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SunAmerica
Income Funds
1998 Semiannual Report
U.S. Government Securities Fund
Federal Securities Fund
Diversified Income Fund
High Income Fund
Tax Exempt Insured Fund
[LOGO] SunAmerica
Mutual Funds
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SunAmerica Income Funds Semiannual Report
REPORT FROM THE SUNAMERICA FIXED INCOME INVESTMENT TEAM
John DiVito
Paul Kunz
P. Christopher Leary
James T. McGrath
Karolann Patranzino
John Risner
Brian Wiese
Dear Shareholders:
After watching liquidity dry up in one overseas market after another,
the global credit crunch finally hit the U.S. The rush by investors into
liquid, high-quality investments has virtually shut down large portions
of U.S. capital markets. Compounding this problem has been an unwinding
of positions by hedge funds and other investors who faced losses from
both Russia's and Latin America's economic woes.
The U.S. Treasury Market outperformed all other fixed income asset
classes during this semiannual period. The yield on the bellwether 30-
year bond fell to 4.97% at the end of September from 5.57% at the
beginning of April. Falling yields mean rising prices. Treasury yields
fell not only because of this global flight to quality, but also because
of confirmed evidence of a slowdown in Gross Domestic Product growth and
a decrease of inflationary price reserves. Due to these factors, the
Federal Reserve Bank cut interest rates for the first time in over 2 1/2
years to 5.25% from 5.50% on September 29th.
Mortgage-backed securities surprised many investors by underperforming
the Treasury market, as did Government National Mortgage Association
(GNMA) securities, Federal National Mortgage Association (FNMA)
securities and municipal bonds. The outlook for tax-exempt municipal
bonds is positive going forward. Supply should remain tempered because a
large majority of potential refunding issues already came in the first
half of the year. As well, the value of municipals relative to other
asset classes has yet to be fully discovered by potential investors.
This should drive demand as the retail investor seeks principal and
income stability heading towards the new millennium.
The flight to quality, and specifically into U.S. Treasuries, has had
the most severe impact in the high-yield market. Despite moderate
default rates and forecasts of continued tempered economic growth,
investor adversity towards higher risk securities caused these yields to
increase from the low during the
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period of 3.50% over the 10-year Treasury and to a high over 5.70% over
the 10-Year Treasury. In contrast, the average yield increase over the
10-Year Treasury during 1985-1997 period was 4.42%.
New high yield issuance has also virtually stopped with only about $4
billion in such securities hitting the market in August and September,
compared to an average of about $15 billion per month over the previous
seven months.
It is important to note the differences in the debt market, and
particularly in the high yield market, today versus 1990. In 1990 we
had higher inflation, weaker economy, a default rate for such
securities approaching 10%, a weakened banking system, and a savings
and loan crisis. Moreover, the high yield debt market was dominated by
one underwriter (Drexel Burnham).
Today, we have low inflation, a relatively strong economy, a 3%
default rate, greater stability in the banking system and a wider and
more diverse underwriter community. While the impacts of weakening
economies and political difficulties in some overseas markets, a
declining stock market and political difficulties have been severe, we
believe that these factors are discounted in current prices, and see
good value in the higher yielding spread markets.
Overall, we expect to see a continued slowdown in the economy based
on fewer exports, reductions in capital spending and a reduction in
discretionary goods and services. We believe that the Federal Open
Market Committee has now adapted an easing bias that should be
favorable for the bond market.
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SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PERFORMANCE
SunAmerica U.S. Government Securities Fund has performed well
considering its defensive and conservative nature relative to other
U.S. Government funds. The Fund's Class A returned 5.61% compared
to 8.36% for the Lipper category, for the six months ending
September 30, 1998. (Neither return reflects a sales charge.) The
Fund ranked in the 80th percentile range for all U.S. Government
funds during this six month period, according to Lipper Analytical
Services. However, it is important to note that your Fund is
actually more characteristic of an intermediate bond fund and
therefore would not be expected to perform as well during periods
of falling interest rates. Although the Fund's target duration
range is three to five years, we have remained closer to the five-
year maturity over the past six months to ensure a better
positioning in the event of a declining interest rate environment.
PORTFOLIO REVIEW
SunAmerica 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. Normally, the Fund invests its assets in such a way
as to minimize the impact of interest rate volatility. The Fund is
neither insured nor guaranteed by the U.S. Government.
The Portfolio presently is structured with one-third invested in
premium mortgages, another third in total return mortgages and the
remainder in U.S. Treasuries. Premium mortgages provide high
current income with reduced-market price volatility. We look for
opportunities in total return mortgages, particularly in the 15-
year sector, and plan to increase positions in these securities.
Most of our maturity adjustments will come through a shift into
five- and 10-year Treasuries, whereas we have traditionally focused
on five-, 10- and 30-year Treasuries.
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SUNAMERICA FEDERAL SECURITIES FUND
PERFORMANCE
SunAmerica Federal Securities Fund has achieved extraordinarily
performance. It ranked first among 44 peer funds for the three-
year period ending September 30, 1998. In addition, it was within
the top five of its over 50 peers for the year-to-date, three-
month, and 12-month periods ending at the same time, according to
Lipper Analytical Services. SunAmerica Federal Securities Fund
Class A returned 6.15% compared to 6.1% for the Lipper Group, for
the six months ending September 30, 1998. (Returns do not reflect
a sales charge.)
PORTFOLIO REVIEW
SunAmerica 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 of its agencies. Normally, the Fund invests its
assets in such a way so as to maximize capital appreciation in a
declining interest rate environment. A significant portion of the
Fund's assets may be invested in mortgage-backed securities.
Over the past six months, your portfolio's Treasury component
has been a major contributor to total return as Treasuries have
outperformed mortgages. We will continue to incorporate U.S.
Treasuries into the portfolio as attractive buying opportunities
are found. Going forward, however, we believe that mortgages may
become more attractive on a relative value basis than U.S.
Treasuries. As a result, we plan to maintain and increase your
Portfolio's mortgage holdings. In fact, our reallocation began
earlier this fall as we began to reduce Treasury holdings and
raise cash to deploy this cash in appropriate mortgage
opportunities.
Moreover, we have maintained durations slightly longer than many
of our peers, which has contributed to your Fund's relative
outperformance. We believe the interest rate environment will
remain favorable in the near future and that more total return
will come from income rather than market appreciation over the
next few months.
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SUNAMERICA DIVERSIFIED INCOME FUND
PERFORMANCE
SunAmerica Diversified Income Fund Class A posted a cumulative
loss of 14.22% compared to a loss of 1.34% for the Lipper group for
the six months ending September 30, 1998, according to Lipper
Analytical Services. (Neither return reflects a sales charge.) The
category is comprised of multi-sector income funds, which encompass
a variety of fixed income securities. We primarily focus on three
sectors: high yield, foreign bonds and U.S. high-grade debt. In
general, the high-yield bond market lost ground as a result of weak
cyclicals including paper, steel, chemicals, shipping and
telecommunications. The Fund also suffered from a concentration in
emerging market bonds. Although U.S. interest rates declined
dramatically over the course of the year, the gains were more than
offset in the other two asset classes. We are neither pleased nor
content with the Fund's performance, and we believe that on a long-
term basis, there are solid opportunities for appreciation.
PORTFOLIO REVIEW
SunAmerica Diversified Income Fund seeks a high level of current
income consistent with moderate investment risk, with preservation
of capital as a secondary objective. The Fund invests in a
diversified portfolio of securities consisting of U.S. government
securities, foreign government and corporate debt securities and
securities issued by domestic corporations, including lower-rated,
high yield securities.
While we attempted to reduce the risk profile of the higher
yielding securities, we were unable to react fast enough to market
turbulence. We are continually reviewing the Fund's positions to
ensure that we still have confidence in the management and business
plans of all the companies. Our hope is that as the markets
stabilize and the forced liquidations caused by hedge funds and
investment bankers subside, our holdings will appreciate closer to
their intrinsic values.
WINNERS AND LOSERS
On the positive side, we sold positions in the government of
Korea, TV Film and Tricom as well as some other foreign government
bonds earlier in the spring. We were also fortunate to lock in
gains through timely sales of ICO Industries (oil services
company), Clearview Cinema, Nationwide Credit Services and Hawk
Corp (aircraft brakes maker). In addition, we consider any
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high yield bond that held its own through the market turbulence or
gained slightly to be in solid standing.
Although we successfully avoided securities in Russia and most
of Asia, our weightings in Brazil, and more specifically, the
telecommunications industries in Brazil and Argentina
underperformed. The Fund accepted losses from companies like
Globopar, RBS and PageNet Do Brazil as well as certain cyclicals,
such as Sterling Chemicals.
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SUNAMERICA HIGH INCOME FUND
PERFORMANCE
SunAmerica High Income Fund Class A posted a cumulative loss of
9.52% year-to-date compared to a loss of 2.98% for the Lipper
category, for the six months ending September 30, 1998, according
to Lipper Analytical Services. (Neither return reflects a sales
charge.) In general, the high yield bond market lost ground as a
result of weak cyclicals including paper, steel, chemicals,
shipping and telecommunications. Your Fund is actively managed and
strives for higher current income for investors. It thus remains
concentrated in B-rated high yield bonds as compared with a BB-
rated bond concentration in the Merrill Lynch High Yield Index. We
believe that the additional risk taken, in a positive market
environment, will serve our investors better than a more
conservative posture.
PORTFOLIO REVIEW
SunAmerica High Income Fund seeks maximum current income by
investing primarily in high yield, high risk corporate bonds. We
believe a high-income investment may be an important component of a
well-diversified portfolio and may provide a cushion during
volatile stock markets.
While we cut our telecommunications stake, we continue to
maintain an overweighting of this sector relative to the Merrill
Lynch High Yield Index, which maintains a 17% stake. We continue to
see relative value in this sector. Our proprietary, bottom-up
research and analysis shows that many of these companies have
strong fundamentals and liquidity despite market turbulence. We
also see fundamental value in several media and consumer goods
companies and continue to hold our positions in those sectors.
While your portfolio is underweighted in energy (5.5%), we
anticipate increasing its stake to 6.4% to match the Merrill Lynch
High Yield Index. Many of those bonds' values have declined and we
consequently see relative buying opportunities.
WINNERS AND LOSERS
We were fortunate to lock in gains through timely sales of ICO
Industries (oil services company), Clearview Cinema, Nationwide
Credit Services and Hawk Corp. (aircraft brakes maker). In
addition, we consider any high yield bond that held its own through
the market turbulence or gained slightly to be in solid standing.
Comcast Cellular, Lifestyle Furnishings and Tenant Healthcare are
three such examples.
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As we mentioned earlier, cyclicals, such as Sterling Chemicals
and Doman (a Canadian-headquartered lumber company) were poor
performers. However, we maintain our positions in these bonds
because we believe the companies have strong fundamentals. Golden
Ocean Group also suffered. But we retain these positions because
this shipping company is generally in good financial standing and
continues to pay its bills on time. We believe its decline in
value was attributable to the weak tanker rates that accompany a
weak economy. But the company continues to build new ships and,
therefore, to maintain newer and bigger fleets.
There were also several poor performers, which we sold at
substantial losses. Among those are American Pad & Paper, a
company unable to achieve cost-savings in its distribution system
that, we believe, permanently damages the overall health of the
company. Acme Metals also experienced operational troubles with
its new caster in particular. Its general financial health has
suffered also from weakening steel prices. We sold our position in
its subordinated notes. However, we retain senior secured notes,
which we believe will be covered by the company's assets.
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SUNAMERICA TAX EXEMPT INSURED FUND
PERFORMANCE
SunAmerica Tax Exempt Insured Fund ranked in the 25th to 30th
percentile position of its objective category for the six months
ending September 30, 1998, according to Lipper Analytical Services.
The Fund's Class A returned 4.49% on a cumulative basis during that
period compared to 5.22% for the Lipper category. (Neither return
reflects a sales charge.) The entire municipal bond sector lagged
U.S. Treasuries during the last quarter due to increased demand for
U.S. Treasuries as investors sought out high quality investments
following problems in overseas markets. The good news, though, is
that the Fund benefited from this shift to government bonds (and
the resulting flattening of the yield curve). To capitalize on this
trend, management reallocated assets in the second and third
quarters toward a heavier concentration of municipal bonds with a
long-term maturity of 20 years. Prior to that, we had maintained
positions across the yield curve in bonds with varying maturities.
The municipal market has remained largely undiscovered by those
investors who have fled the market volatility of the past several
months. As a result, by the end of the third quarter municipal
bonds were at their most attractive levels relative to Treasuries
since 1987. We believe this bodes well for your Fund. Ample
opportunities could abound when retail municipal bond buyers adjust
to the new levels of yield and return available in the fixed income
market. We anticipate the relationship between Treasuries and
municipal bonds to stabilize within the next six months.
PORTFOLIO REVIEW
SunAmerica Tax Exempt Insured Fund seeks as high a level of
current income exempt from Federal income taxes as is consistent
with preservation of capital. The Fund normally invests at least
80% of its assets in federally tax-free municipal bonds, of which
at least 65% are insured as to the scheduled payment of principal
and interest.
We have sold several positions of 10-year, higher-coupon bonds
and purchased securities with maturities out to the 20-year range.
Now the Fund benefits from longer-term maturities which are more
attractive than shorter-term bonds in a falling interest-rate
environment. We also reduced risk by decreasing the Fund's position
in 30-year paper and increasing its concentration in 20-year paper.
The average duration of the Fund is 7.4 years.
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WINNERS AND LOSERS
We began purchasing New York City bonds a few months ago because
the City's municipal and financial health continues to improve. We
believe the City's credit has improved due to its sound
management, continued reduction in social service costs and
increased revenues from both property and personal income taxes.
Wayne County, Michigan Airport paper has also been a top performer
largely due to strong demand for high-yielding securities with low
risk.
We are pleased to say that our Fund has not been subject to many
poor-performing municipal issues. However, one issue, Alliance
Airport in Texas lagged late in the third quarter. We continue to
hold the bonds because we believe they offer potential rewards.
