or repurchased 50,461,295 shares. Of these shares,
22,614,731 were previously used for a reduction pursuant to Paragraph ( c) of
Rule 24f-2. 27,846,564 shares are being used for reduction pursuant to Paragraph
( a) of Rule 24e-2 for purposes of this amendment. No previous filing, other
than that described above, during Registrant's current fiscal year has utilized
redeemed or repurchased shares for purposes of such a reduction. No minimum fee
is due.
<PAGE>
SUNAMERICA INCOME FUNDS
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Under the Securities Act of 1933
--------------------------------
PART A
Item No. Registration Statement Caption Caption in Prospectus
- ---------- ------------------------------- ---------------------------------
1 Cover Page Cover Page
2 Synopsis Summary of Fund Expenses
3 Condensed Financial Information Financial Highlights; Performance
Data
4 General Description of Investment Objectives and
Registrant Policies; Investment Techniques
and Risk Factors; Investment
Restrictions; General Information
5 Management of the Fund Management of the Trust; Portfolio
Transactions and Brokerage and
Turnover
5A Management's Discussion of Fund *
Performance
6 Capital Stock and Other Dividends, Distributions and
Securities Taxes; General Information
7 Purchase of Securities Being Purchase of Shares; Determination
Offered of Net Asset Value
8 Redemption or Repurchase Redemption of Shares; Exchange
Privilege
9 Pending Legal Proceedings Inapplicable
PART B Caption in Statement
Item No. Registration Statement Caption of Additional Information
- -------- ------------------------------ -------------------------
10 Cover Page Cover Page
11 Table of Contents Table of Contents
12 General Information and History History of the Funds
13 Investment Objectives and Investment Objectives and
Policies; Investment Policies
Restrictions; Appendix
14 Management of the Fund Trustees and Officers
15 Contact Persons and Principal Inapplicable
Holders of Securities
16 Investment Advisory and Other Adviser, Personal Securities
Services Trading, Distributor and
Administrator; Additional
Information
<PAGE>
PART B Caption in Statement
Item No. Registration Statement Caption of Additional Information
- -------- ------------------------------ -------------------------
17 Brokerage Allocation Portfolio Transactions and
Brokerage
18 Capital Stock and Other Dividends, Distributions and
Securities Taxes; Description of Shares;
Additional Information
19 Purchase, Redemption and Pricing Additional Information Regarding
of Securities Being Offered Purchase of Shares; Additional
Information Regarding Redemption
of Shares; Determination of Net
Asset Value; Retirement Plans;
Additional Information
20 Tax Status Dividends, Distributions and Taxes
21 Underwriters Adviser, Personal Securities
Trading, Distributor and
Administrator
22 Calculation of Performance Data Performance Data
23 Financial Statements Financial Statements
PART C
The information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.
* Included in the Annual Report to Shareholders for the fiscal year ended
March 31, 1997.
<PAGE>
SUNAMERICA INCOME FUNDS
THE SUNAMERICA CENTER, 733 THIRD AVENUE, NEW YORK, NY 10017-3204
GENERAL MARKETING AND SHAREHOLDER INFORMATION
(800) 858-8850
SunAmerica Income Funds is an open-end diversified management investment
company organized as a Massachusetts business trust (the "Trust") with five
different investment funds (each, a "Fund" and collectively, the "Funds").
Each Fund is a separate series of the Trust with distinct investment
objectives and/or strategies. Each Fund is advised and managed by SunAmerica
Asset Management Corp. (the "Adviser"). An investor may invest in one or more
of the following Funds:
SunAmerica U.S. Government Securities Fund ("Government Securities Fund")--
seeks high current income consistent with relative safety of capital by
investing primarily in securities issued or guaranteed by the U.S. government,
or any agency or instrumentality thereof. The Government Securities Fund is
neither insured nor guaranteed by the U.S. government.
SunAmerica Federal Securities Fund ("Federal Securities Fund")--seeks
current income, with capital appreciation as a secondary objective, by
investing primarily in securities issued or guaranteed by the U.S. government
or any agency or instrumentality thereof. Further, a significant portion of
the Fund's assets will be invested in mortgage-backed securities.
SunAmerica Diversified Income Fund ("Diversified Income Fund")--seeks a high
level of current income consistent with moderate investment risk, with
preservation of capital as a secondary objective. The Fund may invest a
significant portion of its assets in lower-rated bonds, commonly referred to
as "junk bonds."
SunAmerica High Income Fund ("High Income Fund")--seeks maximum current
income by investing primarily in high-yield, high-risk corporate bonds. The
High Income Fund invests predominantly in lower-rated bonds, commonly referred
to as "junk bonds."
SunAmerica Tax Exempt Insured Fund ("Tax Exempt Insured Fund")--seeks as
high a level of current income exempt from Federal income taxes as is
consistent with preservation of capital. Although particular securities of the
Fund may be insured as to the timely payment of principal and interest, the
Fund is not insured by any independent parties or governmental entities.
THE DIVERSIFIED INCOME FUND MAY, AND THE HIGH INCOME FUND WILL, INVEST IN
LOWER-RATED BONDS COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES ARE
SPECULATIVE AND MAY BE SUBJECT TO GREATER RISK OF LOSS OF PRINCIPAL AND
INTEREST THAN ARE INVESTMENTS IN HIGHER-RATED BONDS. BECAUSE INVESTMENT IN
SUCH SECURITIES ENTAILS GREATER RISKS, AN INVESTMENT IN THE DIVERSIFIED INCOME
FUND AND HIGH INCOME FUND SHOULD NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM
AND MAY NOT BE APPROPRIATE FOR ALL INVESTORS.
Each Fund currently offers Class A shares and Class B shares. The offering
price is the next-determined net asset value per share, plus for each class a
sales charge which, at the investor's option, may be (i) imposed at the time
of purchase (Class A shares) or (ii) deferred (Class B shares and purchases of
Class A shares in excess of $1 million). Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge
("CDSC") may be imposed on redemptions made within six years of purchase.
Class B shares of each Fund will convert automatically to Class A shares on
the first business day of the month seven years after the issuance of such
Class B shares and at such time will be subject to the lower distribution fee
applicable to Class A shares. Each Class makes distribution and account
maintenance and service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act"). See "Purchase of Shares."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank through which shares may be sold, and are not federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve
Board, or any other agency.
This Prospectus explains concisely what you should know before investing in
any of the Funds. Please read it carefully before investing and retain it for
future reference. You can find more detailed information about the Funds in
the Statement of Additional Information dated July 28, 1997, which is
incorporated by reference into this Prospectus, and further information about
the performance of the Funds in the Trust's Annual Report to Shareholders. The
Statement of Additional Information and Annual Report to Shareholders may be
obtained without charge by contacting the Trust at the address or telephone
number listed above.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
PROSPECTUS DATED JULY 28, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus.......................... Cover
Summary of Fund Expenses............ 2
Financial Highlights................ 4
Investment Objectives and Policies.. 7
Government Securities Fund.......... 7
Federal Securities Fund............. 7
Diversified Income Fund............. 8
High Income Fund.................... 8
Tax Exempt Insured Fund............. 9
Investment Techniques and Risk Fac-
tors............................... 10
Investment Restrictions............. 17
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management of the Trust.............. 17
Purchase of Shares................... 19
Redemption of Shares................. 22
Exchange Privilege................... 24
Portfolio Transactions, Brokerage and
Turnover............................ 24
Determination of Net Asset Value..... 25
Performance Data..................... 25
Dividends, Distributions and Taxes... 26
General Information.................. 27
</TABLE>
SUMMARY OF FUND EXPENSES
A general comparison of the sales arrangements and other non-recurring ex-
penses applicable to Class A shares and Class B shares follows:
<TABLE>
<CAPTION>
GOVERNMENT FEDERAL TAX EXEMPT
SECURITIES SECURITIES DIVERSIFIED HIGH INCOME INSURED
FUND FUND INCOME FUND FUND FUND
----------- ----------- ----------- ----------- -----------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B A B A B
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTIONS
EXPENSES
Maximum Initial Sales
Load(/1/)............. 4.75% None 4.75% None 4.75% None 4.75% None 4.75% None
Maximum Sales Load on
Reinvested Dividends.. None None None None None None None None None None
Maximum Deferred Sales
Load(/2/)............. None 4.00% None 4.00% None 4.00% None 4.00% None 4.00%
Redemption Fees(/3/)... None None None None None None None None None None
Exchange Fees.......... None None None None None None None None None None
ANNUAL FUND OPERATING
EXPENSES(/4/)
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
(NET OF FEE WAIVERS/
EXPENSE REIMBURSEMENTS)
Management Fees........ 0.70% 0.70% 0.52% 0.52% 0.65% 0.65% 0.75% 0.75% 0.50% 0.50%
12b-1 Fees(/5/)........ 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
Other Expenses......... 0.49% 0.48% 0.54% 0.55% 0.42% 0.39% 0.40% 0.36% 0.39% 0.38%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Operating Ex-
penses(/6/)............ 1.54% 2.18% 1.41% 2.07% 1.42% 2.04% 1.50% 2.11% 1.24% 1.88%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- --------
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1,000,000 or more. See "Purchase of
Shares."
(2) Purchases of Class A shares in excess of $1,000,000 will be subject to a
contingent deferred sales charge on redemptions made within one year of
purchase. The contingent deferred sales charge on Class B shares applies
only if a redemption occurs within six years from their purchase date.
(3) A $15.00 fee may be imposed for wire redemptions.
(4) The information provided is based on data for the fiscal year ended March
31, 1997.
(5) 0.25% of the 12b-1 fee comprises an Account Maintenance and Service Fee. A
portion of the Account Maintenance and Service Fee is allocated to member
firms of the National Association of Securities Dealers, Inc. for continu-
ous personal service by such members to investors in the Funds, such as re-
sponding to shareholder inquiries, quoting net asset values, providing cur-
rent marketing material and attending to other shareholder matters. Class B
shareholders who own their shares for an extended period of time may pay
more in Rule 12b-1 distribution fees than the economic equivalent of the
maximum front-end sales charge permitted under the Conduct Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
(6) For the fiscal year ended March 31, 1997, the total operating expenses (be-
fore waivers) for Government Securities Fund Class A and High Income Fund
Class B were: 1.55%, and 2.12%, respectively. All of the foregoing fee
waivers and/or expense reimbursements were voluntary, and were terminated
by the Adviser effective May 16, 1996.
2
<PAGE>
EXAMPLE:
You would pay the following expenses on a $1,000 investment over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end
of each time period. The 5% return and the expenses used in this example should
not be considered indicative of actual or expected performance or expenses both
of which will vary:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GOVERNMENT SECURITIES FUND
(Class A Shares)............................... $62 $94 $127 $222
(Class B Shares)*.............................. $62 $98 $137 $227
FEDERAL SECURITIES FUND
(Class A Shares)............................... $61 $90 $121 $209
(Class B Shares)*.............................. $61 $95 $131 $215
DIVERSIFIED INCOME FUND
(Class A Shares)............................... $61 $90 $121 $210
(Class B Shares)*.............................. $61 $94 $130 $213
HIGH INCOME FUND
(Class A Shares)............................... $62 $93 $125 $218
(Class B Shares)*.............................. $61 $96 $133 $221
TAX EXEMPT INSURED FUND
(Class A Shares)............................... $60 $85 $112 $190
(Class B Shares)*.............................. $59 $89 $122 $195
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
GOVERNMENT SECURITIES FUND
(Class A Shares)............................... $62 $94 $127 $222
(Class B Shares)*.............................. $22 $68 $117 $227
FEDERAL SECURITIES FUND
(Class A Shares)............................... $61 $90 $121 $209
(Class B Shares)*.............................. $21 $65 $111 $215
DIVERSIFIED INCOME FUND
(Class A Shares)............................... $61 $90 $121 $210
(Class B Shares)*.............................. $21 $64 $110 $213
HIGH INCOME FUND
(Class A Shares)............................... $62 $93 $125 $218
(Class B Shares)*.............................. $21 $66 $113 $221
TAX EXEMPT INSURED FUND
(Class A Shares)............................... $60 $85 $112 $190
(Class B Shares)*.............................. $19 $59 $102 $195
</TABLE>
The foregoing examples should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
- --------
* Class B shares convert to Class A shares on the first business day of the
month following the seventh anniversary of the purchase of such Class B
shares. Therefore, with respect to the 10-year expense information, years 8,
9 and 10 reflect the expenses attributable to ownership of Class A shares.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights for the year ended June 30, 1993, for the
period July 1, 1993 to March 31, 1994 and for each of the three years in the
period ended March 31, 1997 for the Government Securities Fund and for each of
the years in the period ended March 31, 1997 for the Federal Securities Fund,
have been audited by Price Waterhouse LLP, each Fund's independent accountants,
whose report on the financial statements containing such information for each
of the five years in the period ended March 31, 1997 is included in the Trust's
Annual Report to Shareholders. The information for the periods from inception
to June 30, 1990 for the Government Securities Fund is derived from the Fund's
financial statements, which have been audited by other independent accountants.
These Financial Highlights should be read in conjunction with each Fund's
financial statements and notes thereto, which are included in the Statement of
Additional Information and are incorporated by reference herein.
GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
NET
GAIN (LOSS) DISTRI-
ON BUTIONS
INVESTMENTS DISTRI- IN EXCESS NET
NET ASSET NET (BOTH DIVIDENDS BUTION OF NET ASSET
VALUE, INVEST- REALIZED TOTAL FROM FROM NET (FROM RETURN INVEST- TOTAL VALUE,
PERIOD BEGINNING MENT AND INVESTMENT INVESTMENT OTHER OF MENT DISTRI- END OF TOTAL
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME SOURCES) CAPITAL INCOME BUTIONS PERIOD RETURN(/2/)
- ------ --------- --------- ----------- ---------- ---------- -------- ------- --------- ------- ------ -----------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/01/93-
03/31/94(/3/) $8.68 $0.28 $(0.34) $(0.06) $(0.14) $ -- $(0.01) $(0.08) $(0.23) $8.39 (0.68)%
03/31/95 8.39 0.61 (0.30) 0.31 (0.47) -- -- -- (0.47) 8.23 3.89
03/31/96 8.23 0.62 0.16 0.78 (0.51) -- -- -- (0.51) 8.50 9.62
03/31/97 8.50 0.59 (0.26) 0.33 (0.48) -- -- -- (0.48) 8.35 3.98
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
06/30/88 $9.71 $0.88 $(0.30) $ 0.58 $(0.88) $ -- $ -- $ -- $(0.88) $9.41 6.64%
06/30/89 9.41 0.87 (0.30) 0.57 (0.87) -- -- -- (0.87) 9.11 6.64
06/30/90 9.11 0.84 (0.21) 0.63 (0.84) -- -- -- (0.84) 8.90 7.61
06/30/91 8.90 0.82 -- 0.82 (0.73) (0.09) -- -- (0.82) 8.90 9.55
06/30/92 8.90 0.73 (0.02) 0.71 (0.57) (0.16) -- -- (0.73) 8.88 8.33
06/30/93(/5/) 8.88 0.64 (0.17) 0.47 (0.44) (0.17) -- -- (0.61) 8.74 5.49
07/01/93-
03/31/94 8.74 0.43 (0.40) 0.03 (0.24) -- (0.01) (0.13) (0.38) 8.39 0.25
03/31/95 8.39 0.56 (0.30) 0.26 (0.41) -- -- -- (0.41) 8.24 3.25
03/31/96 8.24 0.55 0.17 0.72 (0.45) -- -- -- (0.45) 8.51 8.87
03/31/97 8.51 0.54 (0.26) 0.28 (0.43) -- -- -- (0.43) 8.36 3.31
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF NET
ASSETS, TO INVESTMENT PORT-
END OF AVERAGE INCOME TO FOLIO
PERIOD YEAR NET AVERAGE TURN-
ENDED (000'S) ASSETS NET ASSETS OVER
- ------ ---------- -------- ------------ -----
CLASS A
-------
<S> <C> <C> <C> <C>
10/01/93-
03/31/94(/3/) $ 76,586 1.35%(/4/)(/6/) 6.83%(/4/)(/6/) 35%
03/31/95 73,399 1.46(/6/) 7.50(/6/) 105
03/31/96 125,504 1.44(/6/) 7.11(/6/) 142
03/31/97 113,171 1.54(/6/) 7.01(/6/) 148
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C>
06/30/88 $ 191,413 2.04% 9.26% 95%
06/30/89 300,415 2.03 9.59 51
06/30/90 425,890 1.98 9.45 31
06/30/91 513,062 1.98(/6/) 9.31(/6/) 38
06/30/92 1,075,668 1.92 8.21 54
06/30/93(/5/) 1,259,845 1.82(/6/) 7.27(/6/) 73
07/01/93-
03/31/94 886,089 1.95(/4/)(/6/) 6.61(/4/)(/6/) 35
03/31/95 594,779 2.15(/6/) 6.80(/6/) 105
03/31/96 428,772 2.13 6.46 142
03/31/97 289,040 2.18 6.36 148
</TABLE>
FEDERAL SECURITIES FUND
<TABLE>
<CAPTION>
NET
GAIN (LOSS) DISTRI-
ON BUTIONS
INVESTMENTS IN EXCESS NET
NET ASSET NET (BOTH DIVIDENDS OF NET ASSET
VALUE, INVEST- REALIZED TOTAL FROM FROM NET DISTRIBUTION INVEST- TOTAL VALUE,
BEGINNING MENT AND INVESTMENT INVESTMENT FROM CAPITAL MENT DISTRI- END OF TOTAL
PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(/2/)
- ------------ --------- ------- ----------- ---------- ---------- ------------ --------- ------- ------ -----------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/11/93-
03/31/94(/3/) $10.58 $0.22(/1/) $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)%
03/31/95 10.22 0.60(/1/) (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18
03/31/96 9.98 0.68(/1/) 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94
03/31/97 10.43 0.65(/1/) (0.10) 0.55 (0.59) -- -- (0.59) 10.39 5.40
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
03/31/88 $10.64 $0.82 $(0.49) $ 0.33 $(0.84) $ -- $ -- $(0.84) $10.13 3.50%
03/31/89 10.13 0.84 (0.45) 0.39 (0.84) -- -- (0.84) 9.68 3.67
03/31/90 9.68 0.80 0.23 1.03 (0.80) -- -- (0.80) 9.91 10.95
03/31/91 9.91 0.77 0.44 1.21 (0.77) -- -- (0.77) 10.35 12.78
03/31/92 10.35 0.77 0.29 1.06 (0.77) -- -- (0.77) 10.64 10.57
03/31/93 10.64 0.70 0.14 0.84 (0.64) -- -- (0.64) 10.84 8.06
03/31/94 10.84 0.62(/1/) (0.71) (0.09) (0.49) (0.03) (0.01) (0.53) 10.22 (0.89)
03/31/95 10.22 0.63(/1/) (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81
03/31/96 10.01 0.56(/1/) 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13
03/31/97 10.45 0.57(/1/) (0.08) 0.49 (0.52) -- -- (0.52) 10.42 4.82
<CAPTION>
NET RATIO OF NET
ASSETS, RATIO OF INVESTMENT PORT-
END OF EXPENSES INCOME TO FOLIO
PERIOD TO AVERAGE AVERAGE TURN-
PERIOD ENDED (000'S) NET ASSETS NET ASSETS OVER
- ------------ -------- ---------- ------------ -----
CLASS A
-------
<S> <C> <C> <C> <C>
10/11/93-
03/31/94(/3/) $ 592 1.39%(/4/)(/6/) 4.68%(/4/)(/6/) 68%
03/31/95 6,259 1.40(/6/) 6.90(/6/) 267
03/31/96 40,278 1.37 6.12 311
03/31/97 30,509 1.41 6.11 426
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C>
03/31/88 $186,573 1.82% 8.12% 22%
03/31/89 163,942 1.78 8.41 17
03/31/90 141,277 1.92 8.06 21
03/31/91 129,108 1.93 7.67 23
03/31/92 120,454 1.90 7.32 57
03/31/93 121,267 1.85 6.36 97
03/31/94 81,011 1.98 5.79 68
03/31/95 65,631 2.03 6.33 267
03/31/96 26,165 2.01 5.64 311
03/31/97 18,929 2.07 5.46 426
</TABLE>
- -------
(1) Calculated based upon average shares outstanding
(2) Total Return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(6) Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
6/30/91 6/30/93 3/31/94 3/31/95 3/31/96 3/31/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Government Securities
Fund Class A -- -- .10% .07% .04% .01%
Government Securities
Fund Class B .08% .02% .06% .03% -- --
Federal Securities Fund
Class A -- -- 6.74% 1.26% -- --
</TABLE>
4
<PAGE>
The following Financial Highlights for each of the periods through March 31,
1997 for the Diversified Income Fund and the High Income Fund, have been
audited by Price Waterhouse LLP, each Fund's independent accountants, whose
report on the financial statements containing such information for each of the
five periods through March 31, 1997 is included in the Trust's Annual Report to
Shareholders. These Financial Highlights should be read in conjunction with
each Fund's financial statements and notes thereto, which are included in the
Statement of Additional Information and are incorporated by reference herein.
DIVERSIFIED INCOME FUND
<TABLE>
<CAPTION>
NET
GAIN (LOSS) ON NET NET
NET ASSET INVESTMENTS DIVIDENDS ASSET ASSETS, RATIO OF
VALUE, NET (BOTH REALIZED TOTAL FROM FROM NET VALUE, END OF EXPENSES
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD TO AVERAGE
PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(/1/) (000'S) NET ASSETS
- ------------ --------- ---------- -------------- ---------- ---------- ------ ----------- -------- ----------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/05/93 -
10/31/93(/2/)(/5/) $5.05 $0.02(/3/) $ 0.01 $ 0.03 $(0.01) $5.07 0.65% $ 762 1.40%(/4/)
11/01/93 -
3/31/94 5.07 0.13(/3/) (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42(/4/)(/8/)
03/31/95 4.79 0.43(/3/) (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59
03/31/96 4.14 0.39(/3/) 0.16 0.55 (0.40) 4.29 13.78 16,762 1.46
03/31/97 4.29 0.37(/3/) 0.10 0.47 (0.37) 4.39 11.43 22,601 1.42
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4/06/91 -
10/31/91(/6/) $5.29 $0.28 $(0.08) $ 0.20 $(0.28) $5.21 3.40% $ 39,790 0.00%(/4/)(/8/)
10/31/92(/6/) 5.21 0.42 (0.41) 0.01 (0.40) 4.82 0.16 35,409 0.74(/8/)
10/31/93(/5/)(/6/) 4.82 0.38(/3/) 0.24 0.62 (0.37) 5.07 13.35 102,519 1.78(/8/)
11/01/93 -
3/31/94 5.07 0.15(/3/) (0.27) (0.12) (0.16) 4.79 (2.52) 174,072 2.11(/4/)
03/31/95 4.79 0.40(/3/) (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12
03/31/96 4.15 0.36(/3/) 0.17 0.53 (0.38) 4.30 13.09 110,949 2.06
03/31/97 4.30 0.35(/3/) 0.10 0.45 (0.35) 4.40 10.73 78,081 2.04
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME TO
AVERAGE NET PORTFOLIO
PERIOD ENDED ASSETS TURNOVER
- ------------ ------------------- ---------
<S> <C> <C>
CLASS A
-------
10/05/93 -
10/31/93(/2/)(/5/) 8.92%(/4/) 249%
11/01/93 -
3/31/94 8.25(/4/)(/8/) 48
03/31/95 9.58 160
03/31/96 8.96 166
03/31/97 8.68 131
<CAPTION>
CLASS B
-------
<S> <C> <C>
4/06/91 -
10/31/91(/6/) 8.87%(/4/)(/8/) 8%
10/31/92(/6/) 7.81(/8/) 191
10/31/93(/5/)(/6/) 7.53(/8/) 249
11/01/93 -
3/31/94 7.48(/4/) 48
03/31/95 8.98 160
03/31/96 8.42 166
03/31/97 8.05 131
</TABLE>
HIGH INCOME FUND
<TABLE>
<CAPTION>
NET RATIO OF
GAIN (LOSS) ON NET NET EXPENSES
NET ASSET INVESTMENTS DIVIDENDS ASSET ASSETS, TO
VALUE, NET (BOTH REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL YEAR NET
PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(/1/) (000'S) ASSETS
- ------------ --------- ---------- -------------- ---------- ---------- ------ ----------- -------- --------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
03/31/88(/7/) $10.09 $1.20 $(1.03) $0.17 $(1.16) $9.07 1.28% $ 17,709 1.65%(/8/)
03/31/89(/7/) 9.07 1.14 (0.12) 1.02 (1.11) 8.98 11.21 37,122 1.76
03/31/90(/7/) 8.98 1.05 (1.86) (0.81) (1.06) 7.11 (10.45) 23,162 1.94
03/31/91(/7/) 7.11 0.88 (0.27) 0.61 (0.88) 6.84 9.51 19,347 1.90
03/31/92(/7/) 6.84 0.95 1.28 2.23 (1.00) 8.07 35.27 22,607 1.57
03/31/93(/7/) 8.07 0.95 0.18 1.13 (1.08) 8.12 15.05 30,715 1.77
03/31/94(/7/) 8.12 0.87(/3/) (0.14) 0.73 (0.82) 8.03 9.14 33,724 1.72
03/31/95 8.03 0.78(/3/) (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61
03/31/96 6.95 0.67(/3/) 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53
03/31/97 6.95 0.65(/3/) 0.12 0.77 (0.66) 7.06 11.46 41,139 1.50
<CAPTION>
CLASS B
10/01/93 -
03/31/94(/2/) $ 8.18 $0.38(/3/) $(0.17) $0.21 $(0.35) $8.04 2.46% $131,713 2.15%(/4/)(/8/)
03/31/95 8.04 0.73(/3/) (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16(/8/)
03/31/96 6.96 0.62(/3/) 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06(/8/)
03/31/97 6.96 0.61(/3/) 0.12 0.73 (0.62) 7.07 10.78 98,383 2.11(/8/)
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME TO
AVERAGE NET PORTFOLIO
PERIOD ENDED ASSETS TURNOVER
- ------------ -------------------- ---------
CLASS A
-------
<S> <C> <C>
03/31/88(/7/) 11.55%(/8/) 55%
03/31/89(/7/) 12.43 135
03/31/90(/7/) 12.59 112
03/31/91(/7/) 12.77 95
03/31/92(/7/) 13.19 208
03/31/93(/7/) 11.08 232
03/31/94(/7/) 10.34 290
03/31/95 10.82 196
03/31/96 9.36 183
03/31/97 9.10 164
<CAPTION>
CLASS B
-------
10/01/93 -
03/31/94(/2/) 9.07%(/4/)(/8/) 290%
03/31/95 10.26(/8/) 196
03/31/96 8.85(/8/) 183
03/31/97 8.49(/8/) 164
</TABLE>
- -------
(1) Total Return is not annualized and does not reflect sales load
(2) Commencement of sale of respective class of shares
(3) Calculated based upon average shares outstanding
(4) Annualized
(5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(6) Restated to reflect 1.889180183-for-1 stock split effective December 16,
1992
(7) Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993
(8) Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/88 10/31/91 10/31/92 10/31/93 3/31/94 3/31/95 3/31/96 3/31/97
------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Income Fund
Class A -- -- -- -- .62% -- -- --
Diversified Income Fund
Class B -- 2.31% 1.25% .38% -- -- -- --
High Income Fund Class A .42% -- -- -- -- -- -- --
High Income Fund Class B -- -- -- -- .08% .08% .08% .01%
</TABLE>
5
<PAGE>
The following Financial Highlights for each of the periods through March 31,
1997 for the Tax Exempt Insured Fund, have been audited by Price Waterhouse
LLP, the Fund's independent accountants, whose report on the financial
statements containing such information for each of the five periods through
March 31, 1997 is included in the Trust's Annual Report to Shareholders. These
Financial Highlights should be read in conjunction with the Fund's financial
statements and notes thereto, which are included in the Statement of Additional
Information and are incorporated by reference herein.
TAX EXEMPT INSURED FUND
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
ON RATIO OF
INVESTMENTS NET NET EXPENSES
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO
VALUE NET REALIZED TOTAL FROM FROM NET VALUE END OF AVERAGE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET
PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS
- ------------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- --------
CLASS A
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/88 $11.31 $0.82 $ 0.87 $ 1.69 $(0.82) $12.18 15.27% $111,476 1.30%
10/31/89 12.18 0.82 0.09 0.91 (0.82) 12.27 7.53 105,834 1.32
10/31/90 12.27 0.82 (0.07) 0.75 (0.82) 12.20 6.28 89,950 1.31
10/31/91 12.20 0.81 0.21 1.02 (0.81) 12.41 8.62 95,246 1.32
10/31/92 12.41 0.79 (0.07) 0.72 (0.80)(/3/) 12.33 5.93 110,364 1.25
10/31/93(/2/) 12.33 0.70(/4/) 0.50 1.20 (0.74) 12.79 9.95 191,350 1.10(/7/)
11/01/93-
3/31/94 12.79 0.26(/4/) (0.84) (0.58) (0.26) 11.95 (4.61) 165,216 1.28(/5/)(/7/)
03/31/95 11.95 0.63(/4/) 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20(/7/)
03/31/96 12.13 0.59(/4/) 0.29 0.88 (0.59) 12.42 7.37 121,957 1.22
03/31/97 12.42 0.59(/4/) (0.07) 0.52 (0.59) 12.35 4.24 98,376 1.24
<CAPTION>
CLASS B
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/04/93-
10/31/93(/2/)(/6/) $12.84 $0.02(/4/) $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(/5/)
11/01/93-
3/31/94 12.79 0.22(/4/) (0.83) (0.61) (0.23) 11.95 (4.84) 20,765 2.12(/5/)
03/31/95 11.95 0.54(/4/) 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92
03/31/96 12.14 0.50(/4/) 0.29 0.79 (0.51) 12.42 6.58 29,315 1.90
03/31/97 12.42 0.52(/4/) (0.08) 0.44 (0.51) 12.35 3.57 25,053 1.88
<CAPTION>
RATIO OF NET
INVESTMENT
INCOME TO AVERAGE PORTFOLIO
PERIOD ENDED NET ASSETS TURNOVER
- -------------------- ------------------ ---------
CLASS A
-------
<S> <C> <C>
10/31/88 6.85% 20%
10/31/89 6.68 10
10/31/90 6.70 0
10/31/91 6.57 16
10/31/92 6.26 21
10/31/93(/2/) 5.56(/7/) 26
11/01/93-
3/31/94 4.99(/5/)(/7/) 52
03/31/95 5.32(/7/) 162
03/31/96 4.72 46
03/31/97 4.77 51
<CAPTION>
CLASS B
-------
<S> <C> <C>
10/04/93-
10/31/93(/2/)(/6/) 4.09%(/5/) 26%
11/01/93-
3/31/94 4.17(/5/) 52
03/31/95 4.60 162
03/31/96 4.03 46
03/31/97 4.13 51
</TABLE>
- --------
(1) Total return is not annualized and does not reflect sales load
(2) Pursuant to reorganization of the SunAmerica Mutual Funds, the Fund changed
its fiscal year end to March 31
(3) Prior year amounts reclassified to net investment income
(4) Calculated based upon average shares outstanding
(5) Annualized
(6) Commencement of sale of respective class of shares
(7) Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
10/31/93 3/31/94 3/31/95
-------- ------- -------
<S> <C> <C> <C>
Tax Exempt Insured Fund
Class A .10% .11% .04%
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Government Securities Fund is high current
income consistent with relative safety of capital. The investment objective of
the Federal Securities Fund is current income, with capital appreciation as a
secondary objective. The investment objective of the Diversified Income Fund
is a high level of current income consistent with moderate investment risk,
with preservation of capital as a secondary objective. The investment objec-
tive of the High Income Fund is maximum current income. The investment objec-
tive of the Tax Exempt Insured Fund is as high a level of current income ex-
empt from Federal income taxes as is consistent with preservation of capital.
Each Fund seeks to achieve its investment objective through investment primar-
ily in fixed income securities, as described below. There can be no assurance
that the investment objective of a Fund will be achieved.
Except as specifically indicated, the investment policies and strategies de-
scribed herein are not fundamental policies of the Funds and may be changed by
the Board of Trustees (the "Trustees") without the approval of shareholders.
Each Fund's respective investment objective and fundamental investment re-
strictions, however, may not be changed without approval of shareholders of
the affected Fund. See "Investment Restrictions."
GOVERNMENT SECURITIES FUND
The Fund seeks to achieve its investment objective by investing primarily in
securities issued or guaranteed by the U.S. government, or any agency or in-
strumentality thereof ("U.S. government securities"). See "Investment Tech-
niques and Risk Factors--U.S. Government Securities" for a description of the
various types of U.S. government securities in which the Fund may invest. Un-
der normal circumstances, the Fund's strategy is to invest its assets in such
a way so as to minimize the impact of interest rate volatility.
Under normal market conditions, at least 65% of the Fund's assets will be
invested in U.S. government securities, including certain "mortgage-backed se-
curities". In addition to its primary investments, the Fund may invest in
short-term investments, including short-term U.S. government securities, re-
purchase agreements secured by U.S. government securities, and high quality
money market instruments (including commercial paper and bankers' accept-
ances). See "Investment Techniques and Risk Factors" and the Statement of Ad-
ditional Information for a description of other types of securities in which
the Fund may invest, including mortgage-backed securities, asset-backed secu-
rities and zero-coupon securities.
The Adviser considers both the rate of return and the risk of loss in making
investments. While the Adviser anticipates that, over the long term, the Fund
will consist primarily of U.S. government securities, when interest rates are
rising or for temporary defensive purposes, the Fund may also invest rela-
tively greater portions of its assets in short-term investments. The invest-
ment approach of the Adviser will be characterized by gradual, measured
changes, rather than dramatic shifts, in the maturity structure of the Fund to
reflect what the Adviser believes to be measurable interest rate trends. The
Adviser will select debt securities with longer maturities during periods when
interest rates are declining and securities with shorter maturities when in-
terest rates are rising.
Declining interest rates generally encourage strong bond markets; rising in-
terest rates correspondingly tend to foster weak bond markets. As the bond
market weakens, liquidity of a portfolio becomes increasingly important. For
example, in an uncertain market with no clear trend in interest rates, liquid-
ity is a critical factor and effective portfolio maturities may be reduced to
two years or less. In a stable bond market, liquidity would be only a moderate
concern and the maturities may be lengthened to approximately eight to ten
years. In a strong bond market, liquidity would generally be a minor consider-
ation and maturities may range from ten to thirty years.
FEDERAL SECURITIES FUND
The Fund seeks to achieve its objective by investing primarily in U.S. gov-
ernment securities. Under normal circumstances, the Fund's strategy is to in-
vest its assets in such a way so as to maximize capital appreciation in a de-
clining interest rate environment.
7
<PAGE>
Under normal market conditions, at least 80% of the Fund's assets will be
invested in U.S. government securities, including "mortgage-backed securi-
ties". In addition to its primary investments, the Fund may invest in short-
term investments, including short-term U.S. government securities, repurchase
agreements secured by U.S. government securities, and high quality money mar-
ket instruments (including commercial paper and bankers' acceptances); pri-
vately issued collateralized mortgage obligations; and corporate debt securi-
ties. In general, the Adviser anticipates that, over the long term, the Fund's
investments will consist primarily of U.S. government securities. However,
when interest rates are rising or as a temporary defensive strategy, the Fund
may invest a greater portion of its assets in such other types of investments.
See "Investment Techniques and Risk Factors" and the Statement of Additional
Information for a description of the types of securities in which the Fund may
invest, including U.S. government securities, mortgage-backed securities, as-
set-backed securities and zero-coupon securities.
The investment approach of the Adviser will be characterized by gradual,
measured changes, rather than dramatic shifts, in the maturity structure of
the Fund to reflect what the Adviser believes to be measurable interest rate
trends. The Adviser will select debt securities with longer maturities during
periods when interest rates are declining and securities with shorter maturi-
ties when interest rates are rising.
DIVERSIFIED INCOME FUND
The Diversified Income Fund invests in a diversified portfolio of securities
consisting of: (i) U.S. government securities; (ii) foreign government and
corporate debt securities; and (iii) securities issued by domestic corpora-
tions, including lower-rated high-yield securities, without regard to the ma-
turities of such securities. Under normal conditions, at least 65% of
the Fund's total assets will be invested in income-producing securities, and
the Fund's assets will be invested in each of the three categories. In addi-
tion, the Fund will generally have no more than 75% of its total assets in-
vested in any one category. Distributable income may fluctuate as the Fund
shifts assets among the three categories. See "Investment Techniques and Risk
Factors" and the Statement of Additional Information for a description of the
types of securities in which the Fund may invest, including mortgage-backed
securities, asset-backed securities, zero-coupon securities, participation in-
terests, and foreign securities.
The higher yields and high income sought by the Fund are generally obtain-
able from securities in the lower rating categories of the established rating
services. Such securities are rated "Baa" or lower by Moody's Investors Serv-
ice, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's Ratings Services,
a Division of the McGraw-Hill Companies, Inc. ("S&P"). The Fund may invest in
securities rated as low as "C" by Moody's or "D" by S&P. See the Appendix to
the Statement of Additional Information for a description of securities rat-
ings. Such ratings indicate that the obligations are speculative and may be in
default. The Fund is not obligated to dispose of securities whose issuers sub-
sequently are in default or if the rating of such securities is reduced. The
Fund may also invest in unrated securities which, in the opinion of the Advis-
er, offer comparable yields and risks as those securities which are rated. The
weighted average ratings by Moody's as a percentage of all bonds held in the
Diversified Income Fund's portfolio during the fiscal year ended March 31,
1997 were "AAA" 6.67%; "Ba3" 4.49%; "Ba2" 4.16%; "Ba1" 2.80%; "B1" 31.35%;
"B2" 19.76%; "B3" 26.30%; and "Caa" 4.47%. See "Investment Techniques and Risk
Factors--High Yield/High Risk Securities" below.
HIGH INCOME FUND
The High Income Fund seeks to achieve its objective by investing primarily
in high-yield, high-risk corporate bonds which generally are unrated or carry
ratings lower than those assigned to investment grade bonds by S&P or Moody's.
High yield is ordinarily associated with unrated bonds or bonds in the lower
rating categories of the established rating services (securities rated "Baa"
or lower by Moody's or "BBB" or lower by S&P). See the Appendix to the State-
ment of Additional Information for a description of securities ratings. While
providing higher yields, such bonds, whether rated or unrated, are subject to
greater risks than lower-yielding, higher-rated, fixed income securities.
The market value of bonds generally will be affected by changes in the level
of interest rates. An
8
<PAGE>
increase in interest rates will tend to reduce the market value of bonds, and
a decline in interest rates will tend to increase their value. In addition,
bonds with longer maturities, which tend to produce higher yields, are subject
to potentially greater capital appreciation and depreciation than bonds with
shorter maturities. Fluctuations in the market value of bonds subsequent to
their acquisition will not affect cash income from such bonds, but will be re-
flected in net asset value.
Although the bonds in which the High Income Fund will principally invest
will be in the lower rating categories and have speculative characteristics,
it will not invest in bonds rated less than "B" by Moody's or S&P unless the
Adviser believes, as a result of its own analysis as described below, that the
financial condition of the issuer or the protection afforded to the particular
bonds is stronger than would otherwise be indicated by such low ratings. The
Adviser will select not only rated bonds, but may also select unrated bonds
that offer, in its opinion, an above-average yield without undue risk. The
High Income Fund may invest in instruments rated "Ca," "C" or "D" if the Ad-
viser believes that the opportunity for gain is greater than the risk of such
an investment. From time to time, the Fund will invest in securities which are
composed of both fixed income and equity components. See the Appendix to the
Statement of Additional Information for a description of some of the risks as-
sociated with investing in lower-rated securities. The weighted average rat-
ings by Moody's as a percentage of all bonds held in the High Income Fund's
portfolio during the fiscal year ended March 31, 1997 were "Ba2," 0.70%;
"Ba1," 5.60%; "B1," 4.60%; "B2," 22.50%; "B3," 54.10%; and "Caa," 12.5%.
The Adviser considers both the opportunity for gain and the risk of loss in
selecting investments. Consistent with the primary objective, the Adviser an-
ticipates that, under normal conditions, at least 80% of the High Income
Fund's total assets will be invested in bonds, as described above. The remain-
ing assets may be invested in other securities, including U.S. government se-
curities, asset-backed securities, short-term debt instruments, and common and
preferred stock and other equity securities. See "In- vestment Techniques and
Risk Factors" for a description of the types of securities in which the Fund
may invest.
TAX EXEMPT INSURED FUND
The Tax Exempt Insured Fund seeks to achieve its objective by investing, un-
der normal market conditions, at least 80% of its total assets in Municipal
Bonds, the income of which is exempt from Federal income taxes, and at least
65% of its total assets in Municipal Bonds that, in addition to having income
which is exempt from Federal income tax, also are insured as to the scheduled
payment of principal and interest for as long as such bonds are held by the
Fund, without regard to the maturities of such securities. The Fund's policy
of investing 80% of its total assets in Municipal Bonds, the income of which
is exempt from Federal income taxes, is a fundamental policy of the Fund which
may not be changed without the approval of the Fund's shareholders. The Fund
will not invest more than 25% of its total assets in Municipal Securities, the
issuers of which are located in the same state. Further, the Fund will not in-
vest in Municipal Securities rated below the four highest ratings categories
of Moody's or S&P, or if unrated, deemed by the Adviser to be of comparable
quality. On a temporary defensive basis or due to market conditions, the Fund
may invest up to 100% of its total assets in Municipal Notes and Short-Term
Taxable Securities (neither of which are insured), as well as in repurchase
agreements collateralized by such securities. See the Appendix to the State-
ment of Additional Information for more information with respect to ratings.
"Municipal Securities" include long-term (i.e., maturing in over 10 years)
and medium-term (i.e., maturing in 3 to 10 years) municipal bonds ("Municipal
Bonds") as well as short-term (i.e., maturing in 1 day to 3 years) municipal
notes and tax-exempt commercial paper ("Municipal Notes"), and in each case
refers to debt obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their polit-
ical subdivisions, agencies and instrumentalities, the interest from which is,
in the opinion of bond counsel at the time of issuance, exempt from Federal
income tax.
A portion of the Municipal Bonds in which the Fund invests may be issued by
state, county, city or agency authorities established for the purpose of pur-
chasing residential mortgages ("Municipal Housing Bonds"). To the extent prac-
ticable, the Fund will invest in insured Municipal Housing Bonds that are
9
<PAGE>
secured by residential mortgages, when such mortgages are either insured by
the Federal Housing Authority ("FHA") or guaranteed by the Veteran's Adminis-
tration ("VA") of the United States government. Although the Fund will attempt
to geographically diversify its holdings of Municipal Housing Bonds, there may
be similar factors affecting the mortgagor's ability to maintain payments un-
der the underlying mortgages. Such factors could include changes in national
and state policies relating to transfer payments such as unemployment insur-
ance and welfare, and adverse economic developments, particularly those af-
fecting less skilled and low income workers.
Insurance Feature. As discussed above, the Fund will invest at least 65% of
its total assets in Municipal Bonds that, at the time of purchase, either: (1)
are insured under a Mutual Fund Insurance Policy issued to the Fund by Finan-
cial Guaranty Insurance Company ("Financial Guaranty") or another insurer; (2)
are insured under an insurance policy obtained by the issuer or underwriter of
such Municipal Bonds at the time of original issuance thereof (a "New Issue
Insurance Policy"); or (3) are without insurance coverage, provided that, an
escrow or trust account has been established pursuant to the documents creat-
ing the Municipal Bonds and containing sufficient U.S. government securities
backed by the U.S. government's full faith and credit pledge to ensure the
payment of principal and interest on such bonds. If a Municipal Bond already
is covered by a New Issue Insurance Policy when acquired by the Fund, then
coverage will not be duplicated by a Mutual Fund Insurance Policy; if a Munic-
ipal Bond, other than that described in (3) above, is not covered by a New Is-
sue Insurance Policy then it will be covered by a Mutual Fund Insurance Policy
purchased by the Fund. The Fund may also purchase other Municipal Bonds or Mu-
nicipal Notes that are insured. However, in general, Municipal Notes presently
are not issued with New Issue Insurance Policies, and the Fund generally does
not expect to cover Municipal Notes under its Mutual Fund Insurance Policies.
Accordingly, the Fund does not presently expect that any significant portion
of the Municipal Notes it purchases will be covered by insurance.
For the fiscal year ended March 31, 1997, the premiums for a Mutual Fund In-
surance Policy were 0.02% of the average net assets of the Fund.
