<PAGE>
SUNAMERICA EQUITY FUNDS
(SunAmerica Balanced Assets Fund, SunAmerica Small Company Growth Fund and
SunAmerica Growth and Income Fund)
(Class Z Shares)
SunAmerica Balanced Assets Fund, SunAmerica Small Company Growth Fund and
SunAmerica Growth and Income Fund (each, a "Fund" and collectively, the
"Funds") are three of five separate series of SunAmerica Equity Funds, which
is an open-end management investment company organized as a Massachusetts
business trust (the "Trust"). Each Fund is advised and managed by SunAmerica
Asset Management Corp. More general information about the Funds can be found
in the attached Prospectus dated April 1, 1998 (the "Retail Class
Prospectus"), which is incorporated by reference into this Prospectus.
SunAmerica Balanced Assets Fund ("Balanced Assets Fund") seeks to conserve
principal by maintaining at all times a balanced portfolio of stocks and
bonds. The Balanced Assets Fund seeks to achieve its investment objective by
selecting among different types of investments for capital growth and income
and may alter the composition of the portfolio as economic and market trends
change. Effective April 1, 1998, Class Z shares of the Fund will no longer be
available for purchase.
SunAmerica Small Company Growth Fund ("Small Company Growth Fund") seeks
capital appreciation by investing primarily in equity securities of small
capitalization growth companies. The Small Company Growth Fund pursues its
investment objective by investing, under normal circumstances, at least 65% of
its total assets in the equity securities of small, lesser known or new growth
companies or industries, such as telecommunications, media and biotechnology.
See "Investment Objectives and Policies" for more information about each Fund.
There can be no assurance that the Funds' objectives will be achieved.
SunAmerica Growth and Income Fund ("Growth and Income Fund")--seeks capital
appreciation and current income by investing primarily in common stocks.
Class Z shares are offered exclusively for sale to participants in the
SunAmerica Profit Sharing and Retirement Plan, an employee benefit plan
sponsored by Fidelity Investments (the "401(k) Plan" or the "Plan"). CLASS Z
SHARES ARE ONLY AVAILABLE IN THE FOLLOWING STATES: AK, AL, AZ, CA, CO, CT, DC,
FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, MI, MN, MO, MS, NC, NH, NJ, NM,
NY, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, WA AND WI. Only Class Z shares are
offered through this Prospectus. The Funds currently offer Class A, Class B
shares, and Small Company Growth Fund also offers Class C shares through the
Retail Class Prospectus. Further information regarding Class A, Class B and
Class C shares can be obtained by calling (800) 858-8850.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank through which such shares may be sold, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency.
This Prospectus explains concisely what you should know before investing in
Class Z shares of the Funds. Please read it carefully before investing and
retain it for future reference. You can find more detailed information about
the Funds in the Statement of Additional Information dated April 1, 1998,
which is incorporated by reference into this Prospectus, and further
information about the performance of the Funds in the Trust's Annual Report to
Shareholders, which may be obtained without charge by contacting the Trust at
The SunAmerica Center, 733 Third Avenue, New York, NY 10017 or by calling
(800) 858-8850.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Prospectus dated April 1, 1998
<PAGE>
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
SMALL GROWTH AND
BALANCED COMPANY INCOME
ASSETS FUND GROWTH FUND FUND
CLASS Z CLASS Z CLASS Z
----------- ----------- ----------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Initial Sales Load............... None None None
Maximum Sales Load on Reinvested Divi-
dends................................... None None None
Maximum Deferred Sales Load.............. None None None
Redemption Fees.......................... None None None
Exchange Fees............................ None None None
Annual Fund Operating Expenses (as a per-
centage of net assets)(/1/)
Management Fees.......................... 0.75% 0.75% 0.75%
12b-1 Fees............................... None None None
Other Expenses (net of fee
waivers/expense
reimbursements)(/2/).................... 0.25% 0.32% 0.18%
Total Operating Expenses (net of fee
waivers/expense
reimbursements)(/2/)...................... 1.00% 1.07% 0.93%
</TABLE>
Actual expenses may be greater or less than those shown.
- --------
(/1/) The information provided is based on data for the fiscal year ended
September 30, 1997.
(/2/) For the fiscal year ended September 30, 1997, Other Expenses and Total
Operating Expenses (on a gross basis) were: Balanced Assets Fund 39.66% and
40.41%, respectively, and Small Company Growth Fund 2.51% and 3.26%,
respectively. For the current fiscal year, Other Expenses and Total
Operating Expenses (on a gross basis) for Growth and Income Fund are
estimated to be 2.15% and 2.90%.
EXAMPLE:
You would pay the following expenses on a $1,000 investment over various
time periods assuming (1) a 5% annual rate of return and (2) redemption at the
end of each time period. The 5% return and the expenses used in this example
should not be considered indicative of actual or expected performance or
expenses both of which will vary:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Balanced Assets Fund (Class Z shares)......... $10 $32 $55 $122
Small Company Growth Fund (Class Z shares).... $11 $34 $59 $131
Growth and Income Fund (Class Z shares)....... $ 9 $30 $51 $114
</TABLE>
The foregoing examples should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights for the period ended September 30, 1997
for the Balanced Assets Fund and the Small Company Growth Fund, have been
audited by Price Waterhouse LLP, each Fund's independent accountants, whose
report on the financial statements containing such information for the period
ended September 30, 1997 is included in the Annual Report to Shareholders.
These Financial Highlights should be read in conjunction with each Fund's
financial statements and notes thereto, which are included in the Statement of
Additional Information and are incorporated by reference herein.
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME(/1/) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/2/) (000'S)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCED ASSETS FUND
CLASS Z
10/07/96-
9/30/97(/4/) $17.07 $ 0.38 $3.19 $3.57 $(0.40) $(1.75) $(2.15) $18.49 23.56% $ 53
SMALL COMPANY GROWTH FUND
CLASS Z
10/07/96-
9/30/97(/4/) $24.61 $(0.15) $4.85 $4.70 $ -- $(0.86) $(0.86) $28.45 19.78% $948
<CAPTION>
RATIO OF RATIO
EXPENSES OF NET INVEST-
TO MENT AVERAGE
AVERAGE INCOME COMMISSION
PERIOD NET TO AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/3/)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/07/96-
9/30/97(/4/) 0.99%(5)(6) 2.30%(5)(6) 149% $0.0599
10/07/96-
9/30/97(/4/) 1.07%(/5/)(/6/) (0.67)%(/5/)(/6/) 343% $0.0598
</TABLE>
- -------
(1) Calculated based upon average shares outstanding.
(2) Total return is not annualized and does not reflect sales load.
(3) The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number of
shares purchased and sold.
(4) Commencement of sale of Class Z of shares.
(5) Annualized.
(6) Net of expense reimbursements equivalent to 39.42% and 2.19% of average net
assets of the Balanced Assets Fund and the Small Company Growth Fund,
respectively.
DISCONTINUATION OF BALANCED ASSETS FUND.
Effective April 1, 1998, Class Z shares of the Balanced Assets Fund will no
longer be available for purchase. As of May 1, 1998, such class of shares of
Balanced Assets Fund will be discontinued and totally unavailable for any
transactions. This Fund will be removed from the 401(k) Plan as of the close of
business on April 30. Shareholders have between now and April 30 to transfer
all of their balances and/or future contributions out of the Balanced Assets
Fund into other funds in the 401(k) Plan. Shareholders should call Fidelity at
(800) 835-5098 to transfer their balances or redirect their future
contributions. After April 30, any balances and/or future contributions in the
Fund will be automatically reinvested in INVESCO Total Return Fund.
THE FOLLOWING INFORMATION SUPPLEMENTS "MANAGEMENT OF THE TRUST--THE
DISTRIBUTOR" IN THE RETAIL CLASS PROSPECTUS.
SunAmerica Capital Services, Inc. serves as the Distributor of Class Z shares
and incurs the expenses of distributing the Funds' Class Z shares under a
Distribution Agreement with respect to the Funds, none of which are reimbursed
by or paid for by the Funds. There is no distribution plan in effect for the
Class Z shares.
THE FOLLOWING INFORMATION SUPPLEMENTS "MANAGEMENT OF THE TRUST--THE
ADMINISTRATOR" IN THE RETAIL CLASS PROSPECTUS.
SunAmerica Fund Services, Inc. serves as the Administrator for Class Z shares
and may receive reimbursement from the Trust of its costs through a fee, none
of which is reimbursed by or paid for by the Class Z shares of the Funds. The
Class Z shares, however, pay all direct transfer agency fees and out-of-pocket
expenses.
3
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "DIVIDENDS, DISTRIBUTIONS AND TAXES--
TAXES" IN THE RETAIL CLASS PROSPECTUS.
As a qualified plan, the 401(k) Plan generally pays no federal income tax.
Individual participants in the 401(k) Plan should consult Plan documents and
their own tax advisers for information on the tax consequences associated with
participating in the 401(k) Plan.
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION UNDER "PURCHASE OF
SHARES" AND "REDEMPTION OF SHARES" IN THE RETAIL CLASS PROSPECTUS.
Class Z shares of the Funds are offered exclusively for sale to participants
in the 401(k) Plan. Such shares may be purchased or redeemed only by the
401(k) Plan on behalf of individual Plan participants at net asset value
without any sales or redemption charge. Class Z shares are not subject to any
minimum investment requirements. The Plan purchases and redeems shares to
implement the investment choices of individual Plan participants with respect
to their contributions in the Plan. All purchases of Fund shares through the
Plan will be of Class Z shares.
The net asset value per share at which shares of the Funds are purchased or
redeemed by the Plan for the accounts of individual Plan participants might be
more or less than the net asset value per share prevailing at the time that
such participants made their investment choices or made their contributions to
the Plan.
THE FOLLOWING INFORMATION SUPPLEMENTS "EXCHANGE PRIVILEGE" IN THE RETAIL CLASS
PROSPECTUS.
Class Z shareholders of one Fund may exchange their shares for Class Z
shares of Small Company Growth Fund or Growth and Income Fund on the basis of
relative net asset value per share. Class Z shareholders may also exchange
their shares for shares of any other fund offered through the 401(k) Plan. See
"Purchase of Shares" above.
THE FOLLOWING INFORMATION SUPPLEMENTS "DETERMINATION OF NET ASSET VALUE" IN
THE RETAIL CLASS PROSPECTUS.
Because Class Z shares are not subject to any distribution or service fees,
the net asset value per share of the Class Z shares will generally be higher
than the net asset value per share of each of Class A, Class B and Class C
shares, except following the payment of dividends and distributions.
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION UNDER "GENERAL
INFORMATION--SHAREHOLDER INQUIRIES" IN THE RETAIL CLASS PROSPECTUS.
Inquiries regarding the purchase, redemption or exchange of Class Z shares
or the making or changing of investment choices in the 401(k) Plan should be
directed to the Fidelity Participant Center at (800) 835-5098.
4
<PAGE>
SUNAMERICA EQUITY FUNDS
SUPPLEMENT TO PROSPECTUS DATED JANUARY 28, 1998
The date of the Prospectus is hereby changed to April 1, 1998.
The third sentence of the ninth paragraph on page 1 of the Prospectus is
replaced with the following:
You can find more detailed information about the Funds in the Statement
of Additional Information dated April 1, 1998.
April 1, 1998
<PAGE>
SUNAMERICA EQUITY FUNDS
THE SUNAMERICA CENTER, 733 THIRD AVENUE, NEW YORK, NY 10017-3204
GENERAL MARKETING AND SHAREHOLDER INFORMATION
(800) 858-8850
SunAmerica Equity Funds is an open-end management investment company (the
"Trust"). The Trust currently offers five different investment funds (each, a
"Fund" and collectively, the "Funds") with distinct investment objectives
and/or strategies. Each Fund is advised and managed by SunAmerica Asset
Management Corp. (the "Adviser"). An investor may invest in one or more of the
following Funds with the corresponding investment objectives:
SunAmerica Balanced Assets Fund ("Balanced Assets Fund")--seeks to conserve
principal by maintaining at all times a balanced portfolio of stocks and
bonds.
SunAmerica Blue Chip Growth Fund ("Blue Chip Growth Fund")--seeks capital
appreciation by investing primarily in equity securities of companies with
large market capitalizations.
SunAmerica Mid-Cap Growth Fund ("Mid-Cap Growth Fund")--seeks capital
appreciation by investing primarily in equity securities of medium-sized
companies.
SunAmerica Small Company Growth Fund ("Small Company Growth Fund")--seeks
capital appreciation by investing primarily in equity securities of small
capitalization growth companies.
SunAmerica Growth and Income Fund ("Growth and Income Fund")--seeks capital
appreciation and current income by investing primarily in common stocks.
Each Fund currently offers Class A and Class B shares. The Small Company
Growth Fund and the Growth and Income Fund also offer Class C shares. The
offering price is the next-determined net asset value per share, plus for each
class a sales charge which, at the investor's option, may be (i) imposed at
the time of purchase (Class A shares) or (ii) deferred (Class B and Class C
shares, and purchases of Class A shares in excess of $1 million). Class B
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge ("CDSC") may be imposed on redemptions made
within six years of purchase. Class B shares of each Fund will convert
automatically to Class A shares on the first business day of the month
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. Class C shares may be subject to a CDSC imposed on redemptions made
within one year of purchase. Each class makes distribution and account
maintenance and service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act"). See "Purchase of Shares."
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank through which such shares may be sold, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency.