Approximately 90% of the Fund is invested in AAA rated paper or
in bonds that are backed by publicly held municipal insurers such
as American Municipal Bond Assurance Corp., Financial Guaranty
Insurance Company and Municipal Bond Investors Assurance Corp.
This insurance minimizes volatility relative to uninsured
municipal bonds.
IF YOU WOULD LIKE ADDITIONAL INFORMATION:
[_] CALL FAST FACTS -- CALL OUR 24 HOUR AUTOMATED ACCOUNT AND
FUND INFORMATION HOTLINE AT 800-654-4760.
[_] VISIT SUNAMERICA ON THE WORLD WIDE WEB. VISIT OUR SITE AT
WWW.SUNAMFUNDS.COM FOR MORE UP-TO-DATE INFORMATION.
SUNAMERICA MUTUAL FUNDS
THANKS YOU FOR YOUR CONTINUED SUPPORT.
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SUNAMERICA INCOME FUNDS
STATEMENT OF ASSETS AND LIABILITIES -- September 30, 1998 (unaudited)
<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 $254,189,263;
$45,446,047;
$78,302,760;
$172,783,655 and
$93,294,848,
respectively).......... $259,657,900 $47,162,642 $65,314,536 $150,981,055 $103,381,142
Short-term securities,
at value (identified
cost $0; $0;
$1,051,250; $1,576,875
and $3,400,000,
respectively).......... -- -- 995,000 1,492,500 3,400,000
Repurchase agreements
(cost equals market)... 67,522,000 17,542,000 3,799,000 -- --
Cash.................... 327 614 104 -- 22,780
Receivable for
investments sold....... 30,495,769 3,786,299 26,164 2,791,061 --
Interest and dividends
receivable............. 2,463,855 467,906 1,946,839 3,770,461 1,516,493
Receivable for shares of
beneficial interest
sold................... 91,448 451,800 136,132 1,401,785 22,848
Prepaid expenses........ 26,968 27,796 2,913 17,336 3,229
Receivable due from
investment adviser..... -- -- -- 2,437 --
------------ ----------- ----------- ------------ ------------
Total assets........... 360,258,267 69,439,057 72,220,688 160,456,635 108,346,492
------------ ----------- ----------- ------------ ------------
LIABILITIES:
Payable for investments
purchased.............. 41,788,931 9,423,661 -- -- --
Payable for securities
loaned................. 32,850,000 4,380,000 -- -- --
Dividends payable....... 445,800 96,850 280,679 669,865 175,252
Accrued expenses........ 376,915 69,562 85,900 119,511 94,787
Payable for shares of
beneficial interest
redeemed............... 336,916 135 57,130 47,650 6,521
Distribution and service
maintenance fees
payable................ 177,551 26,678 47,124 99,064 42,525
Investment advisory and
management fees
payable................ 172,199 23,026 38,695 96,957 43,904
Payable for variation
margin on futures
contracts.............. 21,094 2,656 -- -- --
Loan payable............ -- -- -- 2,043,784 --
------------ ----------- ----------- ------------ ------------
Total liabilities...... 76,169,406 14,022,568 509,528 3,076,831 362,989
------------ ----------- ----------- ------------ ------------
Net assets........... $284,088,861 $55,416,489 $71,711,160 $157,379,804 $107,983,503
============ =========== =========== ============ ============
NET ASSETS WERE COMPOSED
OF:
Shares of beneficial
interest, $.01 par
value.................. $ 318,297 $ 48,427 $ 187,070 $ 234,311 $ 80,990
Paid-in capital......... 301,595,764 51,918,630 110,403,284 204,628,997 100,232,604
------------ ----------- ----------- ------------ ------------
301,914,061 51,967,057 110,590,354 204,863,308 100,313,594
Accumulated
undistributed
(distributions in
excess of) net
investment income...... 1,157,217 48,131 245,627 207,446 (105,139)
Accumulated net realized
gain (loss) on
investments, futures,
options and foreign
currency............... (24,373,108) 1,693,920 (26,080,347) (25,803,975) (2,311,246)
Net unrealized
appreciation
(depreciation) on
investments............ 5,468,637 1,716,595 (13,044,474) (21,886,975) 10,086,294
Net unrealized
depreciation on futures
contracts.............. (77,946) (9,214) -- -- --
------------ ----------- ----------- ------------ ------------
Net assets........... $284,088,861 $55,416,489 $71,711,160 $157,379,804 $107,983,503
============ =========== =========== ============ ============
CLASS A (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $107,509,148 $33,656,544 $23,773,703 $ 56,666,182 $ 85,510,684
Shares of beneficial
interest issued and
outstanding........... 12,048,216 2,944,308 6,211,215 8,444,997 6,413,839
Net asset value and
redemption price per
share................. $ 8.92 $ 11.43 $ 3.83 $ 6.71 $ 13.33
Maximum sales charge
(4.75% of offering
price)................ 0.44 0.57 0.19 0.33 0.66
------------ ----------- ----------- ------------ ------------
Maximum offering price
to public............. $ 9.36 $ 12.00 $ 4.02 $ 7.04 $ 13.99
============ =========== =========== ============ ============
CLASS B (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $176,579,713 $21,759,945 $47,937,457 $ 95,808,135 $ 22,472,819
Shares of beneficial
interest issued and
outstanding........... 19,781,458 1,898,360 12,495,758 14,256,970 1,685,183
Net asset value,
offering and
redemption price per
share................. $ 8.93 $ 11.46 $ 3.84 $ 6.72 $ 13.34
============ =========== =========== ============ ============
CLASS C (UNLIMITED
SHARES AUTHORIZED):
Net assets............. $ 4,905,487
Shares of beneficial
interest issued and
outstanding........... 729,145
Net asset value,
offering and
redemption price per
share................. $ 6.73
============
</TABLE>
See Notes to Financial Statements
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SUNAMERICA INCOME FUNDS
STATEMENT OF OPERATIONS -- For the six months ended September 30, 1998
(unaudited)
<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................. $10,670,329 $1,722,695 $ 4,573,429 $ 9,557,055 $2,990,008
Dividends................ -- -- 5,934 131,098 --
----------- ---------- ------------ ------------ ----------
Total investment income.. 10,670,329 1,722,695 4,579,363 9,688,153 2,990,008
----------- ---------- ------------ ------------ ----------
Expenses:
Investment advisory and
management fees......... 1,074,448 134,106 272,342 667,649 271,079
Distribution and service
maintenance fees--Class
A....................... 169,007 55,720 43,472 103,596 150,282
Distribution and service
maintenance fees--Class
B....................... 967,634 97,035 294,783 578,896 112,779
Distribution and service
maintenance fees--Class
C....................... -- -- -- 15,313 --
Transfer agent fees and
expenses--Class A....... 136,693 46,016 35,035 82,819 111,461
Transfer agent fees and
expenses--Class B....... 264,369 27,595 82,436 149,002 28,345
Transfer agent fees and
expenses--Class C....... -- -- -- 4,836 --
Custodian fees and
expenses................ 222,760 45,600 32,960 46,100 39,250
Printing expense......... 17,770 4,305 5,220 9,270 3,885
Trustees' fees and
expenses................ 15,562 2,793 4,522 8,476 5,948
Audit and tax consulting
fees.................... 11,950 10,795 11,020 11,275 11,245
Registration fees--Class
A....................... 6,936 4,776 3,310 9,716 7,543
Registration fees--Class
B....................... 9,677 3,974 4,645 11,578 4,398
Registration fees--Class
C....................... -- -- -- 13,636 --
Legal fees and expenses.. 4,885 1,271 1,480 2,170 1,790
Insurance expense........ 3,400 410 839 1,113 8,216
Interest expense......... -- -- 1,508 22,262 --
Miscellaneous expenses... 1,943 271 530 846 639
----------- ---------- ------------ ------------ ----------
Total expenses........... 2,907,034 434,667 794,102 1,738,553 756,860
Less: expenses
reimbursed by
investment adviser...... -- -- -- (14,963) --
----------- ---------- ------------ ------------ ----------
Net expenses............. 2,907,034 434,667 794,102 1,723,590 756,860
----------- ---------- ------------ ------------ ----------
Net investment income..... 7,763,295 1,288,028 3,785,261 7,964,563 2,233,148
----------- ---------- ------------ ------------ ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments........... 5,401,710 909,356 (1,363,412) (2,894,531) 1,016,893
Net realized gain on
futures contracts........ 361,814 4,387 -- -- 10,847
Net change in unrealized
appreciation/depreciation
on investments........... 1,697,459 866,852 (14,835,147) (21,941,016) 1,373,152
Net change in unrealized
appreciation/depreciation
on futures contracts..... (154,403) (9,214) -- -- --
----------- ---------- ------------ ------------ ----------
Net realized and
unrealized gain (loss) on
investments.............. 7,306,580 1,771,381 (16,198,559) (24,835,547) 2,400,892
----------- ---------- ------------ ------------ ----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS............... $15,069,875 $3,059,409 ($12,413,298) ($16,870,984) $4,634,040
=========== ========== ============ ============ ==========
</TABLE>
See Notes to Financial Statements
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SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND FEDERAL SECURITIES FUND DIVERSIFIED INCOME FUND
------------------------------- -------------------------- ---------------------------
FOR THE SIX FOR THE SIX FOR THE SIX
MONTHS ENDED FOR THE YEAR MONTHS ENDED FOR THE YEAR MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED
1998 MARCH 31, 1998 MARCH 31, 1998 MARCH 31,
(UNAUDITED) 1998 (UNAUDITED) 1998 (UNAUDITED) 1998
---------------- ---------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment income.. $ 7,763,295 $ 22,374,690 $ 1,288,028 $ 2,716,280 $ 3,785,261 $ 8,050,950
Net realized gain
(loss) on investments. 5,401,710 3,606,429 909,356 1,918,591 (1,363,412) 5,155,099
Net realized gain on
futures contracts..... 361,814 -- 4,387 -- -- --
Net realized foreign
exchange loss on other
assets and
liabilities........... -- -- -- -- -- (4,627)
Net change in
unrealized
appreciation/
depreciation on
investments........... 1,697,459 5,602,705 866,852 928,406 (14,835,147) 783,223
Net change in
unrealized
appreciation/
depreciation on
futures contracts .... (154,403) 76,457 (9,214) -- -- --
--------------- ---------------- ----------- ----------- ------------ ------------
Net increase (decrease)
in net assets resulting
from operations........ 15,069,875 31,660,281 3,059,409 5,563,277 (12,413,298) 13,984,645
--------------- ---------------- ----------- ----------- ------------ ------------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income (Class A)...... (2,377,032) (5,951,438) (763,156) (1,684,720) (1,162,790) (1,963,415)
From net investment
income (Class B)...... (4,168,308) (12,224,144) (401,254) (886,109) (2,568,590) (5,673,779)
From net realized gain
on investments (Class
A).................... -- -- -- (51,944) -- --
From net realized gain
on investments (Class
B).................... -- -- -- (30,053) -- --
--------------- ---------------- ----------- ----------- ------------ ------------
Total dividends and
distributions to
shareholders.......... (6,545,340) (18,175,582) (1,164,410) (2,652,826) (3,731,380) (7,637,194)
--------------- ---------------- ----------- ----------- ------------ ------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 6).. (29,881,616) (110,250,060) 3,057,292 (1,884,623) (1,058,155) (18,116,083)
--------------- ---------------- ----------- ----------- ------------ ------------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS................. (21,357,081) (96,765,361) 4,952,291 1,025,828 (17,202,833) (11,768,632)
NET ASSETS:
Beginning of period..... 305,445,942 402,211,303 50,464,198 49,438,370 88,913,993 100,682,625
--------------- ---------------- ----------- ----------- ------------ ------------
End of period [including
undistributed
(distributions in
excess of) net
investment income for
September 30, 1998 and
March 31, 1998 of
$1,157,217, $(60,738),
$48,131, $(75,487),
$245,627 and $191,746,
respectively].......... $ 284,088,861 $ 305,445,942 $55,416,489 $50,464,198 $ 71,711,160 $ 88,913,993
=============== ================ =========== =========== ============ ============
</TABLE>
See Notes to Financial Statements
14
<PAGE>
SUNAMERICA INCOME FUNDS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
HIGH INCOME FUND TAX EXEMPT INSURED FUND
------------------------------ ------------------------------
FOR THE SIX FOR THE YEAR FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED MONTHS ENDED ENDED
SEPTEMBER 30,1998 MARCH 31, SEPTEMBER 30,1998 MARCH 31,
(UNAUDITED) 1998 (UNAUDITED) 1998
----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
OPERATIONS:
Net investment income.... $ 7,964,563 $ 13,096,551 $ 2,233,148 $ 5,107,717
Net realized gain (loss)
on investments.......... (2,894,531) 11,231,344 1,016,893 3,219,309
Net realized gain (loss)
on futures contracts.... -- -- 10,847 (10,563)
Net realized foreign
exchange loss on other
assets and liabilities.. -- (2,086) -- --
Net change in unrealized
appreciation/depreciation
on investments.......... (21,941,016) 2,889,820 1,373,152 3,147,644