It should be noted that insurance is not a substitute for the basic credit
of an issuer, but supplements the existing credit and provides additional se-
curity therefor. Moreover, while insurance coverage for the Municipal Bonds
held by the Fund reduces credit risk by insuring that the Fund will receive
payment of principal and interest, it does not protect against market fluctua-
tions caused by changes in interest rates and other factors.
Financial Guaranty. Financial Guaranty is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. Financial Guaranty, domiciled in the
State of New York, commenced its business of providing insurance and financial
guarantees for a variety of investment instruments in January 1984. FGIC Cor-
poration is a subsidiary of General Electric Capital Corporation. Neither FGIC
Corporation nor General Electric Capital Corporation is obligated to pay the
debts of or the claims against Financial Guaranty.
The information relating to Financial Guaranty contained herein has been
furnished by Financial Guaranty. No representation is made herein as to the
accuracy or adequacy of such information subsequent to the date hereof. The
Fund may purchase insurance from Financial Guaranty or from other insurers.
The use of insurance will result in a lower yield to shareholders of the Fund
than would be the case if non-insured securities were purchased.
INVESTMENT TECHNIQUES AND RISK FACTORS
U.S. GOVERNMENT SECURITIES. Each Fund may invest in securities issued or
guaranteed as to principal or interest by the U.S. government, its agencies or
instrumentalities. Direct obligations of the U.S. Treasury include bills,
notes and bonds, which principally differ in their interest rates, maturities
and times of issuance. Such securities are backed by the "full faith and cred-
it" of the United States government. Securities issued or guaranteed by agen-
cies or instrumentalities are supported by (i) the full faith and credit of
the United States, such as obligations of the Government National Mortgage As-
sociation ("Ginnie Mae"), the Farmers Home Administration or the Export-Import
Bank; (ii) the limited authority of the issuer to borrow from the U.S. Trea-
sury, such as obligations of the Student Loan Marketing Association, the Fed-
eral Home Loan Mortgage Associa -
10
<PAGE>
tion ("Freddie Mac"), or the Tennessee Valley Authority; and (iii) the author-
ity of the U.S. government to purchase certain obligations of the issuer, such
as obligations of the Federal National Mortgage Association ("Fannie Mae"),
the Federal Farm Credit System or the Federal Home Loan Banks. No assurance
can be given that the U.S. government will provide financial support to its
agencies and instrumentalities as described in (ii) and (iii) above, other
than as set forth, since it is not obligated to do so by law. As such, the
Fund must look principally to the agency or instrumentality issuing or guaran-
teeing the obligation for ultimate repayment. U.S. government securities also
include certain mortgage-backed securities, described below under "Mortgage-
Backed Securities."
MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed securi-
ties, which directly or indirectly provide funds for mortgage loans made to
residential home buyers. These include securities which represent interests in
pools of mortgage loans made by lenders such as commercial banks, savings and
loan institutions, mortgage bankers and others. Pools of mortgage loans are
assembled for sale to investors by various governmental, government-related
and private organizations.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates. In-
stead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by prepayments resulting from
the sale of the underlying residential property, refinancing or foreclosure
(net of fees or costs which may be incurred). In addition, pre-payment of
principal on mortgage-backed securities, which often occurs when interest
rates decline, can significantly change the realized yield of these securi-
ties. Some mortgage-backed securities are described as "modified pass-
through." These securities entitle the holders to receive all interest and
principal payments owned on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
The principal government guarantor of mortgage-backed securities is Ginnie
Mae. Ginnie Mae is authorized to guarantee, with the full faith and credit of
the U.S. government, the timely payment of principal and interest on securi-
ties issued by approved institutions such as the FHA or VA and backed by pools
of FHA-insured or VA-guaranteed mortgages.
Residential mortgage loans are pooled by various other governmental or pri-
vate entities, including Freddie Mac. Freddie Mac issues Participation Certif-
icates which represent interests in mortgages from Freddie Mac's national
portfolio. Freddie Mac guarantees the timely payment of interest and ultimate
collection of principal.
Fannie Mae purchases residential mortgages from a list of approved
seller/servicers, which include state and federally-chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed
as to timely payment of principal and interest by Fannie Mae.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans and issue fixed-income securities which
are collateralized by mortgage-backed securities issued by Freddie Mac, Fannie
Mae and Ginnie Mae or by pools of conventional mortgages, and are referred to
as "collateralized mortgage obligations" ("CMOs"). Pools created by such non-
governmental issuers and CMOs issued by the pools generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payments in such pools.
However, timely payment of interest and principal of these pools is supported
by various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance. The insurance and guarantees are issued by govern-
mental entities, private insurers and the mortgage poolers. In the case of
CMOs, timely payment of interest and principal is supported by the government-
related securities which collateralize such obligations or by a pool of con-
ventional mortgages. There can be no assurance that the private insurers can
meet their obligations under the policies.
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<PAGE>
The mortgage-backed securities in which the Funds may invest include
stripped mortgage-backed securities. Stripped mortgage-backed securities are
often structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. Stripped
mortgage-backed securities have greater market volatility than other types of
U.S. government securities in which the Funds invest. A common type of
stripped mortgage-backed security has one class receiving some of the interest
and all or most of the principal (the "principal only" class) from the mort-
gage pool, while the other class will receive all or most of the interest (the
"interest only" class). The yield to maturity on an interest only class is ex-
tremely sensitive, not only to changes in prevailing interest rates, but also
to the rate of principal payments, including principal prepayments, on the un-
derlying pool of mortgage assets, and a rapid rate of principal payment may
have a material adverse effect on a Fund's yield. Notwithstanding the Funds'
ability to do so, they will not invest in the "principal only" component of
stripped mortgage-backed securities until further notice. While interest only
and principal only securities are generally regarded as being illiquid, such
securities may be deemed to be liquid if they can be disposed of promptly in
the ordinary course of business at a value reasonably close to that used in
the calculation of the Fund's net asset value per share. Only government in-
terest only and principal only securities backed by fixed-rate mortgages and
determined to be liquid under guidelines and standards established by the
Trustees may be considered liquid securities not subject to a Fund's limita-
tion on investments in illiquid securities.
The Diversified Income Fund, Federal Securities Fund and Government Securi-
ties Fund may also enter into "forward roll" transactions with U.S. government
agencies or financial institutions with respect to the mortgage-backed securi-
ties in which it may invest. A Fund would be required to place cash or liquid
securities in a segregated account with its custodian in an amount equal to
its obligation under the roll; that amount is subject to the limitation on
borrowing described in the Statement of Additional Information.
ASSET-BACKED SECURITIES. Each Fund, other than the Diversified Income Fund,
may invest up to 15% of its net assets in asset-backed securities meeting such
Fund's credit quality restrictions. With respect to Diversified Income, the
Fund may invest in asset-backed securities without regard to the aforemen-
tioned net asset limitation. Asset-backed securities issued by trusts and spe-
cial purpose corporations, are backed by a pool of assets, such as credit card
or automobile loan receivables representing the obligations of a number of
different parties. Corporate asset-backed securities present certain risks.
For instance, in the case of credit card receivables, these securities may not
have the benefit of any security interest in the related collateral. See the
Statement of Additional Information for further information on these securi-
ties.
ZERO-COUPON SECURITIES. The Funds may invest in zero-coupon securities as
follows: (i) the Government Securities Fund, Federal Securities Fund, Diversi-
fied Income Fund and High Income Fund may invest in zero-coupon securities is-
sued by the U.S. Treasury; and, in addition, (ii) the Diversified Income Fund
and High Income Fund may invest in zero-coupon securities issued by both do-
mestic and foreign corporations, and (iii) the Tax Exempt Insured Fund may in-
vest in zero-coupon securities issued by state and local government entities.
Zero-coupon U.S. government securities are: (i) U.S. Treasury notes and bonds
which have been stripped of their unmatured interest coupons and receipts, or
(ii) certificates representing interest in such stripped debt obligations or
coupons. Because a zero-coupon security pays no interest to its holder during
its life or for a substantial period of time, it usually trades at a deep dis-
count from its face or par value and will be subject to greater fluctuations
of market value in response to changing interest rates than debt obligations
of comparable maturities which make current distributions of interest. Because
the Funds accrue taxable income from these securities without receiving cash,
the Funds may be required to sell portfolio securities in order to pay a divi-
dend, depending upon the proportion of shareholders who elect to receive divi-
dends in cash rather than reinvesting dividends in additional shares of the
Funds. Cash distributed or held by the Funds and not reinvested will hinder
the Funds in seeking a high level of current income. Corporate zero-coupon se-
curities are: (i) notes or debentures which do not pay current interest and
are issued at substantial discounts from par value, or (ii) notes or deben-
tures that pay no current interest until a stated date one or more years into
the future, after which the issuer is obligated to pay interest until maturi-
ty, usually at a higher rate than
12
<PAGE>
if interest were payable from the date of issuance and may also make interest
payments-in-kind (e.g., with identical zero-coupon securities). Such corporate
zero-coupon securities, in addition to the risks identified above, are subject
to the risk of the issuer's failure to pay interest and repay principal in ac-
cordance with the terms of the obligation. The Funds must accrue the discount
or interest on high-yield bonds structured as zero-coupon securities as income
even though it does not receive a corresponding cash interest payment until
the security's maturity or payment date. Municipal zero-coupon securities are:
(i) notes or bonds which do not pay current interest and are issued at sub-
stantial discounts from par value, or (ii) notes or bonds that pay no current
interest until a stated date one or more years into the future, after which
the securities convert to interest bearing securities, generally on a semi-
annual basis. The Funds must accrue the discount or interest on the bonds
structured as zero-coupon securities as income even though it does not receive
a corresponding cash interest payment until the security's maturity or payment
date.
PARTICIPATION INTERESTS. The Diversified Income Fund and High Income Fund
may acquire participation interests in senior, fully-secured floating rate
loans that are made primarily to U.S. companies (the "borrower"). Such partic-
ipation interests, which may take the form of interests in, or assignments of,
loans, are acquired from banks which have made loans or are members of lending
syndicates. Each Fund's investments in participation interests are subject to
its 10% of net assets limitation on investments in illiquid securities. The
Funds may purchase only those participation interests that mature in one year
or less, or, if maturing in more than one year, that have a floating rate that
is automatically adjusted at least once each year according to a specified
rate for such investments, such as the percentage of a bank's prime rate. Par-
ticipation interests are primarily dependent upon the creditworthiness of the
borrower for payment of interest and principal. Such borrowers may have diffi-
culty making payments and may have senior securities rated as low as "C" by
Moody's or "D" by S&P. In the event the borrower fails to pay scheduled inter-
est or principal payments, a Fund could experience a reduction in its income
and might experience a decline in the net asset value of its shares.
FOREIGN SECURITIES. The Diversified Income Fund and High Income Fund may in-
vest in U.S. dollardenominated fixed-income securities issued by domestic cor-
porations in any industry. The Funds may also invest in debt obligations
(which may be denominated in U.S. dollars or in non-U.S. currencies), issued
or guaranteed by foreign corporations, certain supranational entities (such as
the World Bank) and foreign governments (including political subdivisions hav-
ing taxing authority), their agencies or instrumentalities, and debt obliga-
tions issued by U.S. corporations which are either denominated in non-U.S.
currencies or traded in foreign markets (e.g., Eurobonds). The Funds may pur-
chase securities issued by issuers in any country; provided that, the Funds
may not invest more than 25% of their respective total assets in the securi-
ties issued by entities domiciled in any one foreign country. Investment in
securities or issuers in non-industrialized countries generally involves more
risk and may be considered highly speculative. There is no restriction as to
the size of the issuer. These investments may include debt obligations such as
bonds, debentures and notes (including variable and floating rate instru-
ments), zero-coupon securities and sinking funds and callable bonds. If a bond
held by a Fund is selling at a premium (or discount) and the issuer exercises
a call or makes a mandatory sinking fund payment, the Fund would realize a
loss (or gain) in market value; the income from the reinvestment of the pro-
ceeds would be determined by current market conditions.
The percentage of the Diversified Income Fund's or High Income Fund's total
assets that will be allocated to foreign securities will vary depending on the
relative yields of foreign and U.S. securities, the economies of foreign coun-
tries, the condition of such countries' financial markets, the interest rate
climate of such countries and the relationship of such countries' currency to
the U.S. dollar. These factors are judged 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. Subsequent foreign currency losses may result in a Fund having
previously distributed more income in a particular period than was available
from investment income, which could result in a return of capital to share-
holders.
The Diversified Income Fund and High Income Fund may each invest in securi-
ties of foreign issuers in the form of American Depositary Receipts
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<PAGE>
(ADRs), European Depositary Receipts (EDRs) or other similar securities con-
vertible into securities of foreign issuers. These securities may not neces-
sarily be denominated in the same currency as the securities into which may be
converted. Each such Fund may also invest in securities denominated in Euro-
pean Currency Units (ECUs). An ECU is a "basket" consisting of specified
amounts of currencies of certain of the twelve member states of the European
Community. See "Foreign Securities" in the Statement of Additional Information
for a further discussion of these types of securities. Securities of foreign
issuers that are represented by ADRs or that are listed on a U.S. securities
exchange are not considered "foreign securities" for purposes of a Fund's 25%
limitation on investments in such securities.
Foreign securities are subject to risks different than those involved in in-
vestment in domestic securities and markets. Foreign investments may be af-
fected favorably or unfavorably by changes in currency rates and exchange-con-
trol regulations and costs will be incurred in connection with conversions be-
tween various currencies. The value of a security may fluctuate as a result of
currency exchange rates in a manner unrelated to the underlying value of the
security. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
uniform accounting, auditing and financial reporting standards and require-
ments comparable to those applicable to U.S. companies. Securities of some
foreign companies may be less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the U.S. In addition, there is generally less governmental reg-
ulation of stock exchanges, brokers and listed companies abroad than in the
U.S. Investments in foreign securities may also be subject to other risks,
different from those affecting U.S. investments, including local political or
economic developments, expropriation or nationalization of assets and imposi-
tion of withholding taxes on dividend or interest payments.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets, de-
termined as of the date of purchase, in illiquid securities including repur-
chase agreements which have a maturity of longer than seven days, securities
with legal or contractual restrictions on resale (restricted securities), and
securities that are not readily marketable in securities markets either within
or outside the United States. Restricted securities eligible for resale pursu-
ant to Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"), or certain private placements of commercial paper issued in reliance on
an exemption from the Securities Act pursuant to Section 4(2) thereof, that
have a readily available market, are not considered illiquid for purposes of a
Fund's 10% limitation on purchases of illiquid securities. Because it is not
possible to predict with assurance how the market for restricted securities
will develop, the Adviser will monitor the liquidity of such restricted secu-
rities under the supervision of the Trustees. To the extent that, for a period
of time, qualified institutional buyers cease purchasing such restricted secu-
rities pursuant to Rule 144A, the Fund's investing in such securities may have
the effect of increasing the level of illiquidity in the Fund's portfolio dur-
ing such period. See "Illiquid Securities" in the Statement of Additional In-
formation for a discussion of the risks associated with investments in such
securities.
SHORT-TERM AND TEMPORARY DEFENSIVE INVESTMENTS. In addition to their primary
investments, each Fund may also invest up to 10% of its total assets in money
market instruments for liquidity purposes (to meet redemptions and expenses).
For temporary defensive purposes, each Fund may invest up to 100% of its total
assets in short-term fixed-income securities, including corporate debt obliga-
tions and money market instruments rated in one of the two highest categories
by a nationally recognized statistical rating organization (or determined by
the Adviser to be of equivalent quality). Money market instruments include se-
curities issued or guaranteed by the U.S. government, its agencies or instru-
mentalities, repurchase agreements, commercial paper, bankers' acceptances and
certificates of deposit. See the Appendix to the Statement of Additional In-
formation for a description of securities ratings.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in or-
der to generate income while providing liquidity. When a Fund acquires a secu-
rity from a bank or securities dealer, it may simultaneously enter into a re-
purchase agreement, wherein the seller agrees to repurchase the security at a
mutually agreed-upon time (generally within seven days) and price. The repur-
chase price is in excess of the purchase price by an amount which reflects an
agreed-upon market rate of return, which
14
<PAGE>
is not tied to the coupon rate or maturity of the underlying security. Repur-
chase agreements will be fully collateralized. If, however, the seller de-
faults on its obligation to repurchase the underlying security, 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. If bankruptcy proceedings are commenced with respect to the
seller, realization of the collateral by the Fund may be delayed or limited.
There is no limit on the amount of a Fund's net assets that may be subject to
repurchase agreements having a maturity of seven days or less for temporary
defensive purposes.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. When-issued or de-
layed-delivery transactions arise when securities are purchased or sold by a
Fund with payment and delivery taking place a month or more in the future in
order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. While the Fund
will only purchase securities on a when-issued or delayed-delivery basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed-deliv-
ery basis, the Fund will record the transaction and thereafter reflect the
value, each day, of such security in determining the net asset value of the
Fund. At the time of delivery of the securities, the value may be more or less
than the purchase price. The Fund will maintain in a segregated account liquid
assets having a value equal to or greater than the Fund's purchase commit-
ments. The Fund will likewise segregate liquid assets in respect of securities
sold on a delayed-delivery basis. Subject to this requirement, each Fund may
purchase securities on such basis without limitation.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities in
amounts up to 33% of its respective total assets to brokers, dealers and other
financial institutions, provided such loans are callable at any time by the
Fund and are at all times secured by cash or equivalent collateral. By lending
its portfolio securities, a Fund will receive income while retaining the secu-
rities' potential for capital appreciation. As with any extensions of credit,
there are risks of delay in recovery and, in some cases, even loss of rights
in the collateral should the borrower of the securities fail financially. How-
ever, these loans of portfolio securities will only be made to firms deemed by
the Adviser to be creditworthy.
LEVERAGE. In seeking to enhance investment performance, the Federal Securi-
ties Fund, Diversified Income Fund and High Income Fund may borrow money for
investment purposes and may each pledge its assets to secure such borrowings.
This is the speculative factor known as leverage. This practice may help a
Fund increase the net asset value of its shares in an amount greater than
would otherwise be the case when the market values of the securities purchased
through borrowing increase. In the event the return on an investment of bor-
rowed monies does not fully recover the costs of such borrowing, the net asset
value of a Fund's shares would be reduced by a greater amount than would oth-
erwise be the case. The effect of leverage will therefore tend to magnify the
gains or losses to a Fund as a result of investing the borrowed monies. During
periods of substantial borrowings, the net asset value of a Fund's shares
would be reduced due to the added expense of interest on borrowed monies. Each
Fund is authorized to borrow and to pledge assets to secure such borrowings,
up to the maximum extent permissible under the 1940 Act (i.e., 50% of its net
assets). The time and extent to which a Fund may employ leverage will be de-
termined by the Adviser in light of changing facts and circumstances, includ-
ing general economic and market conditions, and will be subject to applicable
lending regulations of the Board of Governors of the Federal Reserve Board. A
Fund's policy regarding the use of leverage is fundamental, and may not be
changed without the approval of the shareholders of the respective Fund.
Under the 1940 Act, the value of a Fund's assets less liabilities, other
than borrowings, must be at least three times all of the Fund's borrowings,
including the proposed borrowing. If for any reason the value of a Fund's as-
sets falls below the 1940 Act requirement, the Fund must, within three busi-
ness days, reduce its borrowings to satisfy such requirement. To do this, a
Fund may have to sell a portion of its investments at a time when it may be
disadvantageous to do so.
HEDGING AND INCOME ENHANCEMENT STRATEGIES. Each Fund may write covered calls
to enhance in-
15
<PAGE>
come. For hedging purposes as a temporary defensive maneuver, each Fund may
use interest rate futures and stock and bond index futures (together,
"Futures"); forward contracts on foreign currencies; and call and put options
on equity and debt securities, Futures, stock and bond indices and foreign
currencies (all of the foregoing are referred to as "Hedging Instruments"). A
call or put may be purchased only if, after such purchase, the value of all
call and put options held by the Fund would not exceed 5% of the Fund's total
assets. A Fund will not use Futures and options on Futures for speculation.
All puts and calls on securities, interest rate futures or stock and bond in-
dex 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.
Special Risks of Hedging and Income Enhancement Strategies. Participation in
the options or Futures markets and in currency exchange transactions involves
investment risks and transaction costs to which a Fund would not be subject
absent the use of these strategies. If the Adviser's predictions of movements
in the direction of the securities, foreign currency and interest rate markets
are inaccurate, the adverse consequences to the Fund may leave the Fund in a
worse position than if such strategies were not used. Risks inherent in the
use of options, foreign currency and Futures contracts and options on Futures
contracts include: (1) dependence on the Adviser's ability to correctly pre-
dict movements in the direction of interest rates, securities prices and cur-
rency markets; (2) imperfect correlation between the price of options and
Futures contracts and options thereon and movements in the prices of the secu-
rities or currencies being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securi-
ties; (4) the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible in-
ability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the
Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. A transaction is "covered" when the Fund owns the secu-
rity subject to the option on such security, or some other security acceptable
for applicable escrow requirements. See the Statement of Additional Informa-
tion for further information concerning income enhancement and hedging strate-
gies and the regulation requirements relating thereto.
HIGH-YIELD/HIGH-RISK SECURITIES. The High Income Fund invests primarily in
high yielding, lower-rated bonds, commonly called "junk bonds." The Diversi-
fied Income Fund may also invest in these securities. Bonds that are rated
"Baa" or lower by Moody's or "BBB" or lower by S&P, or unrated bonds of compa-
rable quality, are generally considered to be high yield bonds. These high
yield bonds are subject to greater risks than lower yielding, higher rated
debt securities.
Risk Factors Applicable to High-Yield/High-Risk Securities. 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) sensi-
tivity to adverse economic changes and corporate developments; (c) redemption
or call provisions which may be exercised at inopportune times; (d) difficulty
in accurately valuing or disposing of such securities; (e) federal legislation
which could affect the market for such securities; and (f) special adverse tax
consequences associated with investments in certain high-yield, high-risk
bonds (e.g., zero-coupon bonds or pay-in-kind bonds). See "Dividends, Distri-
butions and Taxes."
High-yield bonds, like other bonds, may contain redemption or call provi-
sions. If an issuer exercises these provisions in a declining interest rate
market, the High Income Fund or Diversified Income Fund would have to replace
the security with a lower yielding security, resulting in lower return for in-
vestors. Conversely, a high yield bond's value will decrease in a rising in-
terest rate market.
There is a thinly traded market for high yield bonds, and recent market quo-
tations may not be available for some of these bonds. Market quotations are
generally available only from a limited number of dealers and may not repre-
sent firm bids from such dealers or prices for actual sales. As a result, the
Diversified Income Fund and High Income Fund may have difficulty valuing the
high yield bonds in their portfolios accurately and disposing of these bonds
at the time or price desired.
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<PAGE>
Ratings assigned by Moody's and S&P 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 portfolio security's rating
is changed, the Adviser will determine whether the security will be retained
based upon the factors the Adviser considers in acquiring or holding other se-
curities in the portfolio. Investment in high yield bonds may make achievement
of a 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 li-
quidity 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 se-
verely disrupt the market for 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 obli-
gations of the issuer. Further, the issuers of high yield bonds usually have
high levels of indebtedness and are more sensitive to adverse economic condi-
tions, such as recession or increasing interest rates. Upon a default, bond-
holders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of the High Income
Fund and the Diversified Income Fund, to the extent it invests in high yield
bonds, is expected to be more volatile than the net asset value of funds which
invest solely in higher-rated debt securities. This volatility may result in
an increased number of redemptions from time to time. High levels of redemp-
tions in turn may cause a fund to sell its portfolio securities at inopportune
times and decrease the asset base upon which expenses can be spread.
FUTURE DEVELOPMENTS. Each Fund may invest in securities and other instru-
ments which do not presently exist but may be developed in the future, pro-
vided that each such investment is consistent with the Fund's investment ob-
jectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Prospectus will be amended or supplemented as ap-
propriate to discuss any such new investments.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental policies designed to maintain the
diversity of its portfolio and reduce investment risk. With respect to 75% of
a Fund's total assets, such Fund may not invest more than 5% of such assets in
the securities of any one issuer (other than obligations issued or guaranteed
by the U.S. government, its agencies and instrumentalities) or, with respect
to 100% of a Fund's total assets, purchase more than 10% of an issuer's voting
securities. The High Income Fund may not purchase more than 10% of any class
of an issuer's outstanding securities. A Fund may not purchase securities
(other than obligations issued or guaranteed by the U.S. government, its agen-
cies and instrumentalities) if as a result of such purchase more than 25% of a
Fund's total assets would be invested in any one industry. See the Statement
of Additional Information for information concerning other fundamental poli-
cies.
MANAGEMENT OF THE TRUST
TRUSTEES. The Trustees of the Trust are responsible for the overall supervi-
sion of the operation of the Trust and each Fund and perform various duties
imposed on trustees of investment companies by the 1940 Act and by The Common-
wealth of Massachusetts.
THE ADVISER. The Adviser selects and manages the investments of each Fund,
provides various administrative services and supervises the Funds' daily busi-
ness affairs, subject to general review by the Trustees. The Adviser is an in-
direct wholly-owned subsidiary of SunAmerica Inc. ("SunAmerica"), an invest-
ment-grade financial services company which, as of June 30, 1997 has approxi-
mately $46 billion in assets. SunAmerica's principal executive offices are lo-
cated at 1 SunAmerica Center, Century City, Los Angeles, CA 90067-6022. In ad-
dition to serving as adviser to the Funds, the Adviser serves as adviser, man-
ager and/or administrator for Anchor Pathway Fund, SunAmerica Equity Funds,
SunAmerica Money Market Funds, Inc., Style Select Series, Inc.,
17
<PAGE>
Anchor Series Trust, SunAmerica Series Trust and Seasons Series Trust. As of
June 30, 1997, the Adviser managed, advised and/or administered assets of ap-
proximately $10 billion for investment companies, individuals, pension ac-
counts, and corporate and trust accounts.
Pursuant to the Investment Advisory and Management Agreement entered into
between the Adviser and the Trust, on behalf of each Fund, each Fund pays the
Adviser a fee, payable monthly, computed daily at the following annual rates:
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Government Securities Fund High Income Fund............
.75% of average daily
net assets up to $200
million; .72% of the
next $200 million; and
.55% of average daily
net assets in excess of
$400 million.
Federal Securities Fund................................ .55% of average daily
net assets up to $25
million; .50% of the
next $25 million; and
.45% of average daily
net assets in excess of
$50 million.
Diversified Income Fund................................ .65% of average daily
net assets up to $350
million; and .60% of
average daily net assets
in excess of $350
million.
Tax Exempt Insured Fund................................ .50% of average daily
net assets up to $350
million; and .45% of
average daily net assets
in excess of $350
million.
</TABLE>
The advisory fee with respect to Government Securities Fund and High Income
Fund is higher than that paid by most other investment companies. For the fis-
cal year ended March 31, 1997, each Fund paid the Adviser a fee equal to the
following percentage of average daily net assets: Government Securities Fund--
.70%; Federal Securities Fund-- .52%; Diversified Income Fund--.65%; High In-
come Fund--.75%; and Tax Exempt Insured Fund--.50%.
The Fixed Income Investment Team is responsible for the portfolio management
of each of the Funds. The Team, which is headed by P. Christopher Leary, is
composed of six portfolio managers and research analysts. Individual members
of the Team may focus more heavily on particular Funds or particular aspects
of the fixed-income markets. Mr. Leary is a Senior Vice President and Director
of Fixed-Income of the Adviser and has been a portfolio manager with the firm
since 1990.
THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an
indirect wholly owned subsidiary of SunAmerica, acts as distributor of the
shares of each Fund pursuant to the Distribution Agreement between the Dis-
tributor and the Trust on behalf of each Fund. The Distributor receives all
initial and deferred sales charges in connection with the sale of Fund shares,
all or a portion of which it may reallow to other broker-dealers. The Distrib-
utor and other broker-dealers pay commissions to salespersons, as well as the
cost of printing and mailing prospectuses to potential investors and of any
advertising expenses incurred by them in connection with their distribution of
Fund shares.
The Distributor, at its expense, may from time to time, provide additional
compensation to broker-dealers (including in some instances, exclusively to
Royal Alliance Associates, Inc., SunAmerica Securities, Inc., Keogler Morgan &
Company and/or Advantage Capital Corporation, affiliates of the Distributor)
in connection with sales of shares of the Funds. Such compensation may include
(i) full reallowance of the front-end sales charge on Class A shares; (ii) ad-
ditional compensation with respect to the sale of Class A or Class B shares;
or (iii) financial assistance to broker-dealers in connection with confer-
ences, sales or training programs for their employees, seminars for the pub-
lic, advertising campaigns regarding one or more of the Funds, and/or other
broker-dealer-sponsored special events. In some instances, this compensation
will be made available only to certain broker-dealers whose representatives
have sold a significant amount of shares of the Funds. Compensation may also
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives for meetings or semi-
nars of a business nature. In addition, the following types of non-cash com-
pensation 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
Funds' shares to qualify for this compensation to the extent receipt of such
compensation may be prohibited by the laws of any state or any self-regulatory
agency, such as, for example, the National Association of Securities Dealers,
Inc. Dealers who receive bonuses or other incentives may be deemed to be un-
derwriters under the Securities Act.
18
<PAGE>
Certain laws and regulations limit the ability of banks and other depository
institutions to underwrite and distribute securities. However, in the opinion
of the Adviser based upon the advice of counsel, these laws and regulations do
not prohibit such depository institutions from providing other services to in-
vestment companies of the type contemplated by the Distribution Plans (as de-
scribed below). The Trustees will consider appropriate modifications to the
operations of the Funds, including discontinuance of payments under the Dis-
tribution Plans to banks and other depository institutions, in the event such
institutions can no longer provide the services called for under their agree-
ments. Banks and other financial services firms may be subject to various
state laws regarding services described, and may be required to register as
dealers pursuant to state laws.
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment com-
pany, directly or indirectly, to pay expenses associated with the distribution
of its shares ("distribution expenses") in accordance with a plan adopted by
the investment company's board of directors and approved by its shareholders.
Pursuant to such rule, the Trustees and the shareholders of each class of
shares of each Fund have adopted Distribution Plans hereinafter referred to as
the "Class A Plan" and the "Class B Plan." In adopting the Class A Plan and
the Class B Plan, the Trustees determined that there was a reasonable likeli-
hood that each such Plan would benefit the Trust and the shareholders of the
respective class. The sales charge and distribution fees of a particular class
will not be used to subsidize the sale of shares of any other class.
Under the Class A Plan, the Distributor may receive payments from a Fund at
an annual rate of up to 0.10% of average daily net assets of such Fund's Class
A shares to compensate the Distributor and certain securities firms for pro-
viding sales and promotional activities for distributing that class of shares.
Under the Class B Plan, the Distributor may receive payments from a Fund at
the annual rate of up to 0.75% of the average daily net assets of such Fund's
Class B 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 those incurred for sales
literature, prospectus printing and distribution and compensation to wholesal-
ers. It is possible that in any given year, the amount paid to the Distributor
under the Class A Plan or Class B Plan may exceed the Distributor's distribu-
tion costs as described above. The Distribution Plans provide that each class
of shares of each 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 ac-
count maintenance. In this regard, some payments are used to compensate bro-
ker-dealers with account maintenance and service fees in an amount up to 0.25%
per year of the assets maintained in a Fund by their customers.
For the fiscal year ended March 31, 1997, under the Class A Plan, each Fund
paid the Distributor a fee equal to the following percentages of average daily
net assets: Government Securities Fund--.35%; Federal Securities Fund--.35%;
Diversified Income Fund--.35%; High Income Fund--.35%; and Tax Exempt Insured
Fund--.35%. For the same period, under the Class B Plan, each Fund paid the
Distributor a fee equal to the following percentages of average daily net as-
sets: Government Securities Fund--1.00%; Federal Securities Fund--1.00%; Di-
versified Income Fund--1.00%; High Income Fund--1.00%; and Tax Exempt Insured
Fund--1.00%.
ADMINISTRATOR. The Trust has entered into a Service Agreement under the
terms of which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly
owned subsidiary of SunAmerica, assists the Transfer Agent in providing share-
holder services. Pursuant to the Service Agreement, as compensation for serv-
ices rendered, SAFS receives a fee from the Trust, calculated and payable
monthly, at an annual rate of 0.22% of average daily net assets. See the
Statement of Additional Information for further information.
PURCHASE OF SHARES
GENERAL. Shares of each of the Funds are sold at the respective net asset
value next calculated after receipt of a purchase order, plus a sales charge
which, at the election of the investor, may be im posed either (i) at the time
of purchase (Class A shares), or (ii) on a deferred basis (Class B shares and
certain Class A shares).
19
<PAGE>
The minimum initial investment in each Fund is $500 and the minimum subse-
quent investment is $100. However, for Individual Retirement Accounts
("IRAs"), Keogh Plan accounts and accounts for other qualified plans, the min-
imum initial investment is $250 and the minimum subsequent investment is $25.
The decision as to which class is most beneficial to an investor depends on
the amount and intended length of the investment. Investors making large in-
vestments, qualifying for a reduced initial sales charge, might consider Class
A shares because there is a lower distribution fee than Class B shares (prior
to conversion). Investors making small investments might consider Class B
shares because 100% of the purchase price is invested immediately. Sharehold-
ers who purchase $1,000,000 or more of shares of the Funds should only pur-
chase Class A shares. Dealers may receive different levels of compensation de-
pending on which class of shares they sell.
Upon making an investment in shares of a Fund, an open account will be es-
tablished under which shares of the applicable Fund and additional shares ac-
quired through reinvestment of dividends and distributions will be held for
each shareholder's account by State Street Bank and Trust Company ("State
Street") and its affiliate, National Financial Data Services ("NFDS") (collec-
tively, the "Transfer Agent"). Shareholders will not be issued certificates
for their shares unless they specifically so request in writing. Shareholders
receive regular statements from the Transfer Agent that report each transac-
tion affecting their accounts. Further information may be obtained by calling
Shareholder/Dealer Services at (800) 858-8850.
CLASS A SHARES. Class A shares are offered at net asset value plus an ini-
tial sales charge, which varies with the size of the purchase as follows:
<TABLE>
<CAPTION>
CONCESSION
SALES CHARGE TO DEALERS
----------------- ----------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
SIZE OF PURCHASE PRICE INVESTED PRICE
- ---------------- -------- -------- ----------
<S> <C> <C> <C>
Less than $100,000................................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000.................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000.................... 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000.................. 2.10% 2.15% 1.35%
$1,000,000 or more................................. NONE NONE see below
</TABLE>
No sales charge is payable at the time of purchase on investments of $1
million or more. In addition, subject to the conditions listed below, shares
may be purchased at net asset value, without payment of a sales charge, by
employee benefit plans qualified under Sections 401 or 457 of the Internal
Revenue Code of 1986, as amended (the "Code"), or employee benefit plans
created pursuant to Section 403(b) of the Code and sponsored by nonprofit
organizations defined under Section 501(c)(3) of the Code (collectively,
"Plans"). A Plan will qualify for purchases at net asset value, provided that,
(a) the initial amount invested in one or more of the Funds (or in combination
with the shares of other funds in the SunAmerica Family of Mutual Funds) is at
least $1,000,000, (b) the sponsor signs a $1,000,000 Letter of Intent, (c)
such shares are purchased by an employer-sponsored plan with at least 100
eligible employees, or (d) the purchases are by trustees or other fiduciaries
for certain employer-sponsored plans, the trustee, fiduciary or administrator
for which has an agreement with the Distributor with respect to such
purchases, and all such transactions for the plan are executed through a
single omnibus account.
Nevertheless, the Distributor will pay a commission to any dealer who initi-
ates or is responsible for such an investment, in the amount of 1.00% of the
amount invested. Redemptions of such shares within the twelve months following
their purchase will be subject to a CDSC at the rate of 1.00% of the lesser of
the net asset value of the shares being redeemed (exclusive of reinvested div-
idends and distributions) or the total cost of such shares. This CDSC is paid
to the Distributor. Redemptions of such shares held longer than twelve months
would not be subject to a contingent deferred sales charge. However, one-half
of the commission paid, with respect to such a purchase, is subject to forfei-
ture by the dealer in the event the redemption occurs during the second year
from the date of purchase. In determining whether a deferred sales charge is
payable, it is assumed that shares purchased with reinvested dividends and
distributions and then other shares held the longest are redeemed first.
To the extent that sales are made for personal investment purposes, the
sales charge is waived as to Class A shares purchased by current or retired
officers, directors and other full-time employees of SunAmerica and its affil-
iates, as well as members of
20
<PAGE>
the selling group and family members of the foregoing. In addition, 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 adhering to certain standards established by the Distributor. Shares
purchased under this waiver are subject to certain limitations described in
the Statement of Additional Information. Complete details concerning how an
investor may purchase shares at reduced sales charges may be obtained by con-
tacting Shareholder/Dealer Services at (800) 858-8850.
There are certain special purchase plans for Class A shares which can reduce
the amount of the initial sales charge to investors in the Funds. For more in-
formation about "Rights of Accumulation," the "Letter of Intent," "Combined
Purchase Privilege," "Reduced Sales Charges for Group Purchases" and the "Net
Asset Value Transfer Program," see the Statement of Additional Information.
CLASS B SHARES. Class B shares are offered at net asset value. Certain re-
demptions of Class B shares within the first six years of the date of purchase
are subject to a CDSC. The charge is assessed on an amount equal to the lesser
of the then-current market value or the purchase price of the shares being re-
deemed. No charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. In determining whether the CDSC is applicable
to a redemption, the calculation is determined in the manner that results in
the lowest possible rate being charged. Therefore, it is assumed that the re-
demption is first of any Class A shares, second of any shares in the share-
holder's Fund account that are not subject to a CDSC (i.e., shares represent-
ing reinvested dividends and distributions), third of shares held for more
than six years and fourth of shares held the longest during the six-year peri-
od. The CDSC will not be applied to dollar amounts representing an increase in
the net asset value of the shares being redeemed since the time of purchase of
such redeemed shares. The amount of the CDSC, if any, will vary depending on
the number of years from the time of payment for the purchase of Fund shares
until the time of redemption of such shares. Solely for purposes of determin-
ing the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been
made on the first day of the month. The following table sets forth the rates
of the CDSC.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLARS INVESTED OR
PAYMENT WAS MADE REDEMPTION PROCEEDS
- ------------------- -------------------------
<S> <C>
First................................................. 4%
Second................................................ 4%
Third................................................. 3%
Fourth................................................ 3%
Fifth................................................. 2%
Sixth................................................. 1%
Seventh and thereafter................................ 0%
</TABLE>
Waiver of CDSC. The CDSC will be waived, subject to certain conditions, in
connection with redemptions which are: (a) requested within one year of the
death of the shareholder of an individual account or of a joint tenant where
the surviving joint tenant is the deceased's spouse; (b) requested within one
year after the shareholder of an individual account or a joint tenant on a
spousal joint tenant account becomes disabled; (c) taxable distributions or
loans to participants made by qualified retirement plans or retirement ac-
counts (not including rollovers) for which the Adviser serves as fiduciary
(e.g., prepares all necessary tax reporting documents); provided that, in the
case of a taxable distribution, the plan participant or accountholder has at-
tained the age of 59 1/2 at the time the redemption is made; (d) made pursuant
to a Systematic With -
drawal Plan up to a maximum amount of 12% per year from a shareholder account
based on the value of the account at the time the Plan is established, provid-
ed, however, that all dividends and capital gains distributions are reinvested
in Fund shares; and (e) made of shares in accounts consisting of assets which
were originally individually managed by the Adviser and had paid an investment
advisory fee to the Adviser. See the Statement of Additional Information for
further information concerning conditions with respect to (a) and (b) above.
Shareholders of a Fund that acquired their Class B shares pursuant to a re-
organization effected with another SunAmerica mutual fund will remain subject
to the terms of the CDSC in effect for the previous fund at the time of such
reorganization. For additional information, see "Additional Information Re-
garding Purchase of Shares" in the Statement of Additional Information.
21
<PAGE>
Conversion Feature. Class B shares (including a pro rata portion of the
Class B shares purchased through the reinvestment of dividends and distribu-
tions) will convert automatically to Class A shares on the first business day
of the month following the seventh anniversary of the issuance of such Class B
shares. Subsequent to the conversion of a Class B share to a Class A share,
such share will no longer be subject to the higher distribution fee of Class B
shares. Such conversion will be on the basis of the relative net asset values
of Class B shares and Class A shares, without the imposition of any sales
load, fee or charge.
Other CDSC Information. For Federal income tax purposes, the amount of the
CDSC will reduce the amount realized on the redemption of shares, while
reducing gain or increasing loss. For information on the imposition and waiver
of the CDSC contact Shareholder/Dealer Services at (800) 858-8850.
ADDITIONAL PURCHASE INFORMATION. All purchases are confirmed to each share-
holder. The Trust and Distributor reserve the right to reject any purchase or-
der and may at any time discontinue the sale of any class of shares of any
Fund. Share certificates are issued upon written request, but no certificate
is issued for fractional shares.
Shares of the Funds may be purchased through the Distributor or SAFS, by
check or federal funds wire and through a dollar cost averaging program.
Shares will be priced at the net asset value next determined after the order
is placed with the Distributor or SAFS. See "Additional Information Regarding
Purchase of Shares" in the Statement of Additional Information for more infor-
mation regarding these services, the procedures involved and when orders are
deemed to be received.
Checks should be made payable to the specific Fund or to "SunAmerica Funds".
If the payment is for a retirement plan account for which the Adviser serves
as fiduciary, please indicate on the check that payment is for such an ac-
count. Payments to open new accounts should be mailed to SunAmerica Fund Serv-
ices, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue,
New York, New York 10017-3204, together with a completed New Account Applica-
tion. 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 fi-
duciary retirement plan accounts, both initial and subsequent purchases should
be mailed to SunAmerica Fund Services, Inc., Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204. SAFS re-
serves the right to reject any check made payable other than in the manner in-
dicated above. Under certain circumstances, a 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 Funds do not verify the authenticity of the endorsement of such multi-
party check, and acceptance of the check by a Fund should not be considered
verification thereof. Neither the Funds nor their affiliates will be held lia-
ble for any losses incurred as a result of a fraudulent endorsement.
REDEMPTION OF SHARES
Shares of any Fund may be redeemed at any time at their net asset value next
determined, less any applicable CDSC, after receipt by the Fund of a redemp-
tion request in proper form. Any capital gain or loss realized by a share-
holder upon any redemption of shares must be recognized for Federal income tax
purposes. See "Dividends, Distributions and Taxes."
GENERAL. Normally payment is made by check mailed on the next business day
for shares redeemed, but in any event, payment is made by check mailed within
seven days after receipt by the Transfer Agent of share certificates or of a
redemption request, or both, in proper form. Under unusual circumstances, the
Funds may suspend repurchases or postpone payment for up to seven days or
longer, as permitted by the Federal securities laws.
REGULAR REDEMPTION. Shareholders may redeem their shares by sending a writ-
ten request to SAFS, Mutual Fund Operations, The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204. Requests for redemption of shares with a
value of less than $100,000 will be made by check payable to the
22
<PAGE>
shareholder(s) and mailed to the address of record. All written requests for
redemptions of shares with a value of $100,000 or more, or those mailed to an
address other than the address of record, must be endorsed by the sharehold-
er(s) with signature(s) guaranteed by an "eligible guarantor institution"
which includes: banks, brokers, dealers, credit unions, securities and ex-
change associations, clearing agencies and savings associations. Guarantees
must be signed by an authorized signatory of the eligible guarantor and the
words "Signature Guaranteed" must appear with the signature. Signatures guar-
anteed by notaries will not be accepted. SAFS may request further documenta-
tion from corporations, executors, administrators, trustees or guardians.
REPURCHASE THROUGH DISTRIBUTOR. The Distributor is authorized, as agent for
the Funds, to offer to repurchase shares presented by telephone to the Dis-
tributor by investment dealers. Orders received by dealers must be at least
$500. The repurchase price is the net asset value per share of the applicable
class of shares of a Fund next-determined after the repurchase order is re-
ceived, less any applicable CDSC. Repurchase orders received by the Distribu-
tor after the Fund's close of business, will be priced based on the next busi-
ness day's close. Dealers may charge for their services in connection with the
repurchase, but neither the Funds nor the Distributor imposes any charge. The
offer to repurchase may be suspended at any time, as described below.
TELEPHONE REDEMPTION. The Trust accepts telephone requests for redemption of
shares with a value of less than $100,000. The proceeds of a telephone redemp-
tion may be sent by check payable to the shareholder(s) and mailed to the ad-
dress of record, by wire to the shareholder's bank account as set forth in the
New Account Application Form or in a subsequent written authorization. Share-
holders utilizing the redemption through the electronic funds transfer method
will incur a $15.00 transaction fee. The Trust will employ reasonable proce-
dures to confirm that instructions communicated by telephone are genuine.
