<PAGE>
March 31, 1997
SunAmerica
Equity Funds
[Art Appears Here]
Annual Report
U.S. GOVERNMENT SECURITIES . FEDERAL SECURITIES
DIVERSIFIED INCOME . HIGH INCOME . TAX EXEMPT INSURED
[Logo] Sun America
Asset Management
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
April 30, 1997
Dear Shareholder:
Strong individual issue selection, careful monitoring of changing market
conditions, and commitment to long-standing investment strategies were key to
the competitive performance achieved by the SunAmerica Income Funds over the
twelve month period ended March 31, 1997. Four of the five SunAmerica Income
Funds outperformed their respective Lipper category averages for the fiscal
year on a cumulative basis. The Tax Exempt Insured Fund slightly
underperformed its category average primarily because of its more conservative
philosophy.
MARKET ACTIVITY
Overall, the fiscal year was a difficult one for fixed income investors, as
expectations that the U.S. Federal Reserve Board would officially tighten
monetary policy persistently hung over both the U.S. and international debt
markets.
The period began with real U.S. GDP accelerating to a 4.2% pace,
dramatically slowing in the next quarter to 2.1%, and then picking up again to
3.8% in the fourth calendar quarter of 1996. In the first quarter of 1997,
real GDP was in excess of 3%. The actual inflation picture remained quite
benign throughout. In February, however, there appeared to be a renewal of a
consumer-led economy, as the Consumer Price Index, housing starts, and retail
sales, among other indicators, were all higher than anticipated. Federal
Reserve Board Chairman Alan Greenspan's comments regarding "irrational
exuberance" over market valuations and the possibility of a "preemptive
strike" exacerbated the markets' nervous concerns. Finally, after many months
of speculation and for the first time since January 1996, the Federal Reserve
Board raised the fed funds rate by 0.25% on March 25, 1997.
U.S. GOVERNMENT SECURITIES. U.S. interest rates rose over the period, pushed
both by the rapid pace of economic growth and in anticipation of Fed action.
Market volatility from day to day was high, but the yield spread, from the
beginning of the fiscal period to the end, was very tight. For example, yields
on 30-year Treasuries moved less than 1.0%. This is a strong indication that
investors had already priced in some future tightening. Short-term yields
increased more than long-term yields, leading to a flattening yield curve.
Mortgages outperformed all other fixed income sectors for the fiscal year. As
indicated in our last report, when interest rates rise, prepayment activity
declines, and this, combined with a comparatively low interest rate
environment, led investors to prefer the extra income offered by mortgages
over U.S. Treasuries.
One trend that provided support for the U.S. Treasury market in the face of
rising interest rates was the strength of the U.S. dollar versus most G7
currencies. Foreign investors continue to take advantage of the interest rate
differential and the inherent liquidity offered by dollar denominated assets.
HIGH YIELD CORPORATE SECURITIES. These securities started the fiscal period
with a weak quarter, were strong in the next two, and, similar to other fixed
income sectors, were impacted negatively in the most recent quarter by the
Fed's interest rate hike. Overall, however, high yield products experienced
large cash inflows by individuals, insurance companies and pension plans, as
investors sought the benefits of the favorable supply/demand balance and the
higher returns offered in comparison to U.S. Treasuries. The media and
cyclical industries were strong; the consumer and telecommunications
industries were weak.
1
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
INTERNATIONAL SECURITIES. For most of the fiscal year, the foreign debt
markets underperformed the other fixed income sectors. However, by the first
calendar quarter of 1997, yield spreads widened relative to U.S. Treasuries,
indicating, we believe, the beginning of a cyclical upturn in performance.
Within this sector, our focus continued to be on the Latin American markets.
Mexico and Venezuela were weak, but Argentina and Brazil outperformed, based,
in large part, on anticipation of April 2nd upgrades by Standard & Poor's.