------------ ------------ ------------ ------------
Net increase (decrease) in
net assets resulting
from operations.......... (16,870,984) 27,215,629 4,634,040 11,464,107
------------ ------------ ------------ ------------
DIVIDENDS TO SHAREHOLDERS:
From net investment
income (Class A)........ (2,848,560) (4,011,096) (1,823,505) (4,101,670)
From net investment
income (Class B)........ (5,209,581) (8,387,799) (404,175) (903,110)
From net investment
income (Class C)........ (138,857) (6,158) -- --
------------ ------------ ------------ ------------
Total dividends to
shareholders............. (8,196,998) (12,405,053) (2,227,680) (5,004,780)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
CAPITAL SHARE
TRANSACTIONS (NOTE 6).... (102,565) 28,217,413 (5,819,466) (18,491,567)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE)
IN NET ASSETs............ (25,170,547) 43,027,989 (3,413,106) (12,032,240)
NET ASSETS:
Beginning of period....... 182,550,351 139,522,362 111,396,609 123,428,849
------------ ------------ ------------ ------------
End of period [including
undistributed
(distributions in excess
of) net investment income
for September 30, 1998
and March 31, 1998 of
$207,446, $439,881,
$(105,139) and
$(110,607),
respectively]............ $157,379,804 $182,550,351 $107,983,503 $111,396,609
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
15
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS IN EXCESS NET NET
NET ASSET (BOTH FROM FROM NET OF NET ASSET ASSETS
VALUE, NET REALIZED INVEST- INVEST- RETURN INVEST- TOTAL VALUE, END OF
BEGINNING INVESTMENT AND MENT MENT OF MENT DISTRI- END OF TOTAL PERIOD
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME CAPITAL INCOME BUTIONS PERIOD RETURN(2) (000'S)
- ---------------- --------- ---------- ----------- ---------- --------- ------- --------- ------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
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)% $ 76,586
3/31/95......... 8.39 0.61 (0.30) 0.31 (0.47) -- -- (0.47) 8.23 3.89 73,399
3/31/96......... 8.23 0.62 0.16 0.78 (0.51) -- -- (0.51) 8.50 9.62 125,504
3/31/97......... 8.50 0.59 (0.26) 0.33 (0.48) -- -- (0.48) 8.35 3.98 113,171
3/31/98......... 8.35 0.58 0.21 0.79 (0.48) -- -- (0.48) 8.66 9.62 97,496
9/30/98(7)...... 8.66 0.25 0.23 0.48 (0.22) -- -- (0.22) 8.92 5.61 107,509
CLASS B
-------
7/01/93-
3/31/94(5)..... $8.74 $0.43 $(0.40) $0.03 $(0.24) $(0.01) $(0.13) $(0.38) $8.39 0.25% $886,089
3/31/95......... 8.39 0.56 (0.30) 0.26 (0.41) -- -- (0.41) 8.24 3.25 594,779
3/31/96......... 8.24 0.55 0.17 0.72 (0.45) -- -- (0.45) 8.51 8.87 428,772
3/31/97......... 8.51 0.54 (0.26) 0.28 (0.43) -- -- (0.43) 8.36 3.31 289,040
3/31/98......... 8.36 0.52 0.20 0.72 (0.42) -- -- (0.42) 8.66 8.80 207,950
9/30/98(7)...... 8.66 0.23 0.23 0.46 (0.19) -- -- (0.19) 8.93 5.39 176,580
<CAPTION>
U.S. GOVERNMENT SECURITIES FUND
- -------------------------------
RATIO OF RATIO OF
EXPENSES NET
TO INVESTMENT
AVERAGE INCOME TO
NET AVERAGE PORTFOLIO
PERIOD ENDED ASSETS NET ASSETS TURNOVER
- ---------------- ------------- -------------- ---------
<S> <C> <C> <C>
10/01/93-
3/31/94(3)..... 1.35%(4)(6) 6.83%(4)(6) 35%
3/31/95......... 1.46(6) 7.50(6) 105
3/31/96......... 1.44(6) 7.11(6) 142
3/31/97......... 1.54(6) 7.01(6) 148
3/31/98......... 1.63 6.73 229
9/30/98(7)...... 1.58(4) 5.77(4) 177
7/01/93-
3/31/94(5)..... 1.95%(4)(6) 6.61%(4)(6) 35%
3/31/95......... 2.15(6) 6.80(6) 105
3/31/96......... 2.13 6.46 142
3/31/97......... 2.18 6.36 148
3/31/98......... 2.26 6.11 229
9/30/98(7)...... 2.22(4) 5.14(4) 177
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERAL SECURITIES FUND
- -----------------------
NET
GAIN
(LOSS)
ON DISTRI-
INVEST- BUTIONS
MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET NET
NET ASSET (BOTH FROM FROM NET BUTIONS OF NET ASSET ASSETS
VALUE, NET REALIZED INVEST- INVEST- FROM INVEST- TOTAL VALUE, END OF
BEGINNING INVESTMENT AND MENT MENT CAPITAL MENT DISTRI- END OF TOTAL PERIOD
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(2) (000'S)
- ---------------- --------- ---------- ----------- ---------- --------- ------- --- --------- ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
10/11/93-
3/31/94(3)..... $10.58 $0.22 $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% $ 592
3/31/95......... 10.22 0.60 (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 6,259
3/31/96......... 9.98 0.68 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94 40,278
3/31/97......... 10.43 0.65 (0.10) 0.55 (0.59) -- -- (0.59) 10.39 5.40 30,509
3/31/98......... 10.39 0.62 0.63 1.25 (0.59) (0.02) -- (0.61) 11.03 12.29 31,628
9/30/98(7)...... 11.03 0.29 0.38 0.67 (0.27) -- -- (0.27) 11.43 6.15 33,657
CLASS B
-------
3/31/94......... $10.84 $0.62 $(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 (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 65,631
3/31/96......... 10.01 0.56 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13 26,165
3/31/97......... 10.45 0.57 (0.08) 0.49 (0.52) -- -- (0.52) 10.42 4.82 18,929
3/31/98......... 10.42 0.55 0.63 1.18 (0.52) (0.02) -- (0.54) 11.06 11.54 18,837
9/30/98(7)...... 11.06 0.26 0.37 0.63 (0.23) -- -- (0.23) 11.46 5.79 21,760
<CAPTION>
FEDERAL SECURITIES FUND
- -----------------------
RATIO OF RATIO OF
EXPENSES NET
TO INVESTMENT
AVERAGE INCOME TO
NET AVERAGE PORTFOLIO
PERIOD ENDED ASSETS NET ASSETS TURNOVER
- ---------------- ------------- -------------- ---------
<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
3/31/98......... 1.47 5.75 529
9/30/98(7)...... 1.45(4) 5.28(4) 225
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
3/31/98......... 2.13 5.09 529
9/30/98(7)...... 2.10(4) 4.62(4) 225
</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>
3/31/94 3/31/95 3/31/96 3/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Government Securities Fund Class A .10% .07% .04% .01%
U.S. Government Securities Fund Class B .06% .03% -- --
Federal Securities Fund Class A 6.74% 1.26% -- --
</TABLE>
(7) Unaudited
See Notes to Financial Statements
16
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
DIVERSIFIED INCOME FUND
- -----------------------
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
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
11/01/93-
3/31/94(3)..... $5.07 $0.13 $(0.23) $(0.10) $(0.18) $4.79 (2.10)% $ 12,600 1.42%(4)(7) 8.25%(4)(7)
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
3/31/98......... 4.39 0.40 0.27 0.67 (0.38) 4.68 15.84 25,517 1.45 8.83
9/30/98(8)...... 4.68 0.21 (0.85) (0.64) (0.21) 3.83 (14.22) 23,774 1.44 (4) 9.38 (4)
CLASS B
-------
11/01/93-
3/31/94(3)..... $5.07 $0.15 $(0.27) $(0.12) $(0.16) $4.79 (2.52)% $174,072 2.11%(4) 7.48%(4)
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
3/31/98......... 4.40 0.38 0.26 0.64 (0.35) 4.69 15.11 63,397 2.06 8.14
9/30/98(8)...... 4.69 0.20 (0.86) (0.66) (0.19) 3.84 (14.46) 47,937 2.09 (4) 8.89 (4)
<CAPTION>
DIVERSIFIED INCOME FUND
- -----------------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
11/01/93-
3/31/94(3)..... 48%
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
3/31/98......... 157
9/30/98(8)...... 37
11/01/93-
3/31/94(3)..... 48%
3/31/95......... 160
3/31/96......... 166
3/31/97......... 131
3/31/98......... 157
9/30/98(8)...... 37
- --------------------------------------------------------------------------------
<CAPTION>
HIGH INCOME FUND
- ----------------
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
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
3/31/94(5)...... $8.12 $0.87 $(0.14) $0.73 $(0.82) $8.03 9.14% $ 33,724 1.72% 10.34%
3/31/95......... 8.03 0.78 (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 10.82
3/31/96......... 6.95 0.67 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53 9.36
3/31/97......... 6.95 0.65 0.12 0.77 (0.66) 7.06 11.46 41,139 1.50 9.10
3/31/98......... 7.06 0.68 0.68 1.36 (0.64) 7.78 20.07 56,442 1.52 9.13
9/30/98(8)...... 7.78 0.35 (1.06) (0.71) (0.36) 6.71 (9.52) 56,666 1.53 (4) 9.37 (4)
CLASS B
-------
10/01/93-
3/31/94(6)..... $8.18 $0.38 $(0.17) $ 0.21 $(0.35) $8.04 2.46% $131,713 2.15%(4)(7) 9.07%(4)(7)
3/31/95......... 8.04 0.73 (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16 (7) 10.26 (7)
3/31/96......... 6.96 0.62 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06 (7) 8.85 (7)
3/31/97......... 6.96 0.61 0.12 0.73 (0.62) 7.07 10.78 98,383 2.11 (7) 8.49 (7)
3/31/98......... 7.07 0.63 0.69 1.32 (0.60) 7.79 19.31 124,962 2.13 8.51
9/30/98(8)...... 7.79 0.33 (1.06) (0.73) (0.34) 6.72 (9.77) 95,808 2.14 (4) 8.73 (4)
CLASS C
-------
2/02/98-
3/31/98(6)..... $7.70 $0.10 $ 0.07 $ 0.17 $(0.08) $7.79 2.18% $ 1,146 2.10%(4)(7) 9.78%(4)(7)
9/30/98(8)...... 7.79 0.32 (1.04) (0.72) (0.34) 6.73 (9.63) 4,905 2.10 (4)(7) 8.89 (4)(7)
<CAPTION>
HIGH INCOME FUND
- ----------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
3/31/94(5)...... 290%
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
3/31/98......... 236
9/30/98(8)...... 71
10/01/93-
3/31/94(6)..... 290%
3/31/95......... 196
3/31/96......... 183
3/31/97......... 164
3/31/98......... 236
9/30/98(8)...... 71
2/02/98-
3/31/98(6)..... 236%
9/30/98(8)...... 71
</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)Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993
(6)Commencement of sale of respective class of shares
(7)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/94 3/31/95 3/31/96 3/31/97 3/31/98 9/30/98
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Diversified Income Fund Class A .62% -- -- -- -- --
High Income Fund
Class B .08% .08% .08% .01% -- --
High Income Fund
Class C -- -- -- -- 5.37% 0.98%
</TABLE>
(8)Unaudited
See Notes to Financial Statements
17
<PAGE>
SUNAMERICA INCOME FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
TAX EXEMPT INSURED FUND
- -----------------------
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
- ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A
-------
11/01/93-
3/31/94(3)..... $12.79 $0.26 $(0.84) $(0.58) $(0.26) $11.95 (4.61)% $165,216 1.28%(4)(5) 4.99%(4)(5)
3/31/95......... 11.95 0.63 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20 (5) 5.32 (5)
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
3/31/98......... 12.35 0.58 0.67 1.25 (0.57) 13.03 10.28 88,519 1.24 4.52
9/30/98(6)...... 13.03 0.28 0.30 0.58 (0.28) 13.33 4.49 85,511 1.26 (4) 4.26 (4)
CLASS B
-------
11/01/93-
3/31/94(3)..... $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
3/31/98......... 12.35 0.49 0.68 1.17 (0.48) 13.04 9.65 22,878 1.90 3.86
9/30/98(6)...... 13.04 0.24 0.30 0.54 (0.24) 13.34 4.15 22,473 1.92 (4) 3.59 (4)
<CAPTION>
TAX EXEMPT INSURED FUND
- -----------------------
PORTFOLIO
PERIOD ENDED TURNOVER
- ---------------- ---------
<S> <C>
11/01/93-
3/31/94(3)..... 52%
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
3/31/98......... 48
9/30/98(6)...... 14
11/01/93-
3/31/94(3)..... 52%
3/31/95......... 162
3/31/96......... 46
3/31/97......... 51
3/31/98......... 48
9/30/98(6)...... 14
</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)Net of the following expense reimbursements (based on average net assets):
<TABLE>
<CAPTION>
3/31/94 3/31/95
------- -------
<S> <C> <C>
Tax Exempt Insured Fund Class A .11% .04%
</TABLE>
(6)Unaudited
See Notes to Financial Statements
18
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--18.7%
7.50% due 4/01/24 - 6/01/25....................... $ 6,428 $ 6,624,911
8.50% due 6/01/01................................. 2 1,812
9.00% due 1/01/02 - 10/01/16...................... 334 354,608
9.25% due 9/01/08 - 3/01/17....................... 299 318,025
9.50% due 9/01/16 - 9/01/21....................... 3,366 3,625,102
10.00% due 10/01/02 - 8/01/21..................... 12,859 13,996,459
10.50% due 6/01/00 - 1/01/21...................... 495 546,518
10.75% due 9/01/00 - 1/01/15...................... 166 185,714
11.00% due 9/01/00 - 6/01/17...................... 1,343 1,517,947
11.25% due 11/01/13............................... 57 64,171
11.50% due 11/01/01 - 7/01/19..................... 593 672,931
11.75% due 8/01/11 - 10/01/14..................... 102 116,595
12.00% due 7/01/99 - 1/01/15...................... 83 92,594
12.13% due 9/01/11................................ 505 565,777
12.25% due 10/01/99 - 7/01/15..................... 412 476,435
12.50% due 8/01/99 - 4/01/19...................... 13,568 15,804,982
12.75% due 9/01/04 - 6/01/15...................... 545 636,559
13.00% due 5/01/00 - 5/01/15...................... 795 924,307
13.25% due 11/01/10 - 5/01/15..................... 788 935,226
13.50% due 11/01/10 - 2/01/19..................... 4,199 5,024,415
13.75% due 7/01/11 - 8/01/14...................... 78 92,021
14.00% due 6/01/11 - 4/01/16...................... 422 508,105
14.50% due 12/01/10 - 5/01/13..................... 85 102,255
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP.