Failure to do so may result in liability to the Trust for losses incurred due
to unauthorized or fraudulent telephone instructions. Such procedures include,
but are not limited to, requiring some form of personal identification prior
to acting upon instructions received by telephone and/or tape recording of
telephone instructions.
A shareholder making a telephone redemption should call Shareholder/Dealer
Services at (800) 858-8850, and state (i) the name of the shareholder(s) ap-
pearing on the Fund's records, (ii) his or her account number with the Fund,
(iii) the amount to be redeemed, and (iv) the name of the person(s) requesting
the redemption. The Trust reserves the right to terminate or modify the tele-
phone redemption service at any time.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who have invested at least $5,000
in any of the Funds may provide for the periodic payment from their account
pursuant to the Systematic Withdrawal Plan. At the shareholder's election,
such payment may be made directly to the shareholder or to a third party on a
monthly, quarterly, semi-annual or annual basis. The minimum periodic payment
is $50. Maintenance of a withdrawal plan concurrently with purchases of addi-
tional shares may be disadvantageous to a shareholder because of the sales
charge applicable to such purchases. Shareholders who have been issued share
certificates will not be eligible to participate in the Systematic Withdrawal
Plan and will have to comply with certain additional procedures in order to
redeem shares. Further information may be obtained by calling
Shareholder/Dealer Services at (800) 858-8850.
OTHER REDEMPTION INFORMATION. At various times, a Fund may be requested to
redeem shares for which it has not yet received good payment. A 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 purchase of such shares, which will not exceed 15 days.
Because of the high cost of maintaining smaller shareholder accounts, the
Funds may redeem, on at least 60 days' written notice and without shareholder
consent, any account that, due to a shareholder redemption and not to market
fluctuation of the account's value, has a net asset value of less than $500
($250 for retirement plan accounts), as of the close of business on the day
preceding such notice, unless such shareholder increases the account balance
to at least $500 during such 60-day period. In the alternative, the applicable
Fund may impose a $2.00 monthly charge on accounts below the minimum account
size.
23
<PAGE>
If a shareholder redeems shares of any class of a Fund and then within one
year from the date of redemption decides the shares should not have been re-
deemed, the shareholder may use all or any part of the redemption proceeds to
reinstate, free of sales charges (Class A shares) and with the crediting of
any CDSC paid with respect to such reinstated shares at the time of redemption
(Class B shares), all or any part of the redemption proceeds in shares of the
Fund at the then-current net asset value. Reinstatement may affect the tax
status of the prior redemption.
EXCHANGE PRIVILEGE
GENERAL. Shareholders in any of the Funds may exchange their shares for the
same class of shares of any other Fund or other funds in the SunAmerica Family
of 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 sub-
ject to applicable minimum initial investment requirements and can only be ef-
fected 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
fund in the SunAmerica Family of Mutual Funds where the original purchase of
such fund's Class A shares was not subject to an initial sales charge because
the purchase was in excess of $1 million, such shareholder will remain subject
to the 1% CDSC, if any, applicable to such redemptions. In such event, the pe-
riod for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining whether the 1% CDSC is applicable upon a redemption of
any of such shares.
A shareholder who acquires Class B shares through an exchange from another
fund in the SunAmerica Family of Mutual Funds will retain liability for any
deferred sales charge which is outstanding on the date of the exchange. In
such event, the period for which the original shares were held prior to the
exchange will be "tacked" with the holding period of the shares acquired in
the exchange for purposes of determining what, if any, CDSC is applicable upon
a redemption of any of such shares.
RESTRICTIONS ON EXCHANGES. Because excessive trading (including short-term
"market timing" trading) can hurt a Fund's performance, each Fund may refuse
any exchange sell order (i) if it appears to be a "market timing" transaction
involving a significant portion of a Fund's assets or (ii) from any share-
holder account if previous use of the exchange privilege is considered exces-
sive. 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 in-
dicators, will be considered one account for this purpose.
In addition, a Fund reserves the right to refuse any exchange purchase order
if, in the judgment of the Adviser, the Fund would be unable to invest effec-
tively in accordance with its investment objective and policies, or would oth-
erwise 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 dis-
ruptive to the Fund and may therefore be refused.
Finally, as indicated under "Purchase of Shares," the Fund and Distributor
reserve the right to refuse any order for the purchase of shares.
PORTFOLIO TRANSACTIONS, BROKERAGE AND TURNOVER
The Adviser is responsible for decisions to buy and sell securities for the
Funds, selection of broker-dealers and negotiations of commission rates. 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 com-
mission (although the price of the security usually
24
<PAGE>
includes a profit to the dealer). In underwritten offerings, securities are
purchased at a fixed price which includes an underwriter's concession or dis-
count. On occasion, certain money market securities may be purchased directly
from an issuer, in which case no commissions or discounts are paid.
As a general matter, the Adviser selects broker-dealers which, in its best
judgment, provide prompt and reliable execution at favorable security prices
and reasonable commission rates. The Adviser may select broker-dealers which
provide it with research services and may cause a Fund to pay such broker-
dealers commissions which exceed those which other broker-dealers may have
charged, if in the Adviser's view the commissions are reasonable in relation
to the value of the brokerage and/or research services provided by the broker-
dealer. Brokerage arrangements may take into account the distribution of Fund
shares by broker-dealers, subject to best price and execution. The Adviser may
effect portfolio transactions through an affiliated broker-dealer, acting as
agent and not as principal, in accordance with Rule 17e-1 under the 1940 Act
and other applicable securities laws.
Each Fund has no limitation regarding its policy with respect to portfolio
turnover. The portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities, excluding short-term securities,
by the average monthly value of the Fund's long-term portfolio securities.
High portfolio turnover involves correspondingly greater brokerage commissions
and other transaction costs which will be borne directly by the Fund. In addi-
tion, high portfolio turnover may result in short-term capital gains, which,
when distributed to shareholders, are treated as ordinary income.
DETERMINATION OF NET ASSET VALUE
Each Fund is open for business on any day the New York Stock Exchange
("NYSE") is open for regular trading. Shares are valued each day as of the
close of regular trading on the NYSE (generally, 4:00 p.m. Eastern time). Each
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 each class. Investments for which market quotations are readily available
are valued at market as described in the Statement of Additional Information.
Securities and assets for which market quotations are not readily available
are valued at fair value following procedures approved by the Trustees. Short-
term investments that mature in less than 60 days are valued at amortized cost
if their original maturity was 60 days or less, or by amortizing their value
on the 61st day prior to maturity, if their original term exceeds 60 days (un-
less the Trustees determine that amortized cost value does not represent fair
value, in which case, fair value will be determined as described above).
PERFORMANCE DATA
Each Fund may advertise performance data that reflects its yield or total
investment return. A brief summary of the computations is provided below and a
detailed discussion is in the Statement of Additional Information. Both yield
and total return figures are based on historical earnings and are not intended
to indicate future performance.
Yield will be calculated based on a 30-day (or one month) period ended on
the date of the applicable Fund's most recent balance sheet and for other such
periods, as deemed appropriate. The net investment income per share earned
during the period will be divided by the maximum offering price per share on
the last day of the period and annualized to obtain the yield. For purposes of
calculating yields, net income is determined by a standard formula prescribed
by the Securities and Exchange Commission to facilitate comparison with yields
quoted by other mutual funds.
Total return performance data may be advertised by each Fund. The average
annual total return may be calculated for one-, five- and ten-year periods or
for the lesser period since inception. These performance data represent the
average annual percentage changes of a hypothetical $1,000 investment and as-
sumes the reinvestment of all dividends and distributions and includes sales
charges and recurring fees that are charged to shareholder accounts. A Fund's
advertisements may also reflect total return performance data calculated by
means of cumulative, aggregate, average, year-to-date, or other total return
figures. Further, the Fund may advertise total return performance for periods
of time in addition to those noted above.
25
<PAGE>
Although expenses for Class B shares may be higher than those for Class A
shares, the performance of Class B shares may be higher than the performance
of Class A shares after giving effect to the impact of the sales charges and
12b-1 fees applicable to each class of shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are de-
clared daily and paid monthly. Dividends are paid on or about the fifteenth
day of the month. Dividends and distributions generally are taxable in the
year in which they are paid, except any dividends paid in January which were
declared in the previous calendar quarter will be treated as paid in December
of the previous year. Dividends and distributions are paid in additional
shares based on the next determined net asset value, unless the shareholder
elects in writing, not less than five business days prior to the payment date,
to receive amounts in excess of $10 in cash.
In addition to having the dividends and distributions of a Fund reinvested
in shares of such Fund, a shareholder may, if he or she so elects on the New
Account Application Form, have dividends and distributions invested in the
same class of shares of any other SunAmerica Mutual Fund at the then-current
net asset value of such Fund(s).
The excess of net realized long-term capital gains over net capital losses,
if any, will be distributed to the shareholders annually. Each Fund's policy
is to offset any prior year's 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.
TAXES. Each Fund is qualified and intends to continue to qualify and elect
to be taxed as a regulated investment company under the Code. While so quali-
fied, the Trust and each of the Funds will not be subject to U.S. Federal in-
come tax on the portion of its investment company taxable income and net capi-
tal gains distributed to its shareholders.
For Federal income tax purposes, dividends of net investment income and dis-
tributions of any net realized short-term capital gain, whether paid in cash
or reinvested in shares of the Fund, are taxable to shareholders as ordinary
income (except as described below).
The Federal Securities Fund, Diversified Income Fund, High Income Fund, Gov-
ernment Securities Fund and Tax Exempt Insured Fund must report the discount
or interest on debt securities (such as zero-coupon or pay-in-kind securities)
that contain original issue discount as income even though they do not receive
a corresponding cash interest payment until the security's maturity or payment
date. Therefore, the Fund may have to sell some of its assets in order to dis-
tribute cash to shareholders so as to comply with the distribution require-
ments applicable to regulated investment companies.
With respect to the Tax Exempt Insured Fund, distributions out of net in-
vestment income attributable to interest received on tax-exempt securities
("exempt-interest dividends") will be exempt from Federal income tax when paid
to shareholders. It also should be noted that interest on certain "private ac-
tivity bonds" issued after August 7, 1986, is an item of tax preference for
purposes of the alternative minimum tax (investment in such securities will be
limited to 30% of the Fund's net assets). The Fund anticipates that a portion
of its investment may be made in such "private activity bonds" with the result
that a portion of the exempt-interest dividends paid by the Fund will be an
item of tax preference to shareholders subject to the alternative minimum tax.
Additionally, tax-exempt interest, whether or not a tax preference, must be
considered by corporations in determining the amount of the adjustment to al-
ternative minimum taxable income for purposes of the adjustment based on ad-
justed current earnings. Moreover, shareholders should be aware that, while
exempt from Federal income tax, exempt-interest dividends may be taxable for
state and local tax purposes.
Statements as to the tax status of distributions to shareholders of the
Funds will be mailed annually. Shareholders are urged to consult their own tax
advisors regarding specific questions as to Federal, state or local taxes.
Foreign Shareholders are also urged to consult their own tax advisors regard-
ing the foreign tax consequences of ownership of interests in a Fund. See
"Dividends, Distributions and Taxes" in the Statement of Additional Informa-
tion.
26
<PAGE>
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS. The Trust sends to its shareholders audited annual
and unaudited semi-annual reports for the Funds. The financial statements ap-
pearing in annual reports are audited by independent accountants. In addition,
the Transfer Agent sends to each shareholder having an account directly with
the Trust a statement confirming transactions in the account.
ORGANIZATION. The Trust, a business trust organized under the laws of the
Commonwealth of Massachusetts on April 24, 1986, is an open-end diversified
management investment company, commonly referred to as a mutual fund. The
Trust consists of five investment series or funds: Government Securities Fund,
Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Ex-
empt Insured Fund. The Trustees have the authority to issue an unlimited num-
ber of shares of beneficial interest of separate series, par value $.01 per
share, of the Trust, and to divide each such series into one or more classes
of shares.
The Trust does not hold annual shareholder meetings. The Trustees are re-
quired to call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when so requested in writing by the share-
holders of record holding at least 10% of the Trust's outstanding shares. Each
share of each Fund has equal voting rights on each matter pertaining to that
Fund or matters to be voted upon by the Trust, except as noted above. Each
share of each Fund is entitled to participate equally with the other shares of
that Fund in dividends and other distributions and the proceeds of any liqui-
dation, except that, due to the differing expenses borne by the two classes,
such dividends and proceeds are likely to be lower for Class B shares than for
Class A shares. See the Statement of Additional Information for more informa-
tion with respect to the distinctions among classes.
Under Massachusetts law, shareholders of a trust, such as the Trust, in cer-
tain circumstances may be held personally liable as partners for the obliga-
tions of the trust. However the Declaration of Trust, pursuant to which the
Trust was organized, contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides
for indemnification out of the Trust's property for any shareholder held per-
sonally liable for any Trust obligation. Thus the risk of a shareholder being
personally liable as a partner for obligations of the Trust, is limited to the
unlikely circumstance in which the Trust itself would be unable to meet its
obligations.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177 Avenue
of the Americas, New York, NY 10036, serves as independent accountants for the
Funds. The firm of Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Ave-
nue, New York, NY 10022, serves as legal counsel for the Funds.
SHAREHOLDER INQUIRIES. All inquiries regarding the Trust should be directed
to the Trust at the telephone number or address on the cover page of this Pro-
spectus. For questions concerning share ownership, dividends, transfer of own-
ership or share redemption, contact SAFS, Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, or call
Shareholder/Dealer Services at (800) 858-8850.
27
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE
STATEMENT OF ADDITIONAL INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE.
[LOGO] SUNAMERICA
CAPITAL SERVICES
Distributor
IFPRO
<PAGE>
SUNAMERICA INCOME FUNDS
SUNAMERICA INCOME FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 28, 1997
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
SunAmerica Income Funds is a mutual fund consisting of five different
investment funds: SunAmerica U.S. Government Securities Fund, SunAmerica Federal
Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund
and SunAmerica Tax Exempt Insured Fund. Each Fund has distinct investment
objectives and strategies.
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Funds' Prospectus dated July 28, 1997.
To obtain a Prospectus, please call the Trust at (800) 858-8850. Capitalized
terms used herein but not defined have the meanings assigned to them in the
Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORY OF THE FUNDS B-2
INVESTMENT OBJECTIVES AND POLICIES B-2
INVESTMENT RESTRICTIONS B-32
TRUSTEES AND OFFICERS B-34
ADVISER, PERSONAL SECURITIES TRADING, DISTRIBUTOR AND ADMINISTRATOR B-38
PORTFOLIO TRANSACTIONS AND BROKERAGE B-42
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES B-43
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES B-50
DETERMINATION OF NET ASSET VALUE B-51
PERFORMANCE DATA B-52
DIVIDENDS, DISTRIBUTIONS AND TAXES B-57
RETIREMENT PLANS B-60
DESCRIPTION OF SHARES B-61
ADDITIONAL INFORMATION B-62
FINANCIAL STATEMENTS B-64
APPENDIX APPENDIX-1
</TABLE>
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 Trust, the Adviser 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.
B-1
<PAGE>
This Statement of Additional Information relates to the five different
investment funds of SunAmerica Income Funds, a Massachusetts business trust,
which is registered as an open-end investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"). The five Funds are:
SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund,
SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica
Tax Exempt Insured Fund.
HISTORY OF THE FUNDS
The Trust was organized under the name Integrated Income Portfolios in
1986, and subsequently renamed "SunAmerica Income Portfolios" in 1990. On
October 1, 1993, the Trust reorganized with certain mutual funds in the
SunAmerica Family of Mutual Funds (the "Reorganization") and was renamed the
"SunAmerica Income Funds." In the Reorganization, all outstanding shares of the
two existing series of the Trust, the Government Income Portfolio (the
"Government Income Portfolio") and the High Yield Portfolio (the "High Yield
Portfolio"), were redesignated Class A shares and renamed the Government
Securities Fund and the High Income Fund, respectively. In addition, the
SunAmerica U.S. Government Securities Fund series of SunAmerica Fund Group ("Old
Government Securities") and the SunAmerica High Income Fund series of SunAmerica
Fund Group ("Old High Income") reorganized with, and its shareholders received
Class B shares of, the Government Securities Fund and the High Income Fund,
respectively.
With regard to the three additional series of the Trust, the Federal
Securities Fund, the Diversified Income Fund and the Tax Exempt Insured Fund,
the SunAmerica Federal Securities Fund ("Old Federal Securities") was
reorganized with, and its shareholders received Class B shares of, the Federal
Securities Fund. In addition, the SunAmerica Diversified Income Fund series of
SunAmerica Multi-Asset Portfolios, Inc. ("Old Diversified Income") was
reorganized with, and its shareholders received Class B shares of, the
Diversified Income Fund. Until December 16, 1992, Old Diversified Income had a
different investment objective and was named SunAmerica Global Short-Term Income
Fund. Finally, the SunAmerica Tax Exempt Insured Fund series of SunAmerica Tax
Free Portfolios ("Old Tax Exempt Insured") was reorganized with, and its
shareholders received Class A shares of, the Tax Exempt Insured Fund.
The Reorganization was approved by the shareholders of the Funds or
their predecessors who were entitled to vote with respect thereto, on September
23, 1993.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are
described in the Funds' Prospectus. Certain types of securities in which the
Funds may invest and certain investment practices which the Funds may employ,
which are described under "Other Investment Practices and Restrictions" in the
Prospectus, are discussed more fully below.
U.S. GOVERNMENT SECURITIES. Each 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
government. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances. Each Fund may also invest in
securities issued by agencies or instrumentalities of the U.S. government.
These obligations, including those which are guaranteed by federal agencies or
instrumentalities, may or may not be backed by the "full faith and credit" of
the United States government. All of the foregoing are referred to collectively
as "U.S. government securities." Obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration ("FHA") and the
Export-Import Bank are
B-2
<PAGE>
backed by the full faith and credit of the United States government. In the case
of securities not backed by the full faith and credit of the United States, a
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. U.S.
government securities include certain mortgage-backed securities, as described
below under "Mortgage-Backed Securities."
MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed securities.
These securities represent participation interests in pools of residential
mortgage loans made by lenders such as commercial banks, savings and loan
institutions, mortgage bankers and others, which may or may not be guaranteed by
agencies or instrumentalities of the U.S. government.
Mortgage-backed securities differ from conventional debt securities,
which provide for periodic payment of interest in fixed amounts (usually
semiannually) with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments resulting from the
sale of the underlying residential property, refinancing or foreclosure (net of
fees or costs which may be incurred). In addition, prepayment of principal on
mortgage-backed securities, which often occurs when interest rates decline, can
significantly change the realized yield of these securities. Some mortgage-
backed securities are described as "modified pass-through." These securities
entitle the holders to receive all interest and principal payments owed on the
mortgages in the pool, net of certain fees, regardless of whether or not the
mortgagors actually make the payments.
The yield on mortgage-backed securities is based on the average
expected life of the underlying pool of mortgage loans. The actual life of any
particular pool will be shortened by any unscheduled or early payments of
principal and interest. Principal prepayments generally result from the sale of
the underlying property or the refinancing or foreclosure of underlying
mortgages. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible to
predict accurately the average life of a particular pool. Yield on such pools
is usually computed by using the historical record of prepayments for that pool,
or, in the case of newly-issued mortgages, the prepayment history of similar
pools. The actual prepayment experience of a pool of mortgage loans may cause
the yield realized by a Fund to differ from the yield calculated on the basis of
the expected average life of the pool.
Prepayments tend to increase during periods of declining interest
rates and will most likely decrease during periods of rising interest rates.
When prevailing interest rates rise, the value of a pass-through security may
decrease as do the value of other debt securities, but, when prevailing interest
rates decline, the value of a pass-through security is not likely to rise on a
comparable basis with other debt securities because of the prepayment feature of
pass-through securities. The reinvestment of scheduled principal payments and
unscheduled prepayments that a Fund receives may occur at higher or lower rates
than the original investment, thus affecting the yield of the Fund. Monthly
interest payments received by a Fund have a compounding effect which may
increase the yield to shareholders more than debt obligations that pay interest
semiannually. Because of those factors, mortgage-backed securities may be less
effective than U.S. Treasury bonds of similar maturity at maintaining yields
during periods of declining interest rates. Accelerated prepayments adversely
affect yields for pass-through securities purchased at a premium (i.e., at a
price in excess of the principal amount) and may involve additional risk of loss
of principal because the premium may not have been fully amortized at the time
the obligation is repaid. The opposite
B-3
<PAGE>
is true for pass-through securities purchased at a discount. Each Fund may
purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
certificates, the most widely available mortgage-backed securities:
GNMA Certificates. GNMA certificates ("GNMA Certificates") are
-----------------
mortgage-backed securities which evidence an undivided interest in a pool or
pools of mortgages. GNMA Certificates that each Fund may purchase are the
modified pass-through type, which entitle the holder to receive timely payment
of all interest and principal payments due on the mortgage pool, net of fees
paid to the issuer and GNMA, regardless of whether or not the mortgagor actually
makes the payment.
GNMA guarantees the timely payment of principal and interest on
securities backed by a pool of mortgages insured by the FHA or the Farmers' Home
Administration ("FMHA"), or guaranteed by the Veteran's Administration ("VA").
The GNMA guarantee is authorized by the National Housing Act and is backed by
the full faith and credit of the United States. The GNMA is also empowered to
borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates at a premium in the secondary market. As prepayment
rates of the individual mortgage pools vary widely, it is not possible to
predict accurately the average life of a particular issue of GNMA Certificates.
The coupon rate of interest of GNMA Certificates is lower than the
interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the
GNMA Certificates by the amount of the fees paid to GNMA and the issuer. The
coupon rate by itself, however, does not indicate the yield which will be earned
on GNMA Certificates. First, GNMA Certificates may trade in the secondary
market at a premium or discount. Second, interest is earned monthly, rather
than semiannually as with traditional bonds; monthly compounding raises the
effective yield earned. Finally, the actual yield of a GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying it. For
example, if the higher-yielding mortgages from the pool are prepaid, the yield
on the remaining pool will be reduced.
FHLMC Certificates. FHLMC issues two types of mortgage pass-through
------------------
securities: mortgage participation certificates ("PCS") and guaranteed mortgage
certificates ("GMCs") (collectively, "FHLMC Certificates"). PCS resemble GNMA
Certificates in that each PC represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. Like GNMA
Certificates, PCS are assumed to be prepaid fully in their twelfth year. The
FHLMC guarantees timely monthly payment of interest (and, under certain
circumstances, principal) of PCS and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semiannually and return principal once a
year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. government.
B-4
<PAGE>
FNMA Certificates. FNMA issues guaranteed mortgage pass-through
-----------------
certificates ("FNMA Certificates"). FNMA Certificates represent a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest and principal on FNMA
Certificates. The FNMA guarantee is not backed by the full faith and credit of
the U.S. government. However, FNMA guarantees timely payment of interest on
FNMA Certificates and the full return of principal.
Collateralized Mortgage Obligations. Another type of mortgage-backed
security in which each Fund may invest is a Collateralized Mortgage Obligation
("CMO"). CMOs are fully-collateralized bonds which are the general obligations
of the issuer thereof (e.g., the U.S. government, a U.S. government
instrumentality, or a private issuer). The Government Securities Fund will not
invest in privately issued CMOs except to the extent that they are
collateralized by securities of entities that are instrumentalities of the U.S.
government. CMOs generally are secured by an assignment to a trustee (under the
indenture pursuant to which the bonds are issued) of collateral consisting of a
pool of mortgages. Payments with respect to the underlying mortgages generally
are made to the trustee under the indenture. Payments of principal and interest
on the underlying mortgages are not passed through to the holders of the CMOs as
such (i.e., the character of payments of principal and interest is not passed
through, and therefore payments to holders of CMOs attributable to interest paid
and principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs often are issued in two or more classes with varying maturities and stated
rates of interest. Because interest and principal payments on the underlying
mortgages are not passed through to holders of CMOs, CMOs of varying maturities
may be secured by the same pool of mortgages, the payments on which are used to
pay interest on each class and to retire successive maturities in sequence.
Unlike other mortgage-backed securities, CMOs are designed to be retired as the
underlying mortgages are repaid. In the event of prepayment on such mortgages,
the class of CMO first to mature generally will be paid down. Therefore,
although in most cases the issuer of CMOs will not supply additional collateral
in the event of such prepayment, there will be sufficient collateral to secure
CMOs that remain outstanding.
Certain CMOs may be deemed to be investment companies under the 1940
Act. Each Fund intends to conduct operations in a manner consistent with this
view, and therefore generally may not invest more than 10% of its total assets
in such issuers without obtaining appropriate regulatory relief. In reliance on
recent Securities and Exchange Commission ("SEC") staff interpretations, each
Fund may invest in those CMOs and other mortgage-backed securities that are not
by definition excluded from the provisions of the 1940 Act, but have obtained
exemptive orders from the SEC from such provisions.
Stripped Mortgage-Backed Securities. The mortgage-backed securities
in which each Fund may invest include stripped mortgage-backed securities.
Unlike U.S. Treasury securities, which are stripped into separate securities for
each interest and principal payment, mortgage securities are generally stripped
into only two parts: a PO (principal only) strip representing all principal
payments and an IO (interest-only) strip representing all interest payments.
The feature that makes mortgage strips most useful in portfolio
management is their interest rate sensitivity. In principle, mortgage strips
can be very useful hedging devices for a variety of investors and portfolio
managers. However, determining the degree of interest sensitivity of mortgage
strips in different interest rate environments is extremely complicated.
B-5
<PAGE>
The precise sensitivity of mortgage-backed securities and their
associated stripped securities to interest rate changes depends on many factors.
First, the prepayment effect makes the interest rate sensitivity of mortgage-
backed securities different from the interest sensitivity of Treasury
securities. Second, the prepayment effect makes the PO and IO mortgage-backed
strips much more sensitive, on average, to interest rates than the underlying
mortgage-backed security. Third, the prepayment effect is sometimes so strong
that an IO mortgage-backed strip will rise in value when interest rates rise and
fall in value when interest rates fall -- precisely the opposite relationship
from other fixed-income securities. This last feature of stripped mortgage-
backed securities, the positive relationship between the value of some IO strips
and interest rates, is particularly useful to investors who need to hedge a
portfolio of other fixed-income securities.
Mortgage-Backed Security Rolls. The Diversified Income Fund, the
Federal Securities Fund and the Government Securities Fund may enter into
"forward roll" transactions with respect to mortgage-backed securities issued by
GNMA, FNMA or FHLMC. In a forward roll transaction, the Fund will sell a
mortgage-backed security to a U.S. government agency or financial institution
and simultaneously agree to repurchase a similar security from the institution
at a later date at an agreed upon price. The mortgage-backed securities that
are repurchased will bear the same interest rate as those sold, but generally
will be collateralized by different pools of mortgages with different prepayment
histories than those sold. Risks inherent in mortgage-backed security rolls
include: (i) the risk of prepayment prior to maturity, (ii) the possibility
that a Fund may not be entitled to receive interest and principal payments on
the securities sold and that the proceeds of the sale may have to be invested in
money market instruments (typically repurchase agreements) maturing not later
than the expiration of the roll, and (iii) the risk that the market value of the
securities sold by a Fund may decline below the price at which a Fund is
obligated to purchase the securities. Upon entering into a mortgage-backed
security roll a Fund will be required to place cash or other liquid securities
in a segregated account with its custodian in an amount equal to its obligation
under the roll; that amount is subject to the limitation on borrowing described
below under "Investment Restrictions."
ASSET-BACKED SECURITIES. Each Fund may invest up to 15% of its net assets in
asset-backed securities meeting such Fund's credit quality restrictions. These
securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables,
representing the obligations of a number of different parties. Each Fund may
also invest in privately issued asset-backed securities.
Asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
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Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection; and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Fund will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in such
a security.
ZERO-COUPON SECURITIES. The Diversified Income Fund, the High Income Fund, the
Federal Securities Fund and the GOvernment Securities Fund may invest in zero-
coupon securities issued by the U.S. Treasury and, in addition, (ii) the
Diversified Income Fund and High Income Fund may invest in zero-coupon
securities issued by both domestic and foreign corporations, and (iii) the Tax
Exempt Insured Fund may invest in zero-coupon securities issued by state and
local government entities. Investors earn a return on a zero-coupon bond by
purchasing the bond at a discount, that is, by paying less than the face value
of the bond. Since there are no periodic interest payments to reinvest, there
is no reinvestment risk. The yield of a zero-coupon held to maturity is the
yield quoted when the bond is sold. Because a zero-coupon security pays no
interest to its holder during its life or for a substantial period of time, it
usually trades at a deep discount from its face or par value and will be subject
to greater fluctuations of market value in response to changing interest rates
than debt obligations of comparable maturities which make current distributions
of interest. Because the Funds accrue taxable income from these securities
without receiving cash, the Funds may be required to sell portfolio securities
in order to pay a dividend depending upon the proportion of shareholders who
elect to receive dividends in cash rather than reinvesting dividends in
additional shares of the Funds. The Funds might also sell portfolio securities
to maintain portfolio liquidity. In either case, cash distributed or held by
the Funds and not reinvested will hinder the Funds in seeking a high level of
current income.
Zero-Coupon U.S. Government Securities. Zero-coupon U.S. government
securities are: (i) U.S. Treasury notes and bonds which have been stripped of
their unmatured interest coupons and receipts; or (ii) certificates representing
interest in such stripped debt obligations or coupons.
Corporate Zero-Coupon Securities. Corporate zero-coupon securities
are: (i) notes or debentures which do not pay current interest and are issued
at substantial discounts from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into the future, after
which the issuer is obligated to pay interest until maturity, usually at a
higher rate than if interest were payable from the date of issuance and may also
make interest payments in kind (e.g., with identical zero-coupon securities).
Such corporate zero-coupon securities, in addition to the risks identified
above, are subject to the risk of the issuer's failure to pay interest and repay
principal in accordance with the terms of the obligation. A Fund must accrue
the discount or interest on high-yield bonds structured as zero-coupon
securities as income even though it does not receive a corresponding cash
interest payment until the security's maturity or payment date. See "Foreign
Securities" for a description of the risks involved in investments in foreign
corporations.
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PARTICIPATION INTERESTS. The Diversified Income Fund and High Income Fund may
invest in loan participation interests, subject to the 10% of net assets
limitation on illiquid investments. These participation interests provide each
fund an undivided interest in a loan made by the issuing financial institution
in the proportion that the Fund's participation interest bears to the total
principal amount of the loan. The loan participations in which the Funds may
invest will typically be participating interests in loans made by a syndicate of
banks, represented by an agent bank which has negotiated and structured the
loan, to corporate borrowers to finance internal growth, mergers, acquisitions,
stock repurchases, leveraged buy-outs and other corporate activities. Such
loans may also have been made to governmental borrowers, especially governments
of developing countries (loc debt). The loans underlying such participations
may be secured or unsecured, and each Fund may invest in loans collateralized by
mortgages on real property or which have no collateral. The loan participations
themselves may extend for the entire term of the loan or may extend only for
short "strips" that correspond to a quarterly or monthly floating rate interest
period on the underlying loan. Thus, a term or revolving credit that extends
for several years may be subdivided into shorter periods.
The loan participations in which each Fund will invest will also vary
in legal structure. Occasionally, lenders assign to another institution both
the lender's rights and obligations under a credit agreement. Since this type
of assignment relieves the original lender of its obligations, it is called a
novation. More typically, a lender assigns only its right to receive payments
of principal and interest under a promissory note, credit agreement or similar
document. A true assignment shifts to the assignee the direct debtor-creditor
relationship with the underlying borrower. Alternatively, a lender may assign
only part of its rights to receive payments pursuant to the underlying
instrument or loan agreement. Such partial assignments, which are more
accurately characterized as "participating interests," do not shift the debtor-
creditor relationship to the assignee, who must rely on the original lending
institution to collect sums due and to otherwise enforce its rights against the
agent bank which administers the loan or against the underlying borrower.
No more than 5% of each Fund's net assets can be invested in
participation interests of the same issuing bank. Each Fund must look to the
creditworthiness of the borrowing entity, which is obligated to make payments of
principal and interest on the loan. In the event the borrower fails to pay
scheduled interest or principal payments, the Fund could experience a reduction
in its income and might experience a decline in the net asset value of its
shares. In the event of a failure by the financial institution to perform its
obligation in connection with the participation agreement, the Fund might incur
certain costs and delays in realizing payment or may suffer a loss or principal
and/or interest.
FOREIGN SECURITIES. The Diversified Income Fund and High Income Fund may invest
in u.s. dollar denominated fixed-income securities issued by domestic
corporations in any industry. The Funds may also invest in debt obligations
(which may be denominated in u.s. dollars or in non-u.s. currencies) issued or
guaranteed by foreign corporations, certain supranational entities and foreign
governments (including political subdivisions having taxing authority) or their
agencies and instrumentalities, and debt obligations issued by U.S. corporations
which are either denominated in non-U.S. currencies or traded in the foreign
markets (e.g., Eurobonds).
The Adviser may direct the investment of assets of the Diversified
Income Fund and the High Income Fund in securities of foreign issuers in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") 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 receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. EDRs are European receipts evidencing a similar
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arrangement. ADRs may be sponsored or unsponsored. A sponsored ADR is issued
by a depository which has an exclusive relationship with the issuer of the
underlying security. An unsponsored ADR may be issued by any number of U.S.
depositories. Holders of unsponsored ADRs generally bear all the costs
associated with establishing the unsponsored ADR. The depository of an
unsponsored ADR is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through to the holders of the
unsponsored ADR voting rights with respect to the deposited securities or pool
of securities. The Funds 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 Funds may purchase securities in local markets and direct delivery of these
ordinary shares to the local depository of an ADR agent bank in the foreign
country. Simultaneously, the ADR agents create a certificate which settles at
the Fund's custodian in five days. The Funds may also execute trades on the
U.S. markets using existing ADRs. A foreign issuer of the security underlying
an ADR is generally not subject to the same reporting requirements in the United
States as a domestic issuer. Accordingly the information available to a U.S.
investor will be limited to the information the foreign issuer is required to
disclose in its own country and the market value of an ADR may not reflect
undisclosed material information concerning the issuer of the underlying
security. For purposes of a 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 and EDRs, in bearer
form, are designed for use in the European securities markets.
The obligations of foreign governmental entities may or may not be
supported by the full faith and credit of a foreign government. Obligations of
supranational entities include those of international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and of international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. There is no assurance that foreign
governments will be able or willing to honor their commitments.
Investments in foreign securities, including securities of developing
countries, present special additional investment risks and considerations not
typically associated with investments in domestic securities, including
reduction of income by foreign taxes; fluctuation in value of foreign portfolio
investments due to changes in currency rates and control regulations (e.g.,
currency blockage); 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 in the U.S.;
greater difficulties in commencing lawsuits; higher brokerage commission rates
than in the U.S.; increased possibilities in some countries of expropriation,
confiscatory taxation, political, financial or social instability or adverse
diplomatic developments; and differences (which may be favorable or unfavorable)
between the U.S. economy and foreign economies.
Because the Diversified Income Fund and the High Income Fund may
purchase securities denominated in foreign currencies, a change in the value of
any such currency against the U.S. dollar will result in a change in the U.S.
dollar value of each Fund's assets and income available for distribution. In
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addition, although a portion of each Fund's investment income may be received or
realized in foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars, and absorb the cost of currency
fluctuations. Each Fund may engage in foreign currency exchange transactions
for hedging purposes to protect against changes in future exchange rates. See
"Hedging Strategies." Costs will be incurred in connection with conversions
between various currencies.
The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the Funds will invest only in securities
denominated in foreign currencies that at the time of investment do not have
significant government-imposed restrictions on conversion into U.S. dollars,
there can be no assurance against subsequent imposition of currency controls.
In addition, the values of foreign securities will fluctuate in response to
changes in U.S. and foreign interest rates.
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 and bond markets that do not move in a
manner parallel to U.S. markets. From time to time, U.S. government policies
have discouraged certain investments abroad by U.S. investors, through taxation
or other restrictions, and it is possible that such restrictions could be
reimposed.
ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets,
determined as of the date of purchase, in illiquid securities including
repurchase agreements which have a maturity of longer than seven days or in
other securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended ("Securities Act"), securities which are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. There will generally be a lapse of time between a mutual
fund's decision to sell an unregistered security and the registration of such
security promoting sale. Adverse market conditions could impede a public
offering of such securities. When purchasing unregistered securities, each of
the Funds will seek to obtain the right of registration at the expense of the
issuer (except in the case of Rule 144A securities).
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.
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Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act, for which there is a readily available market, will not be
deemed to be illiquid. The Adviser will monitor the liquidity of such
restricted securities subject to the supervision of the Board of Trustees of the
Trust (the "Trustees"). In reaching liquidity decisions, the Adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
Commercial paper issues in which the Funds may invest, include
securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-
called private placement exemption from registration which is afforded by
Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper
is restricted as to disposition under the Federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Fund's 10%
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 Trustees. The Trustees 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 Trustees
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.
The staff of the SEC has taken the position that purchased over-the-
counter ("OTC") options and the assets used as "cover" for written OTC options
are illiquid. The assets used as cover for OTC options written by a Fund will
be considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure will be considered illiquid only
to the extent that the maximum repurchase price under the option formula exceeds
the intrinsic value of the option.
SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. For temporary defensive
purposes, each Fund may invest up to 100% of its total assets in short-term
fixed-income securities, including corporate debt obligations and money market
instruments rated in one of the two highest categories by a nationally
recognized statistical rating organization (or determined by the Adviser to be
of equivalent quality). A description of securities ratings is contained in the
Appendix to this Statement of Additional Information.
Subject to the limitations described above, the following is a
description of the types of money market and short-term fixed-income securities
in which the Funds may invest:
U.S. Government Securities: See 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. Each 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 a
Fund at varying rates of interest
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pursuant to direct arrangements between a Fund, as lender, and the borrower.
Master demand notes permit daily fluctuations in the interest rates, while
interest rates under variable amount floating rate notes fluctuate on a weekly
basis. These notes permit daily changes in the amounts borrowed. A 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, a 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, a 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 rated, a 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.
Certificates of Deposit and Bankers' Acceptances: 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 Funds will generally open interest-bearing accounts only with, or
purchase certificates of deposit or bankers' acceptances only from, banks or
savings and loan associations whose deposits are federally-insured and whose
capital is at least $50 million.
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 and Reverse Repurchase Agreements: See the
sections entitled "Repurchase Agreements" and "Reverse Repurchase Agreements"
below.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
banks, brokers or securities dealers. In such agreements, the seller agrees to
repurchase a security from a Fund 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 resale price is in excess
of the purchase price, reflecting an agreed-upon rate of return effective for
the period of time a Fund's money is invested in the security. Whenever a Fund
enters into a repurchase agreement, it obtains collateral having a market value
at least equal to 102% of the amount of the purchase price. However, a Fund may
collateralize the amount
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of such transaction at 100% if the collateral is cash. The instruments held as
collateral are valued daily and if the value of the instruments declines, a Fund
will require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreements declines, a Fund may incur a loss.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited. The Trustees have established guidelines to be used by the Adviser in
connection with transactions in repurchase agreements and will regularly monitor
each Fund's use of repurchase agreements. A 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 10% of the value of its total
assets. However, for temporary defensive purposes, there is no limit on the
amount of a Fund's net assets that may be subject to repurchase agreements
having a maturity of seven days or less.
REVERSE REPURCHASE AGREEMENTS. Each Fund may engage in 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's investment of
the proceeds of a reverse repurchase agreement is the speculative factor known
as leverage. The Funds will enter into a reverse repurchase agreement only if
the interest income from investment of the proceeds is expected to be greater
than the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. The fund will segregate with
the custodian cash or liquid securities in an amount at least equal to 102% of
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."
INTEREST-RATE SWAP TRANSACTIONS. The Diversified Income and the High Income
Fund may enter into either asset-based interest-rate swaps or liability-based
interest-rate swaps, depending on whether it is hedging its assets or its
liabilities. A Fund will usually enter into interest-rate swaps on a net basis,
i.e., the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Since these
hedging transactions are entered into for good faith hedging purposes and a
segregated account has been established, the adviser believes such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to the borrowing restrictions applicable to each Fund. The net
amount of the excess, if any, of a Fund's obligations over its entitlements with
respect to each interest-rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by a
custodian that satisfies the requirements of the 1940 Act. To the extent that a
Fund enters into interest-rate swaps on other than a net basis, the amount
maintained in a segregated account will be the full amount of the Fund's
obligations, if any, with respect to such interest-rate swaps, accrued on a
daily basis. A Fund may pledge up to 5% of its net assets in connection with
interest-rate swap transactions. A Fund will not enter into any interest-rate
swaps unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated in the highest rating category of at least one nationally
recognized rating organization at the time of entering into such transaction.
If there is a default by the other party to such transaction, a Fund will have
contractual remedies pursuant to the agreement related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
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The use of interest-rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of a Fund would diminish compared to what it would have been if this
investment technique was never used.
A Fund may only enter into interest-rate swaps to hedge its portfolio.
Interest-rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest-rates swaps is limited to the net amount of interest payments that a
Fund is contractually obligated to make. If the other party to an interest-rate
swap defaults, a Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest-
rate swaps are individually negotiated, a Fund expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest-rate swaps.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund may purchase or sell
such securities on a "when-issued" or "delayed-delivery" basis. Although a 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 a 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. A Fund will maintain a segregated account with
its custodian, consisting of cash or liquid securities at least equal to the
value of purchase commitments until payment is made. A Fund will likewise
segregate liquid assets in respect of securities sold on a delayed-delivery
basis.
A 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 a 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 a Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If a
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 a 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 a 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 objectives and policies and not for the purposes
of investment leverage. A Fund enters into such transactions only with the
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 a 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, a Fund might
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sell securities in its portfolio on a forward commitment basis to attempt to
limit its exposure to anticipated falling prices. In periods of falling interest
rates and rising prices, a 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.
WHEN, AS AND IF ISSUED SECURITIES. Each Fund may purchase securities on a
"when, as and if issued" basis under which the issuance of the security depends
upon the occurrence of a subsequent event, such as approval of a merger,
corporate reorganization or debt restructuring. The commitment for the purchase
of any such security will not be recognized until the Adviser determines that
issuance of the security is probable. At such time, each Fund will record the
transaction, and in determining its net asset value, will reflect the value of
the security daily. At such time, each Fund will also establish a segregated
account with its custodian in which it will maintain cash or liquid securities
equal in value to recognized commitments for such securities. The value of a
Fund's commitments to purchase the securities of any one issuer, together with
the value of all securities of such issuer owned by a Fund, may not exceed 5% of
the value of the Fund's total assets at the time the initial commitment to
purchase such securities is made. Subject to the foregoing restrictions, each
Fund may purchase securities on such basis without limit. An increase in the
percentage of a Fund's assets committed to the purchase of securities on a when,
as and if issued basis, may increase the volatility of its net asset value. The
adviser does not believe that the net asset value of the Funds will be adversely
affected by its purchase of securities on such basis.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Fund may lend portfolio securities in amounts up to 33% 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 that is equal to at least 102% of the market
value, determined daily, of the loaned securities. In lending its portfolio
securities, a Fund receives income while retaining the securities' potential for
capital appreciation. The advantage of such loans is that a Fund continues to
receive the interest and dividends on the loaned securities while at the same
time earning interest on the collateral, which will generally be invested in
short-term obligations. A loan may be terminated by the borrower on one
business day's notice or by a 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
only be made to firms deemed by the adviser to be creditworthy. On termination
of the loan, the borrower is required to return the securities to a Fund; and
any gain or loss in the market price of the loaned security during the loan
would inure to the Fund. each 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 which accompany loaned securities pass
to the borrower, each 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 which are the subject of the loan.
PREFERRED STOCKS. The Diversified Income Fund's investment in fixed income
securities issued by domestic corporations may include preferred stocks. In
addition, up to 20% of the High Income Fund's total assets may be invested in
common stocks, preferred stocks, or other equity securities. Dividends on some
preferred stock may be "cumulative" if stated dividends from prior periods have
not been paid. Preferred stock generally has a preference over common stock on
the distribution of a corporation's assets in the event of liquidation of the
corporation, and may be "participating," which means that it may be entitled to
a
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<PAGE>
dividend exceeding the stated dividend in certain cases. The rights of
preferred stock are generally subordinate to rights associated with a
corporation's debt securities.
WARRANTS AND RIGHTS. The Diversified Income Fund may invest up to 5% of its
total assets (at the time of purchase) in warrants and rights. The Fund will
invest only in those warrants or rights: (i) acquired as part of a unit or
attached to other securities purchased by the Fund; or (ii) acquired as part of
a distribution from the issuer. Warrants basically are options to purchase
equity securities at specific prices valid for a specific period of time. Their
prices do not necessarily move parallel to the prices of the underlying
securities. Rights are similar to warrants but normally have a short duration
and are distributed by the issuer to its shareholders. Warrants and rights have
no voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.