This Prospectus explains concisely what you should know before investing in
any of the Funds. Please read it carefully before investing and retain it for
future reference. You can find more detailed information about the Funds in
the Statement of Additional Information dated January 28, 1998, which is
incorporated by reference into this Prospectus, and further information about
the performance of the Funds in the Trust's Annual Report to Shareholders. The
Statement of Additional Information and Annual Report to Shareholders may be
obtained without charge by contacting the Trust at the address or telephone
number listed above.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
PROSPECTUS DATED JANUARY 28, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus......................... Cover
Summary of Fund Expenses........... 2
Financial Highlights............... 4
Investment Objectives, Policies and
Restrictions 7
Balanced Assets Fund............... 7
Blue Chip Growth Fund.............. 7
Mid-Cap Growth Fund................ 8
Small Company Growth Fund.......... 8
Growth and Income Fund............. 8
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Techniques
and Risk Factors....... 9
Management of the Trust. 14
Purchase of Shares...... 16
Redemption of Shares.... 20
Exchange Privilege...... 21
Portfolio Transactions,
Brokerage and Turnover. 22
Determination of Net As-
set Value.............. 22
Performance Data........ 22
Dividends, Distributions
and Taxes.............. 23
General Information..... 24
</TABLE>
SUMMARY OF FUND EXPENSES
A general comparison of the sales arrangements and other non-recurring
expenses applicable to Class A, Class B and Class C shares follows:
<TABLE>
<CAPTION>
BALANCED BLUE CHIP MID-CAP SMALL COMPANY GROWTH AND
ASSETS FUND GROWTH FUND GROWTH FUND GROWTH FUND INCOME FUND
----------- ----------- ----------- ----------------- -----------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B A B C A B C
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Initial Sales
Load(/1/)............. 5.75% None 5.75% None 5.75% None 5.75% None None 5.75% None None
Maximum Sales Load on
Reinvested Dividends.. None None None None None None None None None None None None
Maximum Deferred Sales
Load(/2/)............. None 4.00% None 4.00% None 4.00% None 4.00% 1.00% None 4.00% 1.00%
Redemption Fees(/3/)... None None None None None None None None None None None None
Exchange Fees.......... None None None None None None None None None None None None
Annual Fund Operating Expenses (net
of fee waivers/expense reimburse-
ments)(/4/)
(as a percentage of average net assets)
Management Fees........ 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(/5/)........ 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 1.00% 0.35% 1.00% 1.00%
Other Expenses......... 0.40% 0.36% 0.44% 0.47% 0.54% 0.60% 0.62% 0.59% 0.59% 0.40% 0.40% 0.40%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Operating
Expenses(/6/).......... 1.50% 2.11% 1.54% 2.22% 1.64% 2.35% 1.72% 2.34% 2.34% 1.50% 2.15% 2.15%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- -------
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1,000,000 or more. See "Purchase of Shares."
(2) Purchases of Class A shares in excess of $1,000,000 will be subject to a
CDSC on redemptions made within one year of purchase. The CDSC on Class B
shares applies only if a redemption occurs within six years from their
purchase date. The CDSC on Class C shares applies only on redemptions made
within one year of purchase.
(3) A $15.00 fee may be imposed for wire redemptions.
(4) The information provided is based on data for the fiscal year ended
September 30, 1997, with the exception of Growth and Income Fund Class A and
Class B, which represents estimated expenses for the current fiscal year. The
Growth and Income Fund's expenses for the year ended September 30, 1997 were
1.38% for Class A and 2.05% for Class B, net of expense waivers and
reimbursements.
(5) 0.25% of the 12b-1 fee comprises an Account Maintenance and Service Fee. A
portion of the Account Maintenance and Service Fee is allocated to member
firms of the National Association of Securities Dealers, Inc. for continuous
personal service by such members to investors in the Funds, such as
responding to shareholder inquiries, quoting net asset values, providing
current marketing material and attending to other shareholder matters. Class
B or Class C shareholders who own their shares for an extended period of time
may pay more in Rule 12b-1 distribution fees than the economic equivalent of
the maximum front-end sales charge permitted under the Conduct Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
(6) For the fiscal year ended September 30, 1997, the total operating expenses
(on a gross basis) for Growth and Income Fund Class A and Class B were: 1.60%
and 2.26%, respectively. For the current fiscal year, the total operating
expenses (on a gross basis) for Small Company Growth Fund and Growth and
Income Fund Class C are estimated to be: 3.34% and 3.15%, respectively.
2
<PAGE>
EXAMPLE:
You would pay the following expenses on a $1,000 investment over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end
of each time period. The 5% return and the expenses used in this example should
not be considered indicative of actual or expected performance or expenses both
of which will vary:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
BALANCED ASSETS FUND
(Class A shares).............................. $72 $102 $135 $226
(Class B shares)*............................. $61 $ 96 $133 $221
BLUE CHIP GROWTH FUND
(Class A shares).............................. $72 $103 $137 $230
(Class B shares)*............................. $63 $ 99 $139 $230
MID-CAP GROWTH FUND
(Class A shares).............................. $73 $106 $142 $241
(Class B shares)*............................. $64 $103 $146 $242
SMALL COMPANY GROWTH FUND
(Class A shares).............................. $74 $109 $145 $249
(Class B shares)*............................. $64 $103 $145 $244
(Class C shares).............................. $34 $ 73 $125 $268
GROWTH AND INCOME FUND
(Class A shares).............................. $72 $102 $135 $226
(Class B shares)*............................. $62 $ 97 $135 $224
(Class C shares).............................. $32 $ 67 $115 $248
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
BALANCED ASSETS FUND
(Class A shares).............................. $72 $102 $135 $226
(Class B shares)*............................. $21 $ 66 $113 $221
BLUE CHIP GROWTH FUND
(Class A shares).............................. $72 $103 $137 $230
(Class B shares)*............................. $23 $ 69 $119 $230
MID-CAP GROWTH FUND
(Class A shares).............................. $73 $106 $142 $241
(Class B shares)*............................. $24 $ 73 $126 $242
SMALL COMPANY GROWTH FUND
(Class A shares).............................. $74 $109 $145 $249
(Class B shares)*............................. $24 $ 73 $125 $244
(Class C shares).............................. $24 $ 73 $125 $268
GROWTH AND INCOME FUND
(Class A shares).............................. $72 $102 $135 $226
(Class B shares)*............................. $22 $ 67 $115 $224
(Class C shares).............................. $22 $67 $115 $248
</TABLE>
The foregoing examples should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
- -------
* Class B shares convert to Class A shares on the first business day of the
month following the seventh anniversary of the purchase of such Class B
shares. Therefore, with respect to the 10-year expense information, years 8,
9 and 10 reflect the expenses attributable to ownership of Class A shares.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights for each of the four years in the period
ended September 30, 1997 and for the period July 1, 1993 through September 30,
1993 and for the three years in the period ended June 30, 1993 for the Balanced
Assets Fund and the periods through September 30, 1997 for the Blue Chip Growth
Fund, have been audited by Price Waterhouse LLP, each Fund's independent
accountants, whose report on the financial statements containing such
information for the five periods in the period ended September 30, 1997 is
included in the Annual Report to Shareholders. These Financial Highlights
should be read in conjunction with each Fund's financial statements and notes
thereto, which are included in the Statement of Additional Information and are
incorporated by reference herein.
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
09/24/93-
09/30/93(/3/) $15.07 $ -- $ 0.06 $ 0.06 $ -- $ -- $ -- $15.13 0.40 % $ 33,381
09/30/94 15.13 0.30(/5/) (0.23) 0.07 (0.28) (0.30) (0.58) 14.62 0.50 52,098
09/30/95 14.62 0.32(/5/) 2.51 2.83 (0.45) (0.58) (1.03) 16.42 20.68 119,916
09/30/96 16.42 0.27(5) 1.39 1.66 (0.28) (0.99) (1.27) 16.81 10.65 147,035
09/30/97 16.81 0.31 3.43 3.74 (0.31) (1.75) (2.06) 18.49 24.81 169,201
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS A
<S> <C> <C> <C> <C>
09/24/93-
09/30/93(/3/) 1.54%(4) 0.46%(4) 25% $ N/A
09/30/94 1.58 2.00 141 N/A
09/30/95 1.50 2.13 130 N/A
09/30/96 1.52 1.63 187 0.0611
09/30/97 1.50 1.86 149 0.0599
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS B(6)
----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
06/30/88 $14.72 $0.23(/5/) $(0.52) $(0.29) $(0.23) $(0.72) $(0.95) $13.48 (1.49)% $151,924
06/30/89 13.48 0.37(/5/) 0.70 1.07 (0.38) -- (0.38) 14.17 8.22 131,317
06/30/90 14.17 0.53(/5/) 1.26 1.79 (0.53) -- (0.53) 15.43 12.89 123,611
06/30/91 15.43 0.39(/5/) 0.18 0.57 (0.25) -- (0.25) 15.75 4.41 90,239
06/30/92 15.75 0.33(/5/) 0.98 1.31 (0.42) (1.01) (1.43) 15.63 7.51 83,234
06/30/93 15.63 0.30(/5/) 2.63 2.93 (0.30) (2.40) (2.70) 15.86 20.29 113,871
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS B(6)
----
<S> <C> <C> <C> <C>
06/30/88 2.01% 1.65% 58% $ N/A
06/30/89 2.02 2.74 59 N/A
06/30/90 1.92 3.55 33 N/A
06/30/91 1.94(/7/) 2.65(/7/) 56 N/A
06/30/92 1.93(/8/) 2.04(/8/) 151 N/A
06/30/93 1.91(/9/) 1.94(/9/) 251 N/A
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS B(6)
----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
07/01/93-
09/30/93 15.86 0.05(/5/) 0.49 0.54 (0.06) (1.21) (1.27) 15.13 3.44 137,456
09/30/94 15.13 0.20(/5/) (0.23) (0.03) (0.18) (0.30) (0.48) 14.62 (0.14) 180,655
09/30/95 14.62 0.23(/5/) 2.51 2.74 (0.36) (0.58) (0.94) 16.42 19.96 162,115
09/30/96 16.42 0.17(/5/) 1.38 1.55 (0.18) (0.99) (1.17) 16.80 9.93 171,197
09/30/97 16.80 0.21(/5/) 3.43 3.64 (0.21) (1.75) (1.96) 18.48 24.09 173,435
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BALANCED ASSETS FUND
CLASS B(6)
----
<S> <C> <C> <C> <C>
07/01/93-
09/30/93 2.10(4)(10) 1.36(4)(10) 25 N/A
09/30/94 2.21 1.36 141 N/A
09/30/95 2.12 1.59 130 N/A
09/30/96 2.12 1.03 187 0.0611
09/30/97 2.11 1.26 149 0.0599
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/08/93-
09/30/94(/3/) $16.24 $ 0.09(/5/) $(0.26) $(0.17) $ -- $(0.65) $(0.65) $15.42 (1.05)% $ 3,207
09/30/95 15.42 0.02(/5/) 2.99 3.01 -- (1.09) (1.09) 17.34 21.29 42,407
09/30/96 17.34 (0.03)(/5/) 2.22 2.19 -- (1.91) (1.91) 17.62 13.88 51,993
09/30/97 17.62 (0.02)(/5/) 5.05 5.03 -- (2.43) (2.43) 20.22 32.96 67,812
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS A
<S> <C> <C> <C> <C>
10/08/93-
09/30/94(/3/) 1.64%(/4/)(/12/) 0.65%(/4/)(/1//2/) 170% $ N/A
09/30/95 1.58(/3/) 0.11(13) 251 N/A
09/30/96 1.57 (0.18) 269 0.0600
09/30/97 1.54 (0.11) 211 0.0600
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/88 $10.53 $ 0.16 $ 2.91 $ 3.07 $(0.17) $(0.60) $(0.77) $12.83 29.34% $216,582
12/31/89 12.83 0.17 1.47 1.64 (0.17) (1.35) (1.52) 12.95 12.76 207,549
12/31/90 12.95 0.04 (3.29) (3.25) (0.05) -- (0.05) 9.65 (25.11) 123,379
12/31/91 9.65 (0.06) 2.94 2.88 -- -- -- 12.53 29.84 105,734
12/31/92 12.53 (0.13) 1.19 1.06 -- -- -- 13.59 8.46 83,237
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS B
<S> <C> <C> <C> <C>
12/31/88 2.35% 1.20% 47% $ N/A
12/31/89 2.36 1.12 67 N/A
12/31/90 2.51 3.36 90 N/A
12/31/91 2.50 (0.42) 79 N/A
12/31/92 2.53 (0.75) 192 N/A
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
01/01/93-
09/30/93 13.59 (0.02)(/5/) 2.71 2.69 -- -- -- 16.28 19.79 79,774
09/30/94 16.28 (0.01)(/5/) (0.28) (0.29) -- (0.65) (0.65) 15.34 (1.81) 71,749
09/30/95 15.34 (0.01)(/5/) 2.89 2.88 -- (1.09) (1.09) 17.13 20.51 39,533
09/30/96 17.13 (0.14)(/5/) 2.19 2.05 -- (1.91) (1.91) 17.27 13.17 36,199
09/30/97 17.27 (0.13)(/5/) 4.90 4.77 -- (2.43) (2.43) 19.61 32.02 37,633
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/2/)
- ------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(11)
CLASS B
<S> <C> <C> <C> <C>
01/01/93-
09/30/93 2.46(/4/) (0.14)(/4/) 171 N/A
09/30/94 2.28 (0.05) 170 N/A
09/30/95 2.22 (0.09) 251 N/A
09/30/96 2.23 (0.83) 269 0.0600
09/30/97 2.22 (0.77) 211 0.0600
</TABLE>
- -------
(1) Total return is not annualized and does not reflect sales load.
(2) The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number of
shares purchased or sold.
(3) Commencement of sale of respective class of shares.
(4) Annualized.
(5) Calculated based upon average shares outstanding.
(6) Shares of the SunAmerica Balanced Assets Fund series of SunAmerica Fund
Group were redesignated as Class B shares of SunAmerica Balanced Assets
Fund. In addition, the Fund changed its fiscal year end to September 30,
effective September 24, 1993.