(cost $52,460,602)................................ 53,187,469
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--25.3%
5.75% due 4/15/03 - 2/15/08....................... 15,250 15,985,543
6.50% due 8/01/99 - 7/01/13....................... 12,826 12,982,509
7.00% due TBA..................................... 6,000 6,159,360
7.50% due 5/01/13................................. 5,807 5,978,882
7.50% due TBA..................................... 11,200 11,553,472
8.00% due 12/01/22 - 1/01/23...................... 9,520 9,883,115
9.00% due 6/01/01 - 4/01/07....................... 1,328 1,396,483
9.25% due 12/01/10 - 1/01/17...................... 220 233,312
10.25% due 6/01/14 - 7/01/16...................... 87 95,612
10.50% due 3/01/15................................ 260 286,073
11.00% due 3/01/09 - 8/01/20...................... 862 959,377
11.50% due 5/01/00 - 3/01/14...................... 295 328,705
11.75% due 11/01/15............................... 22 24,512
12.00% due 4/01/13 - 12/01/15..................... 1,803 2,061,980
12.25% due 9/01/99 - 6/01/15...................... 838 966,783
12.50% due 3/01/13 - 5/01/15...................... 556 638,551
12.75% due 9/01/12 - 9/01/15...................... 333 389,933
13.25% due 10/01/13 - 2/01/15..................... 135 159,104
13.50% due 10/01/10 - 2/01/17..................... 856 1,025,628
13.75% due 11/01/11 - 10/01/14.................... 95 112,949
14.00% due 10/01/14............................... 249 300,983
14.50% due 7/01/11................................ 119 143,418
14.75% due 7/01/12................................ 82 102,577
15.00% due 10/01/12 - 2/01/13..................... 79 95,223
15.50% due 10/01/12............................... 43 51,783
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(cost $70,664,985)................................ 71,915,867
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--24.2%
6.50% due TBA..................................... $ 5,000 $ 5,110,975
7.00% due 7/15/23 - 9/15/25....................... 11,475 11,885,158
7.50% due 1/15/17 - 9/15/23....................... 18,896 19,634,300
7.50% due TBA..................................... 18,400 19,072,704
8.50% due 7/15/08 - 11/15/20...................... 501 532,733
9.00% due 5/15/01 - 12/15/20...................... 5,738 6,136,743
9.50% due 3/15/99 - 7/15/20....................... 1,267 1,362,118
10.00% due 9/15/00 - 5/15/19...................... 1,038 1,111,647
10.25% due 7/15/15................................ 48 53,372
10.50% due 12/15/98 - 11/15/03.................... 664 717,046
11.00% due 7/15/00 - 1/15/11...................... 407 443,676
11.50% due 1/15/99 - 1/15/21...................... 433 485,439
11.75% due 7/15/13 - 11/15/15..................... 419 474,561
12.00% due 10/15/98 - 4/15/14..................... 351 399,205
12.50% due 5/15/10 - 7/15/10...................... 118 136,398
13.25% due 7/15/14 - 9/15/14...................... 91 104,665
13.50% due 6/15/10 - 4/15/11...................... 36 41,720
14.00% due 5/15/11................................ 42 50,339
15.00% due 6/15/11 - 2/15/13...................... 558 675,019
16.00% due 12/15/11 - 7/15/12..................... 215 258,179
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $68,171,651)................................ 68,685,997
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--0.6%
10.00% due 9/20/16 - 4/20/19...................... 13 13,844
11.50% due 11/20/13 - 7/20/20..................... 765 852,341
11.75% due 5/20/15 - 2/20/16...................... 148 166,905
12.00% due 10/20/13 - 5/20/15..................... 457 511,533
12.25% due 10/20/15............................... 18 20,374
12.50% due 12/20/13............................... 24 26,863
12.75% due 11/20/13 - 7/20/15..................... 127 145,016
13.25% due 12/20/14 - 5/20/15..................... 37 41,914
13.50% due 10/20/14............................... 12 14,602
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(cost $1,786,318)................................. 1,793,392
------------
U.S. GOVERNMENT AGENCIES--5.9%
Private Export Funding Corp.
5.87% due 7/31/08................................. 10,000 10,620,300
Small Business Administration
6.30% due 6/01/18................................. 6,000 6,210,000
------------
TOTAL U.S. GOVERNMENT AGENCIES
(cost $16,000,000)................................ 16,830,300
------------
U.S. TREASURY BONDS--16.6%
5.50% due 8/15/28(1).............................. 31,565 34,119,875
5.63% due 5/15/08................................. 12,000 13,125,000
------------
TOTAL U.S. TREASURY BONDS
(cost $45,105,707)................................ 47,244,875
------------
TOTAL INVESTMENT SECURITIES--91.4%
(cost $254,189,263)............................... 259,657,900
------------
</TABLE>
19
<PAGE>
SUNAMERICA U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------
REPURCHASE AGREEMENTS--23.9%
PaineWebber, Inc.
Joint Repurchase Agreement Account (Note 2)(4) . $17,522 $ 17,522,000
State Street Bank & Trust Co.
Joint Repurchase Agreement Account (Note 2)..... 50,000 50,000,000
------------
TOTAL REPURCHASE AGREEMENTS
(COST $67,522,000)(2)........................... 67,522,000
------------
TOTAL INVESTMENTS--
(cost $321,711,263*)............................. 115.2% 327,179,900
Liabilities in excess of other assets(3).......... (15.2) (43,091,039)
------- ------------
NET ASSETS-- 100.0% $284,088,861
======= ============
</TABLE>
- --------
* See Note 5
TBA--Securities purchased on a forward commitment basis with an approximate
principal amount and no definitive maturity date. The actual principal and
maturity date will be determined upon settlement date.
(1) The security or a portion thereof is out on loan; see Note 2.
(2) Includes cash received as collateral for securities out on loan in the
amount of $32,850,000.
(3) Includes a liability for fully collateralized securities on loan.
(4) The security or a portion thereof represents collateral for the following
open futures contracts:
<TABLE>
<CAPTION>
VALUE AS OF UNREALIZED
NUMBER OF DESCRIPTION AND SEPTEMBER 30, APPRECIATION/
CONTRACTS EXPIRATION DATE 1998 DEPRECIATION
--------- ------------------ ------------- -------------
<C> <S> <C> <C>
47 Long U.S. Long Bond-- $ 6,179,090 $ 117,025
December 1998
90 Short U.S. Treasury 10,929,600 (194,971)
10 Year Note-- ---------
December 98
Total Unrealized Depreciation $ (77,946)
=========
</TABLE>
See Notes to Financial Statements
20
<PAGE>
SUNAMERICA FEDERAL SECURITIES FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--5.6%
7.50% due 2/01/23 - 6/01/25........................ $ 1,227 $ 1,264,130
10.00% due 1/01/17................................. 1,653 1,794,618
12.50% due 9/30/13(1).............................. 14 13,531
13.50% due 2/01/14................................. 4 5,111
-----------
TOTAL FEDERAL HOME LOAN MORTGAGE
CORP.
(cost $3,047,426).................................. 3,077,390
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--17.6%
5.75% due 4/15/03 - 2/15/08........................ 7,345 7,691,416
7.00% due TBA...................................... 2,000 2,053,120
15.50% due 10/01/12................................ 6 7,915
-----------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION
(cost $9,399,337).................................. 9,752,451
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--36.5%
7.00% due 3/15/23 - 9/15/25........................ 5,325 5,498,971
7.50% due TBA...................................... 3,700 3,835,272
8.50% due 3/15/17 - 9/15/24........................ 6,919 7,318,063
9.00% due 6/15/16 - 5/15/17........................ 2,720 2,920,609
11.25% due 8/15/15................................. 25 27,531
12.00% due 5/15/15................................. 27 30,785
12.25% due 9/15/13 - 7/15/15....................... 358 405,181
12.50% due 11/15/10 - 6/15/15...................... 81 92,756
13.25% due 10/15/13................................ 20 22,495
13.50% due 5/15/11 - 10/15/14...................... 49 57,821
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(cost $19,422,123)................................. 20,209,484
-----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--7.7%
6.50% due TBA...................................... 3,500 3,577,630
10.00% due 10/20/13 - 3/20/17...................... 263 283,482
12.00% due 3/20/15 - 1/20/16....................... 136 153,414
12.25% due 12/20/14 - 10/20/15..................... 195 219,474
13.75% due 9/20/14................................. 8 9,070
-----------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II
(cost $4,162,592).................................. 4,243,070
-----------
U.S. GOVERNMENT AGENCIES--3.7%
Small Business Administration
6.30% due 6/01/18
(cost $2,000,000).................................. 2,000 2,070,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
U.S. TREASURY BONDS--10.1%
5.50% due 8/15/28(2).............................. $ 4,660 $ 5,037,181
7.50% due 11/15/16................................ 460 585,566
-----------
TOTAL U.S. TREASURY BONDS
(cost $5,387,381)................................. 5,622,747
-----------
U.S. TREASURY NOTES--3.9%
5.63% due 5/15/08
(cost $2,027,188)................................. 2,000 2,187,500
-----------
TOTAL INVESTMENT SECURITIES--85.1%
(cost $45,446,047)................................ 47,162,642
-----------
REPURCHASE AGREEMENTS--31.7%
PaineWebber, Inc.
Joint Repurchase Agreement Account (Note 2)(5)... 7,542 7,542,000
State Street Bank & Trust Co.
Joint Repurchase Agreement Account (Note 2)...... 10,000 10,000,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $17,542,000)(3)............................. 17,542,000
-----------
TOTAL INVESTMENTS--
(cost $62,988,047*)............................... 116.8% 64,704,642
Liabilities in excess of other assets(4)........... (16.8) (9,288,153)
------- -----------
NET ASSETS-- 100.0% $55,416,489
======= ===========
</TABLE>
- -------
* See Note 5
TBA--Security purchased on a forward commitment basis with an approximate
principal amount and no definitive maturity date. The actual principal amount
and maturity date will be determined upon settlement date.
(1) Fair valued security; see Note 2.
(2) The security or a portion thereof is out on loan; see Note 2.
(3) Includes cash received as collateral for securities out on loan in the
amount of $4,380,000.
(4) Includes a liability for fully collateralized securities on loan.
(5) The security or a portion thereof represents collateral for the following
open futures contract:
<TABLE>
<CAPTION>
VALUE AS OF UNREALIZED
NUMBER OF DESCRIPTION AND SEPTEMBER 30, APPRECIATION/
CONTRACTS EXPIRATION DATE 1998 DEPRECIATION
--------- ---------------- ------------- -------------
<C> <S> <C> <C>
5 Long U.S. Long Bond-- $ 657,350 $ 12,449
December 1998
10 Short U.S. Treasury 1,214,400 (21,663)
10 Year Note-- --------
December 1998
Total Unrealized Depreciation $ (9,214)
========
</TABLE>
See Notes to Financial Statements
21
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--32.9%
BROADCASTING--2.7%
Big City Radio, Inc.
Sr. Disc. Notes
zero coupon due 3/15/05(1)........................ $ 750 $ 533,438
Spanish Broadcasting Systems, Inc.
Sr. Notes
12.50% due 6/15/02................................ 1,250 1,385,937
------------
1,919,375
------------
CABLE--2.9%
Adelphia Communications Corp.
Sr. Notes
8.13% due 7/15/03................................. 750 753,750
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(1)........................ 1,000 420,000
United International Holdings, Inc.
Sr. Secured Disc. Notes
zero coupon due 2/15/08(1)(2)..................... 2,000 940,000
------------
2,113,750
------------
CELLULAR--3.4%
Celcaribe SA
Sr. Notes
13.50% due 3/15/04................................ 750 777,187
International Wireless
Communications
Sr. Secured Disc. Notes
zero coupon due 8/15/01........................... 1,750 175,000
McCaw International Ltd.
Sr. Disc. Notes
zero coupon due 4/15/07(1)........................ 1,000 500,000
Omnipoint Communications, Inc.
Sr. Notes
8.94% due 2/17/06(2)(3)........................... 993 968,338
------------
2,420,525
------------
CHEMICALS--0.9%
Sterling Chemicals, Inc.
Sr. Subordinated Notes
11.75% due 8/15/06................................ 750 645,000
------------
ENERGY--0.4%
Southwest Royalties, Inc.
Sr. Notes, Series B
10.50% due 10/15/04............................... 500 273,750
------------
GAMING--1.4%
Station Casinos, Inc.
Sr. Subordinated Notes
9.63% due 6/01/03................................. 1,000 980,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
HEALTH SERVICES--0.6%
Fresenius Medical Care Capital Trust
Sr. Notes
7.88% due 2/01/08................................. $ 500 $ 460,000
------------
MANUFACTURING--5.7%
Lifestyle Furnishings
International Ltd.
Sr. Subordinated Notes
10.88% due 8/01/06................................ 1,000 1,080,000
Outboard Marine Corp.
Sr. Notes
10.75% due 6/01/08(2)............................. 1,000 966,250
Trident Automotive PLC
Sr. Subordinated Notes
10.00% due 12/15/05............................... 1,000 1,052,500
Wavetek Corp.
Sr. Subordinated Notes
10.13% due 6/15/07................................ 1,000 1,008,750
------------
4,107,500
------------
MEDIA--1.3%
Diva Systems Corp.
Sr. Disc. Notes
zero coupon due 3/01/08(1)(2)(4).................. 1,250 425,000
Park N' View, Inc.
Sr. Notes
13.00% due 5/15/08(2)(4).......................... 625 540,625
------------
965,625
------------
METALS & MINING--3.4%
Acme Metals, Inc.
Sr. Notes
12.50% due 8/01/02................................ 1,000 970,000
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03................................ 1,500 1,500,000
------------
2,470,000
------------
PAPER PRODUCTS--1.0%
Florida Coast Paper Co. LLC
First Mortgage Notes, Series B
12.75% due 6/01/03................................ 750 708,750
------------
RETAIL--0.6%
Electronic Retailing Systems International
Sr. Disc. Notes
zero coupon due 2/01/04(1)........................ 1,000 393,750
------------
</TABLE>
22
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
TELECOMMUNICATIONS--8.6%
DTI Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/01/08(1).. $ 1,000 $ 391,250
Globix Corp.
Sr. Notes
13.00% due 5/01/05................................. 750 636,255
ICG Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/15/07(1)......................... 1,250 762,500
Impsat Corp.
Sr. Notes
12.38% due 6/15/08................................. 1,000 791,250
Intermedia Communications, Inc.
Sr. Notes
8.60% due 6/01/08.................................. 500 495,000
Orbcomm Global LP
Sr. Notes
14.00% due 8/15/04................................. 1,000 918,750
Orion Network Systems, Inc.