TAX EXEMPT SECURITIES. Municipal securities supply throughout the twelve
month period, both in new issue volume and refunding bonds, was low. This was
due to rising interest rates, a general aura of fiscal conservatism in
Washington, D.C., and relatively strong state and local economies, which
enabled municipalities to use increased tax proceeds and reserve pools, rather
than borrowed money, to pursue projects. Demand, on the other hand, remained
quite strong. This balance, along with an almost 3:1 credit upgrade/downgrade
ratio, was favorable for this sector's performance.
INVESTMENT REVIEW
THE U.S. GOVERNMENT SECURITIES AND FEDERAL SECURITIES FUNDS, each with
approximately 1/3 of their portfolio assets invested in premium, higher coupon
mortgages, 1/3 in current coupon, total return-oriented mortgages, and 1/3 in
U.S. Treasuries, both benefited from their weightings in the outperforming
mortgage sector. This "thirds strategy" also enabled us to adjust quickly in
response to a market characterized by high day-to-day volatility and best
taken advantage of through strong trading capabilities. Clearly, this
strategy, along with a basically neutral posture towards the market, worked,
as both Funds ranked in the top third of their respective Lipper category
averages.
In addition to its allocation structure, the outperformance of the U.S.
Government Securities Fund was due to strong security selection. The Fund's
duration ranged from a high of 4.7 years to a low of 4.1 years over the twelve
months and as of March 31, 1997 stood at 4.5 years. Active trading and minor
maturity adjustments contributed to the outperformance of the Federal
Securities Fund. This Fund's duration ranged from 5.8 to 4.8 years over the
twelve months and as of March 31, 1997 stood at 5.3 years. Once an imminent
tightening in monetary policy was virtually certain, the maturities of both
Funds were shortened in March.
THE DIVERSIFIED INCOME AND HIGH INCOME FUNDS, each of which outperformed
their respective Lipper category averages for the annual period, both
benefited most from outstanding sector selection. Determining allocation based
on relative sector value, the Diversified Income Fund was approximately 47%
invested in foreign securities, 37% in high yield U.S. corporate bonds, 4% in
U.S. Treasuries and 12% in cash and other securities on March 31, 1997. Most
of the shift from an underweight to overweight position in foreign debt
securities was made in the first calendar quarter of 1997, as we began to see
a cyclical upturn there. Over half of the Fund's foreign securities are in
Latin America, where industries are maturing, economies are expanding rapidly,
and cash flows on corporate obligations are strengthening, in turn, enhancing
liquidity. We also continue to see opportunities in several nations' sovereign
issues and in the technology industry on a global basis.
The High Income Fund particularly benefited from its overweight position in
the media sector, especially the U.K. cable companies such as Bell Cablemedia
and Videotron, and the broadcaster New World
2
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
Communications, which outperformed the sector as a whole. Still, toward the
end of the period, we moved to an underweight position in this sector, as
individual positions were sold when they met their target prices and profits
were redeployed elsewhere. The Fund also benefited from its neutral weightings
in the cyclical and consumer sectors. The telecommunications sector
underperformed, but the Fund remained overweight there, as we continue to see
value in this broad-ranging industry.
THE TAX EXEMPT INSURED FUND maintained its defensive posture and its
commitment to stability of principal. The flattening yield curve and rising
interest rates hurt performance somewhat. However, the Fund's laddered
maturity approach, i.e. buying issues across the yield curve, its lower than
average duration, and its strong emphasis on high credit quality all helped it
produce better than category average returns in three of the four fiscal year
quarters. The Fund increased its exposure to New York issues, based on
improving fundamentals in its local economy, and sold off some Oklahoma
issues, as other municipalities offered more compelling relative returns. As
of March 31, 1997, the Fund was broadly diversified among 31 states, and
approximately 85% of its portfolio assets were invested in insured municipal
bonds.
MANAGER OUTLOOK
Looking ahead, we believe the fixed income markets will remain on the
defensive until the U.S. economy moderates. Since the Federal Reserve Board
acted preemptively in March, we do not see any major increase in inflation,
although there is still a fairly strong possibility that the Fed will tighten
monetary policy again by another 0.25%. Still, the level of "real" interest
rates is already close to a historically restrictive level.