(7) Net of expense reimbursement equivalent to .29% of average net assets in
fiscal 1991.
(8) Net of expense reimbursement equivalent to .12% of average net assets in
fiscal 1992.
(9) Net of expense reimbursement equivalent to .05% of average net assets in
fiscal 1993.
(10) Net of expense reimbursement equivalent to .04% of average net assets for
the period ended September 30, 1993.
(11) Blue Chip Growth Fund changed its fiscal year end to September 30,
effective September 24, 1993.
(12) Net of expense reimbursement equivalent to 1.66% of average net assets for
the period ended September 30, 1994.
(13) Net of fee waiver/expense reimbursement equivalent to .11% of average net
assets for the fiscal year ended September 30, 1995.
4
<PAGE>
The following Financial Highlights for the periods through September 30,
1997, have been audited by Price Waterhouse LLP, each Fund's independent
accountants, whose report on the financial statements containing such
information for the five periods in the period ended September 30, 1997 is
included in the Annual Report to Shareholders. These Financial Highlights
should be read in conjunction with each Fund's financial statements and notes
thereto, which are included in the Statement of Additional Information and are
incorporated by reference herein.
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/88 $10.50 $ 0.47 $ 2.36 $ 2.83 $(0.08) -- $(0.08) $13.25 26.97% $ 28,082
11/30/89 13.25 0.17 4.42 4.59 (0.29) $(0.54) (0.83) 17.01 36.39 48,188
11/30/90 17.01 0.30 (3.08) (2.78) (0.24) (1.09) (1.33) 12.90 (17.62) 27,460
11/30/91 12.90 0.16 3.09 3.25 (0.25) (2.60) (2.85) 13.30 31.13 29,142
11/30/92 13.30 (0.07) 2.87 2.80 (0.02) (0.44) (0.46) 15.64 21.42 30,024
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C>
11/30/88 1.84% 3.47% 89% $ N/A
11/30/89 1.83 0.85 54 N/A
11/30/90 1.84 1.72 65 N/A
11/30/91 1.76 1.20 225 N/A
11/30/92 1.76 (0.46) 98 N/A
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/01/92-
09/30/93 15.64 (0.09)(/5/) 3.17 3.08 -- (0.69) (0.69) 18.03 20.42 34,918
09/30/94 18.03 0.04 (/5/) (1.64) (1.60) -- (2.65) (2.65) 13.78 (9.60) 32,906
09/30/95 13.78 (0.08)(/5/) 4.14 4.06 (0.04) -- (0.04) 17.80 29.51 37,714
09/30/96 17.80 (0.12)(/5/) 2.21 2.09 -- (2.11) (2.11) 17.78 12.92 41,904
09/30/97 17.78 (0.15)(/5/) 3.83 3.68 -- (0.80) (0.80) 20.66 21.54 46,051
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C>
12/01/92-
09/30/93 1.81(4) 1.18(/4/) 231 N/A
09/30/94 1.76 0.28 555 N/A
09/30/95 1.66 (0.51) 392 N/A
09/30/96 1.62 (0.69) 307 0.0603
09/30/97 1.64 (0.84) 332 0.0600
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10/04/93-
09/30/94(/6/) $18.12 $ 0.03 (/5/) $(1.80) $(1.77) $ -- $(2.65) $(2.65) $13.70 (10.56)% $ 4,039
09/30/95 13.70 (0.18)(/5/) 4.08 3.90 (0.02) -- (0.02) 17.58 28.55 9,544
09/30/96 17.58 (0.24)(/5/) 2.18 1.94 -- (2.11) (2.11) 17.41 12.16 13,784
09/30/97 17.41 (0.28)(/5/) 3.73 3.45 -- (0.80) (0.80) 20.06 20.65 13,779
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
MID-CAP GROWTH FUND(3)
CLASS B
<S> <C> <C> <C> <C>
10/04/93-
09/30/94(/6/) 2.43%(4)(7) 0.20%(/4/)(/7/) 555% $ N/A
09/30/95 2.31(9) (0.17)(9) 392 N/A
09/30/96 2.32 (1.43) 307 0.0603
09/30/97 2.35 (1.56) 332 0.0600
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11/30/88(8) $ 8.85 $(0.11)(/5/) $ 5.18 $ 5.07 $ -- $ -- $ -- $13.92 57.29% $ 22,180
11/30/89(8) 13.92 (0.01)(/5/) 4.03 4.02 -- (0.29) (0.29) 17.65 29.41 48,956
11/30/90(8) 17.65 (0.04)(/5/) (5.19) (5.23) -- (0.54) (0.54) 11.88 (30.58) 23,548
11/30/91(8) 11.88 (0.01)(/5/) 4.92 4.91 -- (2.91) (2.91) 13.88 52.05 27,832
11/30/92(8) 13.88 (0.12)(/5/) 3.39 3.27 -- (0.69) (0.69) 16.46 24.31 32,056
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C>
11/30/88(8) 2.16% (0.80)% 54% $ N/A
11/30/89(8) 1.82 (0.04) 32 N/A
11/30/90(8) 2.05 (0.26) 27 N/A
11/30/91(8) 1.86 (0.06) 110 N/A
11/30/92(8) 1.90 (0.88) 209 N/A
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12/01/92-
09/30/93(/8/) 16.46 (0.02)(/5/) 4.07 4.05 -- (0.73) (0.73) 19.78 25.68 39,238
09/30/94 19.78 (0.10)(/5/) (1.40) (1.50) -- (1.46) (1.46) 16.82 (7.74) 38,570
09/30/95 16.82 (0.04)(/5/) 8.28 8.24 -- (0.41) (0.41) 24.65 50.00 89,510
09/30/96 24.65 (0.16)(/5/) 4.29 4.13 -- (4.53) (4.53) 24.25 19.35 158,567
09/30/97 24.25 (0.30)(/5/) 5.18 4.88 -- (0.86) (0.86) 28.27 20.84 185,241
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS A
<S> <C> <C> <C> <C>
12/01/92-
09/30/93(/8/) 1.83(/4/) (0.15)(4) 216 N/A
09/30/94 1.67 (0.60) 411 N/A
09/30/95 1.57 (0.22) 351 N/A
09/30/96 1.53 (0.68) 240 0.0607
09/30/97 1.72 (1.27) 343 0.0598
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/1/) (000'S)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
09/24/93-
09/30/93(/5/) $19.66 $ -- $ 0.12 $ 0.12 $ -- $ -- $ -- $19.78 0.61 % $ 38,898
09/30/94 19.78 (0.20)(/5/) (1.42) (1.62) -- (1.46) (1.46) 16.70 (8.40) 52,208
09/30/95 16.70 (0.16)(/5/) 8.19 8.03 -- (0.41) (0.41) 24.32 49.08 68,313
09/30/96 24.32 (0.29)(/5/) 4.20 3.91 -- (4.53) (4.53) 23.70 18.60 107,839
09/30/97 23.70 (0.44)(/5/) 5.03 4.59 -- (0.86) (0.86) 27.43 20.08 124,450
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME PORT- AVERAGE
AVERAGE TO FOLIO COMMISSION
PERIOD NET AVERAGE TURN- PER
ENDED ASSETS NET ASSETS OVER SHARE(/2/)
- ---------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH FUND(3)
CLASS B
<S> <C> <C> <C> <C>
09/24/93-
09/30/93(/5/) 2.34%(4) (1.70)%(4) 216% $ N/A
09/30/94 2.31 (1.23) 411 N/A
09/30/95 2.22 (0.84) 351 N/A
09/30/96 2.16 (1.30) 240 0.0607
09/30/97 2.34 (1.89) 343 0.0598
</TABLE>
- -------
(1) Does not reflect sales load.
(2) The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number of
shares purchased or sold.
(3) Mid-Cap Growth Fund and Small Company Growth Fund both changed their fiscal
year ends to September 30, effective September 24, 1993.
(4) Annualized.
(5) Calculated based upon average shares outstanding.
(6) Commencement of sale of respective class of shares.
(7) Net of expense reimbursement equivalent to .48% of average net assets for
the period ended September 30, 1994.
(8) Restated to reflect a 0.984460367 for 1.00 stock split effective September
24, 1993.
(9) Net of fee waiver/expense reimbursement equivalent to .17% of average net
assets for the year ended September 30, 1995.
5
<PAGE>
The following Financial Highlights for the periods through September 30, 1997
for the Growth and Income Fund have been audited by Price Waterhouse LLP, the
Fund's independent accountants, whose report on the financial statements
containing such information is included in the Annual Report to Shareholders.
These Financial Highlights should be read in conjunction with the Fund's
financial statements and notes thereto, which are included in the Statement of
Additional Information and are incorporated by reference herein.
<TABLE>
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME(/1/) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/2/) (000'S)
- ------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
CLASS A
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
07/01/094-
09/30/94(4) $7.33 $0.07 $0.10 $0.17 $(0.06) $ -- $(0.06) $7.44 2.34% $3,098
09/30/95 7.44 0.32 1.08 1.40 (0.30) (0.15) (0.45) 8.39 19.53 3,532
09/30/96 8.39 0.14 2.50 2.64 (0.17) (0.39) (0.56) 10.47 32.59 21,099
09/30/97 10.47 0.05 3.40 3.45 (0.03) (0.44) (0.47) 13.45 34.18 47,219
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/3/)
- --------------------------------------------------------------------------
GROWTH AND INCOME FUND
CLASS A
<S> <C> <C> <C> <C>
07/01/094-
09/30/94(4) 1.50%(/5/)(/6/) 3.48%(/5/)(/6/) 8% $ N/A
09/30/95 0.46(/6/) 4.16(/6/) 230 N/A
09/30/96 0.96(/6/) 1.52(/6/) 161 0.0600
09/30/97 1.38(/6/) 0.45(/6/) 200 0.0600
<CAPTION>
NET
GAIN (LOSS)
ON
INVESTMENTS TOTAL DIVIDENDS DISTRI- NET NET
NET ASSET NET (BOTH FROM FROM NET BUTIONS ASSET ASSETS,
VALUE, INVEST- REALIZED INVEST- INVEST- FROM TOTAL VALUE, END OF
PERIOD BEGINNING MENT AND MENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD
ENDED OF PERIOD INCOME(/1/) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(/2/) (000'S)
- ------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
07/06/94-
09/30/94(/4/) $7.33 $0.05 $0.11 $0.16 $(0.05) $ -- $(0.05) $7.44 2.19% $ 229
09/30/95 7.44 0.35 1.03 1.38 (0.28) (0.15) (0.43) 8.39 19.19 2,538
09/30/96 8.39 0.08 2.50 2.58 (0.13) (0.39) (0.52) 10.45 31.75 13,903
09/30/97 10.45 (0.03) 3.39 3.36 (0.01) (0.44) (0.45) 13.36 33.30 55,530
<CAPTION>
RATIO
OF NET
RATIO OF INVEST-
EXPENSES MENT
TO INCOME AVERAGE
AVERAGE TO COMMISSION
PERIOD NET AVERAGE PORTFOLIO PER
ENDED ASSETS NET ASSETS TURNOVER SHARE(/3/)
- --------------------------------------------------------------------------
GROWTH AND INCOME FUND
CLASS B
<S> <C> <C> <C> <C>
07/06/94-
09/30/94(/4/) 2.15%(5)(6) 2.86%(5)(6) 8% $ N/A
09/30/95 0.30(/6/) 4.48(/6/) 230 N/A
09/30/96 1.58(/6/) 0.73(/6/) 161 0.0600
09/30/97 2.05(/6/) (0.27)(/6/) 200 0.0600
</TABLE>
- --------
(1) Calculated based upon average shares outstanding.
(2) Total return is not annualized and does not reflect sales load.
(3) The average commission per share is derived by taking the agency
commissions paid on equity securities trades and dividing by the number of
shares purchased or sold.
(4) Commencement of sale of respective class of shares.
(5) Annualized.
(6) Net of the following fee waivers/expense reimbursements (based on average
net assets):
<TABLE>
<CAPTION>
09/30/94 09/30/95 09/30/96 09/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Growth and Income Class A................. 4.48% 2.96% 1.01% 0.22%
Growth and Income Class B................. 20.35 5.07 1.14 0.21
</TABLE>
6
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
A description of each Fund's investment objective and a summary of the in-
vestment policies followed by the Funds are set forth below. However, please
also refer to the section captioned "Investment Techniques and Risk Factors"
for a more detailed description of the characteristics and risks associated
with the Funds and the types of securities in which they invest. There can be
no assurance that the investment objective of a Fund will be achieved.
Each Fund has certain investment restrictions which are described in the
Statement of Additional Information. Except as specifically indicated, a
Fund's investment policies and strategies described herein are not fundamental
and may be changed by the Board of Trustees (the "Trustees") without the ap-
proval of shareholders. Each Fund's respective investment objective and funda-
mental investment restrictions, however, may not be changed without approval
of shareholders of the affected Fund. See "General Information." Each Fund is
classified as diversified within the meaning of the 1940 Act.
BALANCED ASSETS FUND
In seeking to achieve the investment objective of the Balanced Assets Fund,
the Adviser has the flexibility to select among different types of investments
for capital growth and income and may alter the composition of the portfolio
as economic and market trends change. The Adviser considers both the opportu-
nity for gain and the risk of loss in making investments. The Adviser antici-
pates that, over the long term, the portfolio will consist of equity invest-
ments, in the form of common and preferred stocks, warrants and other rights
as well as long-term bonds and other debt securities such as convertible secu-
rities, short-term investments and U.S. government securities. The Adviser may
invest in both domestic and foreign securities. The Balanced Assets Fund will,
under normal circumstances, invest at least 25% of its assets in fixed-income
senior securities; however, the fixed income component will exceed 25% when
the Adviser believes such an adjustment in portfolio mix to be necessary in
order to conserve principal, such as in anticipation of a decline in the equi-
ties market. See "Investment Techniques and Risk Factors."