Sr. Disc. Notes
zero coupon due 1/15/07(1)......................... 1,000 678,750
Splitrock Services, Inc.
Sr. Notes
11.75% due 7/15/08(4).............................. 625 565,625
Transtel Pass Through Trust
Sr. Notes
12.50% due 11/01/07(2)............................. 1,000 597,500
USN Communications, Inc.
Sr. Disc. Notes, Series B
zero coupon due 8/15/04(1)......................... 500 325,000
-----------
6,161,880
-----------
TOTAL CORPORATE BONDS & NOTES
(cost $28,578,037)................................. 23,619,905
-----------
FOREIGN BONDS & NOTES--51.1%
BROADCASTING--2.9%
Central European Media
Enterprises Ltd.
Sr. Notes
9.38% due 8/15/04.................................. 1,000 822,410
RBS Participacoes SA
Guaranteed Notes
11.00% due 4/01/07(2).............................. 1,000 542,230
Tv Azteca SA de CV
Guaranteed Sr. Notes, Series B
10.50% due 2/15/07................................. 1,000 737,500
-----------
2,102,140
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CABLE--5.0%
Australis Holdings Property Ltd.
Sr. Disc. Notes
zero coupon due 11/01/02(1)(5).................... $ 500 $ 58,750
Comcast UK Cable Partners Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(1)(4).................... 1,000 810,000
Diamond Holdings PLC
Sr. Notes
9.13% due 2/01/08................................. 1,000 977,500
Imasac SA
Guaranteed Sr. Notes
11.00% due 5/02/05(2)............................. 1,000 656,200
Multicanal Participacoes SA
Guaranteed Sr. Notes
12.63% due 6/18/04................................ 1,000 730,790
Tevecap SA
Sr. Notes, Series B
12.63% due 11/26/04............................... 1,000 370,000
------------
3,603,240
------------
CELLULAR--2.2%
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(1)........................ 2,000 1,535,000
------------
FINANCE--1.5%
Cei Citicorp Holdings SA
Sr. Notes, Series B
9.75% due 2/14/07................................. 1,500 1,079,070
------------
FOOD RETAIL--2.1%
Bepensa SA
Sr. Notes
9.75% due 9/30/04(2).............................. 2,000 1,490,000
------------
FOOD, BEVERAGE & TOBACCO--1.2%
DGS International Finance Co. BV
Guaranteed Notes
10.00% due 6/01/07(2)............................. 1,500 881,250
------------
GOVERNMENT AGENCY--10.1%
Federal Republic of Brazil
Capitalization Bonds
5.00% due 4/16/00(3)(6)........................... 2,320 1,456,064
Republic of Argentina
Bonds
11.38% due 1/30/17................................ 2,500 2,318,750
Republic of Brazil
Bonds
10.13% due 5/15/27................................ 2,562 1,582,035
United Mexican States
Sr. Notes
11.38% due 9/15/16................................ 2,000 1,890,000
------------
7,246,849
------------
</TABLE>
23
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
FOREIGN BONDS & NOTES (CONTINUED)
METALS & MINING--1.3%
Great Central Mines Ltd.
Sr. Notes
8.88% due 4/01/08................................. $ 1,000 $ 930,000
------------
OIL & GAS--7.8%
Bridas Corp.
Sr. Notes
12.50% due 11/15/99............................... 2,000 1,936,660
Freeport Term Malta Plc
Guaranteed Notes
7.25% due 5/15/28(2).............................. 2,000 2,103,580
Statia Terminals International NV
Mortgage Notes, Series B
11.75% due 11/15/03............................... 1,500 1,556,250
------------
5,596,490
------------
PACKAGING -- 0.9%
Viacap SA
Guaranteed Sr. Notes
11.38% due 5/15/07(2)............................. 1,000 665,000
------------
PAGING--0.8%
Paging Network Do Brasil SA
Sr. Notes
13.50% due 6/06/05................................ 1,000 556,610
------------
SHIPPING--2.3%
Golden Ocean Group Ltd.
Sr. Notes
10.00% due 8/31/01................................ 750 375,000
Panoceanic Bulk Carriers Ltd.
First Preferred Ship Mortgage Notes, Series B
12.00% due 12/15/07............................... 1,000 777,500
Pegasus Shipping Ltd.
Sr. Mortgage Notes
11.88% due 11/15/04............................... 500 480,000
------------
1,632,500
------------
TELECOMMUNICATIONS--9.2%
Call-Net Enterprises, Inc.
Sr. Notes
8.00% due 8/15/08................................. 250 238,125
Globo Communicacoes E Participacoes SA
Guaranteed Notes
10.63% due 12/05/08............................... 1,000 517,360
Hermes Europe Railtel
Sr. Notes
11.50% due 8/15/07................................ 1,000 1,047,500
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(1)(4)..................... 1,000 48,750
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)/ VALUE
SECURITY DESCRIPTION SHARES (NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
Ionica PLC
Sr. Disc. Notes
13.50% due 8/15/06................................ $ 300 $ 90,000
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06............................... 1,250 1,293,750
Telecom Argentina
Notes
12.00% due 11/15/02............................... 3,000 3,371,250
------------
6,606,735
------------
TELEPHONE--1.0%
Comtel Brasileira
Bonds
10.75% due 9/26/04................................ 1,000 672,500
------------
UTILITIES--2.8%
Companhia Paranaense
Unsubordinated Notes
9.75% due 5/02/05(2).............................. 1,000 659,580
Monterrey Power SA
Sr. Secured Notes
9.63% due 11/15/09................................ 2,000 1,355,000
------------
2,014,580
------------
TOTAL FOREIGN BONDS & NOTES
(cost $44,674,500)................................ 36,611,964
------------
U.S. GOVERNMENT & AGENCIES--6.6%
U.S. TREASURY BONDS--3.5%
6.13% due 11/15/27................................ 500 576,405
11.13% due 8/15/03................................ 1,500 1,935,705
------------
2,512,110
------------
U.S. TREASURY NOTES--3.1%
6.13% due 8/15/07................................. 2,000 2,238,740
------------
TOTAL U.S. GOVERNMENT & AGENCIES
(cost $4,765,391)................................. 4,750,850
------------
PREFERRED STOCK--0.1%
TELECOMMUNICATIONS--0.1%
IXC Communications, Inc.
6.75%
cost ($151,375).................................. 3,000 103,875
------------
COMMON STOCK--0.2%
CELLULAR--0.2%
Microcell Telecommunications+..................... 17,900 111,875
------------
PAGING--0.0%
Paging Do Brazil Holdings Co. LLC, Class B+(5).... 1,000 10
------------
TOTAL COMMON STOCK
(cost $120,048)................................... 111,885
------------
</TABLE>
24
<PAGE>
SUNAMERICA DIVERSIFIED INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
WARRANTS/
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- ---------------------------------------------------------------------------------
WARRANTS--0.2%
CABLE--0.1%
Australis Holdings Property Ltd.(2)(5)............. 500 $ 0
UIH Australia Pacific, Inc.(5)..................... 1,000 5,000
United International Holdings, Inc................. 3,000 30,000
------------
35,000
------------
CELLULAR--0.1%
International Wireless Communications(2)(5)........ 1,750 0
Occidente Y Caribe Celular SA(2)(5)................ 8,000 64,000
------------
64,000
------------
MEDIA--0.0%
Knology Holdings, Inc.(2).......................... 1,500 3,000
------------
RETAIL--0.0%
Electronic Retailing Systems International......... 1,000 10,000
------------
SHIPPING--0.0%
Golden Ocean Group Ltd............................. 1,000 4,000
------------
TELECOMMUNICATIONS--0.0%
Bell Technology Group Ltd. ........................ 750 7
DTI Holdings, Inc.(5).............................. 5,000 50
------------
57
------------
TOTAL WARRANTS
(cost $13,409)..................................... 116,057
------------
TOTAL INVESTMENT SECURITIES--91.1%
(cost $78,302,760)................................. 65,314,536
------------
SHORT-TERM SECURITIES--1.4%
PAPER PRODUCTS--1.4%
Stone Container Corp.
Sr. Disc. Notes
11.88% due 12/01/98
(cost $1,051,250)................................. 1,000 995,000
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
REPURCHASE AGREEMENT--5.3%
PaineWebber, Inc.
Joint Repurchase Agreement Account (Note 2)
(cost $3,799,000)................................ $ 3,799 $ 3,799,000
------------
TOTAL INVESTMENTS--
(cost $83,153,010*)............................... 97.8% 70,108,536
Other assets less liabilities..................... 2.2 1,602,624
-------- ------------
NET ASSETS-- 100.0% $ 71,711,160
======== ============
</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) Resale restricted to qualified institutional buyers
(3) Variable rate security; rate as of September 30, 1998
(4) Bond issued as part of a unit which includes an equity component
(5) Fair valued security; see Note 2
(6) A portion of the coupon interest is received in cash and a portion is
capitalized in the principal of the security
(7) Allocation of investments by country as a percentage of net assets as of
September 30, 1998:
<TABLE>
<S> <C>
United States.......................................................... 47.6%
Argentina.............................................................. 10.4%
Brazil................................................................. 9.9%
Mexico................................................................. 8.6%
Britain................................................................ 5.3%
Bermuda................................................................ 4.7%
Malta.................................................................. 2.9%
Netherlands............................................................ 2.7%
Canada................................................................. 2.2%
Columbia............................................................... 2.1%
Australia.............................................................. 1.4%
-----
97.8%
=====
</TABLE>
See Notes to Financial Statements
25
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--78.2%
BROADCASTING--4.4%
Big City Radio, Inc.
Sr. Disc. Notes
zero coupon due 3/15/05(1)........................ $ 2,000 $ 1,422,500
Busse Broadcasting Corp.
Sr. Secured Notes
11.63% due 10/15/00............................... 1,500 1,597,500
Radio One, Inc.
Sr. Subordinated Notes, Series B
7.00% due 5/15/04................................. 1,385 1,393,656
Spanish Broadcasting Systems, Inc.
Sr. Notes
12.50% due 6/15/02................................ 2,250 2,494,688
------------
6,908,344
------------
BUILDING MATERIALS--1.2%
Ainsworth Lumber Ltd.
Sr. Secured Notes
12.50% due 7/15/07(2)............................. 1,250 1,246,875
Congoleum Corp.
Sr. Notes
8.63% due 8/01/08(3).............................. 750 706,875
------------
1,953,750
------------
CABLE--8.4%
Adelphia Communications Corp.
Sr. Notes
8.13% due 7/15/03(3).............................. 3,000 3,015,000
EchoStar DBS Corp.
Sr. Secured Notes
12.50% due 7/01/02................................ 1,250 1,303,125
International CableTel, Inc.
Sr. Deferred Coupon Notes, Series B
zero coupon due 2/01/06(1)........................ 4,000 3,260,000
Medicom LLC
Sr. Notes
8.50% due 4/15/08................................. 3,500 3,508,750
UIH Australia Pacific, Inc.
Sr. Disc. Notes, Series B
zero coupon due 5/15/06(1)........................ 1,000 420,000
United International Holdings, Inc.
Sr. Secured Disc. Notes
zero coupon due 2/15/08(1)(2)..................... 3,500 1,645,000
------------
13,151,875
------------
CELLULAR--5.5%
Celcaribe SA
Sr. Notes
13.50% due 3/15/04................................ 1,000 1,036,250
Callnet Data Systems, inc.........................
Sr. Notes
zero coupon due 10/01/07(1)....................... 1,200 450,000
Centennial Cellular Corp.
Sr. Notes
zero coupon due 4/15/07 (1)....................... 1,000 1,065,000
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
CELLULAR (CONTINUED)
Comcast Cellular Holdings, Inc.
Sr. Notes, Series B
9.50% due 5/01/07................................. $ 2,500 $ 2,562,500
International Wireless
Communications
Sr. Secured Disc. Notes
zero coupon due 8/15/01........................... 3,250 325,000
McCaw International Ltd...........................
Sr. Disc. Notes
zero coupon due 4/15/07(1)........................ 2,500 1,250,000
Omnipoint Communications, Inc.
Sr. Notes
8.56% due 2/17/06(3)(4)........................... 1,993 1,943,514
------------
8,632,264
------------
CHEMICALS--4.4%
American Pacific Corp.
Sr. Notes
9.25% due 3/01/05................................. 1,000 1,006,250
Huntsman Corp.
Sr. Subordinated Notes
9.03% due 7/01/07(3)(4)........................... 1,500 1,468,125
NL Industries, Inc.
Sr. Notes
11.75% due 10/15/03............................... 2,750 2,970,000
Sterling Chemicals Holdings, Inc.
Sr. Secured Disc. Notes
zero coupon due 8/15/08(1)........................ 1,500 600,000
Sterling Chemicals, Inc.
Sr. Subordinated Notes
11.75% due 8/15/06................................ 1,000 860,000
------------
6,904,375
------------
COMMUNICATION EQUIPMENT--1.0%
Orbcomm Global LP
Sr. Notes
14.00% due 8/15/04................................ 1,750 1,607,813
------------
CONSUMER GOODS--6.1%
Carson, Inc.
Sr. Subordinated Notes, Series B
10.38% due 11/01/07............................... 1,000 810,000
Evenflo Co., Inc.
Sr. Subordinated Notes
11.75% due 8/15/06(3)............................. 750 726,562
French Fragrances, Inc.
Sr. Notes, Series B
10.38% due 5/15/07................................ 2,250 2,317,500
Polymer Group, Inc.
Sr. Subordinated Notes, Series B
8.75% due 3/01/08................................. 2,000 1,885,000
Polymer Group, Inc.
Sr. Subordinated Notes, Series B
9.00% due 7/01/07................................. 4,000 3,830,000
------------
9,569,062
------------
</TABLE>
26
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
SECURITY AMOUNT VALUE
DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------
</TABLE>
CORPORATE BONDS & NOTES (CONTINUED)
<TABLE>
<S> <C> <C>
ENERGY--3.3%
P&L Coal Holdings Corp.
Sr. Notes
8.88% due 5/15/08(3)........................................ $1,500 $1,522,500
Parker Drilling Co.