Consequently, we believe that the short-term slowing in the fixed income
markets brought about by these interest rate increases will help preserve the
broader economic expansion in place since 1991 and may very well provide
opportunities for bond yields to fall in the second half of 1997. In addition,
we do not believe that the spending patterns of the consumer have staying
power much past the first quarter of the calendar year, which furthers our
positive disposition toward the fixed income markets. We do believe that
volatility of yields within a tight range will continue.
Given this outlook, we anticipate lengthening the maturities of both the
U.S. Government Securities and Federal Securities Funds once there are clear
indicators that the economy has slowed down, the Federal Reserve Board action
is working, and as long as 30-year Treasury rates remain over 7%. We intend to
stay focused on the higher yielding international markets in the Diversified
Income Fund and on the telecommunications sector in the High Income Fund. As
for the investments of the Tax Exempt Insured Fund, we believe three factors
bode particularly well. The first is continuing budgetary consciousness in
Washington regarding both balancing the budget and keeping spending cuts to a
minimum. The second is a longer-term demographic trend that favors aging baby-
boomers seeking to emphasize protection over creation of wealth. The third is
that technical factors that drive the municipal market continue to be in our
favor.
In all of the SunAmerica Income Funds, what is perhaps most important is our
long-standing commitment to our top-down, issue-specific, value-oriented
strategies, carried out in a disciplined manner consistent with current market
conditions and interest rate forecasts. The wisdom of this philosophy has been
proven in the performance of our Funds over time.
3
<PAGE>
SUNAMERICA INCOME FUNDS
SHAREHOLDER LETTER
We value your ongoing support of the SunAmerica Income Funds and look
forward to serving your investment needs in the years ahead with pro-active
management and high current income consistent with each Fund's objective.
/s/ P. Christopher Leary
P. Christopher Leary
Director of Fixed Income
/s/ John W. Risner /s/ John C. Mooney
John W. Risner John C. Mooney
Portfolio Manager Portfolio Manager
4
<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>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES
As required by the Securities and Exchange Commission, the following graphs
compare the performance of a $10,000 investment in the SunAmerica Income
Funds' portfolios to a similar investment in a broad based index. It is
important to note that the SunAmerica Income Funds are professionally
managed mutual funds while the indices are not available for investment and
are unmanaged. The comparison is shown for illustrative purposes only. The
graphs present the performance of the class of that particular Fund which
has been in existence the longest. The performance of the other class will
vary based upon the difference in sales charges and fees assessed to
shareholders of that class. The maximum sales charge for Class A is 4.75%
of the public offering price. The maximum contingent deferred sales charge
for Class B is 4.0% and is reduced to 0% after 6 years. Both Class A and
Class B bear ongoing 12b-1 distribution and service fees.
<TABLE>
<CAPTION>
U.S. Government Securities Fund
Lehman Brothers U.S. Government
Government Index Securities Fund Class B
<S> <C> <C>
10000 10000
6/87 9826 10673
6/88 10530 11382
6/89 11800 12137
6/90 12619 13060
6/91 13899 14308
6/92 15812 15499
6/93 17851 16351
3/94 17815 16392
3/95 18584 16930
3/96 20614 18433
3/97 21499 19043
</TABLE>
U.S. Government Securities Fund Class Class
Average Annual Total Returns+ A B
1 Year Return (0.96)% (0.69)%
5 Year Return N/A 4.34 %
10 Year Return N/A 6.02 %
Since Inception* 3.29 % 6.01 %
+ Includes any applicable sales charges
* Inception dates for Class A and Class B are 10/01/93 and 3/03/86, respectively
With a cumulative total return of 3.98%, the U.S. Government Securities Fund
Class A outperformed its group average's performance of 3.48% (tracked by Lipper
Analytical Service) for the twelve months ended March 31, 1997. This strong
performance was due to superior security selection more than to adjustment of
portfolio characteristics such as maturity and duration. The Fund underperformed
relative to the Lehman Brothers Government Bond Index, which is an unmanaged
index and not available as an investment.