In selecting equity investments, the Adviser typically seeks companies of
medium to large capitalizations (generally $1 billion or more) that, based on
their future prospects or opportunities, it believes are undervalued in the
marketplace. The Fund intends to limit its investments in companies with mar-
ket capitalizations of less than $1 billion to 20% of its total assets. In-
vestments in companies with market capitalizations of less than $1 billion may
be more volatile than investments in companies with larger market capitaliza-
tions.
In selecting debt investments, the Adviser seeks debt securities with longer
maturities during periods of anticipated lower interest rates and shorter-term
debt securities when interest rates are expected to rise. The Adviser gener-
ally selects long-term debt securities from high-quality bonds (rated "AA" or
higher by Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies Inc. ("S&P"), "Aa" or higher by Moody's Investors Service, Inc.
("Moody's"), or determined by the Adviser to be of equivalent quality if
unrated) to achieve income and capital gains. The Adviser may also invest the
Fund's assets in high-quality, short-term debt securities (such as commercial
paper rated "A-1" by S&P or "P-1" by Moody's or determined by the Adviser to
be of equivalent quality if unrated). However, the Adviser may invest up to
10% of the value of the Fund's total assets (measured at the time of invest-
ment) in securities rated as low as "BBB" by S&P or "Baa" by Moody's (or de-
termined by the Adviser to be of equivalent quality if unrated). See "Fixed
Income Securities" in "Investment Techniques and Risk Factors" below for a
discussion of the risks associated with investing in such securities. See also
the Appendix to the Statement of Additional Information for a description of
securities ratings.
BLUE CHIP GROWTH FUND
The Blue Chip Growth Fund will invest, under normal circumstances, at least
65% of its total assets in equity securities of companies with large market
capitalizations, and which have conducted operations for at least five years.
A "blue chip" or "large-cap" stock is one which the Adviser considers compara-
ble to the stocks included in the Standard & Poor's 500 Index ("S&P 500") at
the time of purchase, and which has a minimum market capitalization of $5 bil-
lion, and that is traded on the New York Stock Ex-
7
<PAGE>
change ("NYSE"), American Stock Exchange ("AMEX") or on other national ex-
changes or on foreign exchanges. The Fund may also invest in equity securities
that are (i) issued by small companies which are believed by the Adviser to
have significant growth potential; or (ii) unlisted, but these will generally
be securities that have an established over-the-counter market, although the
depth and liquidity of that market may vary from time to time and from secu-
rity to security. In pursuing its investment objective, the Fund may, under
normal circumstances, invest up to 35% of its total assets in debt securities
that have the potential for capital appreciation. The Fund may invest in secu-
rities rated as low as "BBB" or "Baa." See "Fixed Income Securities" in "In-
vestment Techniques and Risk Factors" below for a discussion of the risks as-
sociated with investing in such securities.
MID-CAP GROWTH FUND
The Mid-Cap Growth Fund will invest, under normal circumstances, at least
65% of its total assets in the equity securities of medium-sized companies
("Mid-Cap Companies") with market capitalizations of $1 billion to $5 billion,
and which have conducted operations for at least five years. The Fund may also
invest in equity securities that are issued by small companies which are be-
lieved by the Adviser to have significant growth potential. A significant por-
tion of the Fund's equity investments are in securities listed on the NYSE or
other national securities exchanges or on foreign exchanges. The Fund will
also invest in unlisted securities, but these will generally be securities
that have an established over-the-counter market, although the depth and li-
quidity of that market may vary from time to time and from security to securi-
ty. In pursuing its investment objective, the Fund may, under normal circum-
stances, invest up to 35% of its total assets in debt securities that have the
potential for capital appreciation. The Fund may invest in securities rated as
low as "BBB" or "Baa." See "Fixed Income Securities" in "Investment Techniques
and Risk Factors" below for a discussion of the risks associated with invest-
ing in such securities.
SMALL COMPANY GROWTH FUND
The Small Company Growth Fund pursues its investment objective by investing,
under normal circumstances, at least 65% of its total assets in the equity se-
curities of small, lesser known or new growth companies or industries, such as
telecommunications, media and biotechnology. Such "Small Cap" companies will
typically have market capitalizations of under $1 billion and have achieved,
or are expected to achieve, growth or earnings over various major business cy-
cles. The Fund may invest in securities issued by well known and established
domestic or foreign companies, as well as in newer and less-seasoned compa-
nies. Such securities may be listed on an exchange or traded over-the-counter.
See "Investment in Small Companies" in "Investment Techniques and Risk Fac-
tors" below for a discussion of the risks associated with investing in small
companies. In pursuing its investment objectives, the Fund may invest up to
35% of its total assets in debt securities that have the potential for capital
appreciation. The Fund may invest in securities rated as low as "BBB" or
"Baa." See "Fixed Income Securities" in "Investment Techniques and Risk Fac-
tors" below for a discussion of the risks associated with investing in such
securities.
GROWTH AND INCOME FUND
The Growth and Income Fund will invest primarily in common stocks that offer
potential for capital appreciation, current income, or both. The Fund may also
purchase corporate bonds, notes, debentures, preferred stocks, convertible se-
curities (both debt securities and preferred stocks) or U.S. government secu-
rities, if the Adviser determines that their purchase would help further the
achievement of the Fund's investment objectives. In addition, the Fund may in-
vest in equity securities that are (i) issued by small companies which are be-
lieved by the Adviser to have significant growth potential; or (ii) unlisted,
but these will generally be securities that have an established over-the-
counter market, although the depth and liquidity of that market may vary from
time to time and from security to security. The types of securities held by
the Fund may vary from time to time in light of the Fund's investment objec-
tives, changes in interest rates, and economic and other factors. The Fund may
also hold a portion of its assets in cash or money market instruments. When
market conditions warrant, the Fund may, as a temporary defensive measure, in-
vest without limitation in debt securities, preferred stocks, or invest in any
other securities which the Adviser considers consistent with a defensive pos-
ture. See "Investment in Small Companies" in "Investment Techniques and Risk
Factors" below for
8
<PAGE>
a discussion of the risks associated with investment in small companies.
The Fund is authorized to invest a portion of its debt portfolio in fixed
income securities rated below investment grade by a nationally recognized sta-
tistical rating organization or in unrated securities which, in the Adviser's
judgment, possess similar credit characteristics ("high yield bonds"). The Ad-
viser has adopted a policy that the Fund will not invest more than 15% of the
Fund's total assets in obligations rated below "BBB" or "Baa." Investment in
high yield bonds (commonly referred to as "junk" bonds) involves substantial
risk. Investments in high yield bonds will be made only when, in the judgment
of the Adviser, such securities provide attractive total return potential,
relative to the risk of such securities, as compared to higher quality debt
securities. Securities rated "BB" or lower by S&P or "Ba" or lower by Moody's
are considered by those rating agencies to have varying degrees of speculative
characteristics. The Fund generally will not invest in debt securities in the
lowest rating categories ("CC" or lower for S&P or "Ca" or lower for Moody's)
unless the Adviser believes that the financial condition of the issuer or the
protection afforded the particular securities is stronger than would otherwise
be indicated by such low ratings. In the event the rating of a debt security
is down-graded below the lowest rating category deemed by the Adviser to be
acceptable for the Fund's investments, the Adviser will determine on a case-
by-case basis the appropriate action to best serve the interest of sharehold-
ers, including disposition of the security. See "Fixed Income Securities" in
"Investment Techniques and Risk Factors" below and the Statement of Additional
Information for additional information regarding high yield bonds.
INVESTMENT TECHNIQUES AND RISK FACTORS
ILLIQUID SECURITIES. No more than 15% of the value of a Fund's net assets
may be invested in securities which are illiquid, including repurchase agree-
ments that have a maturity of longer than seven days, interest rate swaps,
currency swaps, caps, floors and collars. For this purpose, not all securities
which are restricted are deemed to be illiquid. For example, restricted secu-
rities which the Board of Trustees, or the Adviser pursuant to guidelines es-
tablished by the Board of Trustees, has determined to be marketable, such as
securities eligible for sale under Rule 144A promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), or certain private placements
of commercial paper issued in reliance on an exemption from such Act pursuant
to Section 4(2) thereof, may be deemed to be liquid for purposes of this re-
striction. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers (as defined in Rule 144A) become for a time uninterested in purchasing
these restricted securities. In addition, a repurchase agreement which by its
terms can be liquidated before its nominal fixed-term on seven days or less
notice is regarded as a liquid instrument. Subject to the applicable limita-
tion on illiquid securities investments, a Fund may acquire securities issued
by the U.S. government, its agencies or instrumentalities in a private place-
ment. See "Illiquid Securities" in the Statement of Additional Information for
a further discussion of investments in such securities.
REPURCHASE AGREEMENTS. Under these types of agreements, a Fund buys a secu-
rity and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time (generally within seven days) and price. The
seller must maintain appropriate collateral with the Fund's custodian (or at
an appropriate sub-custodian in the case of tri- or quad-party repurchase
agreements). A Fund will only enter into repurchase agreements involving secu-
rities in which it could otherwise invest and with selected banks and securi-
ties dealers whose financial condition is monitored by the Adviser, subject to
the guidance of the Trustees. If the seller under the repurchase agreement de-
faults, the Fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined, and may incur disposition costs in connec-
tion with liquidating the collateral. If bankruptcy proceedings are commenced
with respect to the seller, realization of the collateral by the Fund may be
delayed or limited. There is no limit on the amount of a Fund's net assets
that may be subject to repurchase agreements having a maturity of seven days
or less for temporary defensive purposes.
SHORT-TERM AND TEMPORARY DEFENSIVE INVESTMENTS. In addition to their primary
investments, each Fund may also invest up to 10% of its total assets in money
market instruments for liquidity purposes (to meet redemptions and expenses).
For temporary defensive purposes, each Fund may invest up to 100% of its total
assets in fixed-income securi-
9
<PAGE>
ties, including corporate debt obligations and money market instruments rated
in one of the two highest categories by a nationally recognized statistical
rating organization (or determined by the Adviser to be of equivalent quali-
ty). Money market instruments include securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, repurchase agreements,
commercial paper, bankers' acceptances and certificates of deposit. See the
Appendix to the Statement of Additional Information for a description of secu-
rities ratings.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in securities issued or
guaranteed by the U.S. government, which include the following: (1) direct ob-
ligations of the U.S. Treasury (such as Treasury bills, notes and bonds) and
(2) federal agency obligations guaranteed as to principal and interest by the
U.S. Treasury (such as Government National Mortgage Association ("GNMA") cer-
tificates and Federal Housing Administration debentures). For these securi-
ties, the payment of principal and interest is unconditionally guaranteed by
the U.S. government. They are of the highest possible credit quality. These
securities are subject to variations in market value due to fluctuations in
interest rates, but if held to maturity, are guaranteed by the U.S. government
to be paid in full.
Each Fund may also invest in securities issued by U.S. government instrumen-
talities and certain federal agencies that are neither direct obligations of,
nor are they guaranteed by, the U.S. Treasury. However, they involve federal
sponsorship in one way or another. For example, some are backed by specific
types of collateral; some are supported by the issuer's right to borrow from
the Treasury; some are supported by the discretionary authority of the Trea-
sury to purchase certain obligations of the issuer; and others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corpo-
ration ("FHLMC"), Federal Land Banks, Farmers Home Administration, Central
Bank for Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan
Banks.
Mortgage-backed Government Securities. The Balanced Assets Fund may invest
in mortgage-backed securities, including those representing an undivided own-
ership interest in a pool of mortgages, e.g., GNMA, FNMA and FHLMC Certifi-
cates. The U.S. government or the issuing agency guarantees the payment of in-
terest and principal of these securities. However, the guarantees do not ex-
tend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates. These certificates are in most cases
"pass-through" instruments, through which the holder receives a share of in-
terest and principal payments from the mortgages underlying the certificate,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their stated maturity date would
indicate as a result of the pass-through of prepayments of principal on the
underlying mortgage obligations. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected
to accelerate. In addition, the Fund may invest in collaterized mortgage obli-
gations and stripped mortgage-backed securities, including interest-only and
principal-only securities. While interest-only and principal-only securities
are generally regarded as being illiquid, such securities may be deemed to be
liquid if they can be disposed of promptly in the ordinary course of business
at a value reasonably close to that used in the calculation of the Fund's net
asset value per share. Only government interest-only and principal-only secu-
rities backed by fixed-rate mortgages and determined to be liquid under guide-
lines and standards established by the Trustees may be considered liquid and
not subject to the Fund's limitation on investment in illiquid securities. See
the Statement of Additional Information for a further discussion of those
types of securities.
FIXED INCOME SECURITIES. In addition to U.S. government securities, each
Fund may invest, subject to the percentage and credit quality limitations
stated in the prospectus, in debt securities, including corporate obligations
issued by domestic and foreign corporations and money market instruments,
without regard to the maturities of such securities. Those debt securities
which are rated "BBB" or "Baa", while considered to be "investment grade", may
have speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds. As
10
<PAGE>
a consequence of the foregoing, the opportunities for income and gain may be
limited. While the Funds have no stated policy with respect to the disposition
of securities whose ratings fall below investment grade, each occurrence is
examined by the Adviser to determine the appropriate course of action.
In addition, the Growth and Income Fund may invest in high yield bonds. High
yield bonds can be expected to provide higher yields, but such securities may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated fixed income securities. High yield bonds
may be issued by less creditworthy companies or by larger, highly leveraged
companies.