Sr. Notes, Series C
9.75% due 11/15/06.......................................... 3,000 2,790,000
Southwest Royalties, Inc.
Sr. Notes, Series B
10.50% due 10/15/04......................................... 1,750 958,125
----------
5,270,625
----------
ENERGY SERVICES--0.9%
Gulfmark Offshore, Inc.
Sr. Notes
8.75% due 6/01/08........................................... 1,500 1,425,000
----------
FINANCIAL SERVICES--0.8%
Western Financial Savings Bank
Sr. Subordinated Notes
8.88% due 8/01/07........................................... 1,500 1,256,250
----------
FOOD & BEVERAGES--2.0%
Richmont Marketing Specialist
Sr. Subordinated Notes
10.13% due 12/15/07(3)...................................... 1,500 1,395,000
Specialty Foods Corp.
Sr. Notes
11.13% due 10/01/02......................................... 2,250 1,800,000
----------
3,195,000
----------
GAMING--1.9%
Capital Gaming
Sr. Notes
zero coupon due 8/01/95(1)(5)(6)............................ 20 2
Hard Rock Hotel, Inc.
Sr. Subordinated Notes
9.25% due 4/01/05(3)........................................ 1,000 980,000
Station Casinos, Inc.
Sr. Subordinated Notes
9.63% due 6/01/03........................................... 2,000 1,960,000
----------
2,940,002
----------
HEALTH SERVICES--5.6%
Fresenius Medical Care Capital Trust
Sr. Notes
7.88% due 2/01/08........................................... 2,250 2,070,000
Fresenius Medical Care Capital Trust
Sr. Notes
9.00% due 12/01/06.......................................... 500 497,500
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
HEALTH SERVICES (CONTINUED)
Schein Pharmaceutical, Inc.
Sr. Notes
8.69% due 12/15/04(4)............................. $ 3,000 $ 2,696,250
Tenet Healthcare Corp.
Sr. Notes
8.00% due 1/15/05................................. 3,500 3,552,500
------------
8,816,250
------------
MANUFACTURING--5.6%
Interlake Corp.
Sr. Subordinated Debentures
12.13% due 3/01/02................................ 2,000 1,980,000
Lifestyle Furnishings
International Ltd.
Sr. Subordinated Notes
10.88% due 8/01/06................................ 3,000 3,240,000
Trident Automotive PLC
Sr. Subordinated Notes
10.00% due 12/15/05............................... 1,000 1,052,500
Wavetek Corp.
Sr. Subordinated Notes
10.13% due 6/15/07................................ 2,500 2,521,875
------------
8,794,375
------------
MEDIA--1.9%
Diva Systems Corp.
Sr. Disc. Notes
zero coupon due 3/01/08(1)(3)(7).................. 2,500 850,000
Knology Holdings, Inc.
Sr. Disc. Notes
zero coupon due 10/15/07.......................... 1,500 643,125
Park N' View, Inc.
Sr. Notes
13.00% due 5/15/08(3)(7).......................... 1,875 1,621,875
------------
3,115,000
------------
METALS & MINING--5.0%
Acme Metals, Inc.
Sr. Notes
12.50% due 8/01/02................................ 1,500 1,455,000
GS Technologies Operating, Inc.
Guaranteed Sr. Notes
12.00% due 9/01/04................................ 1,500 1,365,000
Kaiser Aluminum & Chemical Corp.
Sr. Subordinated Notes
12.75% due 2/01/03................................ 1,500 1,455,000
Metal Management, Inc.
Sr. Subordinated Notes
10.00% due 5/15/08................................ 2,000 1,522,500
Renco Metals, Inc.
Sr. Notes
11.50% due 7/01/03................................ 2,000 2,000,000
------------
7,797,500
------------
</TABLE>
27
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
PAPER PRODUCTS--1.1%
Florida Coast Paper Co. LLC
First Mortgage Notes, Series B
12.75% due 6/01/03................................ $ 1,750 $ 1,653,750
------------
RETAIL--2.1%
Electronic Retailing Systems International
Sr. Disc. Notes
zero coupon due 2/01/04(1)........................ 1,000 393,750
Jumbo Sports, Inc.
Sr. Subordinated Notes
4.25% due 11/01/00................................ 900 225,000
Phillips Van Heusen Corp.
Debentures
7.75% due 11/15/23................................ 1,500 1,450,995
Phillips Van Heusen Corp.
Sr. Subordinated Notes
9.50% due 5/01/08................................. 1,250 1,203,125
------------
3,272,870
------------
SHIPPING--0.6%
Ermis Maritime Holdings Ltd.
First Preferred Ship
Mortgage Notes
12.50% due 3/15/06................................ 1,499 944,559
------------
SUPERMARKETS--1.7%
Jitney Jungle Stores America, Inc.
Sr. Notes
12.00% due 3/01/06................................ 2,500 2,750,000
------------
TELECOMMUNICATIONS--14.1%
Covad Communications Group, Inc.
Sr. Disc. Notes, Series B
zero coupon due 3/15/08(1)........................ 1,000 450,000
DTI Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/01/08(1)........................ 3,000 1,173,750
e.spire Communications, Inc.
Sr. Disc. Notes
zero coupon due 11/01/05(1)....................... 1,500 1,170,000
e.spire Communications, Inc.
Sr. Disc. Notes
zero coupon due 7/01/08(2)(3)..................... 500 255,000
Globix Corp.
Sr. Notes
13.00% due 5/01/05................................ 2,000 1,696,680
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
GST Telecommunications, Inc.
Sr. Secured Disc. Notes
zero coupon due 5/01/08(1)(3)..................... $ 750 $ 372,187
ICG Holdings, Inc.
Sr. Disc. Notes
zero coupon due 3/15/07(1)........................ 2,250 1,372,500
ICG Services, Inc.
Sr. Exchange Disc. Notes
9.88% due 5/01/08(1).............................. 500 250,625
Intermedia Communications, Inc.
Sr. Notes
8.60% due 6/01/08................................. 2,500 2,475,000
KMC Telecom Holdings, Inc.
Sr. Disc. Notes
zero coupon due 2/15/08(1)........................ 3,500 1,675,625
Northeast Optic
Sr. Notes
12.75% due 8/15/08................................ 1,000 988,750
Orion Network Systems, Inc.
Sr. Disc. Notes
zero coupon due 1/15/07(1)
9.88% due 5/15/08................................. 2,500 1,696,875
Primus Telecomm Group, Inc.
Sr. Notes
9.88% due 5/15/08................................. 1,250 1,087,500
Primus Telecomm Group, Inc.
Sr. Notes
11.75% due 8/01/04................................ 1,000 960,000
Rhythms Netconnections, Inc.
Sr. Disc. Notes
13.50% due 5/15/08(3)(7).......................... 2,250 1,012,500
Splitrock Services, Inc.
Sr. Notes
11.75% due 7/15/08(7)............................. 1,125 1,018,125
Transtel Pass Through Trust
Sr. Notes
12.50% due 11/01/07(3)............................ 1,500 896,250
USN Communications, Inc.
Sr. Disc. Notes, Series B
zero coupon due 8/15/04(1)........................ 1,750 1,137,500
Verio, Inc.
Sr. Notes
13.50% due 6/15/04................................ 1,000 1,097,500
Vialog Corp.
Sr. Notes, Series B
12.75% due 11/15/01............................... 1,500 1,350,000
------------
22,136,367
------------
</TABLE>
28
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
TRANSPORTATION--0.6%
Travelcenters of America, Inc.
Sr. Subordinated Notes
10.25% due 4/01/07................................ $ 1,000 $ 977,500
------------
TOTAL BONDS & NOTES
(cost $138,756,827)............................... 123,072,531
------------
FOREIGN BONDS & NOTES--12.8%
BROADCASTING--1.2%
Central European Media Enterprises Ltd.
Sr. Notes
9.38% due 8/15/04................................. 2,250 1,850,423
------------
CABLE--1.1%
Australis Holdings Property Ltd.
Sr. Disc. Notes
zero coupon due 11/01/02(1)(5).................... 1,000 117,500
Comcast UK Cable Partners Ltd.
Sr. Disc. Notes
zero coupon due 11/15/07(1)(7).................... 1,500 1,215,000
Diamond Holdings PLC
Sr. Notes
9.13% due 2/01/08................................. 500 488,750
------------
1,821,250
------------
CELLULAR--1.0%
Occidente Y Caribe Celular SA
Sr. Disc. Notes, Series B
zero coupon due 3/15/04(1)........................ 2,000 1,535,000
------------
ENERGY SERVICES--1.3%
Statia Terminals International NV
Mortgage Notes, Series B
11.75% due 11/15/03............................... 2,000 2,075,000
------------
MANUFACTURING--0.7%
International Utility Structures
Sr. Subordinated Notes
10.75% due 2/01/08................................ 1,250 1,087,500
------------
METALS & MINING--1.2%
Great Central Mines Ltd.
Sr. Notes
8.88% due 4/01/08................................. 2,000 1,860,000
------------
PAGING--0.5%
Paging Network Do Brasil SA
Sr. Notes
13.50% due 6/06/05................................ 1,400 779,254
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(IN THOUSANDS)/ VALUE
SECURITY DESCRIPTION SHARES (NOTE 2)
<S> <C> <C>
PAPER PRODUCTS--0.4%
Doman Industries Ltd.
Sr. Notes
8.75% due 3/15/04................................ $ 1,000 $ 720,000
------------
SHIPPING--2.6%
Alpha Shipping PLC
Sr. Notes, Series A
9.50% due 2/15/08................................ 750 636,562
Golden Ocean Group Ltd.
Sr. Notes
10.00% due 8/31/01............................... 3,400 1,700,000
Panoceanic Bulk Carriers Ltd.
First Preferred Ship Mortgage Notes, Series B
12.00% due 12/15/07.............................. 1,000 777,500
Pegasus Shipping Ltd.
Sr. Mortgage Notes
11.88% due 11/15/04.............................. 1,000 960,000
------------
4,074,062
------------
TELECOMMUNICATIONS--2.8%
Flag Limited
Sr. Notes
8.25% due 1/30/08(3)............................. 1,250 1,184,375
Ionica PLC
Sr. Disc. Notes
zero coupon due 5/01/07(1)(7).................... 1,750 85,312
Ionica PLC
Sr. Notes
13.50% due 8/15/06............................... 750 225,000
Poland Telecom Finance BV
Sr. Notes
14.00% due 12/01/07(3)........................... 1,000 1,000,000
RSL Communications Ltd.
Sr. Notes
12.25% due 11/15/06.............................. 1,850 1,914,750
------------
4,409,437
------------
TOTAL FOREIGN BONDS & NOTES
(cost $25,198,407)............................... 20,211,926
------------
PREFERRED STOCK--4.6%
CABLE--1.5%
CSC Holdings, Inc. 11.125%(2).................... 21,419 2,297,180
------------
FINANCIAL SERVICES--1.3%
Bankunited Financial Corp. 9.00%................. 2,000,000 2,120,000
------------
MEDIA--0.6%
Echostar Communications Corp.
6.75%........................................... 19,000 1,021,250
------------
</TABLE>
29
<PAGE>
SUNAMERICA HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
SHARES/ VALUE
SECURITY DESCRIPTION WARRANTS (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
PREFERRED STOCK (CONTINUED)
TELECOMMUNICATIONS--1.2%
Intermedia Communications, Inc. 7.00%(3)............... 40,000 $ 770,000
IXC Communications, Inc. 6.75%(3)...................... 12,000 415,500
Omnipoint Corp. 7.00%(3)............................... 26,000 653,250
------------
1,838,750
------------
TOTAL PREFERRED STOCK
(cost $8,190,712)...................................... 7,277,180
------------
COMMON STOCK--0.1%
CELLULAR--0.1%
Microcell Telecommunications+.......................... 28,500 178,125
------------
GAMING--0.0%
Capital Gaming International, Inc.+(5)................. 77 1
------------
PAGING--0.0%
Paging Do Brazil Holdings Co. LLC, Class B+(5)......... 1,400 14
------------
TOTAL COMMON STOCK
(cost $201,372)........................................ 178,140
------------
WARRANTS--0.2%+
CABLE--0.0%
Australis Holdings Property Ltd.(3)(5)................. 1,000 0
UIH Australia Pacific, Inc.(5)......................... 1,000 5,000
United International Holdings, Inc..................... 3,000 30,000
------------
35,000
------------
CELLULAR--0.1%
Clearnet Communications, Inc........................... 4,950 29,700
International Wireless Communications(3)(5)............ 3,250 0
Occidente Y Caribe Celular SA(3)(5).................... 8,000 64,000
------------
93,700
------------
GAMING--0.0%
Capital Gaming International, Inc.(5).................. 45,500 228
Fitzgerald Gaming Corp.(3)(5).......................... 2,000 20
------------
248
------------
MEDIA--0.0%
Knology Holdings, Inc.................................. 4,500 9,000
------------
</TABLE>
<TABLE>
<CAPTION>
WARRANTS/
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
RETAIL--0.0%
Electronic Retailing Systems International........ 1,000 $ 10,000
SHIPPING--0.1%
Ermis Maritime Holdings Ltd.(5)................... 1,363 40,890
Golden Ocean Group Ltd............................ 2,500 10,000
------------
50,890
------------
TELECOMMUNICATIONS--0.0%
Bell Technology Group Ltd. ....................... 2,000 20
Cellnet Data Systems, Inc......................... 1,200 12,000
Covad Communications Group, Inc.(5)............... 1,000 10
DTI Holdings, Inc.(5)............................. 15,000 150
Ionica Plc........................................ 1,000 15,000
KMC Telecom Holdings, Inc......................... 3,500 8,750
Poland Telecom Finance BV(5)...................... 1,000 10
Primus Telecomm Group, Inc........................ 1,000 5,000
Vialog Corp....................................... 1,500 1,500
------------
42,440
------------
TOTAL WARRANTS
(cost $436,337)................................... 241,278
------------
TOTAL INVESTMENT SECURITIES--95.9%
(cost $172,783,655)............................... 150,981,055
------------
SHORT-TERM SECURITIES--1.0%
PAPER PRODUCTS--1.0%
Stone Container Corp.