PAY-IN-KIND BONDS. Investments of the Diversified Income Fund, the High Income
Fund and the Federal Securities Fund in fixed-income securities may include pay-
in-kind bonds. These are securities which pay interest in either cash or
additional securities, at the issuer's option, for a specified period. Pay-in-
kind bonds, like zero-coupon bonds, are designed to give an issuer flexibility
in managing cash flow. Pay-in-kind bonds can be either senior or subordinated
debt and trade flat (i.e., without accrued interest). The price of pay-in-kind
bonds is expected to reflect the market value of the underlying debt plus an
amount representing accrued interest since the last payment. Pay-in-kind bonds
are usually less volatile than zero-coupon bonds, but more volatile than cash
pay securities.
INCOME ENHANCEMENT STRATEGIES. Each Fund may write (i.e., sell) call options
("calls") on securities that are traded on U.S. and foreign securities exchanges
and over-the-counter markets to enhance income through the receipt of premiums
from expired calls and any net profits from closing purchase transactions.
After any such sale up to 100% of a Fund's total assets may be subject to calls.
All such calls written by a Fund must be "covered" while the call is outstanding
(i.e., the fund must own the securities subject to the call or other securities
acceptable for applicable escrow requirements). Calls on futures (defined
below) used to enhance income, must be covered by deliverable securities or by
liquid assets segregated to satisfy the futures contract. 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. In addition, the Fund could experience capital losses which might
cause previously distributed short-term capital gains to be re-characterized as
a non-taxable return of capital to shareholders.
HEDGING STRATEGIES. For hedging purposes as a temporary defensive maneuver, the
Diversified Income Fund and the High Income Fund may use forward contracts on
forward currencies ("Forward Contracts") and each Fund may use interest-rate
futures contracts, foreign currency futures contracts, and stock and bond index
futures contracts (together, "Futures"), as well as call and put options on
equity and debt securities, futures, stock and bond indices and foreign
currencies (all the foregoing referred to as "Hedging Instruments"); except that
the Government Securities Fund, the Federal Securities Fund and the Tax Exempt
Insured Fund may not engage in foreign currency futures and options thereon.
Hedging Instruments may be used to attempt to: (i) protect against possible
declines in the market value of a Fund's portfolio resulting from downward
trends in the equity and debt securities markets (generally due to a rise in
interest rates); (ii) protect a Fund's unrealized gains in the value of its
equity and debt securities which have appreciated; (iii) facilitate selling
securities for investment reasons; (iv) establish a position in the equity and
debt securities markets as a temporary substitute for purchasing particular
equity and debt securities; or (v) reduce the risk of adverse currency
fluctuations.
A 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 a
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Fund's portfolio, to permit a Fund to retain unrealized gains in the value of
portfolio securities which have appreciated, or to facilitate selling securities
for investment reasons, a 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, a Fund could: (i) purchase Futures, or (ii) purchase calls on
such Futures or on securities. When hedging to protect against declines in the
dollar value of a foreign currency-denominated security, the Diversified Income
Fund and the High Income Fund could: (i) purchase puts on that foreign currency
and on foreign currency Futures; (ii) write calls on that currency or on such
Futures; or (iii) enter into Forward Contracts at a lower rate than the spot
("cash") rate. Additional information about the Hedging Instruments the Funds
may use is provided below.
OPTIONS
- -------
Options on Securities. As noted above, each Fund may write and
purchase call and put options on equity and debt securities.
When a 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. A Fund has retained
the risk of loss should the price of the underlying security decline during the
call period, which may be offset to some extent by the premium.
To terminate its obligation on a call it has written, a 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 a Fund retains the underlying
security and the premium received. Any such profits are considered short-term
capital gains for Federal income tax purposes, and when distributed by the Fund,
are taxable as ordinary income. If a 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 a 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. A 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 a 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 a
Fund as writing a covered call. The premium a 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, a 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, a Fund (as
the writer of the put) realizes a gain in the amount of the premium. If the put
is exercised, a Fund must fulfill its obligation to purchase the underlying
investment at the exercise
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price, which will usually exceed the market value of the investment at that
time. In that case, a 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.
A 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 a 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. A 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.
As described above, for writing covered calls, any and all such profits
described herein from writing puts are considered short-term gains for Federal
tax purposes, and when distributed by a Fund, are taxable as ordinary income.
When a 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 a Fund owns enables the Fund to protect itself during the put period
against a decline in the value of the underlying investment below the exercise
price by selling such underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and as a result the put is not exercised or
resold, the put will become worthless at its expiration date, and the 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 a 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, a 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, a Fund will deposit in escrow liquid assets
with a value equal to or greater than the exercise price of the underlying
securities. A Fund therefore forgoes the opportunity of investing the
segregated assets or writing calls against those assets. As long as the
obligation of a Fund as the put writer continues, it may be assigned an exercise
notice by the broker-dealer through whom such option was sold, requiring a Fund
to take delivery of the underlying security against payment of the exercise
price. A 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
a Fund effects a closing purchase transaction by purchasing a put of the same
series as that previously sold. Once a Fund has been assigned an exercise
notice, it is thereafter not allowed to effect a closing purchase transaction.
Options on Foreign Currencies. The Diversified Income Fund and the
High Income Fund may write and purchase calls on foreign currencies. A call
written by a Fund on a foreign currency is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call written by a Fund on a foreign currency is for cross-hedging purposes if it
is not covered, but is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the
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<PAGE>
Fund owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, a Fund collateralizes the option by maintaining in a segregated
account with the Fund's custodian, cash or liquid securities in an amount not
less than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
Options on Securities Indices. As noted above, each 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 or Futures.
When a Fund buys a call on a securities index, it pays a premium. During the
call period, upon exercise of a call by a 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 a 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
of the put. That cash payment is determined by the multiplier, in the same
manner as described above pertaining to calls.
FUTURES AND OPTIONS ON FUTURES
- ------------------------------
Futures. Upon entering into a Futures transaction, a Fund will be
required to deposit an initial margin payment with the futures commission
merchant (the "futures broker"). The initial margin payment will be deposited
with the Fund's custodian in an account registered in the futures broker's name;
however, the futures broker can gain access to that account only under specified
conditions. As the Future is marked-to-market to reflect changes in its market
value, subsequent margin payments, called variation margin, will be paid to or
by the futures broker on a daily basis. Prior to expiration of the Future, if a
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.
Interest-rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Fund's current or intended investments in fixed-income securities. For example,
if a Fund owned long-term bonds and interest rates were expected to increase,
that Fund might sell interest-rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that Fund's
portfolio. However, since the Futures market is more liquid than the cash
market, the use of interest-rate futures contracts as a hedging technique allows
a Fund to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Fund's interest-rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the net asset value of that Fund from declining as much as it otherwise
would have. On the other hand, if interest rates were expected to decline,
interest-rate futures contracts may be purchased to hedge in anticipation of
subsequent purchases of long-term bonds at higher prices. Since the
fluctuations in the value of the interest-rate futures contracts should be
similar to that of long-term bonds, a Fund could protect itself against the
effects of the anticipated rise in the value of long-term bonds without actually
buying them until the necessary cash
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<PAGE>
became available or the market had stabilized. At that time, the interest-rate
futures contracts could be liquidated and that Fund's cash reserves could then
be used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used
for hedging purposes to attempt to protect a Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example, a
Fund may sell stock or bond index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the 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 a Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock or
bond index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions in
stock or bond index futures contracts will be closed out.
As noted above, the Diversified Income Fund and the High Income Fund
may purchase and sell foreign currency futures contracts for hedging purposes to
attempt to protect current or intended investments from fluctuations in currency
exchange rates. Such fluctuations could reduce the dollar value of portfolio
securities denominated in foreign currencies, or increase the cost of foreign-
denominated securities to be acquired, even if the value of such securities in
the currencies in which they are denominated remains constant. A Fund may sell
futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the
resulting adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the Futures contracts. However, if the
value of the foreign currency increases relative to the dollar, a Fund's loss on
the foreign currency futures contract may or may not be offset by an increase in
the value of the securities since a decline in the price of the security stated
in terms of the foreign currency may be greater than the increase in value as a
result of the change in exchange rates.
Conversely, a Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing Futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Fund purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
Options on Futures. As noted above, each Fund may purchase and write
options on interest-rate futures contracts and stock and bond index futures
contracts, and the Diversified Income Fund and the High Income Fund may purchase
and write options on foreign currency futures contracts. (Unless otherwise
specified, options on interest-rate futures contracts, options on stock and bond
index futures contracts and options on foreign currency futures contracts are
collectively referred to as "Options on Futures.")
The writing of a call option on a Futures contract constitutes a
partial hedge against declining prices of the securities in a 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
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put option is higher than the exercise price, a Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
a Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its Options on Futures positions, a Fund's losses from exercised
Options on Futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
A 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, a 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 a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, a 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 which the Fund intends to purchase may be less expensive.
FORWARD CONTRACTS
- -----------------
The Diversified Income Fund and the High Income Fund may use Forward
Contracts. A Forward Contract involves bilateral obligations of one party to
purchase, and another party to sell, a specific currency at a future date (which
may be any fixed number of days from the date of the contract agreed upon by the
parties), at a price set at the time the contract is entered into. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. No price is paid
or received upon the purchase or sale of a Forward Contract.
A Fund may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies' increase. A Fund will not
speculate with Forward Contracts or foreign currency exchange rates.
A Fund may enter into Forward Contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates receipt of dividend payments in a foreign currency, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale of
the amount of foreign currency involved in the underlying transaction. A Fund
will thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
A Fund may also use Forward Contracts to lock in the U.S. dollar value
of portfolio positions ("position hedge"). In a position hedge, for example,
when a Fund believes that foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
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of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency, or when a Fund
believes that the U.S. dollar may suffer a substantial decline against a foreign
currency, it may enter into a Forward Contract to buy that foreign currency for
a fixed dollar amount. In this situation a Fund may, in the alternative, enter
into a Forward Contract to sell a different foreign currency for a fixed U.S.
dollar amount where the Fund believes that the U.S. dollar value of the currency
to be sold pursuant to the forward contract will fall whenever there is a
decline in the U.S. dollar value of the currency in which portfolio securities
of the Fund are denominated ("cross-hedged").
The Fund's custodian will place cash or liquid securities in a
separate account of the Fund having a value equal to the aggregate amount of the
Fund's commitments under Forward Contracts entered into with respect to position
hedges and cross-hedges to the extent that such positions are not otherwise
covered. If the value of the securities placed in a separate account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. As an alternative to maintaining all or part of
the separate account, a Fund may purchase a call option permitting the Fund to
purchase the amount of foreign currency being hedged by a forward sale contract
at a price no higher than the Forward Contract price or the Fund may purchase a
put option permitting the Fund to sell the amount of foreign currency subject to
a forward purchase contract at a price as high or higher than the Forward
Contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency a Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency a Fund is obligated to deliver. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward Contracts involve the risk that anticipated currency movements will not
be accurately predicted, causing a Fund to sustain losses on these contracts and
transactions costs.
At or before the maturity of a Forward Contract requiring a Fund to
sell a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a Forward Contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. A Fund would realize a
gain or loss as a result of entering into such an offsetting Forward Contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
offsetting contract.
The cost to a Fund of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such
B-22
<PAGE>
contracts are not traded on an exchange, a Fund must evaluate the credit and
performance risk of each particular counterparty under a Forward Contract.
Although a Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
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 a Fund's entering into a closing transaction.
An option position may be closed out only on a market which provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Fund's option
activities may affect its turnover rate and brokerage commissions. The exercise
by a Fund of puts on securities will cause the sale of related investments, thus
increasing portfolio turnover. Although such exercise is within a Fund's
control, holding a put might cause the Fund to sell the related investments for
reasons which would not exist in the absence of the put. A 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 which would apply to direct purchases
or sales of such underlying investments. Premiums paid for options are small in
relation to the market value of the related investments, and consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading in options could result in a Fund's net asset value being more sensitive
to changes in the value of the underlying investments.
In the future, each 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 a Fund's investment objectives,
legally permissible and adequately disclosed.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
- -----------------------------------------
Each 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 net assets of its portfolio, after taking into account
unrealized profits and unrealized losses on any such transactions. However, the
Fund intends to engage in Futures transactions and options thereon only for
B-23
<PAGE>
hedging purposes. Margin deposits may consist of cash or securities acceptable
to the broker and the relevant contract market.
Transactions in options by a Fund are subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options were written or purchased on the
same or different exchanges or are held in one or more accounts or through one
or more exchanges or brokers. Thus, the number of options which a 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 a Fund
purchases a Future, the Fund will maintain, in a segregated account or accounts
with its custodian, 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.
TAX ASPECTS OF HEDGING INSTRUMENTS
- ----------------------------------
Each Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"). One of the tests
for such qualification is that less than 30% of its gross income must be derived
from gains realized on the sale of stock or securities held for less than three
months. This limitation may limit the ability of each Fund to engage in options
transactions and, in general, to hedge investment risk.
POSSIBLE RISK FACTORS IN HEDGING
- --------------------------------
In addition to the risks discussed in the Prospectus and above, there
is a risk in using short hedging by selling Futures to attempt to protect
against decline in value of a 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 which could distort the normal 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 a 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.
LEVERAGE. In seeking to enhance investment performance, the Federal Securities
Fund, Diversified Income Fund and High Income Fund may each increase its
ownership of securities by borrowing from banks at
B-24
<PAGE>
fixed rates of interest and investing the borrowed funds, subject to the
restrictions stated in the Prospectus. Any such borrowing will be made only from
banks and pursuant to the requirements of the 1940 Act and will be made only to
the extent that the value of the Fund's asset less its liabilities other than
borrowings, is equal to at least 300% of all borrowings including the proposed
borrowing. If the value of a Fund's asset 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.
HIGH-YIELD/HIGH-RISK SECURITIES. The Diversified Income Fund May, and the High
Income Fund will, invest in lower-rated bonds commonly referred to as "junk
bonds." These securities are rated "Baa" or lower by Moody's Investors Service,
Inc. ("Moody's") or "BBB" or lower by Standard Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc. ("S&P"). Each Fund may invest in
securities rated as low as "C" by Moody's or "D" by S&P. These ratings indicate
that the obligations are speculative and may be in default. In addition, each
such Fund may invest in unrated securities subject to the restrictions stated in
the prospectus.
Certain Risk Factors Relating to High-Yield, High-Risk Securities.
The descriptions below are intended to supplement the discussion in the
Prospectus entitled "Risk Factors -- High-Yield/High- Risk Securities."
GROWTH OF HIGH-YIELD, HIGH-RISK BOND MARKET. The widespread expansion
-------------------------------------------
of government, consumer and corporate debt within the U.S. economy has made the
corporate sector more vulnerable to economic downturns or increased interest
rates. Further, an economic downturn could severely disrupt the market for
high-yield, high-risk bonds and adversely affect the value of outstanding bonds
and the ability of the issuers to repay principal and interest.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High-yield, high-
-------------------------------------------------
risk bonds are very sensitive to adverse economic changes and corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress that
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations to pay interest
or principal or entered into bankruptcy proceedings, a Fund may incur losses or
expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and change can be expected to result in increased
volatility of market prices of high-yield, high-risk bonds and a Fund's net
asset value.
PAYMENT EXPECTATIONS. High-yield, high-risk bonds may contain
--------------------
redemption or call provisions. If an issuer exercised these provisions in a
declining interest rate market, a Fund would have to replace the security with a
lower yielding security, resulting in a decreased return for investors.
Conversely, a high-yield, high-risk bond's value will decrease in a rising
interest rate market, as will the value of the Fund's assets. If the Fund
experiences significant unexpected net redemptions, this may force it to sell
high-yield, high-risk bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Fund's rate of return.
B-25
<PAGE>
LIQUIDITY AND VALUATION. There may be little trading in the secondary
-----------------------
market for particular bonds, which may adversely affect a Fund's ability to
value accurately or dispose of such bonds. Adverse publicity and investor
perception, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield, high-risk bonds, especially in a thin
market.
LEGISLATION. Federal laws require the divestiture by federally
-----------
insured savings and loan associations of their investments in high yield bonds
and limit the deductibility of interest by certain corporate issuers of high
yield bonds. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities.
TAXES. A Fund may purchase debt securities (such as zero-coupon or
-----
pay-in-kind securities) that contain original issue discount. Original issue
discount that accrues in a taxable year is treated as earned by a 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.
MUNICIPAL SECURITIES AND SHORT-TERM TAXABLE SECURITIES. Subject to the
restrictions set forth in the prospectus, the Tax Exempt Insured Fund seeks to
achieve its investment objective by investing in municipal securities and short-
term taxable securities (defined below).
Municipal Securities. "Municipal Securities" includes long-term
(i.e., maturing in over ten years) and medium-term (i.e., maturing from three to
ten years) municipal bonds ("Municipal Bonds") and short-term (i.e., maturing in
one day to three years) municipal notes and tax-exempt commercial paper
("Municipal Notes"), and in each case refers to debt obligations issued by or on
behalf of states, territories and possessions of the United States and of the
District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest from which is, in the opinion of bond counsel at
the time of issuance, exempt from Federal income tax.
The two principal classifications of Municipal Bonds are general
obligation bonds and revenue or special obligation bonds. General obligation
bonds are secured by the issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest. The term "issuer" means the agency,
authority, instrumentality or other political subdivision whose assets and
revenues are available for the payment of principal and interest on the bonds.
Revenue or special obligation bonds are payable only from the revenue derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special tax or other specific revenue source and generally are not
payable from the unrestricted revenues of the issuer. There are, of course,
variations in the quality of Municipal Bonds, both within a particular
classification and between classifications.
Municipal Housing Bonds are Municipal Bonds issued by state and
municipal authorities established to purchase single family and other
residential mortgages from commercial banks and other lending institutions
within the applicable state or municipality. Such Bonds are typically revenue
or special obligation bonds in that they are secured only by the authority
issuing such bonds. Such authorities are located in or have been established by
at least 45 states and generally are intended to facilitate the construction and
sales of housing for low income families. Generally, the authorities are not
entitled to state or municipal appropriations from general tax revenues. As a
result, and because investors in Municipal Housing Bonds receive repayments of
principal as the underlying mortgages are paid prior to maturity, the yields
obtainable on such Bonds exceed those of other similarly rated Municipal Bonds.
B-26
<PAGE>
Municipal Housing Bonds are used to purchase single family or other residential
mortgages which may or may not be insured by the FHA or guaranteed by the VA.
Some Municipal Housing Bonds, however, are used only to purchase residential
mortgages that are either insured by the FHA or guaranteed by the VA. Under FHA
insurance programs, upon the conveyance of the insured premises and compliance
with certain administrative procedures, the FHA pays to the mortgage insurance
benefits equal to the unpaid principal amount of the defaulted mortgage loan.
Under a VA guaranty, the VA guarantees the payment of a mortgage loan up to a
maximum. The liability of the VA on any such guaranty is reduced or increased
pro rata with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable on the guaranty exceed the amount of the original
guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of the mortgaged premises is greater than the original guaranty
as adjusted. The VA may, at its option and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage loan
upon its assignment to the VA of the property. As most Municipal Housing Bonds
are secured only by the mortgages purchased, bonds that are used to purchase
mortgages that are either insured by the FHA or guaranteed by the VA, will have
less risk of loss of principal than bonds that are used to purchase comparable
mortgages that are not insured by the FHA or guaranteed by the VA.
The Fund may invest in Municipal Bonds which, on the date of
investment, are within the four highest ratings of Moody's ("Aaa," "Aa," "A,"
"Baa") or S&P ("AAA," "AA," "A," "BBB") or in Municipal Bonds which are not
rated, provided that in the opinion of the Adviser, such Municipal Bonds are
comparable in quality to those within the four highest ratings. Though bonds
rated Baa or BBB normally exhibit 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 such bonds than for
bonds in higher rated categories. Occasional speculative factors apply to some
bonds in this category.
The ratings of Moody's and S&P represent their respective opinions of
the qualities of the securities they undertake to rate and such ratings are
general and are not absolute standards of quality. In determining suitability of
investment in a particular unrated security, the Adviser will take into
consideration asset and debt coverage, the purpose of the financing, history of
the issuer, existence of other rated securities of the issuer and other general
conditions as may be relevant, including comparability to other issuers.
The Fund has no restrictions on the maturity of Municipal Securities
in which it may invest. The Fund seeks to invest in Municipal Securities of
such maturities that, in the judgment of the Adviser will provide a high level
of current income consistent with liquidity requirements and market conditions
after taking into account the cost of any insurance obtainable on such Municipal
Securities. While short-term trading increases the Fund's turnover, the
execution costs for Municipal Securities are substantially less than for
equivalent dollar values of equity securities.
Generally, the value of Municipal Securities will change as the
general level of interest rates fluctuate. During periods of rising interest
rates, the value of outstanding long-term, fixed-income securities generally
decline. Conversely, during periods of falling interest rates, the value of
such securities generally increase. The value of the Fund's shares fluctuates
with the value of its investments. In addition, the individual credit ratings
of issuers' obligations, the ability of such issuers to make payments of
interest and principal on their obligations, and the value of any insurance
applicable thereto, also affects the value of the Fund's investments.
B-27
<PAGE>
Yields on Municipal Bonds vary depending on a variety of factors,
including the general condition of the financial markets and of the municipal
bond market, the size of a particular offering, the maturity of the obligation
and the credit rating of the issuer. Generally, Municipal Bonds of longer
maturities produce higher current yields but are subject to greater price
fluctuation due to changes in interest rates, tax laws and other general market
factors than are Municipal Bonds with shorter maturities. Similarly, lower-
rated Municipal Bonds generally produce a higher yield than higher-rated
Municipal Bonds due to the perception of a greater degree of risk as to the
ability of the issuer to pay principal and interest obligations.
Short-Term Taxable Securities. "Short-Term Taxable Securities" mature
in one year or less from the date of purchase and consist of the following
obligations, the income from which is subject to Federal income tax:
obligations of the U.S. government, its agencies or instrumentalities, some of
which may be secured by the full faith and credit of the U.S. government and
some of which may be secured only by the credit of the agency or instrumentality
of the U.S. government issuing such obligations; corporate bonds or debentures
rated within the four highest grades by either Moody's or S&P; commercial paper
rated by either of such rating services (Prime-1 through Prime 2- or A-1 through
A-2, respectively) or, if not rated, issued by companies having an outstanding
debt issue rated at least "A" by either of such rating services; certificates of
deposit and bankers' acceptances of banks having assets in excess of $2 billion.
Insurance Feature. As discussed in the Prospectus, the Fund under
normal market conditions invests at least 65% of its total assets in Municipal
Bonds that, at the time of purchase, either (1) are insured under a Mutual Fund
Insurance Policy issued to the Trust for the benefit of the Fund by Financial
Guaranty Insurance Company ("Financial Guaranty") or another insurer (subject to
the limitations set forth below); (2) are insured under an insurance policy
obtained by the issuer or underwriter of such Municipal Bonds at the time of
original issuance thereof (a "New Issue Insurance Policy"); or (3) are without
insurance coverage, provided that, an escrow or trust account has been
-------- ----
established pursuant to the documents creating the Municipal Bonds and
containing sufficient U.S. government securities backed by the U.S. government's
full faith and credit pledge in order to ensure payment of principal and
interest on such bonds. If a Municipal Bond is already covered by a New Issue
Insurance Policy when acquired by the Fund, then coverage will not be duplicated
by a Mutual Fund Insurance Policy; if a Municipal Bond, other than that
described in (3) above, is not covered by a New Issue Insurance Policy then it
may be covered by a Mutual Fund Insurance Policy purchased by the Trust for the
benefit of the Fund. The Fund may also purchase Municipal Notes that are
insured. However, in general, Municipal Notes are not presently issued with New
Issue Insurance Policies and the Fund does not generally expect to cover
Municipal Notes under its Mutual Fund Insurance Policy. Accordingly, the Fund
does not presently expect that any significant portion of the Municipal Notes it
purchases will be covered by insurance. Securities other than Municipal Bonds
and Notes purchased by the Fund are not covered by insurance. Although the
insurance feature reduces certain financial risks, the premiums for a Mutual
Fund Insurance Policy, which are paid from the Fund's assets, and the
restrictions on investments imposed by the guidelines in a Mutual Fund Insurance
Policy, reduce the Fund's current yield. For the fiscal year ended March 31,
1997, the premiums paid by Tax Exempt Insured Fund for a Mutual Fund Insurance
Policy were .02% of the average net assets of the Fund.
In order to be considered as eligible insurance by the Fund, such
insurance policies must guarantee the scheduled payment of all principal and
interest on the Municipal Bonds as they become due for as long as such Bonds
remain held by the Fund in the case of a Mutual Fund Insurance Policy, and for
as long as such Bonds are outstanding in the case of a New Issue Insurance
Policy. However, such insurance may provide that in the event of non-payment of
interest or principal when due with respect to an insured Municipal Bond, the
insurer is not obligated to make such payment until a specified time period
after it has been notified by the Fund that such non-payment has occurred. (The
Financial Guaranty Fund Policy
B-28
<PAGE>
described below provides that payments will be made on the later of the date the
principal or interest becomes due for payment or the business day following the
day on which Financial Guaranty shall have received notice of non-payment from
the Fund.) For these purposes, a payment of principal may be due only at final
maturity of the Municipal Bond and not at the time any earlier sinking fund
payment is due. The insurance does not guarantee the market value of the
Municipal Bonds or the value of the shares of the Fund and, except as described
below, has no effect on the price or redemption value of the Fund's shares.
It is anticipated that the insured Municipal Bonds held by the Fund
will be insured by Financial Guaranty (see "Financial Guaranty" below).
However, the Fund may obtain insurance on its Municipal Bonds or purchase
insured Municipal Bonds covered by policies issued by other insurers; provided,
any such company has a claims-paying ability rated "AAA" by S&P or "Aaa" by
Moody's. S&P and Moody's have rated the claims-paying ability of Financial
Guaranty and the Municipal Bonds insured by Financial Guaranty at "AAA" and
"Aaa," respectively.
NEW ISSUE INSURANCE POLICIES. The new issue insurance policies, if
----------------------------
any, will have been obtained by the issuer of the municipal bonds and all
premiums with respect to such bonds for the lives thereof will have been paid in
advance by such issuer. Such policies are generally non-cancelable and will
continue in force so long as the municipal bonds are outstanding and the insurer
remains in business. Since new issue insurance policies remain in effect as
long as the bonds are outstanding, the insurance may have an effect on the
resale value of the municipal bonds. Therefore, new issue insurance policies
may be considered to represent an element of market value in regard to municipal
bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be estimated.
MUTUAL FUND INSURANCE POLICY. The trust has obtained a Mutual Fund
----------------------------
Insurance Policy (the "Fund Policy") on behalf of the Fund from financial
guaranty. Under the Fund policy, if the principal of or interest on a bond
covered by the Fund policy is due for payment, but is unpaid by reason of non-
payment by the issuer, financial guaranty, upon proper notice by the Fund, will
make a payment of such amount to a fiscal agent for the benefit of the Fund,
upon the fiscal agent receiving from the Fund (i) evidence of the Fund's right
to receive payment of the principal or interest due for payment and (ii)
evidence that all of the Fund's right to such payment of the principal or
interest due for payment shall thereupon vest with financial guaranty. The
principal of a bond is considered due for payment under the Fund policy at the
stated maturity date of such bond or the date on which the same shall have been
duly called for mandatory sinking Fund redemption. The principal of a bond will
not be considered due for payment under the Fund policy by reason of a call for
redemption (other than a mandatory sinking Fund redemption), acceleration or
other advancement of maturity. The interest on a bond is considered due under
the Fund policy on the stated date for payment. "Non-payment," by an issuer of
bonds, is when that issuer has not provided, on a timely basis, sufficient Funds
to the paying agent of the issuer for payment in full of all principal and
interest due for payment.
Financial Guaranty's obligation to insure any particular bond which it
has agreed to insure is subject only to the Fund's becoming the owner of such
bond (i) on or before the 100th day following the date on which the Fund
purchases such bond or (ii) on or before the 150th day following the purchase
date in the case of "when, as and if issued" bonds which the issuer thereof has
failed on a timely basis to deliver in definitive form to the purchasers
thereof. So long as the Fund becomes the owner on or before the 100th or 150th
day following the purchase date, as the case may be, such bond will be insured
as of the purchase date. Once the insurance under the Fund Policy is effective
with respect to the Municipal Bonds, it covers the Municipal Bonds only so long
as the Fund is in existence, Financial Guaranty is still in business, the
covered Municipal Bonds continue to be held by the Fund, and the Fund pays the
insurance premium monthly with respect to the covered Municipal Bonds. In the
event of a sale of any Municipal Bond held
B-29
<PAGE>
by the Fund or payment thereof prior to maturity, the Fund Policy terminates as
to such Municipal Bond and Financial Guaranty is liable only for those payments
of principal and interest which are then due and owing. However, if in the
judgment of the Adviser it would be to the Fund's advantage, the Trust, on
behalf of the Fund, may purchase additional insurance (if available at an
acceptable premium) that will extend the insurance coverage on such Municipal
Bond until maturity.
The Fund Policy provides that it is non-cancelable by Financial
Guaranty except for non-payment of premiums. Once the Fund purchases a bond and
begins paying a premium for that bond based upon a stated annual premium, that
annual premium rate cannot be changed by Financial Guaranty so long as the bond
is owned by the Fund and insured under the Fund Policy. Similar Municipal Bonds
purchased at different times, however, may have different premiums. The Trust,
at the request of the Fund, may cancel the Fund Policy at any time upon written
notice to Financial Guaranty and may do so if the Fund determines that the
benefits of the Fund Policy are not justified by the expense involved. In the
event the Fund were to cancel the Fund Policy and not obtain a substitute, the
Fund would satisfy its investment policy concerning the portion of its portfolio
required to be invested in insured Municipal Bonds by limiting such investments
to Municipal Bonds covered by New Issue Insurance Policies. If adequate
quantities of such Municipal Bonds were not available, the Fund would promptly
seek approval of its shareholders to change its name and its fundamental
investment policy.
If the Fund discontinues insuring newly acquired Municipal Bonds with
Financial Guaranty, it has the right to continue paying premiums to Financial
Guaranty for all Municipal Bonds previously insured and still held by the Fund
and keep the insurance in force as to those Municipal Bonds. The insurance
premiums will be payable monthly in advance by the Fund based on a statement of
premiums duly supplied by Financial Guaranty. The amount of premiums due will
be computed on a daily basis for purchases and sales of covered Municipal Bonds
during the month. If the Fund sells a Municipal Bond or that Bond is redeemed,
Financial Guaranty will refund any unused portion of the premium.
Municipal Bonds are eligible for insurance under the Fund Policy if
they are, at the time of purchase by the Fund, identified separately or by
category in qualitative guidelines (based primarily on ratings) furnished by
Financial Guaranty, and are in compliance with the aggregate limitations on
amounts set forth in such guidelines. Premium variations are based, in part, on
the rating of the Municipal Bond being insured at the time the Fund purchases
such Bond. Financial Guaranty may be willing to insure only a portion of the
outstanding bonds, or issue of bonds, by any particular issuer. In such event,
Financial Guaranty will advise the Fund, on a quarterly basis, of any
limitation on the insurance available for such Municipal Bonds. Once Financial
Guaranty has established such a limitation, it cannot reduce that limitation for
any issue during that quarter, but Financial Guaranty may, at its sole
discretion, remove at any time, any Municipal Bond from its list of bonds
eligible to be insured if the credit quality of such Municipal Bond has
materially deteriorated after the quarterly limitation is made. Once such
Municipal Bond is removed from the list of bonds eligible to be insured the Fund
cannot acquire insurance upon such Municipal Bond from Financial Guaranty.
Financial Guaranty, however, must continue to insure the full amount of such
bonds previously acquired so long as they remain held by the Fund and were, at
the time of purchase by the Fund, considered eligible by Financial Guaranty.
The qualitative guidelines and aggregate amount limitations established by
Financial Guaranty, from time to time, will not necessarily be the same as those
the Adviser would use to govern selection of Municipal Bonds for the Fund's
investments. Therefore, from time to time, such guidelines and limitations may
affect investment decisions. When the Fund's investment policies are more
restrictive than the qualitative guidelines and aggregate amount limitations
established by Financial Guaranty or any other insurer, the Fund's policies will
govern.
B-30
<PAGE>
Because coverage under the Fund Policy terminates upon sale of a Municipal
Bond held by the Fund, the insurance does not have any effect on the resale
value of Municipal Bonds. Therefore, the Adviser may decide to retain any
insured Municipal Bonds which are in default or, in the view of the Adviser, in
significant risk of default and to recommend to the Trustees that the Fund place
a value on the insurance which will be equal to the difference between the
market value of the defaulted Municipal Bond and the market value of similar
Municipal Bonds of minimum investment grade (i.e., rated "BBB") which are not in
default. As a result, the Adviser may be unable to fully manage the Fund's
investments to the extent that it holds defaulted Municipal Bonds, which will
limit the ability of the Adviser in certain circumstances to purchase other
Municipal Bonds. While a defaulted Municipal Bond is held by the Fund, the Fund
continues to pay the insurance premium thereon, but also collects interest
payments from the insurer and retains the rights to collect the full amount of
principal from the insurer when the Municipal Bond comes due. The Fund expects
that the market value of a defaulted Municipal Bond covered by a New Issue
Insurance Policy will generally be greater than the market value of an otherwise
comparable defaulted Municipal Bond covered by the Fund Policy.
SECONDARY MARKET INSURANCE POLICIES. On behalf of the Fund, the Trust
-----------------------------------
may, at any time, purchase from Financial Guaranty a secondary market insurance
policy (a "Secondary Market Policy") on any Municipal Bond currently covered by
the Fund Policy at the time such Bond was purchased by the Fund. The coverage
and obligation to pay monthly premiums under the Fund Policy would cease with
the purchase by the Trust of a Secondary Market Policy.
By purchasing a Secondary Market Policy, the Trust would, upon payment of a
single premium, obtain similar insurance for the Fund against non-payment of
scheduled principal and interest for the remaining term Municipal Bond,
regardless of whether the Fund then owned the Bond. Such insurance coverage
will be non-cancelable and will continue in force so long as the Municipal Bonds
so insured are outstanding. The purpose of acquiring such a policy would be to
enable the Fund to sell the Municipal Bond to a third party as an "AAA"/"Aaa"
rated insured Municipal Bond at a market price higher than what otherwise might
be obtainable if the security were sold without the insurance coverage. (Such
rating is not automatic, however, and must specifically be requested for each
Municipal Bond.) Any difference between the excess of a Municipal Bond's market
value as an "AAA"/"Aaa" rated Municipal Bond over its market value without such
rating and the single premium payment would inure to the Fund in determining the
net capital gain or loss realized by the Fund upon the sale of the Bond.
Since Secondary Market Policies remain in effect as long as the Municipal
Bonds insured thereby are outstanding, such insurance may have an effect on the
resale value of such Bonds. Therefore, Secondary Market Policies may be
considered to represent an element of market value with regard to Municipal
Bonds thus insured, but the exact effect, if any, of this insurance on such
market value cannot be estimated. Since the Fund has the right under the Mutual
Fund Insurance Policy to purchase such Secondary Market Policy even if an
eligible Municipal Bond is currently in default as to any payments by the
issuer, the Fund would have the opportunity to sell such Bond, [rather than as
described above,] be obligated to hold it in its portfolio in order to continue
the Fund Policy in force.
FINANCIAL GUARANTY. Financial Guaranty, in addition to providing insurance
------------------
for the payment of interest and principal of municipal bonds and notes held in
mutual fund portfolios, provides insurance for all, or a portion of, new and
secondary market issues of municipal bonds and notes and for municipal bonds and
notes held in unit investment trust portfolios. It is also authorized, in some
states, to write fire, property damage liability, worker's compensation and
employers' liability and fidelity and surety insurance.
B-31
<PAGE>
Financial Guaranty is currently licensed to provide insurance in 50 states
and the District of Columbia, files reports with state insurance regulatory
agencies and is subject to audit and review by such authorities. Such
regulation, however, is no guarantee that Financial Guaranty will be able to
perform its contracts of insurance in the event a claim should be made
thereunder at some time in the future.
INVESTMENT RESTRICTIONS
Each 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 that Fund's outstanding voting securities. A "majority of the
outstanding voting securities" of a 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 to each Fund on an individual basis, and 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 these restrictions:
(1) Each Fund may not purchase securities on margin, but each Fund
may obtain such short-term credits as may be necessary for the
clearance of transactions;
(2) Each Fund may not make short sales of securities to maintain a
short position, except that each Fund may effect short sales
against the box;
(3) Each Fund may not issue senior securities or borrow money or
pledge its assets except that: (i) each Fund may borrow from a
bank for temporary or emergency purposes in amounts not exceeding
5% (taken at the lower of cost or current value) of its total
assets (not including the amount borrowed) and pledge its assets
to secure such borrowings; (ii) the Federal Securities Fund,
Diversified Income Fund and High Income Fund may each borrow
money to purchase securities in amounts not exceeding 50% of its
net assets and pledge its assets to secure such borrowings; and
(iii) the High Income Fund and Diversified Income Fund may pledge
up to 5% of its assets in connection with interest-rate swaps;
(4) Each Fund may not purchase any security (other than obligations
of the U.S. government, its agencies, or instrumentalities) if as
a result: (i) as to 75% of the Fund's total assets (taken at
current value), more than 5% of such assets would then be
invested in securities of a single issuer, or (ii) more than 25%
of the Fund's total assets (taken at current value) would be
invested in a single industry, or (iii) the Fund would then hold
more than 10% of the outstanding voting securities of an issuer;
(5) Each Fund may not buy or sell commodities or commodity contracts
(except financial futures as described under "Investment
Objectives and Policies" above) or real estate or interests in
real estate, although it may purchase and sell securities which
are secured by real estate and securities of companies which
invest or deal in real estate;
B-32
<PAGE>
(6) Each Fund may not act as underwriter except to the extent that,
in connection with the disposition of Fund securities, it may be
deemed to be an underwriter under certain Federal securities
laws;
(7) Each Fund may not make loans, except through (i) repurchase
agreements (repurchase agreements with a maturity of longer than
7 days together with other illiquid assets being limited to 10%
of the Fund's total assets), (ii) loans of portfolio securities
(limited to 33% of a Fund's assets), and (iii) participation in
loans to foreign governments or companies;
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a shareholder vote:
(8) Each Fund may not purchase any security if as a result the Fund
would then have more than 5% of its total assets (taken at
current value) invested in securities of companies (including
predecessors) less than three years old;
(9) Each Fund may not invest in any securities of any issuer if, to
the knowledge of the Fund, any officer, Trustee or director of
the Trust or of the Adviser owns more than 1/2 of 1% of the
outstanding securities of such issue, and such officers,
directors or Trustees who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such
issuer;
(10) Each Fund may not make investments for the purpose of exercising
control or management;
(11) The Fund may not invest more than 10% of its net assets in
illiquid securities, including repurchase agreements which have a
maturity of longer than seven days, time deposits with a maturity
of longer than seven days, securities with legal or contractual
restrictions on resale and securities that are not readily
marketable in securities markets either within or without the
United States. 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
the Securities 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 Trustees, will not be considered illiquid for purposes of
this 10% limitation on illiquid securities;
(12) Each Fund may not 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 the Fund will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have
invested more than 5% of its total assets in any one investment
company and will not have invested more than 10% of its total
assets in such securities of one or more investment companies
(each of the above percentages to be determined at the time of
investment), or except as part of a merger, consolidation or
other acquisition;
B-33
<PAGE>
(13) Each Fund may not invest in interests in oil, gas or other
mineral exploration or development programs, although it may
invest in the securities of companies which invest in or sponsor
such programs;
(14) The High Income Fund may not purchase any security if as a result
the Fund would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues of an issuer as a
single class, all preferred stock issues as a single class, and
all debt issues as a single class); and
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Trust,
their age, business addresses and principal occupations during the past five
years. The SunAmerica Mutual Funds consist of SunAmerica Equity Funds,
SunAmerica Income Funds, SunAmerica Money Market Funds, Inc. and Style Select
Series, Inc. An asterisk indicates those Trustees who are "interested persons"
as that term is defined in the 1940 Act.
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
S. James Coppersmith, 64 Trustee Director/Trustee of the
Emerson College Boston Stock Exchange, Uno
100 Beacon Street Restaurant Corp., Waban
Boston, MA 02116 Corp., Kushner-Locke Co. and
Chayron Inc.; Chairman of
the Board of Emerson
College; formerly, President
and General Manager,
WCVB-TV, a division of the
Hearst Corporation, from
1982 to 1994 (retired);
Director/Trustee, SunAmerica
Mutual Funds and Anchor
Series Trust.
Samuel M. Eisenstat, 57 Chairman of the Attorney in private
430 East 86th Street Board practice; President and
New York, NY 10028 Chief Executive Officer,
Abjac Energy Corporation;
Director/Trustee of Atlantic
Realty Trust, UMB Bank and
Trust (a subsidiary of
United Mizrachi Bank), North
European Royalty Trust, Volt
Information Sciences
Funding, Inc. (a subsidiary
of Volt Information
Sciences, Inc.) and Venture
Partners International (an
Israeli venture capital
fund); Chairman of the
Boards of the
Directors/Trustees,
SunAmerica Mutual Funds and
Anchor Series Trust.
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- --------------------- ------------- -------------------
<S> <C> <C>
Stephen J. Gutman, 54 Trustee Partner and Chief Operating
515 East 79th Street Officer of B.B. Associates
New York, NY 10021 LLC (menswear specialty
retailing and other
activities), since May 1989;
Director/Trustee, SunAmerica
Mutual Funds and Anchor
Series Trust.
Peter A. Harbeck*, 43 Trustee and Director and President,
The SunAmerica Center President SunAmerica Asset Management
733 Third Avenue Corp. ("SunAmerica");
New York, NY 10017-3204 Director, SunAmerica
Capital Services, Inc.
("SACS"), since February
1993; Director and
President, SunAmerica Fund
Services, Inc. ("SAFS"),
since May 1988; President,
SunAmerica Mutual Funds and
Anchor Series Trust;
Executive Vice President and
Chief Operating Officer,
SunAmerica, from May 1988 to
August 1995; Executive Vice
President, SACS, from
November 1991 to August
1995; Director, Resources
Trust Company.
Peter McMillan III*, 39 Trustee Executive Vice President and
1 SunAmerica Center Chief Investment Officer,
Los Angeles, CA 90067 SunAmerica Investments,
Inc., since August 1989;
Director/Trustee, SunAmerica
Mutual Funds; Director,
Resources Trust Company.
Sebastiano Sterpa, 68 Trustee Founder of Sterpa Realty,
Suite 200 Inc., a full service real
200 West Glenoaks Blvd. estate firm, since 1962;
Glendale, CA 91202 Chairman of the Sterpa
Group, real estate
investments and management
company; Director/Trustee,
SunAmerica Mutual Funds.
Stanton J. Feeley, 60 Executive Vice Executive Vice President and
The SunAmerica Center President Chief Investment Officer,
733 Third Avenue SunAmerica, since February
New York, NY 10017-3204 1992; Executive Vice
President, SunAmerica Mutual
Funds.
P. Christopher Leary, 37 Vice President Senior Vice President,
The SunAmerica Center SunAmerica, since January
733 Third Avenue 1994; Director of
New York, NY 10017-3204 Fixed-Income, SunAmerica,
since October 1996; Senior
Portfolio Manager,
SunAmerica, since June 1991.
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Age and Address with the Fund During Past 5 Years
- ---------------------- ------------- -------------------
<S> <C> <C>
Nancy Kelly, 47 Vice President Vice President and Head
The SunAmerica Center Trader, SunAmerica, since
733 Third Avenue April 1994; Vice President
New York, NY 10017-3204 SunAmerica Mutual Funds and
Anchor Series Trust;
formerly Vice President,
Whitehorne & Co. Ltd. from
1991 to 1994; Sales Trader,
Lynch, Jones and Ryan from
1992 to 1994.
Robert M. Zakem, 39 Secretary Senior Vice President and
The SunAmerica Center General Counsel, SunAmerica,
733 Third Avenue since April 1993; Executive
New York, NY 10017-3204 Vice President, General
Counsel and Director, SACS,
since February 1993; Vice
President, General Counsel
and Assistant Secretary,
SAFS, since January 1994;
Vice President, SunAmerica
Series Trust, Anchor Pathway
Fund and Seasons Series
Trust; Assistant Secretary,
SunAmerica Series Trust and
Anchor Pathway Fund, since
September 1993; Assistant
Secretary, Seasons Series
Trust, since April 1997;
Secretary, SunAmerica Mutual
Funds and Anchor Series
Trust; formerly, Vice
President and Associate
General Counsel, SunAmerica,
March 1992 to April 1993.