High yield bonds tend to be more volatile than higher rated fixed income se-
curities so that adverse economic events may have a greater impact on the
prices of high yield bonds than on higher rated fixed income securities. The
high yield bond market may be less liquid than the market for higher rated
fixed income securities even under normal economic conditions. Also, there may
be significant disparities in the prices quoted for high yield bonds by vari-
ous dealers. Adverse economic conditions or investor perceptions (whether or
not based on economic fundamentals) may impair the liquidity of this market
and may cause the prices the Fund receives for its high yield bonds to be re-
duced, or the Fund may experience difficulty in liquidating a portion of its
portfolio. Under such conditions, judgment may play a greater role in valuing
certain of the Fund's portfolio securities than in the case of securities
trading in a more liquid market.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS. Fixed income secu-
rities in which the Growth and Income Fund may invest also include zero coupon
bonds, deferred interest bonds and bonds on which the interest is payable in
kind ("PIK bonds"). Zero coupon and deferred interest bonds are debt obliga-
tions which are issued or purchased at a significant discount from face value.
PIK bonds are debt obligations which provide that the issuer thereof may, at
its option, pay interest on such bonds in cash or in the form of additional
debt obligations. Such investments may experience greater volatility in market
value due to changes in interest rates and other factors than debt obligations
which make regular payments of interest. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributa-
ble to shareholders and which, because no cash is received at the time of ac-
crual, may require the liquidation of other portfolio securities under disad-
vantageous circumstances to satisfy the Fund's distribution obligations.
WARRANTS. Each Fund may invest in warrants which are options to buy a stated
number of shares of common stock at a specified price any time during the life
of the warrants (generally two or more years).
INVESTMENT IN SMALL COMPANIES. The Small Company Growth Fund will invest,
and the other Funds may each invest, in small companies having market capital-
izations of under $1 billion. It may be difficult to obtain reliable informa-
tion and financial data on such companies and the securities of these small
companies may not be readily marketable, making it difficult to dispose of
shares when desirable. Securities of small or emerging growth companies may be
subject to more abrupt or erratic market movements than larger, more estab-
lished companies or the market average in general. A risk of investing in
smaller, emerging companies is that they often are at an earlier stage of de-
velopment and therefore have limited product lines, market access for such
products, financial resources and depth in management than larger, more estab-
lished companies, and their securities may be subject to more abrupt or er-
ratic market movements than securities of larger, more established companies
or the market averages in general. In addition, certain smaller issuers may
face difficulties in obtaining the capital necessary to continue in operation
and may go into bankruptcy, which could result in a complete loss of an in-
vestment. Smaller companies also may be less significant factors within their
industries and may have difficulty withstanding competition from larger compa-
nies. While smaller companies may be subject to these additional risks, they
may also realize more substantial growth than larger, more established compa-
nies.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase or
sell securities on a when-issued or delayed-delivery basis. When-issued or de-
layed-delivery transactions generally involve the purchase or sale of a secu-
rity with payment and delivery taking place at some time in the future--i.e.,
beyond normal settlement. While the Fund will only purchase securities on a
when-issued or delayed-delivery basis with the intention of acquiring the se-
curities, the
11
<PAGE>
Fund may sell the securities before the settlement date, if it is deemed ad-
visable. At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed-delivery basis, the Fund will record the transaction
and thereafter reflect the value, each day, of such security in determining
the net asset value of the Fund. At the time of delivery of the securities,
the value may be more or less than the purchase price. The Fund will segregate
liquid assets having a value equal to or greater than the Fund's purchase com-
mitments. With respect to securities sold on a delayed-delivery basis, the
Fund will either segregate the securities sold or liquid assets of a compara-
ble value. Subject to this requirement, each Fund may purchase securities on
such basis without limitation.
FOREIGN SECURITIES. Although foreign securities are generally not expected
to constitute a significant portion of any Fund's investment portfolio, each
Fund is authorized to invest, without limitation, in foreign securities. A
Fund may purchase securities issued by issuers in any country; provided, that
a Fund may not invest more than 25% of its total assets in the securities is-
sued by entities domiciled in any one foreign country.
Each Fund may also invest in securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs),
Global Depositary Receipts (GDRs) or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be denomi-
nated in the same currency as the securities into which they may be converted.
Each Fund also may invest in securities denominated in European Currency Units
(ECUs). An ECU is a "basket" consisting of specified amounts of currencies of
certain of the twelve member states of the European Community. In addition,
the Funds may invest in securities denominated in other currency "baskets."
See the Statement of Additional Information for a further discussion of these
types of securities.
Emerging Markets. Investment may be made from time to time in issuers domi-
ciled in, or government securities of, developing countries or emerging mar-
kets. Although there is no universally accepted definition, a developing coun-
try is generally considered to be a country in the initial stages of its in-
dustrialization cycle with a low per capita gross national product. Historical
experience indicates that the markets of developing countries or emerging mar-
kets have been more volatile than the markets of developed countries; however,
such markets can provide higher rates of return to investors. Investment in an
emerging market country may involve certain risks, including a less diverse
and mature economic structure, a less stable political system, an economy
based on only a few industries or dependent on international aid or develop-
ment assistance, the vulnerability to local or global trade conditions, ex-
treme debt burdens, or volatile inflation rates.
Risks of Foreign Securities. Foreign investments may be affected favorably
or unfavorably by changes in currency rates and exchange-control regulations
and costs will be incurred in connection with conversions between various cur-
rencies. The value of a security may fluctuate as a result of currency ex-
change rates in a manner unrelated to the underlying value of the security.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to uniform ac-
counting, auditing and financial reporting standards and requirements compara-
ble to those applicable to U.S. companies. Securities of some foreign compa-
nies may be less liquid or more volatile than securities of U.S. companies,
and foreign brokerage commissions and custodian fees are generally higher than
in the U.S. In addition, there is generally less governmental regulation of
stock exchanges, brokers and listed companies abroad than in the U.S. Invest-
ments in foreign securities may also be subject to other risks, different from
those affecting U.S. investments, including local political or economic devel-
opments, expropriation or nationalization of assets, confiscatory taxation and
imposition of withholding taxes on income from sources within such countries.
The performance of investments in securities denominated in a foreign cur-
rency ("non-dollar securities") will depend on, among other things, the
strength of the foreign currency against the dollar and the interest rate en-
vironment in the country issuing the foreign currency. Absent other events
which could otherwise affect the value of non-dollar securities (such as a
change in the political climate or an issuer's credit quality), appreciation
in the value of the foreign currency generally can be expected to increase the
value of a Fund's non-dollar securities in terms of U.S. dollars. A rise in
foreign interest rates or decline in the value of foreign currencies relative
to the U.S. dollar generally can be expected to depress the value of the
Fund's non-dollar securities.
12
<PAGE>
Currencies are evaluated on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of pay-
ments status and economic policies) as well as technical and political data.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities in
amounts up to 33 1/3% of its respective total assets to brokers, dealers and
other financial institutions, provided such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral. By
lending its portfolio securities, a Fund will receive income while retaining
the securities' potential for capital appreciation. As with any extensions of
credit, there are risks of delay in recovery and, in some cases, even loss of
rights in the collateral should the borrower of the securities fail financial-
ly. However, these loans of portfolio securities will be made only to firms
deemed by the Adviser to be creditworthy. The proceeds of such loans will be
invested in high-quality short-term debt securities, including repurchase
agreements.
LEVERAGE. In seeking to enhance investment performance, the Small Company
Growth Fund and Growth and Income Fund may borrow money for investment pur-
poses and may each pledge assets to secure such borrowings. This is the specu-
lative factor known as leverage. This practice may help a Fund increase the
net asset value of its shares in an amount greater than would otherwise be the
case when the market values of the securities purchased through borrowing in-
crease. In the event the return on an investment of borrowed monies does not
fully recover the costs of such borrowing, the net asset value of the Fund's
shares would be reduced by a greater amount than would otherwise be the case.
The effect of leverage will therefore tend to magnify the gains or losses to a
Fund as a result of investing the borrowed monies. During periods of substan-
tial borrowings, the net asset value of a Fund's shares would be reduced due
to the added expense of interest on borrowed monies. Each Fund is authorized
to borrow, and to pledge assets to secure such borrowings, up to the maximum
extent permissible under the 1940 Act (i.e., presently 50% of net assets). The
time and extent to which a Fund may employ leverage will be determined by the
Adviser in light of changing facts and circumstances, including general eco-
nomic and market conditions, and will be subject to applicable lending regula-
tions of the Board of Governors of the Federal Reserve Board. The Funds' poli-
cies regarding the use of leverage are fundamental policies which may not be
changed without the approval of shareholders of the respective Fund.
Under the 1940 Act, the value of a Fund's assets less liabilities, other
than borrowings, must be at least three times all of the Fund's borrowings,
including the proposed borrowing. If for any reason the value of a Fund's as-
sets falls below the 1940 Act requirement, the Fund must within three business
days reduce its borrowings to satisfy such requirement. To do this, a Fund may
have to sell a portion of its investments at a time when it may be disadvanta-
geous to do so.
HEDGING AND INCOME ENHANCEMENT STRATEGIES. Each Fund may write covered calls
to enhance income. For hedging purposes as a temporary defensive maneuver,
each Fund may use interest rate futures and stock and bond index futures (to-
gether, "Futures"); forward contracts on foreign currencies; and call and put
options on equity and debt securities, Futures, stock and bond indices and
foreign currencies (all of the foregoing are referred to as "Hedging Instru-
ments"). A Fund will not use Futures and options on Futures for speculation.
All puts and calls on securities, interest rate Futures or stock and bond in-
dex Futures or options on such Futures purchased or sold by the Fund will be
listed on a national securities or commodities exchange or on U.S. over-the-
counter markets. See "Foreign Securities--Foreign Currency Transactions."
Each Fund may use spread transactions for any lawful purpose consistent with
the Fund's investment objective such as hedging or managing risk, but not for
speculation. A Fund may purchase covered spread options from securities deal-
ers. Such covered spread options are not presently exchange-listed or ex-
change-traded. The purchase of a spread option gives a Fund the right to put,
or sell, a security that it owns at a fixed dollar spread or fixed yield
spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to a Fund in purchasing covered spread
options is the cost of the premium paid for the spread option and any transac-
tion costs. In addition, there is no assurance that closing transactions will
be available. The purchase of spread options will be used to protect a Fund
against adverse changes in prevailing credit quality spreads, i.e., the yield
spread between high
13
<PAGE>
quality and lower quality securities. Such protection is only provided during
the life of the spread option.
Special Risks of Hedging and Income Enhancement Strategies. Participation in
the options or Futures markets and in currency exchange transactions involves
investment risks and transaction costs to which a Fund would not be subject
absent the use of these strategies. If the Adviser's predictions of movements
in the direction of the securities, foreign currency and interest rate markets
are inaccurate, the adverse consequences to a Fund may leave the Fund in a
worse position than if such strategies were not used. Risks inherent in the
use of options, foreign currency and Futures contracts and options on Futures
contracts include (1) dependence on the Adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and Futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strate-
gies are different from those needed to select portfolio securities; (4) the
possible absence of a liquid secondary market for any particular instrument at
any time; (5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be fa-
vorable for it to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate securities in connection with hedging transactions. A
transaction is "covered" when the Fund owns the security subject to the option
on such security, or some other security acceptable for applicable segregation
requirements. See the Statement of Additional Information for further informa-
tion concerning income enhancement and hedging strategies and the regulatory
requirements relating thereto.
SHORT SALES. Each Fund may make "short sales against the box." A short sale
is effected by selling a security which the Fund does not own. A short sale is
against the box to the extent that the Fund contemporaneously owns, or has the
right to obtain without payment, securities identical to those sold short. A
Fund may not enter into a short sale against the box, if, as a result, more
than 25% of its total assets would be subject to such short sales. A Fund gen-
erally will recognize any gain (but not loss) for federal income tax purposes
at the time that it makes a short sale against the box.
SPECIAL SITUATIONS. Each Fund may invest, subject to its particular invest-
ment limitations described above, up to 25% of its assets in "special situa-
tions." A "special situation" arises when, the opinion of the Adviser, the se-
curities of a particular issuer will be recognized and appreciated in value
due to a specific development with respect to that issuer. Developments creat-
ing a special situation might include, among others, a new product or process,
a technological breakthrough, a management change or other extraordinary cor-
porate event, or differences in market supply of and demand for the security.
Investments in special situations may carry an additional risk of loss in the
event that the anticipated development does not occur or does not attract the
expected attention.
FUTURE DEVELOPMENTS. Each Fund may invest in securities and other instru-
ments which do not presently exist but may be developed in the future, pro-
vided that each such investment is consistent with the Fund's investment ob-
jectives, policies and restrictions and is otherwise legally permissible under
federal and state laws. The Prospectus will be amended or supplemented as ap-
propriate to discuss any such new investments.
MANAGEMENT OF THE TRUST
TRUSTEES. The Trustees of the Trust are responsible for the overall supervi-
sion of the operation of the Trust and each Fund and perform various duties
imposed on trustees of investment companies by the 1940 Act and by the Common-
wealth of Massachusetts.
THE ADVISER. The Adviser selects and manages the investments of each Fund,
provides various administrative services and supervises the Funds' daily busi-
ness affairs, subject to general review by the Trustees. The Adviser is an in-
direct wholly owned subsidiary of SunAmerica Inc. ("SunAmerica"), an invest-
ment-grade financial services company, which as of December 31, 1997, held
more than $52 billion in assets. SunAmerica's principal executive offices are
located at 1 SunAmerica Center, Los Angeles, CA 90067-6022. In addition to
serving as adviser to the Funds, the Adviser serves as adviser, manager and/or
administrator for Anchor Pathway Fund, SunAmerica
14
<PAGE>
Income Funds, SunAmerica Money Market Funds, Inc., Style Select Series, Inc.,
Anchor Series Trust, Seasons Series Trust and SunAmerica Series Trust. The Ad-
viser managed, advised and/or administered assets in excess of $12 billion as
of December 31, 1997 for investment companies, individuals, pension accounts,
and corporate and trust accounts.