Sr. Disc. Notes
11.88% due 12/01/98 (cost $1,576,875)............ $ 1,500 1,492,500
------------
TOTAL INVESTMENTS--
(COST $174,360,530*)............................. 96.9% 152,473,555
Other assets less liabilities...................... 3.1 4,906,249
---------- ------------
NET ASSETS-- 100.0% $157,379,804
========== ============
</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) PIK ("Payment-in-Kind") payment made with additional shares in lieu of
cash
(3) Resale restricted to qualified institutional buyers
(4) Variable rate security; rate as of September 30, 1998
(5) Fair valued security; see Note 2
(6) Bond in default
(7) Bond issued as part of a unit which includes an equity component
See Notes to Financial Statements
30
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS--95.7%
ALASKA--1.9%
Alaska State Housing Finance Corp.,
7.50% due 12/01/15+............................... $1,975 $ 2,019,102
------------
ARIZONA--3.5%
Northern Arizona University, Revenue,
6.50% due 6/01/10+................................ 1,845 2,221,786
Pima County, Arizona Unified School District
Number 1, General Obligation,
7.50% due 7/01/10+................................ 1,200 1,555,152
------------
3,776,938
------------
ARKANSAS--0.1%
Arkansas State Development Finance Authority,
Single Family Mortgage Revenue,
9.00% due 6/01/14+................................ 125 127,770
------------
CALIFORNIA--5.5%
Anaheim, California Public Financing Authority,
Revenue, Series A,
zero coupon due 9/01/18+.......................... 1,500 567,450
California Housing Finance Agency, Revenue, Series
A,
5.40% due 8/01/18+................................ 1,000 1,016,460
Long Beach, California Harbor Revenue Refunding,
Series A,
6.00% due 5/15/17+................................ 1,000 1,156,020
San Francisco, California City & County
Redevelopment Agency, Lease Revenue,
6.75% due 7/01/15+................................ 1,000 1,155,920
San Jose, California Redevelopment Agency, Tax
Allocation,
6.00% due 8/01/11+................................ 1,700 1,995,579
------------
5,891,429
------------
COLORADO--4.4%
Highlands Ranch Metropolitan District, Colorado
General Obligation,
6.50% due 6/15/09+................................ 1,960 2,341,671
Jefferson County, Colorado School District R001,
Refunding,
6.50% due 12/15/11+............................... 2,000 2,428,420
------------
4,770,091
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
GEORGIA--3.0%
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/09+................................ $1,250 $ 1,464,562
Municipal Electric Authority, Georgia Special
Obligation, Fifth Crossover Series,
6.40% due 1/01/13+................................ 1,500 1,788,555
------------
3,253,117
------------
IDAHO--1.0%
Idaho Housing & Finance Association, Single Family
Mortgage,
5.63% due 7/01/15................................. 1,000 1,037,920
------------
ILLINOIS--11.5%
Chicago Illinois Board Of Education, General
Obligation,
6.75% due 12/01/11+............................... 2,000 2,465,840
Cook & Du Page Counties, Illinois High School,
District Number 210, General Obligation,
zero coupon due 12/01/12+......................... 1,600 830,704
Cook County, Illinois Community College, District
Number 508,
7.70% due 12/01/07+............................... 4,000 5,082,600
Illinois Health Facilities Authority, Lutheran
General Health System,
7.00% due 4/01/08+................................ 3,400 4,092,274
------------
12,471,418
------------
INDIANA--1.4%
Indiana State Housing Finance Authority, Multi-
Unit Mortgage Program, Series A,
9.00% due 1/01/14+................................ 1,470 1,476,306
------------
KENTUCKY--5.3%
Kenton County Kentucky Airport, Board Revenue
Refunding, Cincinnati/Northern Kentucky, Series
A,
6.30% due 3/01/15+................................ 1,500 1,691,115
Louisville & Jefferson County, Kentucky Regional
Airport Authority, Series A,
6.50% due 7/01/17+................................ 3,500 4,040,645
------------
5,731,760
------------
</TABLE>
31
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
MASSACHUSETTS--1.0%
Massachusetts State Housing Finance Agency,
Insured Rental, Series A,
6.60% due 7/01/14+................................ $ 955 $ 1,035,860
------------
MICHIGAN--4.0%
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/17+.......................... 2,875 1,181,999
Michigan Municipal Bond Authority, Revenue Capital
Appreciation, Local Government Loan,
zero coupon due 5/01/16+.......................... 2,735 1,185,595
Wayne Charter County, Michigan Airport, Revenue,
5.00% due 12/01/28+............................... 2,000 1,978,340
------------
4,345,934
------------
MISSOURI--6.6%
Missouri State Housing Development Commission,
Single Family Mortgage Revenue,
9.38% due 4/01/16+................................ 45 49,389
Sikeston, Missouri Electric, Revenue,
6.20% due 6/01/10+................................ 6,000 7,061,220
------------
7,110,609
------------
NEVADA--4.7%
Nevada Housing Division, Single Family Mortgage
Revenue,
Series A,
zero coupon due 4/01/16+(1)....................... 4,945 5,092,114
------------
NEW JERSEY--1.7%
New Jersey State Transportation Trust Fund
Authority, Transportation Systems Revenue, Series
B,
6.50% due 6/15/10+................................ 1,500 1,807,110
------------
NEW MEXICO--0.1%
New Mexico Mortgage Finance Authority, Single
Family Mortgage Revenue, Series C,
8.63% due 7/01/17+................................ 140 143,160
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
NEW YORK--13.3%
New York, New York, Series C
5.00% due 8/15/22................................. $4,450 $ 4,419,072
New York State Medical Care Facilities Finance
Agency, Revenue, New York Hospital, Mortgage A,
6.75% due 8/15/14+................................ 2,850 3,350,717
Niagara Falls, New York,
General Obligation,
7.50% due 3/01/14+................................ 555 733,888
Niagara Falls, New York,
General Obligation,
7.50% due 3/01/13+................................ 445 586,879
Port Authority of New York & New Jersey Special
Obligation, Revenue, JFK International Air
Terminal-6,
6.25% due 12/01/10+............................... 1,500 1,762,320
Port Authority of New York & New Jersey Special
Obligation, Revenue, JFK International Air
Terminal-6,
6.25% due 12/01/11+............................... 3,000 3,536,850
------------
14,389,726
------------
NORTH DAKOTA--0.5%
North Dakota State Housing Finance Agency, Single
Family Mortgage Revenue, Series A,
7.38% due 7/01/17+................................ 515 526,093
------------
OHIO--4.7%
Lucas County, Ohio Hospital Revenue, St Vincent
Medical Center,
6.50% due 8/15/07+................................ 3,500 3,863,720
Woodridge, Ohio Local School District, General
Obligation,
6.80% due 12/01/14+............................... 1,000 1,255,240
------------
5,118,960
------------
OKLAHOMA--1.6%
Grand River Dam Authority, Oklahoma Revenue
Refunding,
6.25% due 6/01/11+................................ 1,500 1,775,250
------------
PENNSYLVANIA--0.1%
Pennsylvania Housing Finance Agency, Multi-Family
Mortgage,
9.38% due 8/01/28+................................ 120 122,099
------------
</TABLE>
32
<PAGE>
SUNAMERICA TAX EXEMPT INSURED FUND
PORTFOLIO OF INVESTMENTS -- September 30, 1998 (unaudited) -- (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
- --------------------------------------------------------------------------------
MUNICIPAL BONDS (CONTINUED)
PUERTO RICO--2.1%
Puerto Rico Commonwealth Highway & Transportation
Authority, Revenue, Series A,
5.50% due 7/01/13+................................ $2,000 $ 2,241,380
------------
RHODE ISLAND--0.8%
Rhode Island Housing & Mortgage Finance Corp.,
Revenue,
8.38% due 10/01/16+............................... 835 852,585
------------
SOUTH DAKOTA--2.3%
South Dakota State Health and Educational
Facilities Authority Revenue,
6.25% due 7/01/10+................................ 2,120 2,476,732
------------
TEXAS--10.4%
Alliance Airport Authority, Inc., Texas Special
Facilities Revenue,
6.38% due 4/01/21................................. 2,000 2,188,680
Bexar County, Texas Health Facilities Development
Corp., Hospital Revenue,
6.75% due 8/15/19+................................ 2,000 2,328,480
Harris County, Texas Hospital District Mortgage,
Revenue,
7.40% due 2/15/10+................................ 2,500 3,047,225
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/08+............................... 1,250 1,435,687
Houston, Texas Water Conveyance Systems Contract,
Certificates of Participation,
6.13% due 12/15/09+............................... 1,000 1,153,180
San Antonio, Texas, Hotel Occupancy, Revenue,
zero coupon due 8/15/17+.......................... 2,700 1,084,779
------------
11,238,031
------------
VIRGINIA--1.0%
Virginia State Housing Development Authority,
Multi- Family, Series H,
5.50% due 5/01/13................................. 1,000 1,050,460
------------
WASHINGTON--0.4%
Washington State Housing Finance Commission,
Multi-Family Mortgage Revenue, Series A,
9.13% due 7/01/10+................................ 380 388,767
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2)
<S> <C> <C>
WEST VIRGINIA--2.8%
West Virginia State Housing Development Fund,
Series A,
7.25% due 5/01/17+................................ $3,000 $ 3,069,900
------------
WISCONSIN--0.0%
Wisconsin Housing & Economic Development
Authority, Homeownership Revenue, Issue III,
9.13% due 6/01/05+................................ 40 40,521
------------
TOTAL INVESTMENT SECURITIES--95.7%
(cost $93,294,848)................................ 103,381,142
------------
SHORT-TERM SECURITIES--3.2%
NEW YORK--2.3%
Long Island Power Authority, New York Electric
Systems, Revenue, Subordinated Series 6,
4.10% due 10/01/98(2)............................. 1,000 1,000,000
New York State Job Development Authority, St.
Guaranteed Series B-1, B-21,
4.10% due 10/01/98(2)............................. 1,500 1,500,000
------------
2,500,000
------------
NORTH CAROLINA--0.9%
Wake County, North Carolina Industrial Facilities
and Pollution Control Financing Authority,
Revenue,
4.20% due 10/01/98(2)............................. 900 900,000
------------
TOTAL SHORT-TERM SECURITIES
(COST $3,400,000)................................ 3,400,000
------------
TOTAL INVESTMENTS--
(COST $96,694,848*).............................. 98.9% 106,781,142
Other assets less liabilities...................... 1.1 1,202,361
------ ------------
NET ASSETS-- 100.0% $107,983,503
====== ============
</TABLE>
- -------
* See Note 5
+ All or part of this security issued by Government National Mortgage
Association ("GNMA"), Financial Security Assurance ("FSA"), Federal Housing
Administration ("FHA"), Financial Guarantee Insurance Corp. ("FGIC"),
Municipal Bond Insurance Association ("MBIA"), or AMBAC ($94,685,010 or
87.7% of Net Assets)
(1) Represents a zero coupon bond which will convert to an interest-bearing
security at a later date
(2) Variable rate security; maturity date reflects next reset date
See Notes to Financial Statements
33
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited)
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 as high a 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. High Income Fund also offers Class C shares. Class C shares
are offered at net asset value, although they may be subject to a
contingent deferred sales charge on redemptions made within one year of
purchase. Additionally, any purchases of Class A shares in excess of
$1,000,000 will be purchased at net asset value but 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 and Class C shares are subject to higher distribution fee rates.
34
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
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.
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. 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: 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. The Funds, along with other affiliated registered investment
companies, transfer uninvested cash balances into a single 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.
35
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
As of September 30, 1998 the U.S. Government Securities Fund, Federal
Securities Fund and Diversified Income Fund had a 13.3%, 5.7% and 2.9%
undivided interest, respectively, which represented $17,522,000, $7,542,000
and $3,799,000, respectively, in principal amount in a joint repurchase
agreement with PaineWebber, Inc. In addition, the U.S. Government
Securities Fund and Federal Securities Fund had a 38.5% and 7.7% undivided
interest which represented $50,000,000 and $10,000,000, respectively, in
principal amount in a joint repurchase agreement with State Street Bank and
Trust Co. As of such date, the repurchase agreements in the joint accounts
and the collateral therefore were as follows:
PaineWebber, Inc. Repurchase Agreement, 5.20% dated 9/30/98, in the
principal amount of $131,433,000, repurchase price $131,451,985 due
10/1/98, collateralized by $50,000,000 U.S. Treasury Notes 5.25% due
8/15/03, $40,000,000 U.S. Treasury Bonds 6.125% due 11/15/27 and
$32,400,000 U.S. Treasury Notes 6.25% due 2/15/03, approximate aggregate
value $134,487,192.
State Street Bank and Trust Co. Repurchase Agreement, 5.33% dated 9/30/98,
in the principal amount of $130,000,000, repurchase price $130,019,247 due
10/1/98, collateralized by $39,430,000 U.S. Treasury Bonds 5.50% due
12/31/00, $19,180,000 U.S. Treasury Notes 6.125% due 12/31/01, $19,155,000
U.S. Treasury Notes 6.25% due 8/31/02, $16,490,000 U.S. Treasury Bonds
6.875% due 8/15/25, $13,340,000 U.S. Treasury Bonds 12.75% due 11/15/10 and
$9,620,000 U.S. Treasury Notes 7.75% due 11/30/99, approximate aggregate
value $132,620,236.
SECURITIES TRANSACTIONS, INVESTMENT INCOME, 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 and High 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 (or the value
of dividend-eligible shares, as appropriate) 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 are not affected.
36
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
For the year ended March 31, 1998, 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....................... $(3,941,450) $3,941,450 $ --
Federal Securities Fund..... (137,988) 137,988 --
Diversified Income Fund..... (4,627) 4,627 --
High Income Fund............ 15,700 3,599,690 (3,615,390)
Tax Exempt Insured Fund..... -- -- --
</TABLE>
INVESTMENT SECURITIES LOANED: During the six months ended September 30,
1998, U.S. Government Securities Fund and Federal Securities 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. The Funds may use the cash collateral received to invest in short-
term investments which earn interest income or to cover bank overdrafts.