Peter C. Sutton, 32 Treasurer Senior Vice President,
The SunAmerica Center SunAmerica, since April
733 Third Avenue 1997; Treasurer, SunAmerica
New York, NY 10017-3204 Mutual Funds and Anchor
Series Trust, since February
1996; Vice President,
SunAmerica Series Trust and
Anchor Pathway Fund, since
October 1994; Vice
President, Seasons Series
Trust, since April 1997;
formerly, Vice President,
SunAmerica from 1994 to
1997; Controller, SunAmerica
Mutual Funds and Anchor
Series Trust from March 1993
to February 1996; Assistant
Controller, SunAmerica
Mutual Funds from 1990 to
1993.
</TABLE>
Trustees and officers of the Trust are also trustees and officers of some
or all of the other investment companies managed, administered or advised by the
Adviser, and distributed by the Distributor and other affiliates of SunAmerica
Inc.
The Trust pays each Trustee, who is not an interested person of the Trust
or the Adviser (each a "disinterested" Trustee), annual compensation in addition
to reimbursement of out-of-pocket expenses in connection with attendance at
meetings of the Trustees. Specifically, each disinterested Trustee receives a
pro rata portion (based upon the Trust's net assets) of $40,000 in annual
compensation for acting as director or trustee to all the retail funds in the
SunAmerica Mutual Funds. In addition, Mr. Eisenstat receives an aggregate of
$2,000 in annual compensation for serving as the Chairman of the Boards of the
SunAmerica Mutual Funds. Officers of the Trust receive no direct remuneration
in such capacity from the Trust or any of the Funds.
B-36
<PAGE>
In addition, each disinterested Trustee also serves on the Audit Committee
of the Board of Trustees. Each member of the Audit Committee receives an
aggregate of $5,000 in annual compensation for serving on the Audit Committees
of all the SunAmerica Mutual Funds and Anchor Series Trust. With respect to the
Trust, each member of the committee receives a pro rata portion of the $5,000
annual compensation, based on the relative net assets of the Trust. The Trust
also has a Nominating Committee, comprised solely of disinterested Trustees,
which recommends to the Trustees those persons to be nominated for election as
Trustees by shareholders and selects and proposes nominees for election by
Trustees between shareholders' meetings. Members of the Nominating Committee
serve without compensation.
The Trustees (and Directors) of the SunAmerica Mutual Funds have adopted
the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the
"Retirement Plan") effective January 1, 1993 for the Trustees who are
disinterested Trustees. The Retirement Plan provides generally that if a
disinterested Trustee who has at least 10 years of consecutive service as a
disinterested Trustee of any of the SunAmerica Mutual Funds (an "Eligible
Trustee") retires after reaching age 60 but before age 70 or dies while a
Trustee, such person will be eligible to receive a retirement or death benefit
from each SunAmerica Mutual Fund with respect to which he or she is an Eligible
Trustee. As of each birthday, prior to the 70th birthday, but in no event for a
period greater than 10 years, each Eligible Trustee will be credited with an
amount equal to (i) 50% of his or her regular fees (excluding committee fees)
for services as a disinterested Trustee 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 Trustee 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 July 15, 1997, the Trustees and officers of the Trust owned in the
aggregate, less than 1% of the Trust's total outstanding shares.
The following table sets forth information summarizing the compensation of
each disinterested Trustee for his services as Trustee for the fiscal year ended
March 31, 1997. Neither the Trustees who are interested persons of the Trust
nor any officers of the Trust receive any compensation.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Benefits Upon from Registrant and
from Registrant Accrued as Part Retirement** Fund Complex Paid
of Fund Expenses* to Trustees*
Trustee
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S. James Coppersmith $24,093 $35,987 $29,670 $ 65,000
Samuel M. Eisenstat $25,252 $31,686 $46,089 $ 69,000
Stephen J. Gutman $24,093 $32,794 $60,912 $ 65,000
Sebastiano Sterpa $24,497 $22,094 $ 7,900 $43,333***
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Information is as of March 31, 1997 for the five investment companies in
the complex which pay fees to these directors/trustees. The complex
consists of the SunAmerica Mutual Funds and Anchor Series Trust.
** Assuming participant elects to receive benefits in 15 yearly installments.
*** Mr. Sterpa is not a trustee of Anchor Series Trust.
B-37
<PAGE>
ADVISER, PERSONAL SECURITIES TRADING, DISTRIBUTOR AND
ADMINISTRATOR
THE ADVISER. The Adviser, organized as a Delaware corporation in 1982, is
located at The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, and
acts as adviser to each of the Funds pursuant to the Investment Advisory and
Management Agreement dated September 23, 1993 (the "Advisory Agreement") with
the Trust, on behalf of each Fund. The Adviser is an indirect wholly owned
subsidiary of SunAmerica Inc. SunAmerica Inc., is incorporated in the State of
Maryland and maintains its principal executive offices at 1 SunAmerica Center,
Century City, Los Angeles, CA 90067-6022, telephone (310) 772-6000.
Under the Advisory Agreement, the Adviser selects and manages the
investments of each Fund, provides various administrative services and
supervises the Funds' daily business affairs, subject to general review by the
Trustees.
Except to the extent otherwise specified in the Advisory Agreement, each
Fund pays, or causes to be paid, all other expenses of the Trust and each of the
Funds, including, without limitation, charges and expenses of any registrar,
custodian, transfer and dividend disbursing agent; brokerage commissions; taxes;
engraving and printing of share certificates; registration costs of the Funds
and their shares under Federal and state securities laws; the cost and expense
of printing, including typesetting, and distributing Prospectuses and Statements
of Additional Information regarding the Funds, and supplements thereto, to the
shareholders of the Funds; all expenses of shareholders' and Trustees' meetings
and of preparing, printing and mailing proxy statements and reports to
shareholders; all expenses incident to any dividend, withdrawal or redemption
options; fees and expenses of legal counsel and independent accountants;
membership dues of industry associations; interest on borrowings of the Funds;
postage; insurance premiums on property or personnel (including Officers and
Trustees) of the Trust which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification relating thereto); and all other costs of the
Trust's operation.
As compensation for its services to the Funds, the Adviser receives a fee
from each Fund, payable monthly, computed daily at the following annual rates:
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Government Securities Fund .75% of average daily net assets up to $200 million;
.72% of next 200 million;
and .55% of average daily net assets in excess of $400 million.
Federal Securities Fund .55% of average daily net assets up to $25 million;
.50% of the next $25 million;
and .45% of average daily net assets in excess of $50 million.
Diversified Income Fund .65% of average daily net assets up to $350 million;
and .60% of average daily net assets in excess of $350 million.
High Income Fund .75% of average daily net assets up to $200 million;
.72% of the next $200 million;
and .55% of average daily net assets in excess of $400 million.
Tax Exempt Insured Fund .50% of average daily net assets up to $350 million;
and .45% of average daily net assets in excess of $350 million.
</TABLE>
B-38
<PAGE>
The following table sets forth the total advisory fees received by the
Adviser from each Fund pursuant to the Advisory Agreement for the fiscal years
ended March 31, 1997, 1996 and 1995.
ADVISORY FEES
<TABLE>
<CAPTION>
Fund 1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Government Securities Fund $3,370,947 $4,212,162 $5,033,634
Amount Waived -- -- 226,804
Federal Securities Fund 294,357 360,738 365,395
Diversified Income Fund 740,539 915,671 1,153,494
High Income Fund 1,107,351 1,273,169 1,192,998
Tax Exempt Insured Fund 685,760 802,564 874,281
</TABLE>
With respect to the Class A shares of Federal Securities Fund, for the
fiscal year ended March 31, 1995, voluntary expense reimbursements were given to
the Fund by the Adviser in the amount of $20,954.
The Advisory Agreement continues with respect to each Fund from year to
year, if such continuance is approved at least annually by vote of a majority of
the Trustees or by the holders of a majority of the respective Fund's
outstanding voting securities. Any such continuation also requires approval by
a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any such party as defined in the 1940 Act by vote cast
in person at a meeting called for such purpose. The Advisory Agreement may be
terminated with respect to a Fund at any time, without penalty, on 60 days'
written notice by the Trustees, by the holders of a majority of the respective
Fund's outstanding voting securities or by the Adviser. The Advisory Agreement
automatically terminates with respect to each Fund in the event of its
assignment (as defined in the 1940 Act and the rules thereunder).
Under the terms of the Advisory Agreement, the Adviser is not liable to
the Funds, or their shareholders, for any act or omission by it or for any
losses sustained by the Funds or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of
duty.
PERSONAL SECURITIES TRADING. The Trust and the Adviser have adopted a written
Code of Ethics (the "Code of Ethics") 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 of Ethics is an
individual who is a trustee, director, officer, general partner or advisory
person of the Trust or the Adviser. 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 the Adviser; (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. The Adviser reports to the Board of Trustees on a
quarterly basis, as to whether there were any violations of the Code of Ethics
by Access Persons of the Trust or the Adviser during the quarter.
B-39
<PAGE>
THE DISTRIBUTOR. The Trust, on behalf of each Fund, has entered into a
distribution agreement (the "Distribution Agreement") with the Distributor, a
registered broker-dealer and an indirect wholly owned subsidiary of SunAmerica
Inc., to act as the principal underwriter of the shares of each 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 Funds through its registered
representatives and authorized broker-dealers. The Distribution Agreement also
provides that the Distributor will pay the promotional expenses, including the
incremental cost of printing prospectuses, annual reports and other periodic
reports respecting each Fund, for distribution to persons who are not
shareholders of such Fund and the costs of preparing and distributing any other
supplemental sales literature. However, certain promotional expenses may be
borne by the Funds (see "Distribution Plans" below).
The Distribution Agreement continues in effect from year to year, with
respect to each Fund, if such continuance is approved at least annually by vote
of a majority of the Trustees, including a majority of the disinterested
Trustees. The Trust or the Distributor each has the right to terminate the
Distribution Agreement with respect to a Fund on 60 days' written notice,
without penalty. The Distribution Agreement automatically terminates with
respect to each Fund 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 Funds. 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
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 Funds, or of other funds underwritten by the Distributor. In
addition, the terms and conditions of any given promotional incentive may differ
from firm to firm. Such differences will, nevertheless, be fair and equitable,
and based on such factors as size, geographic location, or other reasonable
determinants, and will in no way affect the amount paid to any investor.
DISTRIBUTION PLANS. As indicated in the Prospectus, the Trustees of the Trust
and the shareholders of each class of shares of each Fund have adopted
Distribution Plans (the "Class A Plan" and the "Class B Plan," and collectively,
the "Distribution Plans"). Reference is made to "Management of the Trust -
Distribution Plans" in the Prospectus for certain information with respect to
the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from a Fund
at an annual rate of up to 0.10% of average daily net assets of such 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 Plan, the Distributor may receive payments from a
Fund at the annual rate of up to 0.75% of the average daily net assets of such
Fund's Class B 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. It is possible that
in any given year the amount paid to the Distributor under the Class A Plan or
Class B Plan will exceed the Distributor's distribution costs as described
above. The Distribution Plans provide that each class of shares of each 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
B-40
<PAGE>
with account maintenance and service fees in an amount up to 0.25% per year of
the assets maintained in a Fund by their customers.
The following table sets forth the distribution and service maintenance
fees the Distributor received from the Funds for the fiscal years ended March
31, 1997, 1996 and 1995.
DISTRIBUTION AND SERVICE MAINTENANCE FEES
<TABLE>
<CAPTION>
Fund 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Government Securities Fund $392,498 $3,662,116 $388,894 $5,201,895 $251,367 $7,088,417
Federal Securities Fund 120,785 225,691 116,954 384,150 5,831 711,995
Diversified Income Fund 63,781 957,064 56,515 1,247,253 52,416 1,624,850
High Income Fund 138,128 1,081,816 144,739 1,284,954 109,589 1,277,571
Tax Exempt Insured Fund 379,499 287,238 462,514 283,659 528,127 239,626
</TABLE>
Continuance of the Distribution Plans with respect to each Fund is
subject to annual approval by vote of the Trustees, including a majority of the
disinterested Trustees. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of a 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 Trustees in the manner described above. A
Distribution Plan may be terminated at any time with respect to a Fund without
payment of any penalty by vote of a majority of the disinterested Trustees 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 disinterested Trustees
of the Trust shall be committed to the discretion of the disinterested Trustees.
In the Trustees' quarterly review of the Distribution Plans, they will consider
the continued appropriateness of, and the level of, compensation provided in the
Distribution Plans. In their consideration of the Distribution Plans with
respect to a Fund, the Trustees 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.
THE ADMINISTRATOR. The Trust has entered into a Service Agreement, under the
terms of which SAFS, an indirect wholly owned subsidiary of SunAmerica Inc.,
acts as a servicing agent assisting State Street Bank and Trust Company ("State
Street") in connection with certain services offered to the shareholders of each
of the Funds. Under the terms of the Service Agreement, SAFS may receive
reimbursement of its costs in providing such shareholder services. SAFS is
located at The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204.
The Service Agreement continues in effect from year to year provided that
such continuance is approved annually by vote of a majority of the Trustees
including a majority of the disinterested Trustees.
Pursuant to the Service Agreement, as compensation for services rendered,
SAFS receives a fee from the Trust, 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 Trust.
B-41
<PAGE>
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
Trust). For further information regarding the Transfer Agent, see the section
entitled "Additional Information" below.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Adviser is responsible for decisions
to buy and sell securities for each Fund, selection of broker-dealers and
negotiation of commission rates. Purchases and sales of securities on a
securities exchange are effected through brokers-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 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 which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments may be purchased directly from an issuer, in which case
no commissions or discounts are paid.
The primary consideration of the Adviser 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 which provide them
with research services and may cause a Fund to pay such broker-dealers
commissions which exceed those that other broker-dealers may have charged, if in
their view the commissions are reasonable in relation to the value of the
brokerage and/or research services provided by the broker-dealer. Certain
research services furnished by brokers may be useful to the Adviser with clients
other than the Trust. 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 Funds by improving the quality of the Adviser's investment advice.
The investment advisory fees paid by the Funds are not reduced because the
Adviser receives such services. When making purchases of underwritten issues
with fixed underwriting fees, the Adviser may designate the use of broker-
dealers who have agreed to provide the Adviser with certain statistical,
research and other information.
Subject to applicable law and regulations, consideration may also be
given to the willingness of particular brokers to sell shares of a Fund as a
factor in the selection of brokers for transactions effected on behalf of a
Fund, subject to the requirement of best price and execution.
Although the objectives of other accounts or investment companies which
the Adviser manages may differ from those of the Funds, it is possible that, at
times, identical securities will be acceptable for purchase by one or both of
the Funds and one or more other accounts or investment companies which the
Adviser manages. However, the position of each account or company in the
securities of the same issue may vary with the length of the time that each
account or company may choose to hold its investment in those securities. The
timing and amount of purchase by each account and company will also be
determined by its cash position. If the purchase or sale of a security is
consistent with the investment policies of one or more of the Funds 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
B-42
<PAGE>
of the transaction would enable it to negotiate a better price or reduced
commission. However, simultaneous transactions could adversely affect the
ability of a Fund to obtain or dispose of the full amount of a security, which
it seeks to purchase or sell, or the price at which such security can be
purchased or sold.
The following table sets forth the brokerage commissions paid by those
Funds that paid commissions and the amounts of such brokerage commissions which
were paid to affiliated broker-dealers by the Funds for the fiscal year ended
March 31, 1997.
1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
Aggregate Amount paid to Percentage paid to
Brokerage Affiliated Broker-Dealers Affiliated Broker-Dealers
Fund Commissions
<S> <C> <C> <C>
Federal Securities Fund $ 250 $0 0%
High Income Fund $1,458 $0 0%
Diversified Income Fund $ 684 $0 0%
Government Securities Fund $ 750 $0 0%
</TABLE>
For the fiscal years ended March 31, 1996 and March 31, 1995, the High
Income Fund paid brokerage commissions of $30,000 and $34,028, respectively, and
for the fiscal year ended March 31, 1996, the Federal Securities Fund and the
Diversified Income Fund paid brokerage commissions of $400 and $3,000,
respectively, of which $0 was paid to affiliated brokers. None of the other
Portfolios of the Trust paid any commissions during these periods.
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Shares of each of the Funds 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 either (i) at the time of purchase
(Class A shares), or (ii) on a deferred basis (Class B shares and certain Class
A shares). Reference is made to "Purchase of Shares" in the Prospectus for
certain information as to the purchase of Fund shares.
The following tables set forth the front-end sales charges with respect
to Class A shares of each Fund, the amount of the front-end sales charges which
was reallowed to affiliated broker-dealers, and the contingent deferred sales
charges with respect to Class B shares of each Fund, received by the Distributor
for the fiscal years ended March 31, 1997, 1996 and 1995.
B-43
<PAGE>
1997
<TABLE>
<CAPTION>
Front-End Sales Amount Reallowed Amount Reallowed Contingent Deferred
Concessions to Affiliated to Non-Affiliated Sales Charge -
Fund Class A Shares Broker- Dealers Broker-Dealers Class B Shares
- ---- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Government Securities Fund $ 32,290 $16,822 $10,305 $924,933
Federal Securities Fund 10,220 7,306 2,974 45,178
Diversified Income Fund 86,113 34,644 36,605 221,016
High Income 149,191 57,237 67,696 313,032
Fund
Tax Exempt 41,383 24,953 9,219 88,150
Insured Fund
</TABLE>
1996
<TABLE>
<CAPTION>
Front-End Sales Amount Reallowed Amount Reallowed Contingent Deferred
Concessions to Affiliated to Non-Affiliated Sales Charge -
Fund Class A Shares Broker- Dealers Broker-Dealers Class B Shares
- ---- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Government Securities Fund $ 34,701 $23,047 $ 6,065 $1,767,247
Federal Securities Fund 51,871 26,836 17,101 92,902
Diversified Income Fund 59,956 41,282 9,079 353,984
High Income Fund 110,516 75,941 17,311 379,578
Tax Exempt 118,382 78,270 19,723 113,374
Insured Fund
</TABLE>
1995
<TABLE>
<CAPTION>
Front-End Sales Amount Reallowed Amount Reallowed Contingent Deferred
Concessions to Affiliated to Non-Affiliated Sales Charge -
Fund Class A Shares Broker- Dealers Broker-Dealers Class B Shares
- ---- -------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Government Securities Fund $ 84,710 $ 56,872 $10,813 $4,729,948
Federal Securities Fund 19,976 11,597 3,947 68,586
Diversified Income Fund 201,057 144,342 26,811 776,679
High Income Fund 148,782 107,889 16,642 420,741
Tax Exempt 149,429 85,321 40,047 85,661
Insured Fund
</TABLE>
B-44
<PAGE>
CDSCS APPLICABLE TO CERTAIN CLASS B SHARES. Class B shares of the Government
Securities Fund, the Federal Securities Fund, the Diversified Income Fund and
the High Income Fund issued to shareholders in exchange for shares of Old
Government Securities, Old Federal Securities, Old Diversified Income and Old
High Income, respectively, in the Reorganization, are subject to the CDSC
schedule that applied to redemptions of shares of these funds at the time of
reorganization. Upon a redemption of these shares, the shareholder will receive
credit for the periods both prior to and after the Reorganization during which
the shares were held. The following table sets forth the rates of the CDSC
applicable to shares of the Government Securities Fund, the Federal Securities
Fund and the High Income Fund:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS
- ------------------------------------ -------------------------------
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 2%
Fifth 1%
Sixth and thereafter 0%
==========================================================================
</TABLE>
The following table sets forth the rates of CDSC applicable to shares of the
Diversified Income Fund:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS
- ------------------------------------ -------------------------------
<S> <C>
First 3%
Second 2%
Third 1%
Fourth and thereafter 0%
==========================================================================
</TABLE>
Any Class B shares purchased after the date of the Reorganization (other
than through the reinvestment of dividends and distributions, which are not
subject to the CDSC) will be subject to the CDSC schedule reflected in the
Prospectus.
CONVERSION FEATURE APPLICABLE TO CERTAIN CLASS B SHARES. Shareholders of Class
B shares of the Government Securities Fund, the Federal Securities Fund, the
Diversified Income Fund and the High Income Fund issued in exchange for shares
of Old Government Securities, Old Federal Securities, Old Diversified Income and
Old High Income, respectively, in the Reorganization, will receive credit for
the periods both prior to and after the Reorganization during which the shares
were held, for purposes of computing the seven year holding period applicable to
the conversion feature.
WAIVER OF CDSCS. As discussed under "Purchase of Shares" in the Prospectus,
CDSCs may be waived on redemptions of Class B 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
B-45
<PAGE>
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
date of CDSC will be waived on any redemption from the estate account occurring
within one year of the death. If the Class B shares are not redeemed within one
year of the date of death, they will remain Class B shares and be subject to the
applicable CDSC, if any, 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 a Fund
through dealers which have entered into selected dealer agreements with the
Distributor. An investor's dealer who has entered into a distribution
arrangement with the Distributor is expected to forward purchase orders and
payment promptly to the Fund. Orders received by the Distributor before the
close of business will be executed at the offering price determined at the close
of regular trading on the NYSE that day. Orders received by the Distributor
after the close of business will be executed at the offering price determined
after the close of the NYSE on the next trading day. The Distributor reserves
the right to cancel any purchase order for which payment has not been received
by the fifth business day following the investment. A Fund will not be
responsible for delays caused by dealers.
PURCHASE BY CHECK. Checks should be made payable to the specific Fund or to
"SunAmerica Funds". If the payment is for a retirement plan account for which
the Adviser serves as fiduciary, please indicate on the check that payment is
for such an account. In the case of a new account, purchase orders by check must
be submitted directly by mail to SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-
3204, together with payment for the purchase price of such shares and a
completed New Account Application. Payment for subsequent purchases should be
mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas
City, Missouri 64141-6373 and the shareholder's 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 applicable Fund at the net asset value next computed
after the check is received, plus the applicable sales charge. Subsequent
purchases of shares of each 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, a 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 Funds do not verify the authenticity of the endorsement of such
multi-party check, and acceptance of the check by a Fund should not be
considered verification thereof. Neither the Funds nor their affiliates will be
held liable for any losses incurred as a result of a fraudulent endorsement.
There are restrictions on the redemption of shares purchased by check for which
funds are being collected. (See "Redemption of Shares.")
B-46
<PAGE>
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 Trust's Transfer Agent. Federal funds
purchase orders will be accepted only on a day on which the Trust 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) 551-5343.
2. Call SunAmerica Fund Services' Shareholder/Dealer Services, toll
free at (800) 858-8850, extension 5125 to obtain your new account
number.
3. Instruct the bank to wire the specified amount to the Transfer
Agent: State Street Bank and Trust Company, Boston, MA, ABA#
0110-00028; DDA# 99029712, SunAmerica [name of 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 SunAmerica and its affiliates, as
well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by certain
qualified retirement plans or employee benefit plans (other than IRAs), which
are sponsored or administered by SunAmerica or an affiliate thereof. 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 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 "Purchase of
Shares" 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 Trust.
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:
B-47
<PAGE>
(i) an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act (which includes corporations which are corporate affiliates of
each other);
(ii) an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust estate
or single fiduciary account (including a pension, profit-sharing, or other
employee benefit trust created pursuant to a plan qualified under Section
401 of the Code);
(iv) tax-exempt organizations qualifying under Section 501(c)(3) of the
Code (not including 403(b) plans);
(v) employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
(vi) group purchases as described below.
A combined purchase currently may also include shares of other funds in
the SunAmerica Family of Mutual Funds (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 advised by the Adviser, 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 which is set forth in the New
Account Application, establishes a total investment goal in Class A shares of
one or more Funds to be achieved through any number of investments over a
thirteen-month period, of $50,000 or more. Each investment in such Funds made
during the period will be subject to a reduced sales charge applicable to the
goal amount. The initial purchase must be at least 5% of the stated investment
goal and shares totaling 5% of the dollar amount of the Letter of Intent will be
held in escrow by the Transfer Agent, in the name of the investor. Shares of
any class of shares of any Fund, or of other funds advised by the Adviser which
impose a sales charge at the time of purchase, which the investor intends to
purchase or has previously purchased during a 30-day period prior to the date of
execution of the Letter of Intent and still owns, may also be included in
determining the applicable reduction; provided, the dealer or shareholder
notifies the Distributor of such prior purchase(s).
B-48
<PAGE>
The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amounts of the investment goal. In the event the
investment goal is not achieved within the thirteen-month period, the investor
is required to pay the difference between the sales charge otherwise applicable
to the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
is authorized by the Letter of Intent to liquidate a sufficient number of
escrowed shares to obtain such difference. If the goal is exceeded and
purchases pass the next sales charge break-point, the sales charge on the entire
amount of the purchase that results in passing that break-point, and on
subsequent purchases, will be subject to a further reduced sales charge in the
same manner as set forth above under "Rights of Accumulation," but there will be
no retroactive reduction of sales charges on previous purchases. At any time
while a Letter of Intent is in effect, a shareholder may, by written notice to
the Distributor, increase the amount of the stated goal. In that event, shares
of the applicable Funds purchased during the previous 90-day period and still
owned by the shareholder will be included in determining the applicable sales
charge. The 5% escrow and the minimum purchase requirement will be applicable
to the new stated goal. Investors electing to purchase shares of one or more of
the Funds pursuant to this purchase plan should carefully read such Letter of
Intent.
Investors electing to purchase shares of one or more of the Funds
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 Funds under the combined purchase privilege as
described above.
To receive a rate based on combined purchases, group members must
purchase Class A shares of a 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 a
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. Class B shares are not included in
calculating the purchased amount of a Fund's shares.
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide its
designated investment dealer access to the group's membership by means of
written communication or direct presentation to the membership at a meeting on
not less frequently than an annual basis; (vi) the group or its investment
dealer will provide annual certification, in form satisfactory to the Transfer
Agent, that the group then has at least 25 members and that at least ten members
participated in group purchases during the immediately preceding 12 calendar
months; and (vii) the group or its investment dealer will provide periodic
certification, in form satisfactory to the Transfer Agent, as to the eligibility
of the purchasing members of the group.
Members of a qualified group include: (i) any group which meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is carried
on the records of the group or on the records of any constituent member of the
group as being a good standing employee, partner, member or person of like
status of the group or constituent member; or (iii) any fiduciary purchasing
shares for the account of a member of a qualified
B-49
<PAGE>
group or a member's beneficiary. For example, a qualified group could consist of
a trade association which would have as its members individuals, sole
proprietors, partnerships and corporations. The members of the group would then
consist of the individuals, the sole proprietors and their employees, the
members of the partnership and their employees, and the corporations and their
employees, as well as the trustees of employee benefit trusts acquiring a Fund's
shares for the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Trust reserves the right to revise the terms of or to suspend
or discontinue group sales with respect to shares of the Funds at any time.
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares
--------------------------------
of a 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. Nevertheless, the Distributor will pay a commission
to any dealer who initiates or is responsible for such an investment, in the
amount of .50% of the amount invested, subject, however, to forfeiture in the
event of a redemption during the first year from the date of purchase. In
addition, it is essential that an NAV Transfer Program Form accompany the New
Account Application to indicate that the investment is intended to participate
in the Net Asset Value Transfer Program (formerly, Exchange Program for
Investment Company Shares). This program may be revised or terminated without
notice by the Distributor. For current information, contact Shareholder/Dealer
Services at (800) 858-8850.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption of Fund shares.
If the Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of a Fund to make payment wholly or
partly in cash, the Trust, having filed with the SEC a notification of election
pursuant to Rule 18f-1 on behalf of each of the Funds, may pay the redemption
price in whole or in part, by a distribution in kind of securities from a 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
applicable 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 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.
At various times a Fund may be requested to redeem shares for which it
has not yet received good payment. A Fund may delay or cause to be delayed the
mailing of redemption check until such time as good payment (e.g., cash or
certified check drawn on a United States bank) has been collected for the
purchase of such shares. Normally, this delay will not exceed 15 days.
B-50
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally, 4:00 P.M., Eastern time). Each Fund calculates the net asset
value of its shares separately by dividing the total value of each class's net
assets by the shares of such class outstanding. The net asset value of a
Fund's shares will also be computed on each other day in which there is a
sufficient degree of trading in such Fund's securities that the net asset value
of its shares might be materially affected by changes in the values of the
portfolio securities; provided, however, that on such day the Trust receives a
request to purchase or redeem such Fund's shares. The days and times of such
computation may, in the future, be changed by the Trustees in the event that the
portfolio securities are traded in significant amounts in markets other than the
NYSE, or on days or at times other than those during which the NYSE is open for
trading.
Securities that are actively traded over-the-counter, including listed
securities for which the primary market is believed by the Adviser to be over-
the-counter, are valued on the basis of the bid prices provided by principal
market makers. Securities listed on the NYSE or other national securities
exchanges, other than those principally traded over-the-counter, are valued on
the basis of the last sale price on the exchange on which they are primarily
traded. However, if the last sale price on the NYSE is different than the last
sale price on any other exchange, the NYSE price will be used. If there are no
sales on that day, then the securities are valued at the bid price on the NYSE
or other primary exchange for that day. Options traded on national securities
exchanges are valued at the last sale price on such exchanges preceding the
valuation, and Futures and options thereon, which are traded on commodities
exchanges, are valued at their last sale price as of the close of such
commodities exchanges.
Securities traded primarily on securities exchanges outside the United
States are valued at the last sale price on such exchanges on the day of
valuation, or if there is no sale on the day of valuation, at the last reported
bid price. If a security's price is available from more than one foreign
exchange, a Fund uses the exchange that is the primary market for the security.
The above procedures need not be used to determine the value of debt
securities owned by a Fund if, in the opinion of the Trustees, some other method
would more accurately reflect the fair market value of such debt securities in
the quantities owned by such Fund. Securities for which quotations are not
readily available and other assets are appraised at fair value, as determined
pursuant to procedures adopted in good faith by the Trustees. Short-term
investments that mature in less than 60 days are valued at amortized cost if
their original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original term exceeds 60 days (unless the
Trustees determine that amortized cost value does not represent fair value, in
which case, fair value will be determined as described above). A pricing
service may be utilized to value the Funds' assets under the procedures set
forth above. Any use of a pricing service will be approved and monitored by the
Trustees. The value of assets and liabilities denominated in foreign currencies
and commitments under forward foreign currency contracts are converted into U.S.
dollars at the mean of the quoted bid and asked prices of such securities
against the U.S. dollar.
The values of securities held by the Funds, and other assets used in
computing net asset value, are determined as of the time trading in such
securities is completed each day, which in the case of foreign securities may be
at a time prior to 4:00 P.M., Eastern time. On occasion, the values of foreign
securities and exchange rates may be affected by events occurring between the
time as of which determinations of such values or exchange rates are made and
4:00 P.M., Eastern time. When such events materially affect the values of
securities held by the Funds or their liabilities, such securities and
liabilities will be valued at fair value as determined in good faith by the
Trustees.
B-51
<PAGE>
PERFORMANCE DATA
Each Fund may advertise performance data that reflects various measures
of total return and yield. An explanation of the data presented and the methods
of computation that will be used are as follows.
A 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 and
Class B 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)/to the power of 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 the deferred sales load that
would be applicable to a complete redemption of the investment at
the end of the specified period in the case of the Class B
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 Funds' average annual total return for the 1-, 5- and 10-year periods (or
from date of inception, if sooner) ended March 31, 1997, are as follows:
<TABLE>
<CAPTION>
Class A Shares Since Inception One Year Five Years Ten Years
- -------------- --------------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Government Securities Fund /1/ 3.29% (0.96%) N/A N/A
Federal Securities Fund /1/ 4.00% 0.39% N/A N/A
Diversified Income Fund /1/ 3.54% 6.14% N/A N/A
High Income Fund /2/ 8.08% 6.17% 7.41% 7.96%
Tax Exempt Insured Fund /3/ 6.15% (0.71%) 4.42% 5.51%
</TABLE>
- ----------
/1/ From date of October 1, 1993.
/2/ From date of inception of September 16, 1986.
/3/ From date of inception of November 21, 1985.
B-52
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Since Inception One Year Five Years Ten Years
- -------------- --------------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Government Securities Fund /4/ 6.01% (0.69%) 4.34% 6.02%
Federal Securities Fund /5/ 8.04% 0.82% 4.79% 6.66%
Diversified Income Fund /6/ 4.88% 6.74% 4.82% N/A
High Income Fund /7/ 4.69% 6.78% N/A N/A
Tax Exempt Insured Fund /7/ 2.33% (0.43%) N/A N/A
</TABLE>
Each Fund may advertise cumulative, rather than total 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.
Each Fund may also advertise performance data that reflects yield. Yield
is determined separately for Class A and Class B shares in accordance with a
standardized formula prescribed by the SEC and is not indicative of the amounts
which were or will be paid to shareholders. The current yield quoted in a
Fund's advertisements is computed by dividing the net investment income per
share earned during the 30 day period by the maximum offering price per share on
the last day of the period. The following formula illustrates the computation:
Yield = 2 [{A - B + 1}/to the 6th power/ - 1 ]
-----
CD
A = dividends and interest earned during the period
B = expenses accrued for the period (net of reimbursements)
C = the average daily number of shares outstanding during the
period that were entitled to receive dividends
D = the maximum offering price per share on the last day of the
period
The yields for the one month periods ended March 31, 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
Fund March 31, 1997 March 31, 1996 March 31, 1995
- ------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Government Securities 5.53% 5.15% 5.71% 5.33% 6.04% 5.64%
Fund
Federal Securities Fund 5.38% 4.98% 5.44% 5.09% 6.48% 6.07%
Diversified Income Fund 8.63% 8.42% 8.15% 7.88% 10.39% 10.65%
High Income Fund 9.10% 8.86% 9.02% 8.91% 9.99% 9.93%
Tax Exempt Insured Fund 4.53% 4.10% 4.50% 4.08% 5.10% 4.73%
</TABLE>
- ----------
/4/ From date of inception of March 3, 1986.
/5/ From date of inception of April 25, 1983.
/6/ From date of inception of April 6, 1991.
/7/ From date of October 1, 1993.
B-53
<PAGE>
Current yield is not indicative of the amount which was or will be paid to
the shareholders. The amount paid to shareholders is reflected in the quoted
current distribution rate. The current distribution rate is computed by
annualizing the total amount of dividends per share paid by each Fund during the
past month and dividing by the current maximum offering price. Under some
circumstances it may be appropriate to use the dividends paid over the past
year. The current distribution rate differs from current yield in that it
includes amounts distributed to shareholders from sources other than dividends
and interest, such as short-term capital gains or option writing premiums and is
calculated over a different period of time. Such rates will be accompanied in
advertisements by standardized yield calculations as promulgated by the SEC.
Comparisons
- -----------
Each 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 a 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) Standard & Poor's 500 Stock Index or its component indices -- an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
c) Standard & Poor's 100 Stock Index -- an unmanaged index based on the
prices of 100 blue chip stocks, including 92 industrials, one utility, two
transportation companies and five financial institutions. The Standard & Poor's
100 Stock Index is a smaller, more flexible index for options trading.
d) The NYSE composite or component indices -- unmanaged indices of all
industrial, utilities, transportation and finance stocks listed on the NYSE.
e) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
f) Russell 3000 and 2000 Indices -- represents the top 3,000 and the next
2,000 stocks traded on the NYSE, American Stock Exchange and National
Association of Securities Dealers Automated Quotations, by market
capitalization.
g) 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.
h) 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.
B-54
<PAGE>
i) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes
price, risk and total return for the mutual fund industry.
j) Financial publications: The Wall Street Journal, Business Week,
Changing Times, Financial World, Forbes, Fortune, Money, Pension and Investment
Age, United Mutual Fund Selector, and Wiesenberger Investment Companies Service
and other publications containing financial analyses which rate mutual fund
performance over specified time periods.
k) 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.
l) 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.
m) Savings and Loan Historical Interest Rates as published in the U.S.
Savings & Loan League Fact Book.
n) 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.
o) 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.
p) 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.
q) Value Line Geometric Index -- broad based index made up of
approximately 1700 stocks each of which have an equal weighting.
r) 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.
s) 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.
t) 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.
u) Salomon Brothers Broad Investment Grade Bond Index -- is a market-
weighted index that contains approximately 4700 individually priced investment
grade corporate bonds rated "BBB" or better, U.S. Treasury/agency issues and
mortgage pass-through securities.
B-55
<PAGE>
v) 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
w) J.P. Morgan Global Government Bond Index -- a total return, market
capitalization-weighted index, rebalanced monthly, consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, the United Kingdom and the United States.
x) 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.
y) 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.
z) 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.
aa) 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.
bb) Merrill Lynch High Yield Bond Master Index -- generally includes over
500 issues rated "BB+" to "CCC-" with an aggregate par value of approximately
$100 billion.
cc) Morgan Stanley Capital International World Index -- An arithmetic,
market value-weighted average of the performance of over 1,470 securities list
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
dd) In assessing such comparisons of performance, an investor should keep
in mind that the composition of the investments in the reported indices and
averages is not identical to a 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 a Fund to calculate its figures. In
addition, there can be no assurance that a Fund will continue its performance as
compared to such other standards.
B-56
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Each Fund intends to distribute to the registered
holders of its shares substantially all of its net investment income, which
includes dividends, interest and net short-term capital gains, if any, in excess
of any net long-term capital losses. Each Fund intends to distribute any net
long-term capital gains in excess of any net short-term capital losses.
Dividends from net investment income are declared daily and paid monthly.
Dividends are paid on or about the fifteenth day of the month. Net capital
gains, if any, will be paid annually. In determining amounts of capital gains
to be distributed, any capital loss carry-forwards from prior years will be
offset against capital gains.
Distributions will be paid in additional Fund shares based on the net asset
value at the close of business on the record date, unless the dividends total in
excess of $10 per distribution period and the shareholder notifies the Fund at
least five business days prior to the payment date to receive such distributions
in cash.
TAXES. Each Fund is qualified, intends to remain qualified and elects to be
treated as a regulated investment company under Subchapter M of the Code for
each taxable year. In order to remain qualified as a regulated investment
company, each 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 and certain other related income; (b) derive less than 30% of its
gross income from the sale or other disposition of stock or securities held less
than 3 months; and (c) diversify its holdings so that, at the end of each fiscal
quarter, (i) 50% of the market value of each Fund's assets is represented by
cash, government securities, securities of other regulated investment companies
and other securities limited, in respect of any one issuer, to an amount no
greater than 5% of each 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 regulated investment company, each Fund will not be subject to U.S.
Federal income tax on its income and capital gains which it distributes as
dividends or capital gains distributions to shareholders provided that it
distributes to shareholders at least equal to the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for the
taxable year. Each Fund intends to distribute sufficient income to meet this
qualification requirement.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, each 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 net
capital gains, i.e., capital gains in excess of its capital losses for the 12-
month period ending on October 31 of the calendar year, and (3) all ordinary
income and net capital gains for the previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid during the calendar year if
it actually is paid during calendar year or if declared by each Fund in October,
November or December of such year, payable to shareholders of record on a date
in such month and paid by each Fund during January of the following year. Any
such distributions paid during January of the following year will be taxable to
shareholders as of December 31, rather than the date on which the distributions
are received.
Distributions of net investment income and short-term capital gains
("ordinary income dividends") are taxable to the shareholder as ordinary
dividend income regardless of whether the shareholder receives such
distributions in additional shares or in cash. The portion of such dividends
received from each Fund that will be eligible for the dividends received
deduction for corporations will be determined on the basis of
B-57
<PAGE>
the amount of each Fund's gross income, exclusive of capital gains from sales of
stock or securities, which is derived as dividends from domestic corporations,
other than certain tax-exempt corporations and certain real estate investment
trusts, and will be designated as such in a written notice to shareholders
mailed not later than 60 days after the end of each fiscal year. Because each of
the Funds will invest principally in debt securities, it is not anticipated that
a significant portion of dividends paid by any Fund will qualify for the
dividends received deduction. Distributions of net long-term capital gains, if
any, are taxable as long-term capital gains regardless of whether the
shareholder receives such distributions in additional shares or in cash or how
long the investor has held his or her shares and are not eligible for the
dividends received deduction for corporations. At March 31, 1997, Government
Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income
Fund, and Tax Exempt Insured Fund had capital loss carry forwards of
$36,791,157, $1,045,533, $29,832,034, $37,606,003, and $6,547,732, respectively,
which are available to the extent not utilized to offset future gains from 1998
through 2005. The utilization of such losses will be subject to annual
limitations under the Code and the regulations thereunder.
Upon a sale or exchange of its shares, a shareholder may realize a taxable
gain or loss depending upon its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands and will be long-term capital gain or loss if the shares
have been held for more than one year. The amount of any CDSC will reduce the
amount realized on the sale or exchange of shares for purposes of determining
gain or loss. Generally, any loss realized on a sale or exchange will be
disallowed to the extent the shares disposed of are replaced (by dividend
reinvestments or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. Any loss realized by a
shareholder on the sale of shares of a Fund held by the shareholder for six
months or less will be treated for tax purposes as a long-term capital loss to
the extent of any distributions of net capital gains received by the shareholder
with respect to such shares.
Under certain circumstances (such as the exercise of an exchange privilege
in certain cases), the tax effect of sales load charges imposed on the purchase
of shares in a regulated investment company is deferred if the shareholder does
not hold the shares for at least 90 days.
Income received by a 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 a Fund will be subject, since the amount of that Fund's
assets to be invested in various countries is not known. It is not anticipated
that any 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
such Fund.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time such 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, sales of currencies or dispositions
of debt securities denominated in a foreign currency attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition generally also are
treated as ordinary gain or loss. These gains, referred to under the Code as
"Section 988" gains or losses, increase or decrease the amount of each 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 which a
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
B-58
<PAGE>
forward foreign currency exchange contracts, is generally treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when
held by a 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 a 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 a 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 premium paid for the over-the-counter puts or
increased by the premium received for over-the-counter calls.
A substantial portion of each 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
a Fund when offsetting positions are established and which may convert certain
losses from short-term to long-term and (iv) "conversion transaction" rules
which may treat all or a portion of the gain on a transaction as ordinary income
rather than as capital gains. 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.
The Government Securities Fund, Federal Securities Fund, Diversified Income
Fund, High Income Fund and Tax Exempt Insured Fund may purchase debt securities
(such as zero-coupon or pay-in-kind securities) that contain original issue
discount. Original issue discount that accrues in a taxable year is treated as
earned by a 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.
With respect to the Tax Exempt Insured Fund, distributions out of net
investment income attributable to interest received on tax-exempt securities
("exempt-interest dividends") will be exempt from Federal income tax when paid
to shareholders. It should be noted, however, that interest on certain "private
activity bonds" issued after August 7, 1986 is an item of tax preference for
purposes of the alternative minimum tax, and in any event all except interest
dividends whether or not treated as a tax preference, must be taken into
account by corporate shareholders for purposes of determining the amount of the
adjustment to corporate alternative minimum taxable income based on adjusted
current earnings. The Fund anticipates that a portion of its investment may be
made in such "private activity bonds" with the result that a portion of the
exempt-interest dividends paid by the Fund will be an item of tax preference to
shareholders subject to the alternative minimum tax. Moreover, shareholders
should be aware that, while exempt from Federal income tax, exempt-interest
dividends may be taxable for state and local tax purposes. Any loss realized by
a shareholder on the sale of shares of the Tax Exempt Insured Fund held by the
shareholder for six months or less will be disallowed to the extent of any
exempt-interest dividend received thereon. Moreover, a shareholder may not
deduct interest on indebtedness incurred or continued to
B-59
<PAGE>
purchase or carry shares of the Tax Exempt Insured Fund to the extent that the
Fund distributes exempt-interest dividends to the shareholders during the
taxable year.
Legislation has expanded the market discount rules to apply to tax exempt
bonds purchased after April 30, 1993. Therefore, any gain on the disposition of
such a bond (including the receipt of a partial principal payment) that was
acquired for a price less than the principal amount (or in the case of a bond
issued with original issue discount, the adjusted issue price at the time of
purchase) of the bond is treated as ordinary income to the extent of the
required market discount.
A 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
Funds.
The foregoing is a general abbreviated summary of the applicable provisions
of the Code and Treasury regulations currently in effect. Shareholders are
urged to consult their tax advisers regarding specific questions as to Federal,
state and local taxes. In addition, foreign investors should consult with their
own tax advisers regarding the particular tax consequences to them of an
investment in each Fund. Qualification as a regulated investment company under
the Code for tax purposes does not entail government supervision of management
or investment policies.