Pursuant to the Investment Advisory and Management Agreement entered into
between the Adviser and the Trust, on behalf of each Fund, each Fund pays the
Adviser a fee, payable monthly, computed daily at the annual rate of .75% on
the first $350 million of the Fund's average daily net assets, .70% on the
next $350 million of net assets and .65% on net assets over $700 million for
the services performed, on behalf of the Fund and the facilities furnished by
the Adviser. These advisory fee rates are higher than those paid by most other
investment companies. For the fiscal year ended September 30, 1997, each Fund
paid the Adviser a fee equal to the following percentage of average daily net
assets: Balanced Assets Fund -- .75%; Blue Chip Growth Fund -- .75%; Growth
and Income Fund -- .75%; Mid-Cap Growth Fund -- .75% and Small Company
Growth Fund -- .75%. For the same period, the Growth and Income Fund paid the
Adviser a fee equal to .55% of the Fund's average daily net assets pursuant to
a voluntary fee reimbursement by the Adviser.
PORTFOLIO MANAGERS. The Domestic Equity Investment Team is responsible for
the portfolio management of each of the Funds. The Team is composed of nine
portfolio managers, research analysts and traders. Individual members of the
Team may focus more heavily on particular Funds or particular aspects of the
domestic equity markets.
THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an
indirect wholly owned subsidiary of SunAmerica, acts as distributor of the
shares of each Fund pursuant to the Distribution Agreement between the Dis-
tributor and the Trust on behalf of each Fund. The Distributor receives all
initial and deferred sales charges in connection with the sale of Fund shares,
all or a portion of which it may reallow to other broker-dealers. The Distrib-
utor and other broker-dealers pay commissions to salespersons, as well as the
cost of printing and mailing prospectuses to potential investors and of any
advertising expenses incurred by them in connection with their distribution of
Fund shares.
The Distributor, at its expense, may from time-to-time provide additional
compensation to broker-dealers (including in some instances, affiliates of the
Distributor) in connection with sales of shares of the Fund. Such compensation
may include (i) full re-allowance of the front-end sales charge on Class A
shares; (ii) additional compensation with respect to the sale of Class A,
Class B or Class C shares; or (iii) financial assistance to broker-dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more of the
Funds, and/or other broker-dealer sponsored special events. In some instances,
this compensation will be made available only to certain broker-dealers whose
representatives have sold a significant amount of shares of the Fund. Compen-
sation may also include payment for travel expenses, including lodging, in-
curred in connection with trips taken by invited registered representatives
for meetings or seminars of a business nature. In addition, the following
types of non-cash compensation may be offered through sales contests: (i)
travel mileage on major air carriers; (ii) tickets for entertainment events
(such as concerts or sporting events); or (iii) merchandise (such as clothing,
trophies, clocks, pens or other electronic equipment). Broker-dealers may not
use sales of the Funds' shares to qualify for this compensation to the extent
receipt of such compensation may be prohibited by the laws of any state or any
self-regulatory agency, such as, for example, the National Association of Se-
curities Dealers, Inc. Dealers who receive bonuses or other incentives may be
deemed to be underwriters under the Securities Act.
Certain laws and regulations limit the ability of banks and other depository
institutions to underwrite and distribute securities. However, in the opinion
of the Adviser based upon the advice of counsel, these laws and regulations do
not prohibit such depository institutions from providing other services to in-
vestment companies of the type contemplated by the Distribution Plans (as de-
scribed below). The Trustees will consider appropriate modifications to the
operations of the Funds, including discontinuance of payments under the Dis-
tribution Plans to banks and other depository institutions, in the event such
institutions can no longer provide the services called for under their agree-
ments. Banks and other financial services firms may be subject to various
state laws regarding services described, and may be required to register as
dealers pursuant to state law.
15
<PAGE>
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment com-
pany directly or indirectly to pay expenses associated with the distribution
of its shares in accordance with a plan adopted by the investment company's
board of directors and approved by its shareholders. Pursuant to such rule,
the Trustees and the shareholders of each class of shares of each Fund have
adopted Distribution Plans hereinafter referred to as the "Class A Plan," the
"Class B Plan" and the "Class C Plan," and collectively as the "Distribution
Plans." In adopting each Distribution Plan, the Trustees determined that there
was a reasonable likelihood that each such Plan would benefit the Fund and the
shareholders of each respective class. The sales charge and distribution fees
of a particular class will not be used to subsidize the sale of shares of any
other class.
Under the Class A Plan, the Distributor may receive payments from a Fund at
an annual rate of up to 0.10% of average daily net assets of such Fund's Class
A shares to compensate the Distributor and certain securities firms for pro-
viding sales and promotional activities for distributing that class of shares.
Under the Class B and Class C Plans, the Distributor may receive payments from
a Fund at the annual rate of up to 0.75% of the average daily net assets of
such Fund's Class B and Class C shares, respectively, to compensate the Dis-
tributor and certain securities firms for providing sales and promotional ac-
tivities for distributing each such class of shares. The distribution costs
for which the Distributor may be reimbursed out of such distribution fees in-
clude fees paid to broker-dealers that have sold Fund shares, commissions, and
other expenses such as those incurred for sales literature, prospectus print-
ing and distribution and compensation to wholesalers. It is possible that in
any given year the amount paid to the Distributor under one or more of the
Distribution Plans may exceed the Distributor's distribution costs as de-
scribed above. The Distribution Plans provide that each class of shares of
each Fund may also pay the Distributor an account maintenance and service fee
of up to 0.25% of the aggregate average daily net assets of such class of
shares for payments to broker-dealers for providing continuing account mainte-
nance. In this regard, some payments are used to compensate broker-dealers
with account maintenance and service fees in an amount up to 0.25% per year of
the assets maintained in a Fund by their customers.
For the fiscal year ended September 30, 1997, under the Class A Plan, each
Fund paid the Distributor a fee equal to the following percentages of average
daily net assets: Balanced Assets Fund -- .35%; Blue Chip Growth Fund -- .35%;
Mid-Cap Growth Fund -- .35% and Small Company Growth Fund -- .35%. For the
same period, under the Class B Plan, each Fund paid the Distributor a fee
equal to the following percentages of average daily net assets: Balanced As-
sets Fund --1.00%; Blue Chip Growth Fund -- 1.00%; Mid-Cap Growth Fund --
1.00% and Small Company Growth Fund -- 1.00%.
THE ADMINISTRATOR. The Trust has entered into a Service Agreement under the
terms of which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly
owned subsidiary of SunAmerica, assists the Transfer Agent in providing share-
holder services. Pursuant to the Service Agreement, as compensation for serv-
ices rendered, SAFS receives a fee from each Fund, accrued daily and payable
monthly, at an annual rate of 0.22% of average daily net assets. See the
Statement of Additional Information for more information.
PURCHASE OF SHARES
GENERAL. Shares of each of the Funds are sold at the respective net asset
value next calculated after receipt of a purchase order, plus a sales charge,
which, at the election of the investor, may be imposed either (i) at the time
of purchase (Class A shares), or (ii) on a deferred basis (Class B and Class C
shares, and certain Class A shares).
The minimum initial investment in each Fund is $500 and the minimum subse-
quent investment is $100. However, for (i) wrap or certain other advisory ac-
counts for the benefit of clients of broker-dealers, financial institutions,
registered investment advisers or financial planners adhering to certain stan-
dards established by the Distributor, and (ii) Individual Retirement Accounts
("IRAs"), Keogh Plan accounts and accounts for other qualified plans, the min-
imum initial investment is $250 and the minimum subsequent investment is $25.
The decision as to which class is most beneficial to an investor depends on
the amount and intended length of the investment. Investors should consult
their investment adviser for help in determining which class of shares is most
appropriate for them.
16
<PAGE>
Generally, investors making large investments, qualifying for a reduced ini-
tial sales charge, might consider Class A shares because there is a lower dis-
tribution fee than Class B and Class C shares. Shareholders who purchase
$1,000,000 or more of shares of the Funds should only purchase Class A shares.
Investors making small investments might consider Class B or Class C shares
because 100% of the purchase price is invested immediately. Dealers may re-
ceive different levels of compensation depending on which class of shares they
sell. Investors should consider the CDSC period and any conversion rights in
the context of their investment time frame. For example, while Class C shares
have a shorter CDSC period than Class B shares, Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
Accordingly, Class B shares may be more appropriate than Class C shares for
investors with a longer term investment time frame. Dealers may receive dif-
ferent levels of compensation depending on which class of shares they sell.
Upon making an investment in shares of a Fund, an open account will be es-
tablished under which shares of the applicable Fund and additional shares ac-
quired through reinvestment of dividends and distributions will be held for
each shareholder's account by State Street Bank and Trust Company ("State
Street") and its affiliate, National Financial Data Services ("NFDS") (collec-
tively, the "Transfer Agent"). Shareholders will not be issued certificates
for their shares unless they specifically so request in writing but no certif-
icate is issued for fractional shares. Shareholders receive regular statements
from the Transfer Agent that report each transaction affecting their accounts.
Further information may be obtained by calling Shareholder/Dealer Services at
(800) 858-8850.
CLASS A SHARES. Class A shares are offered at net asset value plus an ini-
tial sales charge, which varies with the size of the purchase as follows:
<TABLE>
<CAPTION>
CONCESSION
SALES CHARGE TO DEALERS
----------------- ----------
% OF % OF NET % OF
OFFERING AMOUNT OFFERING
SIZE OF PURCHASE PRICE INVESTED PRICE
---------------- -------- -------- ----------
<S> <C> <C> <C>
Less than $50,000.................................. 5.75% 6.10% 5.00%
$50,000 but less than $100,000..................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000.................... 3.00% 3.09% 2.25%
$500,000 but less than $1,000,000.................. 2.10% 2.15% 1.35%
$1,000,000 or more................................. None None see below
</TABLE>
No sales charge is payable at the time of purchase on investments of $1 mil-
lion or more. In addition, subject to the conditions listed below, shares may
be purchased at net asset value, without payment of a sales charge, by em-
ployee benefit plans qualified under Sections 401 or 457 of the Internal Reve-
nue Code of 1986, as amended (the "Code"), or employee benefit plans created
pursuant to Section 403(b) of the Code and sponsored by nonprofit organiza-
tions defined under Section 501(c)(3) of the Code (collectively, "Plans"). A
Plan will qualify for purchases at net asset value provided that (a) the ini-
tial amount invested in one or more of the Funds (or in combination with the
shares of other funds in the SunAmerica Family of Mutual Funds) is at least
$1,000,000, (b) the sponsor signs a $1,000,000 Letter of Intent, (c) such
shares are purchased by an employer-sponsored plan with at least 100 eligible
employees, or (d) the purchases are by trustees or other fiduciaries for cer-
tain employer-sponsored plans, the trustee, fiduciary or administrator for
which has an agreement with the Distributor with respect to such purchases and
all such transactions for the plan are executed through a single omnibus ac-
count. Nevertheless, the Distributor will pay a commission to any dealer who
initiates or is responsible for such an investment, in the amount of 1.00% of
the amount invested. Redemptions of such shares within the twelve months fol-
lowing their purchase will be subject to a CDSC at the rate of 1.00% of the
lesser of the net asset value of the shares being redeemed (exclusive of rein-
vested dividends and distributions) or the total cost of such shares. This
CDSC is paid to the Distributor. Redemptions of such shares held longer than
twelve months would not be subject to a CDSC. However, one-half of the commis-
sion paid with respect to such a purchase is subject to forfeiture by the
dealer in the event the redemption occurs during the second year from the date
of purchase. In determining whether a deferred sales charge is payable, it is
assumed that shares purchased with reinvested dividends and distributions and
then other shares held the longest are redeemed first.
To the extent that sales are made for personal investment purposes, the
sales charge is waived as to Class A shares purchased by current or retired
officers, directors, and other full-time employees of SunAmerica and its af-
filiates, as well as members of the selling group and family members of the
foregoing. In addition, the sales charge is waived with respect to shares pur-
chased by wrap or certain other advisory accounts for the benefit of clients
of broker-
17
<PAGE>
dealers, financial institutions, registered investment advisers or financial
planners adhering to certain standards established by the Distributor. Shares
purchased under this waiver are subject to certain limitations described in
the Statement of Additional Information. Complete details concerning how an
investor may purchase shares at reduced sales charges may be obtained by con-
tacting Shareholder/Dealer Services at (800) 858-8850.
There are certain special purchase plans for Class A shares which can reduce
the amount of the initial sales charge to investors in the Funds. For more in-
formation about "Rights of Accumulation," the "Letter of Intent," "Combined
Purchase Privilege," "Reduced Sales Charges for Group Purchases" and the "Net
Asset Value Transfer Program," see the Statement of Additional Information.
CLASS B SHARES. Class B shares are offered at net asset value. Certain re-
demptions of Class B shares within the first six years of the date of purchase
are subject to a CDSC. The charge is assessed on an amount equal to the lesser
of the then-current market value or the purchase price of the shares being re-
deemed. No charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. In determining whether a CDSC is applicable to
a redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemp-
tion is first of any shares of a class other than Class B, second of any
shares in the shareholder's Fund account that are not subject to a CDSC (i.e.,
shares representing reinvested dividends and distributions), third of shares
held for more than six years and fourth of shares held the longest during the
six-year period. The CDSC will not be applied to dollar amounts representing
an increase in the net asset value of the shares being redeemed since the time
of purchase of such redeemed shares. The amount of the CDSC, if any, will vary
depending on the number of years from the time of payment for the purchase of
Fund shares until the time of redemption of such shares. Solely for purposes
of determining the number of years from the time of any payment for the pur-
chase of shares, all payments during a month are aggregated and deemed to have
been made on the first day of the month. The following table sets forth the
rates of the CDSC.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLARS INVESTED OR
PAYMENT WAS MADE REDEMPTION PROCEEDS
- ------------------- -------------------------
<S> <C>
First................................................. 4%
Second................................................ 4%
Third................................................. 3%
Fourth................................................ 3%
Fifth................................................. 2%
Sixth................................................. 1%
Seventh and thereafter................................ 0%
</TABLE>
Shareholders of a Fund that acquired their Class B shares pursuant to a re-
organization effected with another SunAmerica mutual fund will remain subject
to the terms of the CDSC in effect for the previous fund at the time of such
reorganization. For additional information, see "Additional Information Re-
garding Purchase of Shares" in the Statement of Additional Information.