<TABLE>
<CAPTION>
Federal Securities Fund
Salomon Brothers Federal Securities
GNMA Index Fund Class B
<S> <C> <C>
10000 10000
3/88 10566 10350
3/89 11141 10730
3/90 12731 11904
3/91 14534 13426
3/92 16297 14845
3/93 18154 16042
3/94 18379 15899
3/95 19528 16505
3/96 21655 18178
3/97 19079 19053
</TABLE>
Federal Securities Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 0.39% 0.82%
5 Year Return N/A 4.79%
10 Year Return N/A 6.66%
Since Inception* 4.00% 8.04%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 10/11/93 and 4/25/83, respectively
Active trading and maturity adjustments benefited this Fund's annual
performance. The Fund Class A had a cumulative total return of 5.40%,
outperforming its Lipper category average of 4.76%. As you can see in the chart
to the left, over time, the Fund has also closely tracked its benchmark, the
Salomon Brothers GNMA Index, which is an unmanaged index that tracks performance
of the GNMA portion of the U.S. Government bond market. The Fund's Class A
shares ranked 10 out of 51 funds in its comparative Lipper category for the
twelve months.
38
<PAGE>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES -- (continued)
<TABLE>
<CAPTION>
Diversified Income Fund
Diversified Income JP Morgan Global Lehman Salomon Merrill
Fund Class B Government Brothers Brothers Lynch
Bond Bond Index Government High Yield High Yield
Index Market Index Index
<S> <C> <C> <C> <C> <C>
10000 10000 10000 10000 10000
10/91 10346 10774 10691 11331 10176
10/92 10362 12128 11795 13304 13155
10/93 11699 13462 13344 15996 15593
3/94 11405 13415 12850 15799 15699
3/95 10782 15035 13404 16824 16895
3/96 12194 16023 14868 19569 19384
3/97 13402 16361 15507 21740 21520
</TABLE>
Diversified Income Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 6.14% 6.74%
5 Year Return N/A 4.82%
Since Inception* 3.54% 4.88%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 10/05/93 and 4/06/91, respectively
The Diversified Income Fund Class A had a cumlulative total return of 11.43% for
the twelve months ended March 31, 1997, as compared to 10.52% for its Lipper
category average. This outperformance is primarily attributable to superior
sector selection and a shift from an overweighting in corporate bonds one year
ago to an overweighting in foreign debt securities at the end of this fiscal
year. Because the Fund invests in several sectors of the bond market, it is not
compared to any one benchmark. The Fund outperformed, for the twelve months
ended March 31, 1997, the J.P. Morgan Global Government Bond Index and closely
tracked the Lehman Brothers Government Bond Index. It underperformed the Salomon
Brothers High Yield Market Index and the Merrill Lynch High Yield Index. The
Fund's objective has been a high level of current income consistent with
moderate investment risk since late 1992; therefore, performance comparisons
since the Fund's inception in April 1991 may not be relevant.
<TABLE>
<CAPTION>
High Income Fund
High Income Salomon Brothers Merrill Lynch
Fund Class A High Yield High Yield
Market Index Market Index
<S> <C> <C> <C>
9525 10000 10000
3/88 9649 10495 10434
3/89 10735 11552 11474
3/90 9677 11073 11471
3/91 10601 12624 12731
3/92 14330 16252 16217
3/93 16501 19041 18924
3/94 18003 20614 20697
3/95 17479 21952 22274
3/96 19303 25533 25556
3/97 21516 28367 28372
</TABLE>
High Income Fund Class Class
Average Annual Total Returns+ A B
1 Year Return 6.17% 6.78%
5 Year Return 7.41% N/A
10 Year Return 7.96% N/A
Since Inception* 8.08% 4.69%
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 9/19/86 and 10/01/93, respectively
Benefiting primarily from superior sector selection, the High Income Fund Class
A achieved a cumulative total return of 11.46% for the fiscal year ended March
31, 1997, as compared to 11.35% for its Lipper category average. The Fund
underperformed the Salomon Brothers and Merrill Lynch High Yield Market Indices,
both unmanaged indices of high yield bonds. Given the flattening yield curve,
our outlook for this asset class is somewhat tempered; however, careful credit
analysis, constant monitoring of the financial markets, and a well-diversified
portfolio should still enable us to seek maximum current income with less risk
than normally associated with owning high yield securities.