RETIREMENT PLANS
Shares of each Fund (other than the Tax Exempt Insured 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 IRA's
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
B-60
<PAGE>
commence. In addition, certain distributions from some other types of retirement
plans may be placed on a tax-deferred basis in an IRA.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION (SARSEP). This plan was introduced
by a provision of the Tax Reform Act of 1986 as a unique way for small employers
to provide the benefit of retirement planning for their employees.
Contributions are deducted from the employee's paycheck before tax deductions
and are deposited into an IRA by the employer. These contributions are not
included in the employee's income and therefore are not reported or deducted on
his or her tax return.
DESCRIPTION OF SHARES
Ownership of the Trust is represented by transferable shares of beneficial
interest. The Declaration of Trust of the Trust (the "Declaration of Trust")
permits the Trustees to issue an unlimited number of full and fractional shares,
$.01 par value, and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Trust.
Currently, five series of shares of the Trust have been authorized pursuant
to the Declaration of Trust: the Government Securities Fund, the Federal
Securities Fund, the Diversified Income Fund, the High Income Fund and the Tax
Exempt Insured Fund. Each series has been divided into two classes of shares,
designated as Class A and Class B shares. The Trustees may authorize the
creation of additional series of shares so as to be able to offer to investors
additional investment portfolios within the Trust that would operate
independently from the Trust's present portfolios, or to distinguish among
shareholders, as may be necessary, to comply with future regulations or other
unforeseen circumstances. Each series of the Trust's shares represents the
interests of the shareholders of that series in a particular portfolio of Trust
assets. In addition, the Trustees may authorize the creation of additional
classes of shares in the future, which may have fee structures different from
those of existing classes and/or may be offered only to certain qualified
investors.
Shareholders are entitled to a full vote for each full share held. The
Trustees have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Trustees and appoint their
own successors, provided that at all times at least a majority of the Trustees
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 Trustees being elected, while the holders of the remaining
shares would be unable to elect any Trustees. Although the Trust need not hold
annual meetings of shareholders, the Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Declaration of Trust. Also, a shareholders meeting must be called, if so
requested in writing by the holders of record of 10% or more of the outstanding
shares of the Trust. In addition, the Trustees may be removed by the action of
the holders of record of two-thirds or more of the outstanding shares. All
series of shares will vote with respect to certain matters, such as election of
Trustees. When all series of shares are not affected by a matter to be voted
upon, such as approval of investment advisory agreements or changes in a Fund's
policies, only shareholders of the series affected by the matter may be entitled
to vote.
Both classes of shares of a given series are identical in all respects,
except that (i) each class may bear differing amounts of certain class-specific
expenses, (ii) Class A shares are subject to an initial sales charge, a
distribution fee and an ongoing account maintenance and service fee, (iii) Class
B shares are subject to a CDSC, a distribution fee and an ongoing account
maintenance and service fee, (iv) Class B shares convert automatically to Class
A shares on the first business day of the month seven years after the purchase
of such Class B Shares, (v) 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 the Class B
B-61
<PAGE>
shares may be entitled to vote on material changes to the Class A Rule 12b-1
plan, and (vi) each class of shares will be exchangeable only into the same
class of shares of any other Fund or other funds in the SunAmerica Family of
Mutual Funds that offers that class. All shares of the Trust issued and
outstanding and all shares offered by the Prospectus when issued, are and will
be fully paid and non-assessable. Shares have no preemptive or other
subscription rights and are freely transferable on the books of the Trust. In
addition, shares have no conversion rights, except as described above.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Trust is liable to the Trust or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties. It also provides that all third persons shall look solely to the
Trust's property for satisfaction of claims arising in connection with the
affairs of the Trust. With the exceptions stated, the Declaration of Trust
provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Trust.
The Trust shall continue, without limitation of time, subject to the provisions
in the Declaration of Trust concerning termination by action of the
shareholders.
ADDITIONAL INFORMATION
Computation of Offering Price per Share
- ---------------------------------------
The offering price for Class A and Class B shares of the Funds, based on
the value of each Fund's net assets as of March 31, 1997, is calculated as
follows:
[This area intentionally left blank.]
B-62
<PAGE>
<TABLE>
<CAPTION>
Government Securities Federal Securities Diversified Income
- ------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets $113,171,469 $289,039,834 $30,509,148 $18,929,222 $22,601,192 $78,081,433
Number of Shares 13,546,280 34,580,049 2,936,039 1,816,306 5,145,977 17,734,431
Outstanding
Net Asset Value (net assets divided by $ 8.35 $ 8.36 $ 10.39 $ 10.42 $ 4.39 $ 4.40
number of shares)
Sales Charge (for Class A Shares: 4.75%
of offering price (6.10% of net asset
value per share))* $ 0.42 ** $ 0.52 ** $ 0.22 **
Offering Price $ 8.77 $ 8.36 $ 10.91 $ 10.42 $ 4.61 $ 4.40
</TABLE>
<TABLE>
<CAPTION>
High Income Tax Exempt Insured
- -----------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Assets $ 41,139,198 $98,383,164 $98,375,528 $25,053,321
Number of Shares Outstanding 5,828,578 13,921,621 7,968,704 2,028,803
Net Asset Value (net assets divided by number of $ 7.06 $ 7.07 $ 12.35 $ 12.35
shares)
Sales Charge (for Class A Shares: 4.75% of offering
price (6.10% of net asset value per share)* $ 0.35 ** $ 0.62 **
Offering Price $ 7.41 $ 7.07 $ 12.97 $ 12.35
</TABLE>
* Rounded to nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a CDSC on redemption of shares within six years of
purchase.
REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited semi-
annual reports to shareholders of each of the Funds. In addition, the Transfer
Agent sends a statement to each shareholder having an account directly with the
Trust to confirm transactions in the account.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent
for the Funds and in those capacities maintains certain financial and accounting
books and records pursuant to agreements with the Trust. 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.
SunAmerica Fund Services, Inc., The
B-63
<PAGE>
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, acts as a
servicing agent assisting State Street Bank and Trust Company in connection with
certain services offered to the shareholders of each of the Funds.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177 Avenue of
the Americas, New York, NY 10036, serves as the Trust's independent accountants
and in that capacity examines the annual financial statements of the Trust. The
firm of Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue, New York,
NY 10022, serves as legal counsel to the Trust.
FINANCIAL STATEMENTS
Set forth following this Statement of Additional Information are the
financial statements of SunAmerica Income Funds with respect to Registrant's
fiscal year ended March 31, 1997.
B-64
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF ASSETS AND LIABILITIES--March 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND
--------------- --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment securities, at
value (identified cost
$396,039,808;
$45,092,074;
$89,818,361;
$121,465,554 and
$115,459,232,
respectively)........... $394,208,281 $45,013,411 $ 90,825,811 $118,629,775 $121,024,730
Short-term securities
(cost equals market).... -- -- -- -- 3,900,000
Joint repurchase
agreements (cost equals
market)................. 30,041,000 9,042,000 3,985,000 7,976,000 --
Cash..................... 735 229 163 688 75,312
Interest and dividends
receivable.............. 4,072,628 373,831 1,858,122 2,345,301 1,873,210
Receivable for
investments sold........ 1,187,380 -- 4,750,249 14,927,626 4,617,722
Receivable for shares of
beneficial interest
sold.................... 68,177 2,386 134,657 320,624 389
Prepaid expenses......... 37,476 28,897 5,280 12,957 22,423
------------ ----------- ------------ ------------ ------------
Total assets............ 429,615,677 54,460,754 101,559,282 144,212,971 131,513,786
------------ ----------- ------------ ------------ ------------
LIABILITIES:
Payable for securities
loaned.................. 24,000,000 4,800,000 -- -- --
Payable for shares of
beneficial interest
redeemed................ 1,656,140 5,187 329,488 2,402,852 115,778
Dividends payable........ 809,310 104,318 321,271 484,440 225,778
Accrued expenses......... 397,043 64,811 90,897 108,260 100,269
Distribution and service
maintenance fees
payable................. 286,533 25,657 76,797 101,137 51,759
Investment advisory and
management fees payable. 255,348 22,411 58,204 93,920 53,516
Payable for investments
purchased............... -- -- -- 1,500,000 7,537,837
------------ ----------- ------------ ------------ ------------
Total liabilities....... 27,404,374 5,022,384 876,657 4,690,609 8,084,937
------------ ----------- ------------ ------------ ------------
Net assets........... $402,211,303 $49,438,370 $100,682,625 $139,522,362 $123,428,849
============ =========== ============ ============ ============
NET ASSETS WERE COMPOSED
OF:
Shares of beneficial
interest, $.01 par
value................... $ 481,263 $ 47,523 $ 228,804 $ 197,502 $ 99,975
Paid-in capital.......... 441,564,474 50,746,865 129,535,788 180,166,348 124,524,652
------------ ----------- ------------ ------------ ------------
442,045,737 50,794,388 129,764,592 180,363,850 124,624,627
Accumulated distributions
in excess of net
investment income....... (318,396) (82,950) (217,383) (267,317) (213,544)
Accumulated net realized
loss on investments,
futures and options
contracts and foreign
currency................ (37,684,511) (1,194,405) (29,872,034) (37,738,392) (6,547,732)
Net unrealized
appreciation
(depreciation) on
investments............. (1,831,527) (78,663) 1,007,450 (2,835,779) 5,565,498
------------ ----------- ------------ ------------ ------------
Net assets........... $402,211,303 $49,438,370 $100,682,625 $139,522,362 $123,428,849
============ =========== ============ ============ ============
CLASS A (UNLIMITED SHARES
AUTHORIZED):
Net asset value and
redemption price per
share
($113,171,469/13,546,280;
$30,509,148/2,936,039;
$22,601,192/5,145,977;
$41,139,198/5,828,578
and
$98,375,528/7,968,704
net assets and shares of
beneficial interest
issued and outstanding,
respectively)........... $ 8.35 $ 10.39 $ 4.39 $ 7.06 $ 12.35
Maximum sales charge
(4.75% of offering
price).................. 0.42 0.52 0.22 0.35 0.62
------------ ----------- ------------ ------------ ------------
Maximum offering price to
public.................. $ 8.77 $ 10.91 $ 4.61 $ 7.41 $ 12.97
============ =========== ============ ============ ============
CLASS B (UNLIMITED SHARES
AUTHORIZED):
Net asset value, offering
and redemption price
(less any applicable
contingent deferred
sales charge) per share
($289,039,834/34,580,049;
$18,929,222/1,816,306;
$78,081,433/17,734,431;
$98,383,164/13,921,621
and
$25,053,321/2,028,803
net assets and shares of
beneficial interest
issued and outstanding,
respectively)........... $ 8.36 $ 10.42 $ 4.40 $ 7.07 $ 12.35
============ =========== ============ ============ ============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF OPERATIONS--For the year ended March 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND
--------------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest................. $ 40,869,021 $4,296,512 $11,440,856 $15,523,828 $8,244,562
Dividends................ -- -- 46,590 130,000 --
------------ ---------- ----------- ----------- ----------
Total Investment Income.. 40,869,021 4,296,512 11,487,446 15,653,828 8,244,562
------------ ---------- ----------- ----------- ----------
Expenses:
Investment advisory and
management fees......... 3,370,947 294,357 740,539 1,107,351 685,760
Distribution and service
maintenance fees--Class
A....................... 392,498 120,785 63,781 138,128 379,499
Distribution and service
maintenance fees--Class
B....................... 3,662,116 225,691 957,064 1,081,816 287,238
Transfer agent fees and
expenses--Class A....... 298,321 97,429 52,384 111,423 279,444
Transfer agent fees and
expenses--Class B....... 942,666 62,457 255,361 284,740 69,271
Custodian fees and
expenses................ 844,490 103,560 79,340 83,425 89,850
Trustees' fees and
expenses................ 66,219 7,859 15,341 19,225 18,376
Audit and tax consulting
fees.................... 55,855 18,090 22,170 24,410 25,575
Printing expense......... 26,050 5,955 6,735 9,620 4,820
Insurance expense........ 9,620 1,096 2,217 2,624 27,298
Legal fees and expenses.. 8,550 780 1,420 1,990 2,460
Registration fees--Class
A....................... 5,642 6,534 3,823 4,310 4,505
Registration fees--Class
B....................... 6,653 6,034 4,939 4,883 4,878
Interest expense......... 4,985 338 1,295 6,533 --
Miscellaneous expenses... 9,334 2,942 4,006 4,283 3,914
------------ ---------- ----------- ----------- ----------
Total expenses........... 9,703,946 953,907 2,210,415 2,884,761 1,882,888
Less: expenses
reimbursed by
distributor............. (6,176) -- -- (11,034) --
------------ ---------- ----------- ----------- ----------
Net expenses............. 9,697,770 953,907 2,210,415 2,873,727 1,882,888
------------ ---------- ----------- ----------- ----------
Net investment income..... 31,171,251 3,342,605 9,277,031 12,780,101 6,361,674
------------ ---------- ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments........... (13,021,676) (270,175) 3,537,013 8,745,205 2,352,893
Net realized gain (loss)
on futures and options
contracts................ (68,606) 19,076 (19,031) -- 15,222
Net realized foreign
exchange loss on other
assets and liabilities... -- -- (1,754) -- --
Net change in unrealized
appreciation/depreciation
on investments........... (1,446,259) (165,240) (866,163) (6,210,119) (3,258,254)
Net change in unrealized
foreign exchange
gain/loss on other assets
and liabilities.......... -- -- 15 -- --
------------ ---------- ----------- ----------- ----------
Net realized and
unrealized gain (loss) on
investments and foreign
currency................. (14,536,541) (416,339) 2,650,080 2,535,086 (890,139)
------------ ---------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS............... $ 16,634,710 $2,926,266 $11,927,111 $15,315,187 $5,471,535
============ ========== =========== =========== ==========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND FEDERAL SECURITIES FUND DIVERSIFIED INCOME FUND
------------------------------- ----------------------------- -----------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
--------------- --------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
DECREASE IN NET ASSETS:
OPERATIONS:
Net investment income.. $ 31,171,251 $ 41,530,783 $ 3,342,605 $ 4,210,239 $ 9,277,031 $ 11,947,523
Net realized gain
(loss) on
investments........... (13,021,676) 9,603,179 (270,175) 2,758,114 3,537,013 (8,084,041)
Net realized gain
(loss) on futures and
options contracts..... (68,606) 45,590 19,076 (23,056) (19,031) (292,616)
Net realized foreign
exchange loss on other
assets and
liabilities........... -- -- -- -- (1,754) --
Net change in
unrealized
appreciation/
depreciation on
investments........... (1,446,259) 5,738,709 (165,240) 423,129 (866,163) 13,961,546
Net change in
unrealized foreign
exchange gain/loss on
other assets and
liabilities........... -- -- -- -- 15 (102)
--------------- --------------- ------------ ----------- ------------ ------------
Net increase in net
assets resulting from
operations............. 16,634,710 56,918,261 2,926,266 7,368,426 11,927,111 17,532,310
--------------- --------------- ------------ ----------- ------------ ------------
DIVIDENDS TO
SHAREHOLDERS:
From net investment
income (Class A)...... (6,332,560) (6,676,176) (1,939,301) (1,985,432) (1,544,886) (1,513,903)
From net investment
income (Class B)...... (18,378,969) (27,782,092) (1,107,790) (2,098,335) (7,502,127) (11,028,301)
--------------- --------------- ------------ ----------- ------------ ------------
Total dividends to
shareholders........... (24,711,529) (34,458,268) (3,047,091) (4,083,767) (9,047,013) (12,542,204)
--------------- --------------- ------------ ----------- ------------ ------------
NET DECREASE IN NET
ASSETS RESULTING
FROM CAPITAL SHARE
TRANSACTIONS
(NOTE 6)............... (143,987,563) (136,362,670) (16,883,153) (8,732,579) (29,908,684) (23,870,313)
--------------- --------------- ------------ ----------- ------------ ------------
TOTAL DECREASE IN NET
ASSETS................. (152,064,382) (113,902,677) (17,003,978) (5,447,920) (27,028,586) (18,880,207)
NET ASSETS:
Beginning of year....... 554,275,685 668,178,362 66,442,348 71,890,268 127,711,211 146,591,418
--------------- --------------- ------------ ----------- ------------ ------------
End of year [including
distributions in excess
of net investment
income for March 31,
1997 and March 31, 1996
of $(318,396),
$(1,255,322),
$(82,950), $(174,321),
$(217,383) and
$(522,977),
respectively].......... $ 402,211,303 $ 554,275,685 $ 49,438,370 $66,442,348 $100,682,625 $127,711,211
=============== =============== ============ =========== ============ ============
</TABLE>
See Notes to Financial Statements
7
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HIGH INCOME FUND TAX EXEMPT INSURED FUND
----------------------------- -----------------------------
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
OPERATIONS:
Net investment income.... $ 12,780,101 $ 15,243,396 $ 6,361,674 $ 7,373,636
Net realized gain (loss)
on investments.......... 8,745,205 (7,236,768) 2,352,893 1,630,756
Net realized gain (loss)
on futures and options
contracts............... -- -- 15,222 (199,383)
Net change in unrealized
appreciation/depreciation
on investments.......... (6,210,119) 7,416,828 (3,258,254) 2,644,616
------------ ------------ ------------ ------------
Net increase in net assets
resulting from
operations............... 15,315,187 15,423,456 5,471,535 11,449,625
------------ ------------ ------------ ------------
DIVIDENDS TO SHAREHOLDERS:
From net investment
income (Class A)........ (3,645,653) (4,100,978) (5,107,379) (6,307,717)
From net investment
income (Class B)........ (9,395,202) (12,111,523) (1,167,279) (1,156,665)
------------ ------------ ------------ ------------
Total dividends to
shareholders............. (13,040,855) (16,212,501) (6,274,658) (7,464,382)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
CAPITAL SHARE
TRANSACTIONS (NOTE 6).... 9,485,027 (65,066,720) (27,040,178) (16,652,927)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS............ 11,759,359 (65,855,765) (27,843,301) (12,667,684)
NET ASSETS:
Beginning of year......... 127,763,003 193,618,768 151,272,150 163,939,834
------------ ------------ ------------ ------------
End of year [including
distributions in excess
of net investment income
for March 31, 1997 and
March 31, 1996 of
$(267,317), $(228,649),
$(213,544) and
$(308,829),
respectively]............ $139,522,362 $127,763,003 $123,428,849 $151,272,150
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
8
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET
NET ASSET (BOTH FROM FROM NET BUTIONS OF NET ASSET
VALUE, NET REALIZED INVEST- INVEST- FROM RETURN INVEST- TOTAL VALUE,
PERIOD BEGINNING INVESTMENT AND MENT MENT OTHER OF MENT DISTRI- END OF TOTAL
ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME SOURCES CAPITAL INCOME BUTIONS PERIOD RETURN(2)
- ---------------- --------- ---------- ----------- ---------- --------- ------- ------- --------- ------- ------ ---------
<CAPTION>
RATIO OF RATIO OF
NET EXPENSES NET
ASSETS TO INVESTMENT
END OF AVERAGE INCOME TO
PERIOD PERIOD NET AVERAGE PORTFOLIO
ENDED (000'S) ASSETS NET ASSETS TURNOVER
- ---------------- ---------- ------------- -------------- ---------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/01/93-
3/31/94(3)..... $8.68 $0.28 $(0.34) $(0.06) $(0.14) $ -- $(0.01) $(0.08) $(0.23) $8.39 (0.68)%
3/31/95......... 8.39 0.61 (0.30) 0.31 (0.47) -- -- -- (0.47) 8.23 3.89
3/31/96......... 8.23 0.62 0.16 0.78 (0.51) -- -- -- (0.51) 8.50 9.62
3/31/97......... 8.50 0.59 (0.26) 0.33 (0.48) -- -- -- (0.48) 8.35 3.98
<S> <C> <C> <C> <C>
10/01/93-
3/31/94(3)..... $ 76,586 1.35%(4)(6) 6.83%(4)(6) 35%
3/31/95......... 73,399 1.46(6) 7.50(6) 105
3/31/96......... 125,504 1.44(6) 7.11(6) 142
3/31/97......... 113,171 1.54(6) 7.01(6) 148
CLASS B
6/30/93(5)...... $8.88 $0.64 $(0.17) $ 0.47 $(0.44) $(0.17) $ -- $ -- $(0.61) $8.74 5.49%
7/01/93-
3/31/94........ 8.74 0.43 (0.40) 0.03 (0.24) -- (0.01) (0.13) (0.38) 8.39 0.25
3/31/95......... 8.39 0.56 (0.30) 0.26 (0.41) -- -- -- (0.41) 8.24 3.25
3/31/96......... 8.24 0.55 0.17 0.72 (0.45) -- -- -- (0.45) 8.51 8.87
3/31/97......... 8.51 0.54 (0.26) 0.28 (0.43) -- -- -- (0.43) 8.36 3.31
7/01/93-
3/31/94........ 886,089 1.95(4)(6) 6.61(4)(6) 35
3/31/95......... 594,779 2.15(6) 6.80(6) 105
3/31/96......... 428,772 2.13 6.46 142
3/31/97......... 289,040 2.18 6.36 148
</TABLE>
- --------------------------------------------------------------------------------
FEDERAL SECURITIES FUND
<TABLE>
<CAPTION>
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS OF NET ASSET ASSETS
VALUE, INVEST- REALIZED INVEST- INVEST- FROM INVEST- TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL MENT DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(2) (000'S)
- ---------------- --------- ------- ----------- ---------- --------- ------- --------- ------- ------ --------- --------
<CAPTION>
RATIO OF RATIO OF
EXPENSES NET
TO INVESTMENT
AVERAGE INCOME TO
PERIOD NET AVERAGE PORTFOLIO
ENDED ASSETS NET ASSETS TURNOVER
- ---------------- ------------- -------------- ---------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/11/93-
3/31/94(3)..... $10.58 $0.22(1) $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% $ 592
3/31/95......... 10.22 0.60(1) (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 6,259
3/31/96......... 9.98 0.68(1) 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94 40,278
3/31/97......... 10.43 0.65(1) (0.10) .55 (0.59) -- -- (.59) 10.39 5.40 30,509
<S> <C> <C> <C>
10/11/93-
3/31/94(3)..... 1.39%(4)(6) 4.68%(4)(6) 68%
3/31/95......... 1.40(6) 6.90(6) 267
3/31/96......... 1.37 6.12 311
3/31/97......... 1.41 6.11 426
CLASS B
3/31/93......... $10.64 $0.70 $ 0.14 $ 0.84 $(0.64) $ -- $ -- $(0.64) $10.84 8.06% $121,267
3/31/94......... 10.84 0.62(1) (0.71) (0.09) (0.49) (0.03) (0.01) (0.53) 10.22 (0.89) 81,011
3/31/95......... 10.22 0.63(1) (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 65,631
3/31/96......... 10.01 0.56(1) 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13 26,165
3/31/97......... 10.45 0.57(1) (.08) .49 (.52) -- -- (.52) 10.42 4.82 18,929
3/31/93......... 1.85% 6.36% 97%
3/31/94......... 1.98 5.79 68
3/31/95......... 2.03 6.33 267
3/31/96......... 2.01 5.64 311
3/31/97......... 2.07 5.46 426
</TABLE>
- ------------
(1) Calculated based upon average shares outstanding
(2) Total return is not annualized and does not reflect sales load
(3) Commencement of sale of respective class of shares
(4) Annualized
(5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(6) Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
6/30/93 3/31/94 3/31/95 3/31/96 3/31/97
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. Government Securities Fund
Class A -- .10% .07% .04% .01%
U.S. Government Securities Fund
Class B .02% .06% .03% -- --
Federal Securities Fund Class A -- 6.74% 1.26% -- --
</TABLE>
See Notes to Financial Statements
9
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
DIVERSIFIED INCOME FUND
<TABLE>
<CAPTION>
NET GAIN
(LOSS) ON RATIO OF
INVESTMENTS NET NET EXPENSES RATIO OF NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<CAPTION>
PORTFOLIO
PERIOD ENDED TURNOVER
- ----------------- ---------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/05/93 -
10/31/93(3)(4). $5.05 $0.02 $ 0.01 $ 0.03 $(0.01) $5.07 0.65% $ 762 1.40%(5) 8.92%(5)
11/01/93 -
3/31/94........ 5.07 0.13 (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42 (5)(8) 8.25 (5)(8)
3/31/95......... 4.79 0.43 (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 9.58
3/31/96......... 4.14 0.39 0.16 0.55 (0.40) 4.29 13.78 16,762 1.46 8.96
3/31/97......... 4.29 0.37 0.10 0.47 (0.37) 4.39 11.43 22,601 1.42 8.68
<S> <C>
10/05/93 -
10/31/93(3)(4). 249%
11/01/93 -
3/31/94........ 48
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
CLASS B
10/31/93(4)(6).. $4.82 $0.38 $ 0.24 $ 0.62 $(0.37) $5.07 13.35% $102,519 1.78%(8) 7.53%(8)
11/01/93 -
3/31/94........ 5.07 0.15 (0.27) (0.12) (0.16) 4.79 (2.52) 174,072 2.11 (5) 7.48 (5)
3/31/95......... 4.79 0.40 (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 8.98
3/31/96......... 4.15 0.36 0.17 0.53 (0.38) 4.30 13.09 110,949 2.06 8.42
3/31/97......... 4.30 0.35 0.10 0.45 (0.35) 4.40 10.73 78,081 2.04 8.05
10/31/93(4)(6).. 249%
11/01/93 -
3/31/94........ 48
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
</TABLE>
- --------------------------------------------------------------------------------
HIGH INCOME FUND
<TABLE>
<CAPTION>
NET GAIN
(LOSS) ON RATIO OF
INVESTMENTS NET NET EXPENSES RATIO OF NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET
PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<CAPTION>
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3/31/93(7)...... $8.07 $0.95 $ 0.18 $ 1.13 $(1.08) $8.12 15.05% $ 30,715 1.77% 11.08%
3/31/94(7)...... 8.12 0.87(1) (0.14) 0.73 (0.82) 8.03 9.14 33,724 1.72 10.34
3/31/95......... 8.03 0.78(1) (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 10.82
3/31/96......... 6.95 0.67(1) 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53 9.36
3/31/97......... 6.95 0.65(1) 0.12 0.77 (0.66) 7.06 11.46 41,139 1.50 9.10
<S> <C>
3/31/93(7)...... 232%
3/31/94(7)...... 290
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
CLASS B
10/01/93 -
3/31/94(3)..... $8.18 $0.38(1) $(0.17) $ 0.21 $(0.35) $8.04 2.46% $131,713 2.15%(5)(8) 9.07%(5)(8)
3/31/95......... 8.04 0.73(1) (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16 (8) 10.26 (8)
3/31/96......... 6.96 0.62(1) 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06 (8) 8.85 (8)
3/31/97......... 6.96 0.61(1) 0.12 0.73 (0.62) 7.07 10.78 98,383 2.11 (8) 8.49 (8)
10/01/93 -
3/31/94(3)..... 290%
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
</TABLE>
- ------------
(1)Calculated based upon average shares outstanding
(2)Total return is not annualized and does not reflect sales load
(3)Commencement of sale of respective class of shares
(4)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(5)Annualized
(6)Restated to reflect 1.889180183-for-1 stock split effective December 16,
1992
(7)Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993
(8)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
10/31/93 3/31/94 3/31/95 3/31/96 3/31/97
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Diversified Income Fund Class A -- .62% -- -- --
Diversified Income Fund Class B .38% -- -- -- --
High Income Fund Class B -- .08% .08% .08% .01%
</TABLE>
See Notes to Financial Statements
10
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
TAX EXEMPT INSURED FUND
<TABLE>
<CAPTION>
NET GAIN
(LOSS) ON RATIO OF RATIO OF
INVESTMENTS NET NET EXPENSES NET
NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT
VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME PERIOD RETURN(2) (000'S) ASSETS NET ASSETS
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ----------
<CAPTION>
PORTFOLIO
PERIOD ENDED TURNOVER
- ----------------- ---------
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/31/93(3)..... $12.33 $0.70 $ 0.50 $ 1.20 $(0.74) $12.79 9.95% $191,350 1.10%(6) 5.56%(6)
11/01/93-
3/31/94........ 12.79 0.26 (0.84) (0.58) (0.26) 11.95 (4.61) 165,216 1.28 (4)(6) 4.99 (4)(6)
3/31/95......... 11.95 0.63 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20 (6) 5.32 (6)
3/31/96......... 12.13 0.59 0.29 0.88 (0.59) 12.42 7.37 121,957 1.22 4.72
3/31/97......... 12.42 0.59 (0.07) 0.52 (0.59) 12.35 4.24 98,376 1.24 4.77
<S> <C>
10/31/93(3)..... 26%
11/01/93-
3/31/94........ 52
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
CLASS B
10/04/93-
10/31/93(3)(5). $12.84 $0.02 $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(4) 4.09%(4)
11/01/93-
3/31/94........ 12.79 0.22 (0.83) (0.61) (0.23) 11.95 (4.84) 20,765 2.12 (4) 4.17 (4)
3/31/95......... 11.95 0.54 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 4.60
3/31/96......... 12.14 0.50 0.29 0.79 (0.51) 12.42 6.58 29,315 1.90 4.03
3/31/97......... 12.42 0.52 (0.08) 0.44 (0.51) 12.35 3.57 25,053 1.88 4.13
10/04/93-
10/31/93(3)(5). 26%
11/01/93-
3/31/94........ 52
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
</TABLE>
- ------------
(1)Calculated based upon average shares outstanding
(2)Total return is not annualized and does not reflect sales load
(3)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund
changed its fiscal year end to March 31
(4)Annualized
(5)Commencement of sale of respective class of shares
(6)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
10/31/93 3/31/94 3/31/95
-------- ------- -------
<S> <C> <C> <C>
Tax Exempt
Insured Fund
Class A .10% .11% .04%
</TABLE>
See Notes to Financial Statements
11
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--27.7%
6.50% due 3/15/24................................. $ 9,624 $ 8,538,393
7.50% due 4/01/24 - 6/01/25....................... 9,479 9,344,922
8.50% due 6/01/01................................. 3 3,580
9.00% due 1/01/02 - 10/01/16...................... 492 516,732
9.25% due 9/01/08 - 3/01/17....................... 491 516,828
9.50% due 9/01/16 - 9/01/21....................... 5,241 5,625,886
10.00% due 10/01/02 - 8/01/21..................... 19,492 21,221,035
10.50% due 6/01/00 - 1/01/21...................... 752 818,164
10.75% due 9/01/00 - 1/01/15...................... 212 231,324
11.00% due 9/01/00 - 6/01/17...................... 1,816 2,003,683
11.25% due 11/01/13............................... 58 64,306
11.50% due 11/01/01 - 7/01/19..................... 861 960,781
11.75% due 8/01/11 - 10/01/14..................... 171 190,278
12.00% due 7/01/99 - 7/01/20...................... 12,061 13,483,834
12.13% due 9/01/11................................ 709 803,526
12.25% due 10/01/99 - 7/01/15..................... 800 904,880
12.50% due 8/01/99 - 4/15/19...................... 20,043 23,022,735
12.75% due 2/01/00 - 6/01/15...................... 972 1,112,106
13.00% due 5/01/00 - 10/01/15..................... 10,789 12,553,410
13.25% due 11/01/10 - 5/01/15..................... 1,114 1,294,144
13.50% due 2/01/10 - 2/01/19...................... 6,246 7,365,413
13.75% due 7/01/11 - 8/01/14...................... 86 100,165
14.00% due 10/01/09 - 4/01/16..................... 576 679,666
14.50% due 12/01/10 - 5/01/13..................... 121 142,778
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(cost $108,430,962)............................... 111,498,569
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--16.6%
6.00% due 11/01/03................................ 5,000 4,904,299
6.50% due 8/01/99 - 1/01/01....................... 6,382 6,218,225
8.00% due 12/01/22 - 1/01/23...................... 14,977 15,033,182
9.00% due 12/01/97 - 4/01/07...................... 2,339 2,423,982
9.25% due 12/01/10 - 1/01/17...................... 448 469,018
10.25% due 6/01/14 - 7/01/16...................... 110 119,533
10.50% due 3/01/15................................ 328 358,586
11.00% due 3/01/09 - 8/01/20...................... 1,309 1,455,646
11.50% due 5/01/00 - 3/01/14...................... 531 573,526
11.75% due 3/01/15 - 11/01/15..................... 59 66,842
12.00% due 9/01/07 - 5/01/16...................... 10,695 12,198,724
12.25% due 9/01/99 - 10/01/15..................... 1,543 1,764,122
12.50% due 12/01/97 - 9/01/15..................... 6,456 7,460,948
12.75% due 9/01/12 - 9/01/15...................... 566 656,538
13.00% due 10/01/09 - 9/01/16..................... 8,488 9,973,338
13.25% due 10/01/13 - 2/01/15..................... 180 211,634
13.50% due 10/01/10 - 2/01/17..................... 1,509 1,794,256
13.75% due 11/01/11 - 10/01/14.................... 146 173,589
14.00% due 10/01/14............................... 395 473,894
14.50% due 12/01/21............................... 138 165,851
14.75% due 7/01/12................................ 101 125,570
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION (CONTINUED)
15.00% due 10/01/12 - 2/01/13..................... $ 129 $ 154,309
15.50% due 10/01/12............................... 61 73,953
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(cost $66,020,298)................................ 66,849,565
------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--28.5%
6.50% due 12/15/98 - 10/15/04..................... 4,595 4,389,086
7.00% due 7/15/23 - 9/15/25....................... 13,465 12,848,516
7.50% due 1/15/17 - 8/15/26....................... 25,008 24,505,625
8.50% due 6/15/01 - 11/15/20...................... 11,941 12,394,901
9.00% due 5/15/01 - 12/15/20...................... 8,685 9,091,494
9.50% due 2/15/98 - 7/15/20....................... 2,563 2,730,252
10.00% due 3/15/98 - 5/15/19...................... 1,932 2,060,191
10.25% due 7/15/15................................ 49 55,269
10.50% due 11/15/97 - 6/15/21..................... 7,532 8,260,480
11.00% due 2/15/98 - 4/15/21...................... 5,526 6,154,133
11.50% due 3/15/98 - 1/15/21...................... 7,310 8,298,852
11.75% due 7/15/13 - 11/15/15..................... 914 1,019,985
12.00% due 9/15/98 - 10/15/19..................... 3,182 3,656,373
12.25% due 8/15/13 - 7/15/15...................... 964 1,115,867
12.50% due 4/15/10 - 3/15/16...................... 6,875 7,995,604
12.75% due 10/15/13............................... 6 6,462
13.00% due 11/15/10 - 6/15/15..................... 3,602 4,231,104
13.25% due 7/15/14 - 11/15/14..................... 112 131,122
13.50% due 5/15/10 - 1/15/15...................... 2,392 2,837,771
14.00% due 5/15/11 - 12/15/14..................... 1,167 1,397,968
15.00% due 6/15/11 - 2/15/13...................... 813 992,047
16.00% due 12/15/11 - 7/15/12..................... 288 354,542
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $116,762,956)............................... 114,527,644
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--2.1%
10.00% due 9/20/16 - 4/20/19...................... 20 21,703
11.00% due 7/20/00................................ 16 16,890
11.50% due 8/20/13 - 7/20/20...................... 1,062 1,208,429
11.75% due 11/20/14 - 2/20/16..................... 385 440,623
12.00% due 10/20/13 - 5/20/15..................... 743 853,743
12.25% due 10/20/15............................... 34 38,922
12.50% due 9/20/13 - 1/20/15...................... 3,145 3,649,393
12.75% due 11/20/13 - 7/20/15..................... 146 169,481
13.00% due 9/20/13 - 10/20/14..................... 1,531 1,799,705
13.25% due 12/20/14 - 5/20/15..................... 81 94,037
13.50% due 10/20/14............................... 73 86,730
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(cost $8,112,113)................................. 8,379,656
------------
</TABLE>
12
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- ---------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCIES--1.2%
Small Business Administration
6.95% due 11/01/16 (1)
(cost $5,000,000)................................. $ 5,000 $ 4,839,844
------------
U.S. TREASURY NOTES--9.8%
6.25% due 2/15/07(2)............................... 31,000 29,542,070
6.50% due 10/15/06................................. 10,000 9,689,100
------------
TOTAL U.S. TREASURY NOTES
(cost $40,746,189)................................. 39,231,170
------------
U.S. TREASURY BOND--12.1%
6.63% due 2/15/27 (cost $50,967,290)............... 51,950 48,881,833
------------
TOTAL INVESTMENT SECURITIES--98.0%
(cost $396,039,808)................................ 394,208,281
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
------------
REPURCHASE AGREEMENT--7.5%
Joint Repurchase Agreement Account (Note 2)
(cost $30,041,000).............................. $30,041 $ 30,041,000
------------
TOTAL INVESTMENTS--
(cost $426,080,808*)............................. 105.5% 424,249,281
Liabilities in excess of other assets (3)......... (5.5) (22,037,978)
------- ------------
NET ASSETS-- 100.0% $402,211,303
======= ============
</TABLE>
- --------
* See Note 5
(1) Fair valued security; see Note 2
(2) The security or a portion thereof is out on loan; see Note 2
(3) Includes a liability for fully collateralized securities on loan; see
Note 2
See Notes to Financial Statements
13
<PAGE>
SUNAMERICA FEDERAL SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--9.2%
7.50% due 2/01/23 - 6/01/25....................... $ 1,869 $ 1,842,519
10.00% due 1/01/17................................ 2,437 2,659,035
12.50% due 9/30/13................................ 20 21,976
13.50% due 2/01/14................................ 7 7,627
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(COST $4,554,687)................................ 4,531,157
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.0%
15.50% due 10/01/12 (cost $7,198)................. 8 10,083
------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--46.4%
7.00% due 3/15/23 - 9/15/25....................... 6,131 5,869,804
8.50% due 3/15/17 - 9/15/24....................... 10,703 11,037,898
9.00% due 6/15/16 - 5/15/17....................... 4,020 4,273,972
11.00% due 11/15/15............................... 389 435,109
11.25% due 8/15/15................................ 34 37,523
12.00% due 5/15/15................................ 28 31,842
12.25% due 9/15/13 - 7/15/15...................... 583 673,425
12.50% due 11/15/10 - 6/15/15..................... 170 196,844
13.00% due 1/15/11 - 4/15/15...................... 268 314,261
13.25% due 10/15/13............................... 20 23,596
13.50% due 5/15/11 - 10/15/14..................... 52 62,205
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $22,665,141)................................ 22,956,479
------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION II--2.4%
10.00% due 10/20/13 - 3/20/17..................... 431 467,688
11.00% due 12/20/13............................... 62 69,041
12.00% due 3/20/15 - 1/20/16...................... 222 256,076
12.25% due 12/20/14 - 10/20/15.................... 325 373,207
13.00% due 6/20/14................................ 18 20,845
13.75% due 9/20/14................................ 8 9,435
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(COST $1,114,406)................................ 1,196,292
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
U.S. TREASURY NOTES--21.6%
6.13% due 12/31/01............................... $ 2,000 $ 1,948,440
6.25% due 2/15/07(1)............................. 6,000 5,717,820
7.00% due 7/15/06................................ 3,000 3,007,500
------------
TOTAL U.S. TREASURY NOTES (COST $10,961,970)...... 10,673,760
------------
U.S. TREASURY BOND--11.4%
6.63% due 2/15/27 (cost $5,788,672).............. 6,000 5,645,640
------------
TOTAL INVESTMENT SECURITIES--91.0%
(cost $45,092,074)............................... 45,013,411
------------
REPURCHASE AGREEMENT--18.3%
Joint Repurchase Agreement Account (Note 2)
(cost $9,042,000)............................... 9,042 9,042,000
------------
TOTAL INVESTMENTS--
(cost $54,134,074*).............................. 109.3% 54,055,411
Liabilities in excess of other assets (2)......... (9.3) (4,617,041)
------- ------------
NET ASSETS-- 100.0% $ 49,438,370
======= ============
</TABLE>
- --------
* See Note 5
(1) The security or portion thereof is out on loan; see Note 2
(2) Includes a liability for fully collateralized securities on loan; see Note
2
See Notes to Financial Statements
14
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--36.8%
AUTOMOTIVE--2.1%
Chrysler Corp.
Debentures
7.45% due 3/01/27................................. $ 2,250 $ 2,130,975
------------
CABLE--6.4%
Echostar Communications Corp.
Sr. Secured Disc. Notes
zero coupon due 6/01/04(1)........................ 1,875 1,603,125
Echostar Satellite Broadcasting Corp.
Sr. Secured Disc. Notes
zero coupon due 3/15/04(1)........................ 1,875 1,481,250
International CableTel, Inc.
Sr. Notes
zero coupon due 4/15/05(1)........................ 1,000 690,000
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(1)........................ 1,000 520,000
United International Holdings, Inc.
Sr. Disc. Notes, Series B
zero coupon due 11/15/99.......................... 3,000 2,171,250
------------
6,465,625
------------
CELLULAR--10.1%
Cellular Communications International, Inc.
Sr. Disc. Notes
zero coupon due 8/15/00........................... 1,000 710,000
Cellular Communications International, Inc.
Sr. Disc. Notes
zero coupon due 8/15/00(2)........................ 2,000 1,420,000
Comcast Cellular Corp.
Notes
zero coupon due 3/05/00........................... 3,000 2,208,750
Globalstar L.P.
Sr. Notes
11.38% due 2/15/04(2)(3).......................... 1,000 971,250
Intercel, Inc.
Sr. Disc. Notes
zero coupon due 5/01/06(1)........................ 2,000 1,180,000
International Wireless Communication
Sr. Secured Disc. Notes
zero coupon due 8/15/01........................... 1,500 843,750
Microcell Telecommunications
Sr. Disc. Notes, Series B
zero coupon due 6/01/06(1)........................ 2,500 1,275,000
Omnipoint Corp.
Sr. Notes
11.63% due 8/15/06................................ 1,750 1,522,500
------------
10,131,250
------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
COMPUTERS--1.0%
Unisys Corp.
Sr. Notes
11.75% due 10/15/04............................... $ 1,000 $ 1,045,000
------------
ELECTRONICS--0.7%
Electronic Retailing Systems International, Inc.
Sr. Disc. Notes
zero coupon due 2/01/04(1)(2)(3).................. 1,000 676,250
------------
FINANCE--2.4%
Homeside, Inc.
Sr. Secured Priority Notes,
Series B
11.25% due 5/15/03................................ 1,299 1,454,880
Mego Mortgage Corp.
Sr. Subordinated Notes
12.50% due 12/01/01............................... 1,000 1,005,000
------------
2,459,880
------------
GAMING--2.9%
California Hotel Finance Corp.
Sr. Subordinated Notes
11.00% due 12/01/02............................... 1,500 1,545,000
Stuart Entertainment, Inc.
Sr. Subordinated Notes, Series B
12.50% due 11/15/04............................... 1,000 900,000
Trump Atlantic City Associates
First Mortgage Notes
11.25% due 5/01/06................................ 500 455,000
------------
2,900,000
------------
GROCERY--2.2%
Smith's Food & Drug Centers, Inc.
Sr. Subordinated Notes
11.25% due 5/15/07................................ 2,000 2,190,000
------------
HEALTH SERVICES--2.9%
Dade International, Inc.
Sr. Subordinated Notes
11.13% due 5/01/06................................ 1,500 1,702,500
Multicare, Inc.
Sr. Subordinated Notes
12.50% due 7/01/02................................ 1,150 1,259,250
------------
2,961,750
------------
METALS & MINING--1.6%
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03................................ 1,500 1,560,000
------------
OFFICE PRODUCTS--0.7%
American Pad & Paper Co.
Sr. Subordinated Notes, Series B
13.00% due 11/15/05............................... 650 754,000
------------
</TABLE>
15
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
OIL & GAS--0.5%
DeepTech International, Inc.
Sr. Secured Notes
12.00% due 12/15/00............................... $ 500 $ 526,250
------------
TELECOMMUNICATIONS--3.3%
ICG Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/15/07(1)(3)..................... 1,000 555,000
RSL Communications, Ltd
Sr. Notes
12.25% due 11/15/06(2)(3)......................... 1,000 1,025,000
Sprint Spectrum L.P.
Sr. Notes
11.00% due 8/15/06................................ 1,000 1,060,000
Teleport Communications Group
Sr. Subordinated Disc. Notes
zero coupon due 7/01/07(1)........................ 1,000 670,000
------------
3,310,000
------------
TOTAL CORPORATE BONDS & NOTES
(cost $37,384,671)................................ 37,110,980
------------
FOREIGN BONDS & NOTES--46.8%
BANKS--1.0%
Unibanco Leasing SA
Notes
11.13% due 11/28/97(3)............................ 1,000 1,027,500
------------
BROADCASTING--1.9%
Tv Azteca SA de CV
Sr. Notes, Series B
10.50% due 2/15/07(3)............................. 2,000 1,951,840
------------
CABLE--15.0%
Bell Cablemedia PLC
Sr. Disc. Notes
zero coupon due 9/15/05(1)........................ 1,750 1,400,000
CANTV Finance Ltd.