Any interest earned from the investment of the collateral is recorded by
the Funds net of the portion of interest that is rebated to the borrowing
broker. If the amounts are used to cover bank overdrafts, the broker
rebates incurred are reflected as interest expense on the Statement of
Operations. 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 September 30, 1998, U.S. Government Securities Fund and Federal
Securities Fund have loaned securities having a value of $32,629,715 and
$4,350,628, respectively, and held cash collateral of $32,850,000 and
$4,380,000, respectively, for these loans. The value of the collateral was
sufficient at the time the loan agreements were entered into. As a result
of an increase in the market value of the loaned securities on the last
business day of the fiscal year, the Funds were furnished with additional
collateral on the following business day.
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. Similarly, 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
37
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
transactions, the difference between the amounts of interest, dividends and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
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 rate.
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 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. Futures contracts involve elements of risk in
excess of the amount reflected in the Statement of Assets and Liabilities.
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 average
daily net assets:
<TABLE>
<CAPTION>
MANAGEMENT
ASSETS FEES
----------------- ----------
<S> <C> <C>
U.S. Government Securities Fund and High
Income 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>
For the six months ended September 30, 1998, SAAMCo has agreed to
voluntarily reimburse expenses of $14,963 on Class C of the High Income
Fund.
38
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(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," the "Class B Plan"
and the "Class C Plan." In adopting the Class A Plan, the Class B Plan and
the Class C Plan, the Trustees determined that there was a reasonable
likelihood that each 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, Class B Plan and Class C Plan, the Distributor
receives payments from a Fund at an annual rate of up to 0.10%, .75% and
.75%, respectively, of average daily net assets of such Fund's Class A,
Class B and Class C 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,
Class B Plan or Class C 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 six months
ended September 30, 1998, SACS received fees (see the Statement of
Operations) based upon the aforementioned rates.
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
and Class C fund shares. SACS has advised the Funds that for the six months
ended September 30, 1998, the proceeds received from Class A sales (and
paid out to affiliated and non-affiliated broker-dealers) and Class B and
Class C redemptions were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------- ------------ ------------
CONTINGENT CONTINGENT
SALES AFFILIATED NON-AFFILIATED DEFERRED DEFERRED
CHARGES BROKER-DEALERS BROKER-DEALERS SALES CHARGE SALES CHARGE
-------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
U.S. Government Securi-
ties Fund.............. $ 20,179 $ 5,866 $ 11,253 $ 61,542 $ --
Federal Securities Fund. 54,153 5,098 39,306 8,433 --
Diversified Income Fund. 86,426 20,467 52,649 33,826 --
High Income Fund........ 301,427 97,846 148,754 137,408 2,535
Tax Exempt Insured Fund. 24,957 8,300 12,255 28,423 --
</TABLE>
39
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(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 permits the Funds to compensate SAFS for services rendered, based
upon an annual rate of .22% of average daily net assets, which is approved
annually by the Trustees. For the six months ended September 30, 1998, the
Funds incurred the following expenses which are included in transfer agent
fees and expenses in the Statement of Operations to compensate SAFS
pursuant to the terms of the Service Agreement:
<TABLE>
<CAPTION>
PAYABLE AT
EXPENSES SEPTEMBER 30, 1998
------------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Securities
Fund..................... $106,233 $212,879 $ -- $18,536 $32,573 $--
Federal Securities Fund... 35,024 21,348 -- 5,971 3,779 --
Diversified Income Fund... 27,325 64,852 -- 4,199 8,897 --
High Income Fund.......... 65,118 127,357 3,369 10,225 17,431 784
Tax Exempt Insured Fund... 94,463 24,811 -- 15,326 3,991 --
</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 six
months ended September 30, 1998 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..... $498,757,489 $111,122,744 $29,586,509 $122,922,740 $14,994,197
============ ============ =========== ============ ===========
Aggregate sales......... $527,359,126 $106,577,287 $32,990,080 $128,761,907 $21,478,628
============ ============ =========== ============ ===========
</TABLE>
Note 5. Portfolio Securities (Tax Basis)
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 for federal tax purposes, including short-term securities and
repurchase agreements, 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.................... $321,711,263 $62,988,047 $ 83,153,010 $174,360,530 $96,694,848
============ =========== ============ ============ ===========
Appreciation............ $ 5,596,461 $ 1,716,595 $ 790,619 $ 941,598 $10,153,087
Depreciation............ (127,824) -- (13,835,093) (22,828,573) (66,793)
------------ ----------- ------------ ------------ -----------
Unrealized appreciation
(depreciation)--net.... $ 5,468,637 $ 1,716,595 $(13,044,474) $(21,886,975) $10,086,294
============ =========== ============ ============ ===========
</TABLE>
40
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
At March 31, 1998, U.S. Government Securities Fund, Diversified Income
Fund, High Income Fund and Tax Exempt Insured Fund had capital loss
carryforwards of $29,467,409, $24,716,935, $22,767,991 and $3,338,986,
respectively, which were available to the extent provided in regulations
and which will expire between 1999-2005. 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.
U.S. Government Securities Fund, Federal Securities Fund, Diversified
Income Fund, High Income Fund and Tax Exempt Insured Fund utilized capital
loss carryforwards of $7,942,831, $1,045,533, $5,115,099, $11,236,372 and
$3,208,746, respectively, to offset the Funds' net taxable gains realized
and recognized in the year ended March 31, 1998.
High Income Fund had capital loss carryforwards of $3,615,390 which expired
in the year ended March 31, 1998.
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
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998 SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ ------------------------ ------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 2,162,431 $ 18,956,564 1,561,577 $ 13,510,139 544,251 $ 4,772,624 482,064 $ 4,147,772
Reinvested
dividends...... 185,416 1,614,524 440,207 3,777,028 306,474 2,669,264 872,849 7,489,193
Shares redeemed. (1,559,223) (13,598,687) (4,288,472) (36,902,611) (5,073,462) (44,295,905) (11,930,767) (102,271,581)
---------- ------------ ---------- ------------ ---------- ------------ ----------- -------------
Net increase
(decrease) .... 788,624 $ 6,972,401 (2,286,688) $(19,615,444) (4,222,737) $(36,854,017) (10,575,854) $ (90,634,616)
========== ============ ========== ============ ========== ============ =========== =============
<CAPTION>
FEDERAL SECURITIES FUND
--------------------------------------------------------------------------------------------------------
CLASS A CLASS B
-------------------------------------------------- ----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998 SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ ------------------------ ------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold..... 302,750 $ 3,378,351 374,888 $ 4,088,015 400,286 $ 4,487,501 358,787 $ 3,922,859
Reinvested
dividends...... 51,662 574,702 118,009 1,278,607 29,628 330,597 65,988 716,876
Shares redeemed. (278,569) (3,093,328) (560,471) (6,066,157) (235,224) (2,620,531) (537,411) (5,824,823)
---------- ------------ ---------- ------------ ---------- ------------ ----------- -------------
Net increase
(decrease)..... 75,843 $ 859,725 (67,574) $ (699,535) 194,690 $ 2,197,567 (112,636) $ (1,185,088)
========== ============ ========== ============ ========== ============ =========== =============
</TABLE>
41
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 -- (unaudited) --
(continued)
<TABLE>
<CAPTION>
DIVERSIFIED INCOME FUND
-----------------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------------- --------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998 SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ ----------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold...... 1,485,593 $ 6,398,776 1,839,412 $ 8,430,833 1,122,803 $ 4,972,124 2,110,864 $ 9,588,048
Reinvested
dividends....... 158,816 697,591 240,267 1,101,956 307,017 1,356,394 671,248 3,082,375
Shares redeemed.. (882,488) (3,893,552) (1,776,362) (8,143,958) (2,441,667) (10,589,488) (7,008,938) (32,175,337)
---------- ------------ ---------- ----------- ---------- ------------ ---------- ------------
Net increase
(decrease)...... 761,921 $ 3,202,815 303,317 $ 1,388,831 (1,011,847) $ (4,260,970) (4,226,826) $(19,504,914)
========== ============ ========== =========== ========== ============ ========== ============
<CAPTION>
HIGH INCOME FUND
-----------------------------------------------------------------------------------------------------
CLASS A CLASS B
------------------------------------------------- --------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998 SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ ----------------------- ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold...... 2,685,196 $ 20,210,400 2,986,074 $22,434,607 4,164,378 $ 31,394,990 9,598,071 $ 70,922,480
Reinvested
dividends....... 232,860 1,746,084 321,604 2,408,861 375,868 2,838,329 630,317 4,732,950
Shares redeemed.. (1,723,497) (12,937,091) (1,885,818) (13,976,905) (6,315,090) (47,694,275) (8,118,195) (59,444,035)
---------- ------------ ---------- ----------- ---------- ------------ ---------- ------------
Net increase
(decrease)...... 1,194,559 $ 9,019,393 1,421,860 $10,866,563 (1,774,844) $(13,460,956) 2,110,193 $ 16,211,395
========== ============ ========== =========== ========== ============ ========== ============
<CAPTION>
HIGH INCOME FUND
-------------------------------------------------
CLASS C
-------------------------------------------------
FOR THE PERIOD
FOR THE FEBRUARY 2, 1998*
SIX MONTHS ENDED THROUGH
SEPTEMBER 30, 1998 MARCH 31, 1998
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold...... 654,678 $ 4,891,732 146,640 $ 1,136,487
Reinvested
dividends....... 9,467 70,256 396 3,080
Shares redeemed.. (82,022) (622,990) (14) (112)
---------- ------------ ---------- -----------
Net increase..... 582,123 $ 4,338,998 147,022 $ 1,139,455
========== ============ ========== ===========
</TABLE>
* Commencement of sale of respective class of shares
<TABLE>
<CAPTION>
TAX EXEMPT INSURED FUND
---------------------------------------------------------------------------------------------
CLASS A CLASS B
----------------------------------------------- --------------------------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1998 MARCH 31, 1998 SEPTEMBER 30, 1998 MARCH 31, 1998
--------------------- ------------------------ --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ----------- ---------- ------------ -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares sold............. 102,823 $ 1,348,056 139,133 $ 1,784,062 131,853 $ 1,729,362 338,073 $ 4,316,434
Reinvested dividends.... 73,763 963,783 166,540 2,132,131 20,033 261,766 45,130 578,035
Shares redeemed......... (553,840) (7,222,874) (1,483,284) (18,915,862) (221,452) (2,899,559) (657,257) (8,386,367)
-------- ----------- ---------- ------------ -------- ----------- -------- -----------
Net decrease............ (377,254) $(4,911,035) (1,177,611) $(14,999,669) (69,566) $ (908,431) (274,054) $(3,491,898)
======== =========== ========== ============ ======== =========== ======== ===========
</TABLE>
42
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 (unaudited) --
(continued)
Note 7. Commitments and Contingencies
The SunAmerica Family of Mutual Funds has established an uncommitted line
of credit with the State Street Bank and Trust Company, the Funds'
custodian, 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 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 six months ended September 30, 1998 the Diversified
Income Fund and High Income Fund periodically utilized the uncommitted line
of credit and incurred an interest expense of $1,508 and $22,262,
respectively. At September 30, 1998 the High Income Fund had $2,043,784 in
outstanding borrowings at an interest rate of 6.75%.
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 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 September 30, 1998, U.S. Government Securities
Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund
and Tax Exempt Insured Fund had accrued $78,216, $8,637, $17,265, $21,508
and $20,461, respectively, for the Retirement Plan, which is included in
accrued expenses on the Statement of Assets and Liabilities and for the six
months ended September 30, 1998 expensed $6,451, $963, $1,777, $2,987 and
$2,203, respectively, for the Retirement Plan, which is included in
Trustees' fees and expenses on the Statement of Operations.
Note 9. Subsequent Events
On August 19, 1998, SunAmerica Inc. entered into an agreement with American
International Group, Inc. ("AIG"). Under the terms of the agreement,
SunAmerica Inc. will merge with and into AIG, and consequently, SAAMCo,
which acts as investment adviser of the Trust, will become a subsidiary of
AIG. SAAMCo will not change its name and no organizational changes are
currently planned which would affect services provided to the Trust. As a
result of the merger, Trust shareholders of record as of October 30, 1998
are being asked to approve a new investment advisory and management
agreement with SAAMCo, to take effect upon consummation of the merger, as
well as certain other matters. The
43
<PAGE>
SUNAMERICA INCOME FUNDS
NOTES TO FINANCIAL STATEMENTS -- September 30, 1998 (unaudited) --
(continued)
new agreement will be identical to the current agreement in all respects
except for its effective date and termination date and will have no effect
on the fees or expenses payable by the Trust or its shareholders. The
merger transaction is expected to be consummated in late 1998 or early
1999.
Effective December 1, 1998, the High Income Fund will offer Class II shares
in place of Class C Shares. Class II shares are subject to an initial sales
charge. In addition, a contingent deferred sales charge may be imposed on
redemptions made within one year of purchase.
44
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
Sebastiano Sterpa DISTRIBUTOR
SunAmerica Capital Services, Inc.
OFFICERS The SunAmerica Center
Peter A. Harbeck, President 733 Third Avenue
P. Christopher Leary, Vice President New York, NY 10017-3204
John Risner, Vice President
John DiVito, Vice President SHAREHOLDER SERVICING AGENT
Karolann Patranzino, Vice President SunAmerica Fund Services, Inc.
Robert M. Zakem, Secretary The SunAmerica Center
Peter C. Sutton, Treasurer 733 Third Avenue
John T. Genoy, Assistant Treasurer New York, NY 10017-3204
Donna M. Handel, Assistant Treasurer
Cheryl L. Hawthorne, Assistant Treasurer CUSTODIAN AND TRANSFER AGENT
Abbe P. Stein, Assistant Secretary State Street Bank and Trust Company
P.O. Box 419572
Kansas City, MO 64141-6572
</TABLE>
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.
The accompanying report has not been examined by independent accountants and
accordingly no opinion has been expressed thereon.
[LOGO] SunAmerica Bulk Rate
Mutual Funds U.S. Postage
PAID
The SunAmerica Center, Kansas City, MO
733 Third Avenue Permit No. 2891
New York, NY 10017-3204