Conversion Feature--Class B Shares. Class B shares (including a pro-rata
portion of the Class B shares purchased through the reinvestment of dividends
and distributions) will convert automatically to Class A shares on the first
business day of the month following the seventh anniversary of the issuance of
such Class B shares. Subsequent to the conversion of a Class B share to a
Class A share, such share will no longer be subject to the higher distribution
fee of Class B shares. Such conversion will be on the basis of the relative
net asset values of Class B shares and Class A shares, without the imposition
of any sales load, fee or charge.
CLASS C SHARES. Class C shares are offered at net asset value. Certain re-
demptions of Class C shares within the first year of the date of purchase are
subject to a CDSC of 1%. The method for calculating any such CDSC will be the
same method used for calculating the CDSC for Class B shares. See "Class B
Shares" above.
WAIVER OF CDSC. The CDSC applicable to Class B and Class C shares will be
waived, subject to certain conditions, in connection with redemptions which
are (a) requested within one year of the death of the shareholder of an indi-
vidual account or a joint tenant where the surviving joint tenant is the de-
ceased's spouse; (b) requested within one year after the shareholder of an in-
dividual account or of a joint tenant on a spousal joint tenant account be-
comes disabled; or the initial determination of disability of a
18
<PAGE>
shareholder, (c) taxable distributions or loans to participants made by quali-
fied retirement plans or retirement accounts (not including rollovers) for
which the Adviser serves as fiduciary (e.g., prepares all necessary tax re-
porting documents); provided that, in the case of a taxable distribution, the
plan participant or accountholder has attained the age of 59 1/2 at the time
the redemption is made; (d) made pursuant to a Systematic Withdrawal Plan, up
to a maximum amount of 12% per year from a shareholder account based on the
value of the account at the time the Plan is established, provided, however,
that all dividends and capital gains distributions are reinvested in Fund
shares; and (e) made of shares in accounts consisting of assets which were
originally individually managed by the Adviser and had paid an investment ad-
visory fee to the Adviser. See the Statement of Additional Information for
further information concerning conditions with respect to (a) and (b) above.
For information on the waiver of the CDSC contact Shareholder/Dealer services
at (800)858-8850.
Other CDSC Information. For Federal income tax purposes, the amount of the
CDSC will reduce the amount realized on the redemption of shares, concomi-
tantly reducing gain or increasing loss. For information on the imposition and
waiver of the CDSC contact Shareholder/Dealer Services at (800) 858-8850.
ADDITIONAL PURCHASE INFORMATION. All purchases are confirmed to each share-
holder. The Trust and the Distributor reserve the right to reject any purchase
order and may at any time discontinue the sale of any class of shares of any
Fund.
Shares of the Funds may be purchased through the Distributor or SAFS, by
check or federal funds wire.
Shareholders who have met the minimum initial investment of the Fund may
elect to have periodic purchases made through a dollar cost averaging program.
At the shareholder's election, such purchases may be made from their bank
checking or savings account on a monthly, quarterly, semi-annual or annual ba-
sis. Purchases can be made via electronic funds transfer through the Automated
Clearing House or by physical draft check. Purchases made via physical draft
check require an authorization card to be filed with the shareholder's bank.
Checks should be made payable to the specific Fund or to "SunAmerica Funds."
If the payment is for a retirement plan account for which the Adviser serves
as fiduciary, please indicate on the check that payment is for such an ac-
count. Payments to open new accounts should be mailed to SunAmerica Fund Serv-
ices, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue,
New York, New York 10017-3204, together with a completed New Account Applica-
tion. Payment for subsequent purchases should be mailed to SunAmerica Fund
Services, Inc., c/o NFDS, P.O. Box 419373, Kansas City, Missouri 64141-6373
and the shareholder's Fund account number should appear on the check. For fi-
duciary retirement plan accounts, both initial and subsequent purchases should
be mailed to SunAmerica Fund Services, Inc., Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204. SAFS re-
serves the right to reject any check made payable other than in the manner in-
dicated above. Under certain circumstances, a Fund will accept a multi-party
check (e.g., a check made payable to the shareholder by another party and then
endorsed by the shareholder to the Fund in payment for the purchase of
shares); however, the processing of such a check may be subject to a delay.
The Funds do not verify the authenticity of the endorsement of such multi-
party check, and acceptance of the check by a Fund should not be considered
verification thereof. Neither the Funds nor their affiliates will be held lia-
ble for any losses incurred as a result of a fraudulent endorsement.
Shares will be priced at the net asset value next determined after the order
is placed with the Distributor or SAFS. See "Additional Information Regarding
Purchase of Shares" in the Statement of Additional Information for more infor-
mation regarding these services and the procedures involved and when orders
are deemed to be placed.
Investors may purchase Class A shares of a Fund at net asset value to the
extent that the investment represents the proceeds from a redemption of shares
of a non-SunAmerica mutual fund in which the investor either (a) paid a front-
end sales load or (b) was subject to or paid a CDSC on the redemption pro-
ceeds. See " Net Asset Value Transfer Program" in the Statement of Additional
Information for more details regarding this privilege.
19
<PAGE>
REDEMPTION OF SHARES
Shares of any Fund may be redeemed at any time at their net asset value next
determined, less any applicable CDSC, after receipt by the Fund of a redemp-
tion request in proper form. Any capital gain or loss realized by a share-
holder upon any redemption of shares must be recognized for federal income tax
purposes. See "Dividends, Distributions and Taxes."
GENERAL. Normally payment is made by check mailed on the next business day
for shares redeemed, but in any event, payment is made by check mailed within
seven days after receipt by the Transfer Agent of share certificates or of a
redemption request, or both, in proper form. Under unusual circumstances, the
Funds may suspend repurchases or postpone payment for up to seven days or
longer, as permitted by the federal securities laws.
REGULAR REDEMPTION. Shareholders may redeem their shares by sending a writ-
ten request to SAFS, Mutual Fund Operations, The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204. Requests for redemption of shares with a
value of less than $100,000 will be made by check made payable to the share-
holder(s) and mailed to the address of record. All written requests for re-
demption of shares with a value of $100,000 or more, or those mailed to an ad-
dress other than the address of record, must be endorsed by the shareholder(s)
with signature(s) guaranteed by an "eligible guarantor institution" which in-
cludes: banks, brokers, dealers, credit unions, securities and exchange asso-
ciations, clearing agencies and savings associations. Guarantees must be
signed by an authorized signatory of the eligible guarantor and the words
"Signature Guaranteed" must appear with the signature. Signature guarantees by
notaries will not be accepted. SAFS may request further documentation from
corporations, executors, administrators, trustees or guardians.
REPURCHASE THROUGH THE DISTRIBUTOR. The Distributor is authorized, as agent
for the Funds, to offer to repurchase shares which are presented by telephone
to the Distributor by investment dealers. Orders received by dealers must be
at least $500. The repurchase price is the net asset value per share of the
applicable class of shares of a Fund next-determined after the repurchase or-
der is received, less any applicable CDSC. Repurchase orders received by the
Distributor after the Fund's close of business will be priced based on the
next business day's close. Dealers may charge for their services in connection
with the repurchase, but neither the Funds nor the Distributor imposes any
such charge. The offer to repurchase may be suspended at any time, as de-
scribed below.
TELEPHONE REDEMPTION. The Trust accepts telephone requests for redemption of
shares with a value of less than $100,000. The proceeds of a telephone redemp-
tion may be sent by check payable to the shareholder(s) and mailed to the ad-
dress of record, or by wire to the shareholder's bank account as set forth in
the New Account Application Form or in a subsequent written authorization.
Shareholders utilizing the redemption through the electronic funds transfer
method will incur a $15.00 transaction fee. The Trust will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Failure to do so may result in liability to the Trust for losses incurred due
to unauthorized or fraudulent telephone instructions. Such procedures include,
but are not limited to, requiring some form of personal identification prior
to acting upon instructions received by telephone and/or tape recording of
telephone instructions.
A shareholder making a telephone redemption should call Shareholder/Dealer
Services at (800) 858-8850, and state (i) the name of the shareholder(s) ap-
pearing on the Trust's records, (ii) his or her account number with the Trust,
(iii) the name of the Fund, (iv) the amount to be redeemed, and (v) the name
of the person(s) requesting the redemption. The Trust reserves the right to
terminate or modify the telephone redemption service at any time.
SYSTEMATIC WITHDRAWAL PLAN. Shareholders who have invested at least $5,000
in any of the Funds may provide for the periodic payment from the account pur-
suant to the Systematic Withdrawal Plan. Payment may be made by check or by
electronic funds transfer through the Automated Clearing House. At the share-
holder's election, such payment may be made directly to the shareholder or to
a third party on a monthly, quarterly, semi-annual or annual basis. The mini-
mum periodic payment is $50. Maintenance of a withdrawal plan concurrently
with purchases of additional shares may be disadvantageous to a shareholder
because of the sales charge applicable to such purchases. Shareholders who
have been issued share certificates will not be eligible to participate in the
Systematic Withdrawal Plan and will have
20
<PAGE>
to comply with certain additional procedures in order to redeem shares. Fur-
ther information may be obtained by calling Shareholder/Dealer Services at
(800) 858-8850.
OTHER REDEMPTION INFORMATION. At various times, a Fund may be requested to
redeem shares for which it has not yet received good payment. A Fund may delay
or cause to be delayed the mailing of a redemption check until such time as
good payment (e.g., cash or certified check drawn on a United States bank) has
been collected for the purchase of such shares, which will not exceed 15 days.
Because of the high cost of maintaining smaller shareholder accounts, the
Funds may redeem, on at least 60 days' written notice and without shareholder
consent, any account that has a net asset value of less than $500 ($250 for
retirement plan accounts), as of the close of business on the day preceding
such notice, unless such shareholder increases the account balance to at least
$500 during such 60-day period. In the alternative, the applicable Fund may
impose a $2.00 monthly charge on accounts below the minimum account size.
If a shareholder redeems shares of any class of a Fund and then within one
year from the date of redemption decides the shares should not have been re-
deemed, the shareholder may use all or any part of the redemption proceeds to
reinstate, free of sales charges (Class A shares) and with the crediting of
any CDSC paid with respect to such reinstated shares at the time of redemption
(Class B and Class C shares), all or any part of the redemption proceeds in
shares of the Fund at the then-current net asset value. Reinstatement may af-
fect the tax status of the prior redemption.
EXCHANGE PRIVILEGE
GENERAL. Shareholders in any of the Funds may exchange their shares for the
same class of shares of any other Fund or other funds in the SunAmerica Family
of Mutual Funds that offer such class at the respective net asset value per
share. Before making an exchange, a shareholder should obtain and review the
prospectus of the fund whose shares are being acquired. All exchanges are sub-
ject to applicable minimum initial or subsequent investment requirements. Not-
withstanding the foregoing, shareholders may elect to make periodic exchanges
on a monthly, quarterly, semi-annual and annual basis through the Systematic
Exchange Program. Through this program, the minimum exchange amount is $25 and
there is no fee for exchanges made. All exchanges can only be effected if the
shares to be acquired are qualified for sale in the state in which the share-
holder resides. Exchanges of shares generally will constitute a taxable trans-
action except for IRAs, Keogh Plans and other qualified or tax-exempt ac-
counts. The exchange privilege may be terminated or modified upon 60 days'
written notice. Further information about the exchange privilege may be ob-
tained by calling Shareholder/Dealer Services at (800) 858-8850.
If a shareholder acquires Class A shares through an exchange from another
SunAmerica fund where the original purchase of such fund's Class A shares was
not subject to an initial sales charge because the purchase was in excess of
$1 million, such shareholder will remain subject to the 1% CDSC, if any, ap-
plicable to such redemptions. In such event, the period for which the original
shares were held prior to the exchange will be "tacked" with the holding pe-
riod of the shares acquired in the exchange for purposes of determining
whether the 1% CDSC is applicable upon a redemption of any of such shares.
A shareholder who acquires Class B or Class C shares through an exchange
from another SunAmerica fund will retain liability for any deferred sales
charge which is outstanding on the date of the exchange. In such event, the
period for which the original shares were held prior to the exchange will be
"tacked" with the holding period of the shares acquired in the exchange for
purposes of determining what, if any, CDSC is applicable upon a redemption of
any of such shares and the timing of conversion of Class B shares to Class A.
RESTRICTIONS ON EXCHANGES. Because excessive trading (including short-term
"market timing" trading) can hurt a Fund's performance, each Fund may refuse
any exchange sell order (1) if it appears to be a market timing transaction
involving a significant portion of a Fund's assets or (2) from any shareholder
account if previous use of the exchange privilege is considered excessive. Ac-
counts under common ownership or control, including, but not limited to, those
with the same taxpayer identification number and those administered so as to
redeem or purchase shares based upon certain predetermined market indications,
will be considered one account for this purpose.
21
<PAGE>
In addition, a Fund reserves the right to refuse any exchange purchase order
if, in the judgment of the Adviser, the Fund would be unable to invest effec-
tively in accordance with its investment objective and policies, or would oth-
erwise potentially be adversely affected. A shareholder's purchase exchange
may be restricted or refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing" strategy may be dis-
ruptive to the Fund and may therefore be refused.