Guaranteed Notes
9.25% due 2/01/04................................. 1,000 982,500
Comcast UK Cable Partners, Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(1)....................... 2,000 1,300,000
Diamond Cable Communications PLC
Sr. Disc. Notes
zero coupon due 12/15/05(1)....................... 1,000 640,000
Globo Comunicacoes e
Participacoes Ltda.
Notes, Series B
10.50% due 12/20/06(3)............................ 2,500 2,515,625
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CABLE (CONTINUED)
Kabelmedia Holding
Sr. Disc. Notes
zero coupon due 8/01/06(1)........................ $ 1,000 $ 583,750
Multicanal Participacoes SA
Guaranteed Sr. Notes
12.63% due 6/18/04................................ 3,000 3,296,250
Tevecap SA
Sr. Notes, Series B
12.63% due 11/26/04(3)............................ 2,500 2,575,000
TV Filme, Inc.
Sr. Notes, Series B
12.88% due 12/15/04(3)............................ 1,000 1,017,785
Videotron Holdings PLC
Sr. Disc. Notes
zero coupon due 8/15/05........................... 1,000 790,000
------------
15,100,910
------------
CELLULAR--1.3%
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(1)........................ 2,000 1,260,000
------------
FINANCE--2.4%
CEI Citicorp Holdings SA
Bonds
9.75% due 2/14/07(3).............................. 2,500 2,425,000
------------
FOOD & BEVERAGES--2.9%
Fage Dairy Industries SA
Sr. Notes
9.00% due 2/01/07(3).............................. 3,000 2,902,500
------------
INDUSTRIAL--0.6%
International Semi-Tech Microelectronic, Inc.
Sr. Secured Disc. Notes
zero coupon due 8/15/03(1)........................ 1,250 625,000
------------
INSURANCE--2.0%
Veritas Holdings
Sr. Notes
9.63% due 12/15/03(3)............................. 2,000 2,000,000
------------
NON U.S. GOVERNMENT AGENCY--10.2%
Federative Republic of Brazil
Capitalization Bonds
4.50% due 4/15/14(4).............................. 2,203 1,624,521
Federative Republic of Brazil
Variable Rate Disc. Notes
5.00% due 4/15/24(4).............................. 3,000 1,867,500
Republic of Argentina
Sr. Unsubordinated Bonds
10.95% due 11/01/99............................... 2,000 2,115,000
</TABLE>
16
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)/ VALUE
SECURITY DESCRIPTION SHARES (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FOREIGN BONDS & NOTES (CONTINUED)
NON U.S. GOVERNMENT AGENCY (CONTINUED)
Republic of Argentina
Bonds
11.38% due 1/30/17............................... $ 2,500 $ 2,569,375
United Mexican States
Bonds
11.38% due 9/15/16............................... 2,000 2,047,500
------------
10,223,896
------------
OIL & GAS--3.7%
Bridas Corp.
Sr. Notes
12.50% due 11/15/99.............................. 2,000 2,160,000
Statia Terms International
Mortgage Notes, Series B
11.75% due 11/15/03(3)........................... 1,500 1,530,000
------------
3,690,000
------------
TELECOMMUNICATIONS--5.8%
Colt Telecom Group PLC
Sr. Disc. Notes
zero coupon due 12/15/06(1)(2)................... 1,290 791,737
Ionica PLC
Sr. Disc. Notes
13.50% due 8/15/06............................... 1,000 1,021,250
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(1)(2).................... 1,500 693,750
Telecom Argentina
Notes
12.00% due 11/15/02.............................. 3,000 3,366,600
------------
5,873,337
------------
TOTAL FOREIGN BONDS & NOTES
(cost $45,666,509)............................... 47,079,983
------------
U.S. GOVERNMENT AND AGENCIES--3.7%
U.S. TREASURY BOND--1.8%
11.13% due 8/15/03............................... 1,500 1,825,785
------------
SMALL BUSINESS ADMINISTRATION--1.9%
6.70% due 12/01/16(5)............................ 2,000 1,907,813
------------
TOTAL U.S. GOVERNMENT AND AGENCIES
(cost $4,108,125)................................ 3,733,598
------------
PREFERRED STOCK--2.7%
FOREST PRODUCTS--1.3%
SDW Holdings Corp. 15.00%(3)(5).................. 37,000 1,276,500
------------
TELECOMMUNICATIONS--1.4%
Intermedia Communications, Inc. 13.50%........... 150 1,449,375
------------
TOTAL PREFERRED STOCK
(cost $2,450,530)................................ 2,725,875
------------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS/
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
WARRANTS--0.2%+
CABLE--0.0%
United International Holdings, Inc. .............. 3,000 $ 15,000
------------
CELLULAR--0.2%
International Wireless Communication(3)(5)........ 1,500 0
Microcell Telecommunications(3)................... 10,000 135,625
Microcell Telecommunications (contingent
warrants)(3)..................................... 10,000 6,250
Occidente Y Caribe Celular SA(5).................. 8,000 0
------------
141,875
------------
FOREST PRODUCTS--0.0%
SDW Holdings Corp.(3)(5).......................... 3,700 18,500
------------
TOTAL WARRANTS
(cost $208,526)................................... 175,375
------------
TOTAL INVESTMENT SECURITIES--90.2%
(cost $89,818,361)................................ 90,825,811
------------
REPURCHASE AGREEMENT--4.0%
Joint Repurchase Agreement
Account (Note 2) (cost $3,985,000) .............. $ 3,985 3,985,000
------------
TOTAL INVESTMENTS--
(cost $93,803,361*)............................... 94.2% 94,810,811
Other assets less liabilities...................... 5.8 5,871,814
------- ------------
NET ASSETS-- 100.0% $100,682,625
======= ============
</TABLE>
- -------
* See Note 5
+ Non-income producing security
(1) Represents a zero coupon bond which will convert to an interest-bearing
security at a later date
(2) Bond issued as part of a unit which includes an equity component
(3) Resale restricted to qualified institutional buyers
(4) Variable rate security; rate as of March 31, 1997
(5) Fair valued security; see Note 2
(6) Allocation of investments by country as a percentage of net assets as of
March 31, 1997:
United States 47.4%
Brazil 13.8
Argentina 12.5
Britain 6.6
Mexico 4.0
Greece 2.9
Germany 2.6
Canada 2.1
Colombia 1.3
Venezuela 1.0
----
94.2%
=====
See Notes to Financial Statements
17
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--64.6%
AUTOMOTIVE--2.3%
Collins & Aikman Products
Sr. Subordinated Notes
11.50% due 4/15/06................................. $ 2,000 $ 2,210,000
Foamex L.P.
Sr. Subordinated Debentures 11.88% due 10/01/04.... 1,000 1,055,000
-----------
3,265,000
-----------
BROADCASTING--4.4%
Busse Broadcasting Corp.
Sr. Secured Notes
11.63% due 10/15/00................................ 1,500 1,560,000
Orion Network Systems, Inc.
Sr. Notes
zero coupon due 1/15/07(1)(2)...................... 3,000 1,500,000
Scholastic Brands, Inc.
Sr. Subordinated Notes
11.00% due 1/15/07(3).............................. 3,000 3,075,000
-----------
6,135,000
-----------
CABLE--5.5%
Echostar Communications Corp.
Sr. Secured Disc. Notes
zero coupon due 6/01/04(1)......................... 4,000 3,420,000
Echostar Satellite Broadcasting Corp.
Sr. Secured Disc. Notes
zero coupon due 3/15/04(1)......................... 2,000 1,580,000
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(1)......................... 1,000 520,000
United International Holdings, Inc.
Sr. Disc. Notes, Series B
zero coupon due 11/15/99........................... 3,000 2,171,250
-----------
7,691,250
-----------
CELLULAR--9.3%
Cellular Communications International, Inc.
Sr. Disc. Notes
zero coupon due 8/15/00(2)......................... 4,000 2,840,000
Comcast Cellular Corp.
Notes
zero coupon due 3/05/00............................ 4,000 2,945,000
Globalstar L.P.
Sr. Notes
11.38% due 2/15/04(2)(3)........................... 1,500 1,456,875
Intercel, Inc.
Sr. Disc. Notes
zero coupon due 2/01/06(1)(2)...................... 1,750 1,006,250
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CELLULAR (CONTINUED)
International Wireless Communication
Sr. Secured Disc. Notes
zero coupon due 8/15/01........................... $ 2,500 $ 1,406,250
Microcell Telecommunications
Sr. Disc. Notes, Series B
zero coupon due 6/01/06(1)........................ 4,000 2,040,000
Omnipoint Corp.
Sr. Notes
11.63% due 8/15/06................................ 1,500 1,305,000
------------
12,999,375
------------
CHEMICALS--1.1%
NL Industies, Inc.
Sr. Notes
11.75% due 10/15/03............................... 1,500 1,575,000
------------
COMMUNICATION EQUIPMENT--1.1%
Orbcomm Global L.P.
Sr. Notes
14.00% due 8/15/04................................ 1,500 1,492,500
------------
COMPUTERS--1.9%
Advanced Micro Devices, Inc.
Sr. Secured Notes
11.00% due 8/01/03................................ 1,500 1,620,000
Unisys Corp.
Sr. Notes
11.75% due 10/15/04............................... 1,000 1,045,000
------------
2,665,000
------------
ELECTRONICS--0.5%
Electronic Retailing Systems International, Inc.
Sr. Disc. Notes
zero coupon due 2/01/04(1)(2)(3) 1,000 676,250
------------
FINANCE--4.9%
Bank United Capital
Trust Preferred Securities, Series A
10.25% due 12/31/26(3)............................ 2,000 1,957,500
Eagle Financial Capital Trust
Guaranteed Notes
10.00% due 4/01/27(3)............................. 500 493,175
Homeside, Inc.
Sr. Secured Priority Notes, Series B
11.25% due 5/15/03................................ 2,598 2,909,760
Mego Mortgage Corp.
Sr. Subordinated Notes
12.50% due 12/01/01............................... 1,500 1,507,500
------------
6,867,935
------------
</TABLE>
18
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
FOOD & BEVERAGES--0.7%
Printpack, Inc.
Sr. Subordinated Notes, Series B
10.63% due 8/15/06................................ $ 1,000 $ 1,025,000
------------
GAMING--3.8%
Capital Gaming International, Inc.
Promissory Notes
zero coupon due 8/01/95+(4)(6).................... 20 2,000
Showboat, Inc.
Sr. Subordinated Notes
13.00% due 8/01/09................................ 3,000 3,420,000
Stuart Entertainment, Inc.
Sr. Subordinated Notes, Series B
12.50% due 11/15/04............................... 2,000 1,800,000
------------
5,222,000
------------
GROCERY--3.1%
Smith's Food & Drug Centers, Inc.
Sr. Subordinated Notes
11.25% due 5/15/07................................ 4,000 4,380,000
------------
HEALTH SERVICES--2.4%
Dade International, Inc.
Sr. Subordinated Notes
11.13% due 5/01/06................................ 2,000 2,270,000
Imed Corp.
Sr. Subordinated Notes
9.75% due 12/01/06(3)............................. 1,000 1,030,000
------------
3,300,000
------------
INDUSTRIAL--1.5%
U.S. Can Corp.
Sr. Subordinated Notes, Series B
10.13% due 10/15/06............................... 2,000 2,080,000
------------
METALS & MINING--2.6%
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03................................ 2,000 2,080,000
WCI Steel, Inc.
Sr. Secured Notes, Series B 10.00% due 12/01/04... 1,500 1,500,000
------------
3,580,000
------------
OFFICE PRODUCTS--2.2%
American Pad & Paper Co.
Sr. Subordinated Notes, Series B
13.00% due 11/15/05............................... 2,600 3,016,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
OIL & GAS--1.8%
Clark (R & M) Holdings, Inc.
Sr. Notes, Series A
zero coupon due 2/15/00........................... $ 2,000 $ 1,455,000
DeepTech International, Inc.
Sr. Secured Notes
12.00% due 12/15/00............................... 1,000 1,052,500
------------
2,507,500
------------
RETAIL--1.5%
Finlay Fine Jewelry Corp.
Sr. Notes
10.63% due 5/01/03................................ 2,000 2,110,000
------------
TELECOMMUNICATIONS--14.0%
Advanced Radio Telecom Corp.
Sr. Notes
14.00% due 2/15/07(2)............................. 1,000 1,077,500
American Communications Services
Sr. Disc. Notes
zero coupon due 11/01/05(1)....................... 4,000 2,360,000
GST USA, Inc.
Sr. Disc. Exchange Notes
zero coupon due 12/15/05(1)....................... 3,000 1,800,000
Hyperion Telecommunications, Inc.
Sr. Disc. Notes, Series B
zero coupon due 4/15/03(1)........................ 3,000 1,642,500
ICG Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/15/07(1)(3)..................... 1,000 555,000
Intermedia Communications, Inc.
Sr. Notes, Series B
13.50% due 6/01/05................................ 2,500 2,818,750
Mcleod, Inc.
Sr. Disc. Notes
zero coupon due 3/01/07(1)(3)..................... 3,000 1,627,500
RSL Communications, Ltd.
Sr. Notes
12.25% due 11/15/06(2)(3)......................... 3,000 3,075,000
Teleport Communications Group
Sr. Subordinated Disc. Notes
zero coupon due 7/01/07(1)........................ 1,000 670,000
Viatel, Inc.
Sr. Disc. Notes
zero coupon due 1/15/05(1)........................ 3,000 1,965,000
WinStar Communications, Inc.
Sr. Disc. Notes
zero coupon due 10/15/05(1)....................... 3,500 1,942,500
------------
19,533,750
------------
TOTAL CORPORATE BONDS & NOTES
(cost $90,966,139)................................ 90,121,560
------------
</TABLE>
19
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FOREIGN BONDS & NOTES--14.0%
CABLE--4.5%
Bell Cablemedia PLC
Sr. Disc. Notes
zero coupon due 9/15/05(1)........................ $ 3,000 $ 2,400,000
Comcast UK Cable Partners Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(1)....................... 2,000 1,300,000
Diamond Cable Communications PLC
Sr. Disc. Notes
zero coupon due 12/15/05(1)....................... 1,000 640,000
Globo Comunicacoes e Participacoes Ltda. Notes,
Series B
10.50% due 12/20/06(3)............................ 1,000 1,006,250
Kabelmedia Holding
Sr. Disc. Notes
zero coupon due 8/01/06(1)........................ 1,500 875,625
------------
6,221,875
------------
CELLULAR--2.0%
Clearnet Communications, Inc.
Sr. Disc. Notes
zero coupon due 12/15/05(1)...................... 1,500 937,500
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(1)........................ 3,000 1,890,000
------------
2,827,500
------------
FINANCE--0.7%
Intertek Financial Corp. Sr. Subordinated Notes
10.25% due 11/01/06(3)........................... 1,000 1,026,250
------------
INDUSTRIAL--0.5%
International Semi-Tech Microelectronic, Inc.
Sr. Secured Disc. Notes
zero coupon due 8/15/03(1)........................ 1,500 750,000
------------
OIL & GAS--1.5%
Statia Terms International
Mortgage Notes, Series B
11.75% due 11/15/03(3)............................ 2,000 2,040,000
------------
PAPER PRODUCTS--1.4%
Repap New Brunswick, Inc. Second Priority Sr.
Secured Notes
10.03% due 4/15/05............................... 2,000 2,000,000
------------
TELECOMMUNICATIONS--3.4%
Colt Telecom Group PLC
Sr. Disc. Notes
zero coupon due 12/15/06(1)(2)................... 2,000 1,227,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)/ VALUE
SECURITY DESCRIPTION SHARES/WARRANTS (NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
Ionica PLC
Sr. Notes
13.50% due 8/15/06............................... $ 3,000 $ 3,063,750
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(1)(2).................... 1,000 462,500
------------
4,753,750
------------
TOTAL FOREIGN BONDS & NOTES
(cost $19,898,252)............................... 19,619,375
------------
PREFERRED STOCK--5.5%
CABLE--2.1%
International Cabletel, Inc.(3).................. 3,000 2,895,000
------------
FOREST PRODUCTS--0.9%
SDW Holdings Corp. 15.00%(3)(4).................. 37,000 1,276,500
------------
TELECOMMUNICATIONS--2.5%
Intermedia Communications, Inc. 13.50%(3)........ 200 1,932,500
Nextlink Communications, Inc. 14.00%(2)(5)....... 35,000 1,548,750
------------
3,481,250
------------
TOTAL PREFERRED STOCK
(cost $7,726,780)................................ 7,652,750
------------
COMMON STOCK--0.3%
COMPUTERS--0.3%
Open Text Corp.+(4)(7)........................... 70,754 384,725
------------
GAMING--0.0%
Capital Gaming International, Inc.+.............. 30,000 937
------------
MEDIA--0.0%
TMM, Inc.+(4)(7)................................. 2,000,000 20,000
------------
TOTAL COMMON STOCK
(cost $2,060,071)................................ 405,662
------------
WARRANTS--0.6%+
CABLE--0.0%
United International Holdings, Inc. ............. 3,000 15,000
------------
CELLULAR--0.2%
Clearnet Communications, Inc..................... 4,950 35,467
International Wireless Communication(3)(4)....... 2,500 0
</TABLE>
20
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
VALUE
SECURITY DESCRIPTION WARRANTS (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
WARRANTS (CONTINUED)
CELLULAR (CONTINUED)
Microcell Telecommunications(3)....................... 16,000 $ 217,000
Microcell Telecommunications (contingent warrants)(3). 16,000 10,000
Occidente Y Caribe Celular SA(4)...................... 12,000 0
------------
262,467
------------
FOREST PRODUCTS--0.0%
SDW Holdings Corp.(4)................................. 3,700 18,500
------------
GAMING--0.0%
Capital Gaming International, Inc..................... 45,500 711
Fitzgerald Gaming Corp.(3)(4)......................... 2,000 20,000
------------
20,711
------------
HOUSEHOLD PRODUCTS--0.0%
Chattem, Inc.......................................... 1,500 4,500
------------
TELECOMMUNICATIONS--0.4%
Hyperion Telecommunications, Inc...................... 3,000 75,000
Ionica PLC............................................ 3,000 434,250
------------
509,250
------------
TOTAL WARRANTS
(cost $814,312)....................................... 830,428
------------
TOTAL INVESTMENT SECURITIES--85.0%
(cost $121,465,554)................................... 118,629,775
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
REPURCHASE AGREEMENT--5.7%
Joint Repurchase Agreement Account (Note 2)
(cost $7,976,000)................................. $ 7,976 $ 7,976,000
------------
TOTAL INVESTMENTS--
(cost $129,441,554*).............................. 90.7% 126,605,775
Other assets less liabilities...................... 9.3 12,916,587
---------- ------------
NET ASSETS-- 100.0% $139,522,362
========== ============
</TABLE>
- -------
* See Note 5
+ Non-income producing security
(1) Represents a zero coupon bond which will convert to an interest-bearing
security at a later date
(2) Bond issued as part of a unit which includes an equity component
(3) Resale restricted to qualified institutional buyers
(4) Fair valued security; see Note 2
(5) PIK ("Payment-in-kind") payment made with additional securities in lieu of
cash
(6) Bond in default
(7) At March 31, 1997 the Fund held restricted securities amounting to 0.3% of
net assets. The Fund will not bear any costs, including those involved in
registration under the Securities Act of 1933, in connection with the
disposition of the following securities:
<TABLE>
<CAPTION>
VALUATION
AS OF
DATE OF UNIT MARCH 31,
DESCRIPTION ACQUISITION COST 1997
------------------------------------------------- ----------- ----- ---------
<S> <C> <C> <C>
Open Text Corp. ................................. 7/12/95 $3.92 $5.4375
TMM, Inc. ....................................... 2/1/95 .83 .01
</TABLE>
See Notes to Financial Statements
21
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS--98.0%
ALASKA--2.8%
Alaska State Housing Finance Corp., Capital
Appreciation Mortgage, Series A
zero coupon due 12/01/17+......................... $3,000 $ 849,360
Alaska State Housing Finance Corp., Capital
Appreciation Mortgage, Series A
zero coupon due 12/01/27+......................... 3,665 523,252
Alaska State Housing Finance Corp.,
7.50% due 12/01/15+............................... 1,975 2,038,852
------------
3,411,464
------------
ARIZONA--1.2%
Pima County, Arizona Unified School District
Number 1,
7.50% due 7/01/10+................................ 1,200 1,431,108
------------
ARKANSAS--0.2%
Arkansas State Development Finance Authority,
Single Family Mortgage Revenue,
9.00% due 6/01/14................................. 150 154,646
Arkansas State Development Finance Authority,
Single Family Mortgage Revenue, Series A,
9.38% due 8/01/14................................. 140 145,100
------------
299,746
------------
CALIFORNIA--7.8%
Anaheim, California Public Financing Authority,
Series A,
zero coupon due 9/01/18+.......................... 1,500 413,325
California Housing Finance Agency, Home Mortgage
Revenue, Series A,
8.13% due 8/01/19+................................ 810 845,438
California Housing Finance Agency, Home Mortgage
Revenue, Series A,
8.20% due 8/01/17+................................ 1,000 1,031,720
Los Angeles, California Harbor Department Revenue
Series B,
6.60% due 8/01/14................................. 1,000 1,063,690
San Francisco, California City & County
Redevelopment Agency, Lease Revenue,
6.75% due 7/01/15+................................ 1,000 1,093,590
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CALIFORNIA (CONTINUED)
San Jose, California Redevelopment Agency Tax
Allocation, Merged Area Redevelopment Project,
6.00% due 8/01/11+................................ $3,700 $ 3,911,640
Whittier, California Health Facility Revenue,
Presbyterian Hospital,
6.25% due 6/01/09+................................ 1,145 1,249,046
------------
9,608,449
------------
COLORADO--1.9%
Colorado Housing Finance Authority, Single Family
Revenue, Series C,
9.38% due 3/01/12+................................ 130 134,047
Highlands Ranch Metropolitan District No 2,
Colorado
6.50% due 6/15/09+................................ 1,960 2,174,816
------------
2,308,863
------------
DISTRICT OF COLUMBIA--0.1%
District of Columbia Housing Finance Agency,
Mortgage Revenue Collateral, Single Family,
Series A,
7.75% due 12/01/18................................ 120 121,070
------------
FLORIDA--1.6%
Dade County, Florida Seaport,
6.50% due 10/01/10+............................... 1,800 1,995,390
------------
GEORGIA--4.0%
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/09+................................ 1,250 1,367,850
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/13+................................ 1,500 1,631,910
Paulding County, Georgia, General Obligation,
School District, 6.00% due 2/01/13+.............. 1,875 1,975,125
------------
4,974,885
------------
HAWAII--2.3%
Hawaii State, General Obligation, Series C,
6.00% due 3/01/09+................................ 2,750 2,888,545
------------
ILLINOIS--7.0%
Cook County, Illinois Community College, District
Number 508,
7.70% due 12/01/07+............................... 4,000 4,775,920
</TABLE>
22
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
ILLINOIS (CONTINUED)
Illinois Health Facilities Authority, Lutheran
General Health System, Series C
7.00% due 4/01/08+................................ $3,400 $ 3,837,750
------------
8,613,670
------------
INDIANA--1.2%
Indiana State Housing Finance Authority, Multi-
Unit Mortgage Program, Series A,
9.00% due 1/01/14................................. 1,470 1,482,848
------------
KENTUCKY--4.3%
Kenton County Kentucky Airport, Board Revenue
Refunding, Series A,
6.30% due 3/01/15+................................ 1,500 1,549,440
Kentucky Housing Corp., Multi-Family Revenue
Mortgage, Series A,
8.88% due 7/01/19+................................ 85 86,139
Louisville & Jefferson County, Kentucky Regional
Airport Authority, Series A,
6.50% due 7/01/17+................................ 3,500 3,662,260
------------
5,297,839
------------
MARYLAND--0.1%
Maryland State Community Development
Administration, Multi-Family Housing Revenue,
1985 Series B,
8.75% due 5/15/12................................. 110 110,654
------------
MASSACHUSETTS--5.8%
Massachusetts State Health & Educational
Facilities Authority Revenue,
5.85% due 7/01/16+................................ 1,000 985,150
Massachusetts State Housing Finance Agency,
Insured Rental, Series A,
6.60% due 7/01/14+................................ 1,000 1,036,970
Massachusetts State Water Resources Authority,
6.25% due 11/01/10+............................... 4,000 4,201,440
Massachusetts Educational Financing Authority,
Issue E,
5.75% due 7/01/12+................................ 1,000 984,950
------------
7,208,510
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
MICHIGAN--1.9%
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/16+.......................... $2,735 $ 885,128
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/17+.......................... 2,875 877,019
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/18+.......................... 1,820 523,323
------------
2,285,470
------------
MISSOURI--5.3%
Missouri State Housing Development Commission,
Insured, Single Family Mortgage Revenue,
9.38% due 4/01/16+................................ 65 68,718
Sikeston, Missouri Electric, Revenue,
6.20% due 6/01/10+................................ 6,000 6,477,060
------------
6,545,778
------------
NEVADA--4.2%
Nevada Housing Division, Single Family Mortgage,
Series A,
zero coupon due 4/01/16+.......................... 5,945 5,230,827
------------
NEW HAMPSHIRE--0.2%
New Hampshire State Housing Finance Authority,
Single Family Residential Mortgage, Series A,
9.25% due 7/01/11+................................ 285 291,934
------------
NEW JERSEY--1.3%
New Jersey State Transportation Trust Fund
Authority, Transportation Systems, Series B,
6.50% due 6/15/10+................................ 1,500 1,661,715
------------
NEW MEXICO--0.2%
New Mexico Mortgage Finance Authority, Single
Family Mortgage Revenue, Series C,
8.63% due 7/01/17................................. 185 191,677
------------
</TABLE>
23
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
NEW YORK--12.0%
New York City Industrial Development Agency, Civic
Facility, Revenue,
6.25% due 11/15/06+............................... $2,000 $ 2,160,300
New York City, New York,
General Obligation, Series A,
7.00% due 8/01/06................................. 1,875 2,042,269
New York City, New York, General Obligation,
Series I,
6.50% due 3/15/06................................. 1,700 1,790,644
New York City, New York, General Obligation,
Series K,
6.25% due 4/01/11................................. 2,000 2,019,000
New York City, New York, Industrial Development
Agency, JAL Project,
6.00% due 11/01/15+............................... 2,500 2,506,050
New York State Medical Care
Facilities Finance Agency,
Revenue, New York Hospital,
Mortgage A,
6.75% due 8/15/14+................................ 2,850 3,089,200
Niagara Falls, New York, General Obligation,
7.50% due 3/01/14+................................ 555 663,170
Niagara Falls, New York, General Obligation,
7.50% due 3/01/13+................................ 445 534,320
------------
14,804,953
------------
NORTH CAROLINA--2.5%
Harnett County, North Carolina Certificates of
Participation,
6.20% due 12/01/09+............................... 2,900 3,083,918
------------
NORTH DAKOTA--0.5%
North Dakota State Housing Finance Agency, Single
Family Mortgage Revenue, Series A,
7.38% due 7/01/17+................................ 585 603,082
------------
OHIO--4.0%
Lucas County, Ohio Hospital Revenue, St Vincent
Medical Center,
6.50% due 8/15/07+................................ 3,500 3,763,760
Woodridge, Ohio Local School District, General
Obligation,
6.80% due 12/01/14+............................... 1,000 1,136,090
------------
4,899,850
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
PENNSYLVANIA--1.9%
Northeastern Pennsylvania Hospital & Education
Authority, Health Care Revenue, Series A
6.20% due 1/01/04+................................ $2,000 $ 2,132,580
Pennsylvania Housing Finance Agency, Multi-Family
Mortgage,
9.38% due 8/01/28+................................ 170 173,449
------------
2,306,029
------------
RHODE ISLAND--0.8%
Rhode Island Housing & Mortgage Finance Corp.,
Supplementary Insurance, Series B,
8.38% due 10/01/16+............................... 1,000 1,023,950
------------
TEXAS--16.9%
Alliance Texas Airport Authority, Special
Facilities Revenue,
6.38% due 4/01/21................................. 3,500 3,485,930
Bexar County, Texas Health Facilities Development
Corp., Hospital Revenue,
6.75% due 8/15/19+................................ 4,000 4,360,640
Grand Prairie, Texas Health
Facilities Development Corp.,
Hospital Revenue,
6.88% due 11/01/10+............................... 1,600 1,767,584
Harris County, Texas Hospital District Mortgage,
Revenue,
7.40% due 2/15/10+................................ 2,500 2,937,150
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/08+............................... 1,250 1,341,237
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/09+............................... 1,000 1,069,740
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.38% due 12/15/07+............................... 2,000 2,189,160
San Antonio, Texas Hotel Occupancy Texas Revenue
zero coupon due 8/15/17+.......................... 2,700 808,083
Sherman Texas Independent School District,
Prerefunded,
6.50% due 2/15/20+................................ 2,680 2,942,426
------------
20,901,950
------------
</TABLE>
24
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
UTAH--0.2%
Utah State Housing Finance Agency, Single Family
Mortgage, Series D,
7.50% due 7/01/16+................................ $ 255 $ 256,387
------------
WASHINGTON--3.2%
Washington State Housing Finance Commission,
Multi-Family Mortgage Revenue, Series A,
9.13% due 7/01/10+................................ 380 403,020
Washington State, Series B, General Obligation,
6.00% due 6/01/11................................. 3,400 3,589,516
------------
3,992,536
------------
WEST VIRGINIA--2.5%
West Virginia State Housing Development Fund,
Series A,
7.25% due 5/01/17+................................ 3,000 3,094,500
------------
WISCONSIN--0.1%
Wisconsin Housing & Economic Development
Authority, Homeownership Revenue, 1985 Issue III,
9.13% due 6/01/05+................................ 95 97,133
------------
TOTAL INVESTMENT SECURITIES--98.0%
(cost $115,459,232)............................... 121,024,730
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
SHORT-TERM SECURITIES--3.2%
MISSOURI--1.9%
Missouri State Health & Educational Facilities,
Authority Educational Facilities Revenue
Refunding,
3.80% due 4/01/97(1)............................. $2,300 $ 2,300,000
------------
TEXAS--1.3%
Brazos River Authority, Texas Pollution Control
Revenue,
3.85% due 4/01/97(1)............................. 1,600 1,600,000
------------
TOTAL SHORT-TERM SECURITIES
(cost $3,900,000)................................ 3,900,000
------------
TOTAL INVESTMENTS--
(cost $119,359,232)*............................. 101.2% 124,924,730
Liabilities in excess of other assets............. (1.2) (1,495,881)
------ ------------
NET ASSETS-- 100.0% $123,428,849
====== ============
</TABLE>
- -------
* See Note 5
+ All or part of this security is insured by Government National Mortgage
Association ("GNMA"), Municipal Bond Insurance Association ("MBIA"),
Financial Security Assurance ("FSA"), Financial Guarantee Insurance Corp.
("FGIC"), AMBAC, Inc., Bond Insurance Guarantee ("BIG"), Connie Lee or
Capital Guarantee ("CAP") ($104,827,686 or 84.9% of net assets).
(1) Variable rate security; maturity date reflects next reset date; rate as of
March 31, 1997
See Notes to Financial Statements
25
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997
Note 1. Organization
SunAmerica Income Funds is an open-end diversified management investment
company organized as a Massachusetts business trust (the "Trust"). It
currently consists of five different investment series (each, a "Fund" and
collectively, the "Funds"). Each Fund is a separate series of the Trust
with distinct investment objectives and/or strategies. Each Fund is managed
by SunAmerica Asset Management Corp. (the "Adviser" or "SAAMCo"), an
indirect wholly owned subsidiary of SunAmerica Inc. An investor may invest
in one or more of the following Funds: SunAmerica U.S. Government
Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified
Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured
Fund. The Funds are considered to be separate entities for financial and
tax reporting purposes. The investment objectives for each of the Funds are
as follows:
U.S. Government Securities Fund seeks high current income consistent with
relative safety of capital by investing primarily in securities issued or
guaranteed by the U.S. government, or any agency or instrumentality
thereof.
Federal Securities Fund seeks current income, with capital appreciation as
a secondary objective, by investing primarily in securities issued or
guaranteed by the U.S. government or any agency or instrumentality thereof.
Diversified Income Fund seeks a high level of current income consistent
with moderate investment risk, with preservation of capital as a secondary
objective.
High Income Fund seeks maximum current income by investing primarily in
high-yield, high-risk corporate bonds.
Tax Exempt Insured Fund seeks a high level of current income exempt from
Federal income taxes as is consistent with preservation of capital.
Each Fund currently offers two classes of shares. Class A shares are
offered at net asset value per share plus an initial sales charge. Class B
shares are offered without an initial sales charge, although a declining
contingent sales charge may be imposed on redemptions made within six years
of purchase. Additionally, any purchases of Class A shares in excess of
$1,000,000 will be subject to a contingent deferred sales charge on
redemptions made within one year of purchase. Class B shares of each Fund
convert automatically to Class A shares on the first business day of the
month following the seventh anniversary of the issuance of such Class B
shares and at such time will be subject to the lower distribution fee
applicable to Class A shares. Each class of shares bears the same voting,
dividend, liquidation and other rights and conditions and each makes
distribution and account maintenance and service fee payments under a
distribution plan pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the "1940 Act") except that Class B shares are subject to higher
distribution fee rates.
Note 2. Significant Accounting Policies
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates.
26
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
The following is a summary of the significant accounting policies followed
by the Funds in the preparation of their financial statements:
SECURITY VALUATIONS: Securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed by the Adviser to be over-the-counter, are valued at the quoted
bid price provided by principal market makers. Securities listed on the New
York Stock Exchange ("NYSE") or other national securities exchanges, are
valued on the basis of the last sale price on the exchange on which they
are primarily traded. If there is no sale on that day, then securities are
valued at the closing bid price on the NYSE or other primary exchange for
that day. However, if the last sale price on the NYSE is different than the
last sale price on any other exchange, the NYSE price is used. Securities
that are traded on foreign exchanges are ordinarily valued at the last
quoted sales price available before the time when the assets are valued. If
a securities price is available from more than one foreign exchange, a Fund
uses the exchange that is the primary market for the security. Values of
portfolio securities primarily traded on foreign exchanges are already
translated into U.S. dollars when received from a quotation service.
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. The Funds may make use of a pricing service in the
determination of their net asset values. The preceding procedures need not
be used to determine the value of debt securities owned by a Fund if, in
the opinion of the Trustees, some other method would more accurately
reflect the fair market value of such debt securities in quantities owned
by such Fund. Securities for which market quotations are not readily
available and other assets are valued at fair value as determined pursuant
to procedures adopted in good faith by the Trustees. Short-term investments
which mature in less than 60 days are valued at amortized cost, if their
original maturity was 60 days or less, or by amortizing their value on the
61st day prior to maturity, if their original term to maturity exceeded 60
days.
REPURCHASE AGREEMENTS: The Funds, along with other affiliated registered
investment companies, transfer uninvested cash balances into a joint
account, the daily aggregate balance of which is invested in one or more
repurchase agreements collateralized by U.S. Treasury or federal agency
obligations. The Funds' custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral
is valued daily on a mark to market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In
the event of default of the obligation to repurchase, a Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. If the seller defaults and the value of the collateral declines
or 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.
Pursuant to exemptive relief granted by the Securities and Exchange
Commission, the Funds are permitted to participate in joint repurchase
agreement transactions with other affiliated investment companies.
27
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
As of March 31, 1997, the U.S. Government Securities Fund, Federal
Securities Fund, and High Income Fund had a 28.0%, 8.4% and 7.4% undivided
interest which represented $30,041,000, $9,042,000 and $7,976,000,
respectively, in principal amount in a joint repurchase agreement with
Yamaichi International (America), Inc. In addition, the Diversified Income
Fund had a 5.3% undivided interest which represented $3,985,000 in
principal amount in a joint repurchase agreement with Yamaichi
International (America), Inc. As of such date, the repurchase agreements in
the joint account and the collateral therefore were as follows:
Yamaichi International (America), Inc. Repurchase Agreement, 6.50% dated
3/31/97, in the principal amount of $107,182,000 repurchase price
$107,201,352 due 4/1/97 collateralized by $42,010,000 U.S. Treasury Notes
7.00% due 7/15/06, $51,350,000 U.S. Treasury Notes 7.75% due 11/30/99,
$10,000,000 U.S. Treasury Notes 7.25% due 8/15/04 and $1,925,000 U.S.
Treasury Bonds 8.125% due 8/15/19, approximate aggregate value
$109,328,448.
Yamaichi International (America), Inc. Repurchase Agreement, 6.10% dated
3/31/97, in the principal amount of $75,499,000 repurchase price
$75,511,793 due 4/1/97 collateralized by $19,000,000 U.S. Treasury Bonds
7.625% due 2/15/07, $19,400,000 U.S. Treasury Notes 7.875% due 11/15/04,
$20,675,000 U.S. Treasury Notes 6.375% due 3/31/01 and $16,230,000 U.S.
Treasury Bill 5.37% due 9/18/97, approximate aggregate value $77,014,142.
SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES, DIVIDENDS AND
DISTRIBUTIONS TO SHAREHOLDERS: Securities transactions are recorded on a
trade date basis. Realized gains and losses on sales of investments are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis; dividend income is recorded on the ex-dividend date. The
Funds do not amortize market premiums (except for Tax Exempt Insured Fund)
or accrete market discounts (except for Diversified Income Fund) except
original issue discounts for which amortization is required for federal
income tax purposes.
Net investment income, other than class specific expenses, and realized and
unrealized gains and losses are allocated daily to each class of shares
based upon the relative net asset value of outstanding shares of each class
of shares at the beginning of the day (after adjusting for the current
capital share activity of the respective class).
Expenses common to all Funds are allocated among the Funds based upon their
relative net asset values or other appropriate allocation methods.
Dividends from net investment income are accrued daily and paid monthly.
Capital gain distributions, if any, are paid annually. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations, which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in
nature, such amounts are reclassified within the capital accounts based on
their federal tax-basis treatment; temporary differences do not require
reclassification. Net investment income/loss, net realized gain/loss, and
net assets were not affected.
28
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
For the year ended March 31, 1997, the following reclassifications arising
from book/tax differences were primarily the result of market discount and
paydown losses.
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET UNDISTRIBUTED NET
INVESTMENT REALIZED PAID-IN
INCOME/(LOSS) GAIN/(LOSS) CAPITAL
----------------- ----------------- -------
<S> <C> <C> <C>
U.S. Government Securities Fund... $(5,522,796) $5,522,796 $--
Federal Securities Fund........... (204,143) 204,143 --
Diversified Income Fund........... 75,576 (75,576) --
High Income Fund.................. 222,086 (222,086) --
Tax Exempt Insured Fund........... 8,269 (8,269) --
</TABLE>
INVESTMENT SECURITIES LOANED: During the year ended March 31, 1997, U.S.
Government Securities Fund, Federal Securities Fund and Diversified Income
Fund participated in securities lending with qualified brokers. In lending
portfolio securities to brokers the Funds receive cash as collateral
against the loaned securities, which must be maintained at not less than
102% of the market value of the loaned securities during the period of the
loan. To the extent income is earned on the cash collateral invested, it is
recorded as interest income. Alternatively, an interest expense is recorded
on the books when the cash collateral from the securities on loan is used
to cover an overdraft. As with other extensions of credit, should the
borrower of the securities fail financially, the Funds may bear the risk of
delay in recovery or may be subject to replacing the loaned securities by
purchasing them with the cash collateral held, which may be less than 100%
of the market value of such securities at the time of replacement.
At March 31, 1997, U.S. Government Securities Fund and Federal Securities
Fund have loaned securities having a value of $24,019,562 and $4,803,913,
respectively, and held cash collateral of $24,000,000 and $4,800,000,
respectively, for these loans.
FOREIGN CURRENCY TRANSLATION: The books and records of the Funds are
maintained in U.S. dollars. Assets and liabilities denominated in foreign
currencies and commitments under forward foreign currency contracts are
translated into U.S. dollars at the mean of the quoted bid and asked prices
of such currencies against the U.S. dollar.
The Fund does not isolate that portion of the results of operations arising
as a result of changes in the foreign exchange rates from the changes in
the market prices of securities held at fiscal year-end. The Fund does not
isolate the effect of changes in foreign exchange rates from the changes in
the market prices of portfolio securities sold during the year.
Realized foreign exchange gains and losses on other assets and liabilities
and change in unrealized foreign exchange gains and losses on other assets
and liabilities include foreign exchange gains and losses from currency
gains or losses realized between the trade and settlement dates of
securities transactions, forward currency contracts, dividends received,
the difference between the amounts of interest, discount and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar
29
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
equivalent amounts actually received or paid and changes in the unrealized
foreign exchange gains and losses relating to other assets and liabilities
arising as a result of changes in the exchange rates.
FUTURES CONTRACTS: A futures contract is an agreement between two parties
to buy and sell a financial instrument at a set price on a future date.
Upon entering into such a contract the Funds are required to pledge to the
broker an amount of cash or U.S. government securities equal to the minimum
"initial margin" requirements of the exchange on which the futures contract
is traded. The contract amount reflects the extent of a Fund's exposure in
these financial instruments. The Funds' activities in futures contracts are
for hedging purposes and are conducted through regulated exchanges which do
not result in counterparty credit risks. A Fund's participation in the
futures markets involves certain risks, including imperfect correlation
between movements in the price of futures contracts and movements in the
price of the securities hedged or used for cover. Pursuant to a contract
the Funds agree to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as "variation margin" and are recorded by the Funds as
unrealized appreciation or depreciation. When a contract is closed, the
Funds record a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time
it was closed.
Note 3. Investment Advisory and Management Agreement, Distribution Agreement
and Service Agreement
The Trust, on behalf of each Fund, has an Investment Advisory and
Management Agreement (the "Agreement") with SAAMCo. Under the Agreement,
SAAMCo provides continuous supervision of a Fund's portfolio and
administers its corporate affairs, subject to general review by the
Trustees. In connection therewith, SAAMCo furnishes the Funds with office
facilities, maintains certain of the Funds' books and records, and pays the
salaries and expenses of all personnel, including officers of the Funds,
who are employees of SAAMCo and its affiliates.
The Funds pay SAAMCo a monthly investment advisory and management fee
calculated daily at the following annual percentages of each Fund's net
assets:
<TABLE>
<CAPTION>
MANAGEMENT
ASSETS FEES
----------------- ----------
<S> <C> <C>
U.S. Government Securities Fund and High In-
come Fund.................................... $0 - $200 million 0.75%
> $200 million 0.72%
> $400 million 0.55%
Federal Securities Fund....................... $0 - $25 million 0.55%
> $25 million 0.50%
> $50 million 0.45%
Diversified Income Fund....................... $0 - $350 million 0.65%
> $350 million 0.60%
Tax Exempt Insured Fund....................... $0 - $350 million 0.50%
> $350 million 0.45%
</TABLE>
30
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
The Trust, on behalf of each Fund, has a Distribution Agreement with
SunAmerica Capital Services, Inc. ("SACS" or "Distributor"), an indirect
wholly owned subsidiary of SunAmerica Inc. Each Fund has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule
12b-1 under the 1940 Act. Rule 12b-1 under the 1940 Act permits an
investment company directly or indirectly to pay expenses associated with
the distribution of its shares ("distribution expenses") in accordance with
a plan adopted by the investment company's board of trustees and approved
by its shareholders. Pursuant to such rule, the Trustees and the
shareholders of each class of shares of each Fund have adopted Distribution
Plans, hereinafter referred to as the "Class A Plan" and the "Class B
Plan." In adopting the Class A Plan and the Class B Plan, the Trustees
determined that there was a reasonable likelihood that each such Plan would
benefit the Trust and the shareholders of the respective class. The sales
charge and distribution fees of a particular class will not be used to
subsidize the sale of shares of any other class.
Under the Class A Plan and Class B Plan, the Distributor receives payments
from a Fund at an annual rate of up to 0.10% and .75%, respectively, of
average daily net assets of such Fund's Class A and Class B 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 those incurred for sales
literature, prospectus printing and distribution and compensation to
wholesalers. It is possible that in any given year the amount paid to the
Distributor under the Class A Plan or Class B Plan may exceed the
Distributor's distribution costs as described above. The Distribution Plans
provide that each class of shares of each Fund may also pay the Distributor
an account maintenance and service fee at the annual rate 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.
Accordingly, for the year ended March 31, 1997, SACS received fees (see
Statement of Operations) based upon the aforementioned rates (of which
$6,176 and $11,034 was reimbursed to the U.S. Government Securities Fund
Class A and High Income Fund Class B, respectively).