39
<PAGE>
SUNAMERICA INCOME FUNDS
COMPARISONS: PORTFOLIOS VS. INDICES -- (continued)
<TABLE>
<CAPTION>
Tax Exempt Insured Fund
Lehman Brothers Tax Exempt Insured
Municipal Bond Index Fund Class A
<S> <C> <C>
10000 9525
10/87 9520 9260
10905 10674
10/89 11788 11478
12663 12199
10/91 14204 13251
15397 14037
10/93 17563 15434
16800 14723
3/95 18054 15749
19566 16910
3/97 20635 17627
</TABLE>
Tax Exempt Insured Fund Class Class
Average Annual Total Returns+ A B
1 Year Return (0.71)% (0.43)%
5 Year Return 4.42 % N/A
10 Year Return 5.51 % N/A
Since Inception* 6.15 % 2.33 %
+Includes any applicable sales charges
*Inception dates for Class A and Class B are 11/22/85 and 10/04/93, respectively
For the year ended March 31, 1997, the Tax Exempt Insured Fund Class A had a
cumulative total return of 4.24%, as compared to 4.35% for its Lipper category
average. The Fund also underperformed the return for the Lehman Brothers
Municipal Bond Index, an unmanaged index consisting of municipal bonds that may
not be insured as to the timely payment of principal and interest. In contrast,
at least 65% of the holdings of the Tax Exempt Insured Fund are insured under
normal conditions. In fact, on March 31, 1997, approximately 85% of the Fund's
holdings were insured. The remainder is invested in investment grade bonds or
bonds of comparable quality. This Fund continues to be conservatively managed,
as it seeks as high a level of current income exempt from Federal taxes as is
consistent with preservation of capital.
40
<PAGE>
TRUSTEES INVESTMENT ADVISER
S. James Coppersmith SunAmerica Asset Management Corp.
Samuel M. Eisenstat The SunAmerica Center
Stephen J. Gutman 733 Third Avenue
Peter A. Harbeck New York, NY 10017-3204
Peter McMillan III DISTRIBUTOR
Sebastiano Sterpa
SunAmerica Capital Services, Inc.
OFFICERS The SunAmerica Center
Peter A. Harbeck, President 733 Third Avenue
Stanton J. Feeley, Executive New York, NY 10017-3204
Vice President
Nancy Kelly, Vice President
P. Christopher Leary, Vice President SHAREHOLDER SERVICING AGENT
Robert M. Zakem, Secretary SunAmerica Fund Services, Inc.
Peter C. Sutton, Treasurer The SunAmerica Center
John T. Genoy, Assistant Treasurer 733 Third Avenue
Donna M. Handel, Assistant Treasurer New York, NY 10017-3204
Abbe P. Stein, Assistant Secretary
CUSTODIAN AND TRANSFER AGENT
State Street Bank & Trust Company
P.O. Box 419572
Kansas City, MO 64141-6572
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BULK RATE
SUNAMERICA INCOME FUNDS U.S. POSTAGE
THE SUNAMERICA CENTER PAID
733 THIRD AVENUE Kansas City,
NEW YORK, NY 10017-3204 MO
1-800-858-8850 PERMIT NO.
3657
This report is submitted solely for
the general information of
shareholders of the Fund.
Distribution of this report to
persons other than shareholders of
the Fund is authorized only in
connection with a currently effective
prospectus, setting forth details of
the Fund, which must precede or
accompany this report.
SPONSORED BY:
[LOGO]SunAmerica
Asset Management
IFANN