SACS receives sales charges on each Fund's Class A shares, portions of
which are reallowed to affiliated broker-dealers and non-affiliated broker-
dealers. SACS also receives the proceeds of contingent deferred sales
charges paid by investors in connection with certain redemptions of Class B
fund shares. SACS has advised the Funds that for the year ended March 31,
1997, the proceeds received from Class A sales (and paid out to affiliated
and non-affiliated broker-dealers) and Class B redemptions are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------- ------------
CONTINGENT
SALES AFFILIATED NON-AFFILIATED DEFERRED
CHARGES BROKER-DEALERS BROKER-DEALERS SALES CHARGE
-------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
U.S. Government Securi-
ties Fund.............. $ 32,290 $16,822 $10,305 $924,933
Federal Securities Fund. 10,220 7,306 2,974 45,178
Diversified Income Fund. 86,113 34,644 36,605 221,016
High Income Fund........ 149,191 57,237 67,696 313,032
Tax Exempt Insured Fund. 41,383 24,953 9,219 88,150
</TABLE>
31
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
The Trust has entered into a Service Agreement with SunAmerica Fund
Services, Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica
Inc. Under the Service Agreement, SAFS performs certain shareholder account
functions by assisting the Funds' transfer agent in connection with the
services that it offers to the shareholders of the Funds. The Service
Agreement, which permits the Funds to compensate SAFS for services rendered
based upon an annual rate of 0.22% of average daily net assets, is approved
annually by the Trustees. For the year ended March 31, 1997, the Funds
incurred the following expenses which are included in transfer agent fees
in the Statement of Operations to compensate SAFS pursuant to the terms of
the Service Agreement:
<TABLE>
<CAPTION>
PAYABLE AT
EXPENSES MARCH 31, 1997
----------------- ---------------
CLASS A CLASS B CLASS A CLASS B
-------- -------- ------- -------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund............ $246,713 $805,666 $21,479 $55,520
Federal Securities Fund.................... 75,922 49,652 5,777 3,623
Diversified Income Fund.................... 40,090 210,554 4,315 15,385
High Income Fund........................... 86,823 238,000 8,153 19,396
Tax Exempt Insured Fund.................... 238,542 63,192 18,708 4,839
</TABLE>
Note 4. Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales and maturities of
long-term investments (excluding U.S. Government securities in the
Diversified Income and High Income Funds, respectively) during the year
ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
U.S.
GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES SECURITIES INCOME INCOME INSURED
FUND FUND FUND FUND FUND
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Aggregate purchases..... $685,086,064 $230,552,983 $128,129,317 $228,538,571 $69,216,439
============ ============ ============ ============ ===========
Aggregate sales......... $710,631,110 $237,260,273 $145,743,969 $238,998,110 $94,278,004
============ ============ ============ ============ ===========
</TABLE>
Note 5. Federal Income Taxes
The Funds intend to comply with the requirements of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to
distribute all of their net income (taxable and tax-exempt) to their
shareholders. Therefore, no federal income tax or excise tax provisions are
required.
The amounts of aggregate unrealized gain (loss) and the cost of investment
securities, including short-term securities, for federal income tax
purposes were as follows:
<TABLE>
<CAPTION>
U.S.
GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT
SECURITIES SECURITIES INCOME INCOME INSURED
FUND FUND FUND FUND FUND
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cost (tax basis)........ $426,795,594 $54,193,761 $93,843,361 $129,573,943 $119,359,232
============ =========== =========== ============ ============
Appreciation............ $ 6,453,342 $ 569,476 $ 3,342,352 $ 3,496,642 $ 5,919,860
Depreciation............ (8,999,655) (707,826) (2,374,902) (6,464,810) (354,362)
------------ ----------- ----------- ------------ ------------
Unrealized appreciation
(depreciation)--net.... $ (2,546,313) $ (138,350) $ 967,450 $ (2,968,168) $ 5,565,498
============ =========== =========== ============ ============
</TABLE>
32
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
Capital losses and currency losses after October 31 within the taxable year
are deemed to arise on the first business day of the Funds' next taxable
year. Accordingly, the U.S. Government Securities Fund and Federal
Securities Fund, incurred and elected to defer capital losses of $178,567
and $89,186, respectively, to the taxable year ended March 31, 1998. To the
extent these losses are permitted under regulations to be used to offset
future gains, it is probable that the gains so offset will not be
distributed.
At March 31, 1997, U.S. Government Securities Fund, Federal Securities
Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund
had capital loss carryforwards of $36,791,157, $1,045,533, $29,832,034,
$37,606,003 and $6,547,732, respectively, which were available to the
extent provided in regulations and which will expire between 1998-2005.
Some of these capital loss carry-forwards were acquired from mergers and
may be subject to certain limitations. To the extent that these carryover
losses are used to offset future capital gains, it is probable that the
gains so offset will not be distributed.
Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund
utilized capital loss carryforwards of $2,011,740, $7,129,273 and
$2,316,366, respectively, to offset the Funds' net taxable gains realized
and recognized in the year ended March 31, 1997.
Note 6. Capital Share Transactions
Transactions in capital shares of each class of each series were as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
----------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------ -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,843,102 $ 24,070,752 13,131,939 $112,301,977 851,285 $ 7,192,469 9,360,875 $ 79,755,257
Reinvested
dividends...... 462,183 3,908,049 410,804 3,519,824 1,318,904 11,152,661 1,974,201 16,845,172
Shares redeemed. (4,515,889) (38,204,048) (7,702,779) (65,848,530) (17,979,626) (152,107,446) (33,167,131) (282,936,370)
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
Net increase
(decrease)..... (1,210,604) $(10,225,247) 5,839,964 $ 49,973,271 (15,809,437) $(133,762,316) (21,832,055) $(186,335,941)
========== ============ ========== ============ =========== ============= =========== =============
<CAPTION>
FEDERAL SECURITIES FUND
----------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------ -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 187,062 $ 1,941,579 4,123,463 $ 43,030,581 171,783 $ 1,794,682 814,487 $ 8,530,005
Reinvested
dividends...... 130,519 1,361,673 111,354 1,172,357 82,353 860,591 153,756 1,604,033
Shares redeemed. (1,244,469) (12,990,824) (998,837) (10,515,594) (941,907) (9,850,854) (5,023,383) (52,553,961)
---------- ------------ ---------- ------------ ----------- ------------- ----------- -------------
Net increase
(decrease)..... (926,888) $ (9,687,572) 3,235,980 $ 33,687,344 (687,771) $ (7,195,581) (4,055,140) $ (42,419,923)
========== ============ ========== ============ =========== ============= =========== =============
</TABLE>
33
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
<TABLE>
<CAPTION>
DIVERSIFIED INCOME FUND
---------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- -----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------ ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,967,500 $ 13,107,488 2,955,037 $ 12,861,772 2,028,462 $ 8,850,838 2,801,046 $ 12,136,400
Reinvested
dividends...... 192,535 845,962 195,515 841,738 935,249 4,101,854 1,377,852 5,943,373
Shares redeemed. (1,919,822) (8,393,062) (2,674,706) (11,458,461) (11,026,801) (48,421,764) (10,248,505) (44,195,135)
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
Net increase
(decrease)..... 1,240,213 $ 5,560,388 475,846 $ 2,245,049 (8,063,090) $(35,469,072) (6,069,607) $ (26,115,362)
========== ============ ========== ============ =========== ============ =========== =============
<CAPTION>
HIGH INCOME FUND
---------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- -----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------ ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,138,523 $ 15,178,086 8,359,027 $ 57,916,776 7,842,612 $ 55,170,199 12,736,686 $ 88,552,474
Reinvested
dividends...... 306,218 2,170,892 368,814 2,562,289 753,534 5,344,680 977,729 6,803,888
Shares redeemed. (1,792,558) (12,665,768) (9,390,977) (64,906,948) (7,864,875) (55,713,062) (22,505,915) (155,995,199)
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
Net increase
(decrease)..... 652,183 $ 4,683,210 (663,136) $ (4,427,883) 731,271 $ 4,801,817 (8,791,500) $ (60,638,837)
========== ============ ========== ============ =========== ============ =========== =============
<CAPTION>
TAX EXEMPT INSURED FUND
---------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- -----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997 MARCH 31, 1996
------------------------ ------------------------ ------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 191,259 $ 2,373,663 561,023 $ 7,051,303 530,461 $ 6,566,926 1,455,371 $ 18,163,807
Reinvested
dividends...... 213,682 2,650,948 264,543 3,294,346 59,647 740,342 55,207 688,264
Shares redeemed. (2,254,438) (27,912,841) (2,378,115) (29,684,179) (920,911) (11,459,216) (1,292,255) (16,166,468)
---------- ------------ ---------- ------------ ----------- ------------ ----------- -------------
Net increase
(decrease)..... (1,849,497) $(22,888,230) (1,552,549) $(19,338,530) (330,803) $ (4,151,948) 218,323 $ 2,685,603
========== ============ ========== ============ =========== ============ =========== =============
</TABLE>
Note 7. Commitments and Contingencies
State Street Bank and Trust Company, the Funds' custodian, has established
an uncommitted line of credit with the SunAmerica family of mutual funds
with interest payable at the Federal Funds rate plus 100 basis points with
respect to the U.S. Government Securities Fund and Federal Securities Fund,
and at the Federal Funds rate plus 125 basis points with respect to the
Diversified Income Fund and the High Income Fund. Borrowings under the line
of credit will commence when the Fund's cash shortfall exceeds $100,000.
During the year ended March 31, 1997 the Diversified Income and High Income
Fund periodically utilized the uncommitted line of credit and incurred an
interest expense of $1,295 and $6,533, respectively.
Note 8. Trustees Retirement Plan
The Trustees (and Directors) of the SunAmerica Family of Mutual Funds have
adopted the SunAmerica Disinterested Trustees' and Directors' Retirement
Plan (the "Retirement Plan") effective
34
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- March 31, 1997 -- (continued)
January 1, 1993 for the unaffiliated Trustees. The Retirement Plan provides
generally that if an unaffiliated Trustee who has at least 10 years of
consecutive service as a Disinterested Trustee of any of the SunAmerica
mutual funds (an "Eligible Trustee") retires after reaching age 60 but
before age 70 or dies while a Trustee, such person will be eligible to
receive a retirement or death benefit from each SunAmerica mutual fund with
respect to which he or she is an Eligible Trustee. As of each birthday,
prior to the 70th birthday, but in no event for a period greater than 10
years, each Eligible Trustee will be credited with an amount equal to 50%
of his or her regular fees (excluding committee fees) for services as a
Disinterested Trustee of each SunAmerica mutual fund for the calendar year
in which such birthday occurs. In addition, an amount equal to 8.5% of any
amounts credited under the preceding clause during prior years is added to
each Eligible Trustee's Account until such Eligible Trustee reaches his or
her 70th birthday. An Eligible Trustee 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 March 31, 1997, U.S.
Government Securities Fund, Federal Securities Fund, Diversified Income
Fund, High Income Fund and Tax Exempt Insured Fund had accrued $54,424,
$5,542, $11,104, $12,341 and $12,962, respectively, for the Retirement
Plan, which is included in accrued expenses on the Statement of Assets and
Liabilities and for the year ended March 31, 1997 expensed $23,804, $2,660,
$5,211, $6,390 and $6,266, respectively, for the Retirement Plan, which is
included in Trustees' fees and expenses on the Statement of Operations.
35
<PAGE>
SUNAMERICA INCOME FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of SunAmerica Income Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of SunAmerica U.S. Government
Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified
Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund
(constituting SunAmerica Income Funds, hereafter referred to as the "Fund") at
March 31, 1997, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at March 31, 1997 by correspondence with the custodian and brokers
and the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
May 12, 1997
36
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER TAX INFORMATION--(UNAUDITED)
Certain tax information regarding the SunAmerica Income Funds is required to be
provided to shareholders based upon each Fund's income and distributions for
the taxable periods ended March 31, 1997. The information and distributions
reported herein may differ from the information and distributions taxable to
the shareholders for the calendar year ending December 31, 1997. The
information necessary to complete your income tax returns will be included with
your Form 1099-DIV to be received under separate cover in January 1998.
During the year ended March 31, 1997 Tax Exempt Insured Fund paid tax exempt
interest dividends of $.59 per share to Class A shareholders and $.51 per share
to Class B shareholders. For the year ended March 31, 1996, 0.5% and 1.0% of
the dividends paid from ordinary income by Diversified Income Fund and High
Income Fund, respectively, qualified for the 70% dividends received deductions
for corporations.
37
<PAGE>
APPENDIX
BOND, NOTE AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE AND TAX-
EXEMPT BOND RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate, and therefore not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Appendix-1
<PAGE>
CAA Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of the generic rating
category. The foregoing ratings for tax-exempt bonds are sometimes presented in
parentheses preceded with a "con" indicating the bonds are rated conditionally.
Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally. These are bonds secured
by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Such parenthetical rating denotes the probable credit stature upon completion of
construction or elimination of the basis of the condition.
DESCRIPTION OF MOODY'S TAX-EXEMPT NOTE RATINGS
The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG
4.
MIG 1 Notes bearing the designation MIG 1 are judged to be of
the best quality, enjoying strong protection from
established cash flows of funds for their servicing or
from established and broad-based access to the market for
refinancing, or both.
MIG 2 Notes bearing the designation MIG 2 are judged to be of
high quality, with margins of protection ample although
not so large as in the preceding group.
MIG 3 Notes bearing the designation MIG 3 are judged to be of
favorable quality, with all security elements accounted
for but lacking the undeniable strength of the preceding
grades. Market access for refinancing, in particular, is
likely to be less well established.
Appendix-2
<PAGE>
MIG 4 Notes bearing the designation MIG 4 are judged to be of
adequate quality, carrying specific risk but having
protection commonly regarded as required of an investment
security and not distinctly or predominantly speculative.
DESCRIPTION OF MOODY'S CORPORATE AND TAX-EXEMPT 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 rating grades for commercial paper are applied to municipal
commercial paper as well as taxable commercial paper.
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 of 1933, as amended, 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.
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.
Appendix-3
<PAGE>
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment. Moody's makes no representation and gives no opinion on the
legal validity or enforceability of any support arrangement. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES, A DIVISION OF THE MCGRAW-HILL
COMPANIES, INC. ("STANDARD & POOR'S") CORPORATE AND TAX-EXEMPT BOND RATINGS
A Standards & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligers such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation: (2) nature of and provisions of the obligation; 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.
Appendix-4
<PAGE>
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and
C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposure to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BBB - rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
Appendix-5
<PAGE>
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
Plus (+) or minus (-): The ratings of "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within these
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the credit worthiness of the obligor but do not take into
account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S TAX-EXEMPT NOTE RATINGS
The ratings of Standard & Poor's for municipal notes issued on or after
July 29, 1984 are "SP-1", "SP-2" and "SP-3." Prior to July 29, 1984, municipal
notes carried the same symbols as municipal bonds.
Appendix-6
<PAGE>
SP-1 The designation "SP-1" indicates a very strong capacity to pay
principal and interest. A "+" is added for those issues determined to
possess overwhelming safety characteristics.
SP-2 An "SP-2" designation indicates a satisfactory capacity to pay
principal and interest.
SP-3 "SP-3" designation indicates speculative capacity to pay principal and
interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER
RATINGS.
Standard & Poor's rating grades for commercial paper are applied to
municipal commercial paper as well as taxable commercial paper.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of not more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree
of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted
with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effect of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix-7
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Set forth in Part B of Registrant's Statement of Additional
Information are the financial statements for the SunAmerica Income
Funds for the fiscal year ended March 31, 1997. Selected per share
data and ratios are set forth in Part A of the Prospectus under the
caption "Financial Highlights." No financial statements are included
in Part C.
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing
do not exist.
(b) Exhibits:
(1) Declaration of Trust, as amended. Incorporated herein by
reference to Post-Effective Amendment No. 20 to Registrant's
Registration Statement on form N-1A filed on July 27, 1995.
(2) By-Laws, as amended. Incorporated herein by reference to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement on form N-1A filed on July 27, 1995.
(3) Inapplicable.
(4) Inapplicable.
(5) Investment Advisory and Management Agreement between
Registrant and SunAmerica Asset Management Corp.
Incorporated herein by reference to Post-Effective Amendment
No. 20 to Registrant's Registration Statement on form N-1A
filed on July 27, 1995.
(6) (a) Distribution Agreement between Registrant and SunAmerica
Capital Services, Inc. Incorporated herein by reference to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement on Form N-1A filed on July 27, 1995.
(b) Dealer Agreement. Incorporated herein by reference to Post-
Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on July 19, 1996.
(7) Directors'/Trustees' Retirement Plan. Incorporated herein by
reference to Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on July 1996.
(8) Custodian Agreement between Registrant and State Street Bank
and Trust Company. Incorporated herein by reference to
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on July 1996.
<PAGE>
(9) (a) Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company. Incorporated herein by
reference to Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on July 19,
1996.
(b) Service Agreement between Registrant and SunAmerica Fund
Services, Inc. Incorporated herein by reference to Post-
Effective Amendment No. 20 to Registrant's Registration
Statement on form N-1A filed on July 27, 1995.
(10) Opinion of Counsel (filed herewith).
(11) Consent of Independent Accountants (filed herewith.
(12) Inapplicable.
(13) Inapplicable.
(14) Model Retirement Plan. Incorporated herein by reference to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement on form N-1A filed on July 27, 1995.
(15) Distribution Plans pursuant to Rule 12b-1 (Class A Shares
and Class B Shares). Incorporated herein by reference to
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on July 19, 1996.
(16) Schedule of Computation of Performance Quotations.
Incorporated herein by reference to Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form N-1A
filed on July 19, 1996.
(17) Financial Data Schedules (filed herewith).
Other Exhibits
(a) Powers of Attorney. Incorporated herein by reference to
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on July 19,1996
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
There are no persons controlled by or under common control with
Registrant.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
Number of Record Number of Record
Holders as of Holders as of
Title of Class June 30, 1997 June 30, 1997
- --------------------------------- ---------------- ----------------
<S> <C> <C>
U.S. Government Securities Fund 6,433 12,683
Shares of Beneficial Interest
($.01 par value)
Federal Securities Fund 2,913 1,402
Shares of Beneficial Interest
($.01 par value)
Diversified Income Fund 1,416 3,734
Shares of Beneficial Interest
($.01 par value)
High Income Fund 3,131 4,370
Shares of Beneficial Interest
($.01 par value)
Tax Exempt Insured Fund 3,069 551
Shares of Beneficial Interest
($.01 par value)
</TABLE>
ITEM 27. INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to
trustees, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
trustee, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of
its counsel the matter has been settled by the controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of the Investment Adviser.
Information concerning business and other connections of SunAmerica
Asset Management Corp. ("SunAmerica") is incorporated herein by
reference to SunAmerica'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 "Management of the Fund" in the
Prospectus constituting Part A of the Registration Statement and
"Investment Adviser and Distributor" and "Trustees and Officers"
constituting Part B of the Registration Statement.
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The principal underwriter of the Registrant also acts as principal
underwriter for:
SunAmerica Equity Funds
SunAmerica Money Market Funds, Inc.
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:
Name and Principal Position With Position with the
Business Address Underwriter Registrant
------------------ ----------- ---------------
J. Steven Neamtz President None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Peter A. Harbeck Director President
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Gary W. Krat Director None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
Robert M. Zakem Executive Vice Secretary &
The SunAmerica Center President, and Chief
733 Third Avenue General Counsel Compliance
New York, NY 10017-3204 and Director Officer
Joseph M. Tumbler Director None
SunAmerica Inc.
1 Sun America Center
Century City
Los Angeles, CA 90067-6022
Susan L. Harris Secretary None
SunAmerica Inc.
1 Sun America Center
Century City
Los Angeles, CA 90067-6022
Steven E. Rothstein Treasurer None
The SunAmerica Center
733 Third Avenue
New York, NY 10017-3204
<PAGE>
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
SunAmerica Asset Management Corp., The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204, or an affiliate thereof, will
maintain physical possession of each such accounts, books or other
documents of Registrant, except for those maintained by Registrant's
custodian, 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.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
(c) The Registrant hereby undertakes to furnish, upon request and without
charge, to each person to whom a Prospectus is delivered a copy of the
Registrant's latest annual report to shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of the Post-Effective Amendment No. 22 to the
Registration Statement pursuant to Rule 485 (b) under the Securities Act of
1933, as amended, and that Registrant has duly caused the Post-Effective
Amendment No. 22 to the Registration Statement on Form N-1A to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the State of New York, on the 24th day of July, 1997.
SUNAMERICA INCOME FUNDS
By: /s/ Peter A. Harbeck
----------------
Peter A. Harbeck,
President
Pursuant to the requirements of the Securities Ac of 1933, as amended,
the Post-Effective Amendment No. 22 to Registrant's Registration Statement on
Form N-1A has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Peter A. Harbeck President and Trustee July 24, 1997
Peter A. Harbeck (Principal Executive
Officer)
Peter C. Sutton* Treasurer (Principal July 24, 1997
Financial and Accounting
Officer)
S. James Coppersmith* Trustee July 24, 1997
Samuel M. Eisenstat* Trustee July 24, 1997
Stephen J. Gutman* Trustee July 24, 1997
Peter McMillan III* Trustee July 24, 1997
Sebastiano Sterpa* Trustee July 24, 1997
</TABLE>
*By: /s/Robert M. Zakem
Robert M. Zakem,
Attorney-in-Fact
<PAGE>
SUNAMERICA INCOME FUNDS
EXHIBIT INDEX
Exhibit No. Name
- ----------- -----
10 Opinion of Counsel
11 Consent of Independent Auditors
17 Financial Data Schedules
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SUNAMERICA DIVERSIFIED INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 93,803,361<F1>
<INVESTMENTS-AT-VALUE> 94,810,811<F1>
<RECEIVABLES> 6,743,028<F1>
<ASSETS-OTHER> 5,280<F1>
<OTHER-ITEMS-ASSETS> 163<F1>
<TOTAL-ASSETS> 101,559,282<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 876,657<F1>
<TOTAL-LIABILITIES> 876,657<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 129,764,592<F1>
<SHARES-COMMON-STOCK> 5,145,977<F2>
<SHARES-COMMON-PRIOR> 3,905,764<F2>
<ACCUMULATED-NII-CURRENT> (217,383)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (29,872,034)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 1,007,450<F1>
<NET-ASSETS> 100,682,625<F1>
<DIVIDEND-INCOME> 46,590<F1>
<INTEREST-INCOME> 11,440,856<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 2,210,415<F1>
<NET-INVESTMENT-INCOME> 9,277,031<F1>
<REALIZED-GAINS-CURRENT> 3,516,228<F1>
<APPREC-INCREASE-CURRENT> (866,148)<F1>
<NET-CHANGE-FROM-OPS> 11,927,111<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 9,047,013<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,967,500<F2>
<NUMBER-OF-SHARES-REDEEMED> (1,919,822)<F2>
<SHARES-REINVESTED> 192,535<F2>
<NET-CHANGE-IN-ASSETS> (27,028,586)<F1>
<ACCUMULATED-NII-PRIOR> (522,977)<F1>
<ACCUMULATED-GAINS-PRIOR> (33,312,686)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 740,539<F1>
<INTEREST-EXPENSE> 1,295<F1>
<GROSS-EXPENSE> 2,210,415<F1>
<AVERAGE-NET-ASSETS> 18,222,624<F2>
<PER-SHARE-NAV-BEGIN> 4.29<F2>
<PER-SHARE-NII> .37<F2>
<PER-SHARE-GAIN-APPREC> .1<F2>
<PER-SHARE-DIVIDEND> (.37)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 4.39<F2>
<EXPENSE-RATIO> 1.42<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica Diversified Income Fund as a whole
<F2>Information pertains to SunAmerica Diversifed Fund Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> SUNAMERICA U.S. GOVERNMENT FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 426,080,808<F1>
<INVESTMENTS-AT-VALUE> 424,249,281<F1>
<RECEIVABLES> 5,328,185<F1>
<ASSETS-OTHER> 37,476<F1>
<OTHER-ITEMS-ASSETS> 735<F1>
<TOTAL-ASSETS> 429,615,677<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 27,404,374<F1>
<TOTAL-LIABILITIES> 27,404,374<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 442,045,737<F1>
<SHARES-COMMON-STOCK> 34,580,049<F2>
<SHARES-COMMON-PRIOR> 50,389,486<F2>
<ACCUMULATED-NII-CURRENT> (318,396)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (37,684,511)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (1,831,527)<F1>
<NET-ASSETS> 402,211,303<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 40,869,021<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 9,697,770<F1>
<NET-INVESTMENT-INCOME> 31,171,251<F1>
<REALIZED-GAINS-CURRENT> (13,090,282)<F1>
<APPREC-INCREASE-CURRENT> (1,446,259)<F1>
<NET-CHANGE-FROM-OPS> 16,634,710<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 24,711,529<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 851,285<F2>
<NUMBER-OF-SHARES-REDEEMED> (17,979,626)<F2>
<SHARES-REINVESTED> 1,318,904<F2>
<NET-CHANGE-IN-ASSETS> (152,064,382)<F1>
<ACCUMULATED-NII-PRIOR> (1,255,322)<F1>
<ACCUMULATED-GAINS-PRIOR> (30,117,025)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,370,947<F1>
<INTEREST-EXPENSE> 4,985<F1>
<GROSS-EXPENSE> 9,703,946<F1>
<AVERAGE-NET-ASSETS> 366,211,641<F2>
<PER-SHARE-NAV-BEGIN> 8.51<F2>
<PER-SHARE-NII> 0.54<F2>
<PER-SHARE-GAIN-APPREC> (0.26)<F2>
<PER-SHARE-DIVIDEND> (0.43)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 8.36<F2>
<EXPENSE-RATIO> 2.18<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica U.S. Government Fund as a whole
<F2>Information pertains to SunAmerica U.S. Government Fund Class B
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 021
<NAME> SUNAMERICA U.S. GOVERNMENT FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 426,080,808<F1>
<INVESTMENTS-AT-VALUE> 424,249,281<F1>
<RECEIVABLES> 5,328,185<F1>
<ASSETS-OTHER> 37,476<F1>
<OTHER-ITEMS-ASSETS> 735<F1>
<TOTAL-ASSETS> 429,615,677<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 27,404,374<F1>
<TOTAL-LIABILITIES> 27,404,374<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 442,045,737<F1>
<SHARES-COMMON-STOCK> 13,546,280<F2>
<SHARES-COMMON-PRIOR> 14,756,884<F2>
<ACCUMULATED-NII-CURRENT> (318,396)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (37,684,511)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (1,831,527)<F1>
<NET-ASSETS> 402,211,303<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 40,869,021<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 9,697,770<F1>
<NET-INVESTMENT-INCOME> 31,171,251<F1>
<REALIZED-GAINS-CURRENT> (13,090,282)<F1>
<APPREC-INCREASE-CURRENT> (1,446,259)<F1>
<NET-CHANGE-FROM-OPS> 16,634,710<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 24,711,529<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,843,102<F2>
<NUMBER-OF-SHARES-REDEEMED> (4,515,889)<F2>
<SHARES-REINVESTED> 462,183<F2>
<NET-CHANGE-IN-ASSETS> (152,064,382)<F1>
<ACCUMULATED-NII-PRIOR> (1,255,322)<F1>
<ACCUMULATED-GAINS-PRIOR> (30,117,025)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,370,947<F1>
<INTEREST-EXPENSE> 4,985<F1>
<GROSS-EXPENSE> 9,703,946<F1>
<AVERAGE-NET-ASSETS> 112,142,352<F2>
<PER-SHARE-NAV-BEGIN> 8.50<F2>
<PER-SHARE-NII> 0.59<F2>
<PER-SHARE-GAIN-APPREC> (0.26)<F2>
<PER-SHARE-DIVIDEND> (0.48)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 8.35<F2>
<EXPENSE-RATIO> 1.54<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica U.S. Government Fund as a whole
<F2>Information pertains to SunAmerica U.S. Government Fund Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 052
<NAME> SUNAMERICA TAX-EXEMPT INSURED FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 119,359,232<F1>
<INVESTMENTS-AT-VALUE> 124,924,730<F1>
<RECEIVABLES> 6,491,321<F1>
<ASSETS-OTHER> 22,423<F1>
<OTHER-ITEMS-ASSETS> 75,312<F1>
<TOTAL-ASSETS> 131,513,786<F1>
<PAYABLE-FOR-SECURITIES> 7,537,837<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 547,100<F1>
<TOTAL-LIABILITIES> 8,084,937<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 124,624,627<F1>
<SHARES-COMMON-STOCK> 2,028,803<F2>
<SHARES-COMMON-PRIOR> 2,359,606<F2>
<ACCUMULATED-NII-CURRENT> (213,544)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,547,732)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 5,565,498<F1>
<NET-ASSETS> 123,428,849<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 8,244,562<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 1,882,888<F1>
<NET-INVESTMENT-INCOME> 6,361,674<F1>
<REALIZED-GAINS-CURRENT> 2,368,115<F1>
<APPREC-INCREASE-CURRENT> (3,258,254)<F1>
<NET-CHANGE-FROM-OPS> 5,471,535<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 7,464,382<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 530,461<F2>
<NUMBER-OF-SHARES-REDEEMED> (920,911)<F2>
<SHARES-REINVESTED> 59,647<F2>
<NET-CHANGE-IN-ASSETS> (27,843,301)<F1>
<ACCUMULATED-NII-PRIOR> (308,829)<F1>
<ACCUMULATED-GAINS-PRIOR> (8,907,578)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 685,760<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,882,888<F1>
<AVERAGE-NET-ASSETS> 28,723,778<F2>
<PER-SHARE-NAV-BEGIN> 12.42<F2>
<PER-SHARE-NII> 0.52<F2>
<PER-SHARE-GAIN-APPREC> (0.08)<F2>
<PER-SHARE-DIVIDEND> 0<F2>
<PER-SHARE-DISTRIBUTIONS> (0.51)<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 12.35<F2>
<EXPENSE-RATIO> 1.88<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to SunAmerica Tax-Exempt Insured Fund as a whole
<F2>Information pertains to SunAmerica Tax-Exempt Insured Fund Class B
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 051
<NAME> SUNAMERICA TAX-EXEMPT INSURED FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 119,359,232<F1>
<INVESTMENTS-AT-VALUE> 124,924,730<F1>
<RECEIVABLES> 6,491,321<F1>
<ASSETS-OTHER> 22,423<F1>
<OTHER-ITEMS-ASSETS> 75,312<F1>
<TOTAL-ASSETS> 131,513,786<F1>
<PAYABLE-FOR-SECURITIES> 7,537,837<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 547,100<F1>
<TOTAL-LIABILITIES> 8,084,937<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 124,624,627<F1>
<SHARES-COMMON-STOCK> 7,968,704<F2>
<SHARES-COMMON-PRIOR> 9,818,201<F2>
<ACCUMULATED-NII-CURRENT> (213,544)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,547,732)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 5,565,498<F1>
<NET-ASSETS> 123,428,849<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 8,244,562<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 1,882,888<F1>
<NET-INVESTMENT-INCOME> 6,361,674<F1>
<REALIZED-GAINS-CURRENT> 2,368,115<F1>
<APPREC-INCREASE-CURRENT> (3,258,254)<F1>
<NET-CHANGE-FROM-OPS> 5,471,535<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 7,464,382<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 191,259<F2>
<NUMBER-OF-SHARES-REDEEMED> (2,254,438)<F2>
<SHARES-REINVESTED> 213,682<F2>
<NET-CHANGE-IN-ASSETS> (27,843,301)<F1>
<ACCUMULATED-NII-PRIOR> (308,829)<F1>
<ACCUMULATED-GAINS-PRIOR> (8,907,578)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 685,760<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,882,888<F1>
<AVERAGE-NET-ASSETS> 108,428,191<F2>
<PER-SHARE-NAV-BEGIN> 12.42<F2>
<PER-SHARE-NII> 0.59<F2>
<PER-SHARE-GAIN-APPREC> (0.07)<F2>
<PER-SHARE-DIVIDEND> 0<F2>
<PER-SHARE-DISTRIBUTIONS> (0.59)<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 12.35<F2>
<EXPENSE-RATIO> 1.24<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to SunAmerica Tax-Exempt Insured Fund as a whole
<F2>Information pertains to SunAmerica Tax-Exempt Insured Fund Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 042
<NAME> SUNAMERICA DIVERSIFIED INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 93,803,361<F1>
<INVESTMENTS-AT-VALUE> 94,810,811<F1>
<RECEIVABLES> 6,743,028<F1>
<ASSETS-OTHER> 5,280<F1>
<OTHER-ITEMS-ASSETS> 163<F1>
<TOTAL-ASSETS> 101,559,282<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 876,657<F1>
<TOTAL-LIABILITIES> 876,657<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 129,764,592<F1>
<SHARES-COMMON-STOCK> 17,734,431<F2>
<SHARES-COMMON-PRIOR> 25,797,521<F2>
<ACCUMULATED-NII-CURRENT> (217,383)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (29,872,034)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 1,007,450<F1>
<NET-ASSETS> 100,682,625<F1>
<DIVIDEND-INCOME> 46,590<F1>
<INTEREST-INCOME> 11,440,856<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 2,210,415<F1>
<NET-INVESTMENT-INCOME> 9,277,031<F1>
<REALIZED-GAINS-CURRENT> 3,516,228<F1>
<APPREC-INCREASE-CURRENT> (866,148)<F1>
<NET-CHANGE-FROM-OPS> 11,927,111<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 9,047,013<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,028,462<F2>
<NUMBER-OF-SHARES-REDEEMED> (11,026,801)<F2>
<SHARES-REINVESTED> 935,249<F2>
<NET-CHANGE-IN-ASSETS> (27,028,586)<F1>
<ACCUMULATED-NII-PRIOR> (522,977)<F1>
<ACCUMULATED-GAINS-PRIOR> (33,312,686)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 740,539<F1>
<INTEREST-EXPENSE> 1,295<F1>
<GROSS-EXPENSE> 2,210,415<F1>
<AVERAGE-NET-ASSETS> 95,706,332<F2>
<PER-SHARE-NAV-BEGIN> 4.30<F2>
<PER-SHARE-NII> .35<F2>
<PER-SHARE-GAIN-APPREC> .1<F2>
<PER-SHARE-DIVIDEND> (.35)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 4.40<F2>
<EXPENSE-RATIO> 2.04<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica Diversified Income Fund as a whole
<F2>Information pertains to SunAmerica Diversifed Fund Class B
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 031
<NAME> SUNAMERICA FEDERAL SECURITIES FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 54,134,074<F1>
<INVESTMENTS-AT-VALUE> 54,055,411<F1>
<RECEIVABLES> 376,217<F1>
<ASSETS-OTHER> 28,897<F1>
<OTHER-ITEMS-ASSETS> 229<F1>
<TOTAL-ASSETS> 54,460,754<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5,022,384<F1>
<TOTAL-LIABILITIES> 5,022,384<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 50,794,388<F1>
<SHARES-COMMON-STOCK> 2,936,039<F2>
<SHARES-COMMON-PRIOR> 3,862,927<F2>
<ACCUMULATED-NII-CURRENT> (82,950)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,194,405)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (78,663)<F1>
<NET-ASSETS> 49,438,370<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 4,296,512<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 953,907<F1>
<NET-INVESTMENT-INCOME> 3,342,605<F1>
<REALIZED-GAINS-CURRENT> (251,099)<F1>
<APPREC-INCREASE-CURRENT> (165,240)<F1>
<NET-CHANGE-FROM-OPS> 2,926,266<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 3,047,091<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 187,062<F2>
<NUMBER-OF-SHARES-REDEEMED> (1,244,469)<F2>
<SHARES-REINVESTED> 130,519<F2>
<NET-CHANGE-IN-ASSETS> (17,003,978)<F1>
<ACCUMULATED-NII-PRIOR> (174,321)<F1>
<ACCUMULATED-GAINS-PRIOR> (1,147,449)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 294,357<F1>
<INTEREST-EXPENSE> 338<F1>
<GROSS-EXPENSE> 953,907<F1>
<AVERAGE-NET-ASSETS> 34,510,134<F2>
<PER-SHARE-NAV-BEGIN> 10.43<F2>
<PER-SHARE-NII> .65<F2>
<PER-SHARE-GAIN-APPREC> (0.10)<F2>
<PER-SHARE-DIVIDEND> (0.59)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 10.39<F2>
<EXPENSE-RATIO> 1.41<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica Federal Securities Fund as a whole
<F2>Information pertains to SunAmerica Federal Securities Fund Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 011
<NAME> SUNAMERICA HIGH INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 129,441,554<F1>
<INVESTMENTS-AT-VALUE> 126,605,775<F1>
<RECEIVABLES> 17,593,551<F1>
<ASSETS-OTHER> 12,957<F1>
<OTHER-ITEMS-ASSETS> 688<F1>
<TOTAL-ASSETS> 144,212,971<F1>
<PAYABLE-FOR-SECURITIES> 1,500,000<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 3,190,609<F1>
<TOTAL-LIABILITIES> 4,690,609<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 180,363,850<F1>
<SHARES-COMMON-STOCK> 5,828,578<F2>
<SHARES-COMMON-PRIOR> 5,176,395<F2>
<ACCUMULATED-NII-CURRENT> (267,317)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (37,738,392)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (2,835,779)<F1>
<NET-ASSETS> 139,522,362<F1>
<DIVIDEND-INCOME> 130,000<F1>
<INTEREST-INCOME> 15,523,828<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 2,873,727<F1>
<NET-INVESTMENT-INCOME> 12,780,101<F1>
<REALIZED-GAINS-CURRENT> 8,745,205<F1>
<APPREC-INCREASE-CURRENT> (6,210,119)<F1>
<NET-CHANGE-FROM-OPS> 15,315,187<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 13,040,855<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,138,523<F2>
<NUMBER-OF-SHARES-REDEEMED> (1,792,558)<F2>
<SHARES-REINVESTED> 306,218<F2>
<NET-CHANGE-IN-ASSETS> 11,759,359<F1>
<ACCUMULATED-NII-PRIOR> (228,649)<F1>
<ACCUMULATED-GAINS-PRIOR> (46,261,511)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,107,351<F1>
<INTEREST-EXPENSE> 6,533<F1>
<GROSS-EXPENSE> 2,884,761<F1>
<AVERAGE-NET-ASSETS> 39,465,149<F2>
<PER-SHARE-NAV-BEGIN> 6.95<F2>
<PER-SHARE-NII> 0.65<F2>
<PER-SHARE-GAIN-APPREC> 0.12<F2>
<PER-SHARE-DIVIDEND> (0.66)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 7.06<F2>
<EXPENSE-RATIO> 1.50<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica High Income Fund as a whole
<F2>Information pertains to SunAmerica High Income Fund Class A
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 012
<NAME> SUNAMERICA HIGH INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 129,441,554<F1>
<INVESTMENTS-AT-VALUE> 126,605,775<F1>
<RECEIVABLES> 17,593,551<F1>
<ASSETS-OTHER> 12,957<F1>
<OTHER-ITEMS-ASSETS> 688<F1>
<TOTAL-ASSETS> 144,212,971<F1>
<PAYABLE-FOR-SECURITIES> 1,500,000<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 3,190,609<F1>
<TOTAL-LIABILITIES> 4,690,609<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 180,363,850<F1>
<SHARES-COMMON-STOCK> 13,921,621<F2>
<SHARES-COMMON-PRIOR> 13,190,350<F2>
<ACCUMULATED-NII-CURRENT> (267,317)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (37,738,392)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (2,835,779)<F1>
<NET-ASSETS> 139,522,362<F1>
<DIVIDEND-INCOME> 130,000<F1>
<INTEREST-INCOME> 15,523,828<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 2,873,727<F1>
<NET-INVESTMENT-INCOME> 12,780,101<F1>
<REALIZED-GAINS-CURRENT> 8,745,205<F1>
<APPREC-INCREASE-CURRENT> (6,210,119)<F1>
<NET-CHANGE-FROM-OPS> 15,315,187<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 13,040,855<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 7,842,612<F2>
<NUMBER-OF-SHARES-REDEEMED> (7,864,875)<F2>
<SHARES-REINVESTED> 753,534<F2>
<NET-CHANGE-IN-ASSETS> 11,759,359<F1>
<ACCUMULATED-NII-PRIOR> (228,649)<F1>
<ACCUMULATED-GAINS-PRIOR> (46,261,511)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,107,351<F1>
<INTEREST-EXPENSE> 6,533<F1>
<GROSS-EXPENSE> 2,884,761<F1>
<AVERAGE-NET-ASSETS> 108,181,633<F2>
<PER-SHARE-NAV-BEGIN> 6.96<F2>
<PER-SHARE-NII> 0.61<F2>
<PER-SHARE-GAIN-APPREC> 0.12<F2>
<PER-SHARE-DIVIDEND> (0.62)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 7.07<F2>
<EXPENSE-RATIO> 2.11<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica High Income Fund as a whole
<F2>Information pertains to SunAmerica High Income Fund Class B
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000795307
<NAME> SUNAMERICA INCOME FUNDS
<SERIES>
<NUMBER> 032
<NAME> SUNAMERICA FEDERAL SECURITIES FUND CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 54,134,074<F1>
<INVESTMENTS-AT-VALUE> 54,055,411<F1>
<RECEIVABLES> 376,217<F1>
<ASSETS-OTHER> 28,897<F1>
<OTHER-ITEMS-ASSETS> 229<F1>
<TOTAL-ASSETS> 54,460,754<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5,022,384<F1>
<TOTAL-LIABILITIES> 5,022,384<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 50,794,388<F1>
<SHARES-COMMON-STOCK> 1,816,306<F2>
<SHARES-COMMON-PRIOR> 2,504,077<F2>
<ACCUMULATED-NII-CURRENT> (82,950)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,194,405)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (78,663)<F1>
<NET-ASSETS> 49,438,370<F1>
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 4,296,512<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 953,907<F1>
<NET-INVESTMENT-INCOME> 3,342,605<F1>
<REALIZED-GAINS-CURRENT> (251,099)<F1>
<APPREC-INCREASE-CURRENT> (165,240)<F1>
<NET-CHANGE-FROM-OPS> 2,926,266<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 3,047,091<F1>
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 171,783<F2>
<NUMBER-OF-SHARES-REDEEMED> (941,907)<F2>
<SHARES-REINVESTED> 82,353<F2>
<NET-CHANGE-IN-ASSETS> (17,003,978)<F1>
<ACCUMULATED-NII-PRIOR> (174,321)<F1>
<ACCUMULATED-GAINS-PRIOR> (1,147,449)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 294,357<F1>
<INTEREST-EXPENSE> 338<F1>
<GROSS-EXPENSE> 953,907<F1>
<AVERAGE-NET-ASSETS> 22,569,123<F2>
<PER-SHARE-NAV-BEGIN> 10.45<F2>
<PER-SHARE-NII> .57<F2>
<PER-SHARE-GAIN-APPREC> (0.08)<F2>
<PER-SHARE-DIVIDEND> (0.52)<F2>
<PER-SHARE-DISTRIBUTIONS> 0<F2>
<RETURNS-OF-CAPITAL> 0<F2>
<PER-SHARE-NAV-END> 10.42<F2>
<EXPENSE-RATIO> 2.07<F2>
<AVG-DEBT-OUTSTANDING> 0<F2>
<AVG-DEBT-PER-SHARE> 0<F2>
<FN>
<F1>Information given pertains to the SunAmerica Federal Securities Fund as a whole
<F2>Information pertains to SunAmerica Federal Securities Fund Class B
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.10
OPINION OF COUNSEL
July 25, 1997
SunAmerica Income Funds
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 Income Funds (the "Trust"), a Massachusetts business trust, of
Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A
(the "Amendment") which definitely registers 27,846,564 shares of beneficial
interest, $.01 par value (the "Shares").
I am familiar with the proceedings taken by the Trust in connection
with the authorization, issuance and sale of the Shares. In addsition, I have
examined the Trust's Declaration of Trust, 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 Trust.
I hereby consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the Amendment of the Trust, and to
the filing of this opinion under the securities laws of any state.
Very truly yours,
SunAmerica Asset Management Corp.
By: ________________________________
Robert M. Zakem
Senior Vice President and
General Counsel
<PAGE>
EXHIBIT 99.11
CONSENT OF AUDITORS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated May
12, 1997, relating to the financial statements and financial highlights of
SunAmerica Income Funds, which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of the Registration Statement. We also consent
to the reference to us under the heading "Additional Information - Independent
Accountants and Legal Counsel" in such Statement of Additional Information and
to the references to us under the headings "Financial Highlights" and "General
Information - Independent Accountants and Legal Counsel" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
July 21, 1997