Finally, as indicated under "Purchase of Shares", the Fund and Distributor
reserve the right to refuse any order for the purchase of shares.
PORTFOLIO TRANSACTIONS, BROKERAGE AND TURNOVER
The Adviser is responsible for decisions to buy and sell securities for the
Funds, selection of broker-dealers and negotiation of commission rates. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission
(although the price of the security usually includes a profit to the dealer).
In underwritten offerings, securities are purchased at a fixed price which in-
cludes an underwriter's concession or discount. On occasion, certain money
market securities may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
As a general matter, the Adviser selects broker-dealers which, in its best
judgment, provide prompt and reliable execution at favorable security prices
and reasonable commission rates. The Adviser may select broker-dealers which
provide it with research services and may cause a Fund to pay such broker-
dealers commissions which exceed those which other broker-dealers may have
charged, if in the Adviser's view the commissions are reasonable in relation
to the value of the brokerage and/or research services provided by the broker-
dealer. Brokerage arrangements may take into account the distribution of Fund
shares by broker-dealers, subject to best price and execution. The Adviser may
effect portfolio transactions through an affiliated broker-dealer, acting as
agent and not as principal, in accordance with Rule 17e-1 under the 1940 Act
and other applicable securities laws.
Each Fund has no limitation regarding its policy with respect to portfolio
turnover. The portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities, excluding short-term securities,
by the average monthly value of the Fund's long-term portfolio securities.
High portfolio turnover involves correspondingly greater brokerage commissions
and other transaction costs which will be borne directly by the Fund. In addi-
tion, high portfolio turnover may result in increased short-term capital
gains, which, when distributed to shareholders, are treated as ordinary in-
come.
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular trad-
ing. Shares are valued each day as of the close of regular trading on the NYSE
(generally, 4:00 P.M., Eastern time). Each Fund calculates the net asset value
of each class of its shares separately by dividing the total value of each
class's net assets by the shares outstanding of each class. Investments for
which market quotations are readily available are valued at market. All other
securities and assets are valued at fair value following procedures approved
by the Trustees.
PERFORMANCE DATA
Each Fund may advertise performance data that reflect its total investment
return. A brief summary of the computations is provided below and a detailed
discussion is in the Statement of Additional Information. Both total return
and yield figures are based on historical earnings and are not intended to in-
dicate future performance.
Total return performance data may be advertised by each Fund. The average
annual total return may be calculated for one-, five- and ten-year periods or
for the lesser period since inception. These performance data represent the
average annual percentage changes of a hypothetical $1,000 investment and as-
sumes the reinvestment of all dividends and distributions and includes sales
charges and recurring fees that are charged to shareholder accounts. A Fund's
advertisements may also reflect total return performance data calculated by
means of cumulative, aggregate, average, year-to-date, or other total return
figures. Fur-
22
<PAGE>
ther, the Fund may advertise total return performance for periods of time in
addition to those noted above.
Yield will be calculated based on a 30-day (or one-month) period ended on
the date of the applicable Fund's most recent balance sheet and for other such
periods, as deemed appropriate. The net investment income per share earned
during the period will be divided by the maximum offering price per share on
the last day of the period and annualized to obtain the yield. For purposes of
calculating yields, net income is determined by a standard formula prescribed
by the Securities and Exchange Commission to facilitate comparison with yields
quoted by other mutual funds.
Although expenses for Class B and Class C shares may be higher than those
for Class A shares, the performance of Class B and Class C shares may be
higher than the performance of Class A shares after giving effect to the im-
pact of the sales charges and 12b-1 fees applicable to each class of shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if any,
and the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed to the sharehold-
ers at least annually. Dividends and distributions generally are taxable in
the year in which they are paid, except any dividends paid in January which
were declared in the previous calendar quarter will be treated as paid in De-
cember of the previous year. With respect to capital gain distributions, each
Fund's policy is to offset any prior year capital loss carry forward against
any realized capital gains, and accordingly, no distribution of capital gains
will be made until gains have been realized in excess of any such loss carry
forward. Dividends and distributions are paid in additional shares based on
the next determined net asset value, unless the shareholder elects in writing,
not less than five business days prior to the payment date, to receive amounts
in excess of $10 in cash.
In addition to having the dividends and distributions of a Fund reinvested
in shares of such Fund, a shareholder may, if he or she so elects on the New
Account Application Form, have dividends and distributions invested in the
same class of shares of any other SunAmerica Mutual Fund at the then-current
net asset value of such Fund(s).
TAXES. Each Fund is qualified and intends to continue to qualify and elect
to be taxed as a regulated investment company under the Code. While so quali-
fied, the Trust and each of the Funds will not be subject to U.S. Federal in-
come tax on the portion of its investment company taxable income and net capi-
tal gains distributed to its shareholders.
For Federal income tax purposes, dividends of net investment income and dis-
tributions of any net realized short-term capital gain, whether paid in cash
or reinvested in shares of the Fund, are taxable to shareholders as ordinary
income. Distributions made from the Fund's net capital gains (including gains
from certain transactions in futures and options) are taxable to shareholders
as capital gains, regardless of the length of time the shareholder has owned
Fund shares. To the extent a Fund's income is derived from certain dividends
received from domestic corporations, a portion of the dividends paid to corpo-
rate shareholders of such Fund will be eligible for the 70% dividends received
deduction.
Under Code Section 988, foreign currency gains or losses from certain for-
ward contracts, from futures contracts that are not "regulated futures con-
tracts" and from unlisted non-equity options will generally be treated as or-
dinary income or loss. Such Code Section 988 gains or losses will generally
increase or decrease the amount of a fund's investment company taxable income
available to be distributed to shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. Addition-
ally, if Code Section 988 losses exceed other investment company taxable in-
come during a taxable year, a Fund would not be able to make any ordinary div-
idend distributions, and any distributions made in the same taxable year may
be recharacterized as a return of capital to shareholders, thereby reducing
the basis of each shareholder's fund shares. In certain cases, a Fund may be
entitled to elect to treat foreign currency gains on forward or futures con-
tracts, or options thereon, as capital gains.
The Growth and Income Fund may purchase debt securities (such as zero-coupon
or pay-in-kind securities) that contain original issue discount. Original is-
sue discount that accrues in a taxable year is treated as earned by the Fund
and therefore is subject to the distribution requirements of the Code. Because
23
<PAGE>
the original issue discount earned by the Fund in a taxable year may not be
represented by cash income, the Fund may have to dispose of other securities
and use the proceeds to make distributions to shareholders.
Statements as to the tax status of distributions to shareholders of the
Funds will be mailed annually. Shareholders are urged to consult their own tax
advisors regarding specific questions as to federal, state or local taxes.
Foreign shareholders are also urged to consult their own tax advisors regard-
ing the foreign tax consequences of ownership of interests in a Fund. See
"Dividends, Distributions and Taxes" in the Statement of Additional Informa-
tion.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS. The Trust sends to its shareholders audited annual
and unaudited semi-annual reports for the Funds. The financial statements ap-
pearing in annual reports are audited by independent accountants. In addition,
the Transfer Agent sends to each shareholder having an account directly with
the Trust a statement confirming transactions in the account.
ORGANIZATION. The Trust, a business trust organized under the laws of the
Commonwealth of Massachusetts on June 18, 1986, is an open-end diversified
management investment company, commonly referred to as a mutual fund. The
Trust consists of five investment series or funds: the Balanced Assets Fund,
the Blue Chip Growth Fund, the Mid-Cap Growth Fund, the Small Company Growth
Fund and the Growth and Income Fund. The Trustees have the authority to issue
an unlimited number of shares of beneficial interest of separate series, par
value $.01 per share, of the Trust, and to divide each such series into one or
more classes of shares.
The Trust does not hold annual shareholder meetings. The Trustees are re-
quired to call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when so requested in writing by the share-
holders of record holding at least 10% of the Trust's outstanding shares. Each
share of each Fund has equal voting rights on each matter pertaining to that
Fund or matters to be voted upon by the Trust, except as noted above. Each
share of each Fund is entitled to participate equally with the other shares of
that Fund in dividends and other distributions and the proceeds of any liqui-
dation, except that, due to the differing expenses borne by the two classes,
such dividends and proceeds are likely to be lower for Class B and Class C
shares than for Class A shares. See the Statement of Additional Information
for more information with respect to the distinctions among classes.
Under Massachusetts law, shareholders of a trust, such as the Trust, in cer-
tain circumstances may be held personally liable as partners for the obliga-
tions of the trust. However the Declaration of Trust, pursuant to which the
Trust was organized, contains an express disclaimer of shareholder liability
for acts or obligations of the Trust. The Declaration of Trust also provides
for indemnification out of the Trust's property for any shareholder held per-
sonally liable for any Trust obligation. Thus the risk of a shareholder being
personally liable, as a partner for obliga-tions of the Trust, is limited to
the unlikely circumstance in which the Trust itself would be unable to meet
its obligations.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP has been se-
lected as independent accountants for the Funds. The firm of Shereff, Fried-
man, Hoffman & Goodman, LLP has been selected as legal counsel for the Funds.
SHAREHOLDER INQUIRIES. All inquiries regarding the Trust should be directed
to the Trust at the telephone number or address on the cover page of this Pro-
spectus. For questions concerning share ownership, dividends, transfer of own-
ership or share redemption, contact SAFS, Mutual Fund Operations, The
SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, or call
Shareholder/Dealer Services at (800) 858-8850.
24
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDI-
TIONAL INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESEN-
TATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE AD-
VISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN
ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY MAY NOT LAWFULLY BE MADE.
[LOGO] SunAmerica
Capital Services
Distributor
EFPRO
<PAGE>
SUNAMERICA EQUITY FUNDS
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 28, 1998
The date of the Statement of Additional Information is hereby changed to
April 1, 1998.
The first sentence of the second paragraph on page 1 of the Statement of
Additional Information is replaced with the following:
This Statement of Additional Information is not a Prospectus, but should
be read in conjunction with the Trust's Prospectus dated April 1, 1998.
April 1, 1998
<PAGE>
SUNAMERICA EQUITY FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 28, 1998
The SunAmerica Center General Marketing and
733 Third Avenue Shareholder Information
New York, NY 10017-3204 (800) 858-8850
SunAmerica Equity Funds (the "Trust") is a mutual fund consisting of five
different investment funds: SunAmerica Balanced Assets Fund, SunAmerica Blue
Chip Growth Fund, SunAmerica Mid-Cap Growth Fund, SunAmerica Small Company
Growth Fund and SunAmerica Growth and Income Fund. Each Fund has distinct
investment objectives and strategies.
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Trust's Prospectus dated January 28, 1998. To
obtain a Prospectus, please call the Trust at (800) 858-8850. Capitalized terms
used herein but not defined have the meanings assigned to them in the
Prospectus.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
HISTORY OF THE FUNDS...................................................B-2
INVESTMENT OBJECTIVES AND POLICIES.....................................B-3
PORTFOLIO TURNOVER....................................................B-24
INVESTMENT RESTRICTIONS...............................................B-25
TRUSTEES AND OFFICERS.................................................B-26
ADVISER, PERSONAL TRADING, DISTRIBUTOR AND
ADMINISTRATOR.........................................................B-31
PORTFOLIO TRANSACTIONS AND BROKERAGE..................................B-36
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES...................B-39
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES.................B-46
DETERMINATION OF NET ASSET VALUE......................................B-46
PERFORMANCE DATA......................................................B-47
DIVIDENDS, DISTRIBUTIONS AND TAXES....................................B-51
RETIREMENT PLANS......................................................B-54
DESCRIPTION OF SHARES.................................................B-55
ADDITIONAL INFORMATION................................................B-57
FINANCIAL STATEMENTS..................................................B-58
APPENDIX........................................................APPENDIX-1
</TABLE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust, the Adviser or the Distributor. This Statement of
Additional Information and the Prospectus do not constitute an offer to sell or
a solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction in which such an offer to sell or solicitation of an offer to buy
may not lawfully be made.
<PAGE>
This Statement of Additional Information relates to the five different
investment funds (each, a "Fund," and collectively, the "Funds") of SunAmerica
Equity Funds, a Massachusetts business trust, which is registered as an open-end
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The five Funds are: SunAmerica Balanced Assets Fund ("Balanced
Assets Fund"), SunAmerica Blue Chip Growth Fund ("Blue Chip Growth Fund"),
SunAmerica Mid-Cap Growth Fund ("Mid-Cap Growth Fund"), SunAmerica Small Company
Growth Fund ("Small Company Growth Fund") and SunAmerica Growth and Income Fund
("Growth and Income Fund").
HISTORY OF THE FUNDS
On September 24, 1993, the Trust reorganized with certain funds in the
SunAmerica Family of Mutual Funds (the "Reorganization") and was renamed
"SunAmerica Equity Funds". In the Reorganization, all outstanding shares of the
two then-existing series of the Trust, the Growth Portfolio ("Growth Portfolio")
and the Aggressive Growth Portfolio ("Aggressive Growth Portfolio"), were
redesignated Class A shares and renamed the SunAmerica Growth Fund ("Growth
Fund") and the SunAmerica Emerging Growth Fund ("Emerging Growth Fund"),
respectively. In addition, the SunAmerica Emerging Growth Fund series of
SunAmerica Fund Group ("Old Emerging Growth") reorganized with, and its
shareholders received Class B shares of, the Emerging Growth Fund. With regard
to the Balanced Assets Fund series of the Trust, the Total Return Fund series of
SunAmerica Multi-Asset Portfolios, Inc. ("Total Return") and the SunAmerica
Balanced Assets Fund series of SunAmerica Fund Group ("Old Balanced Assets")
reorganized with, and their shareholders received Class A and Class B shares of
the Balanced Assets Fund, respectively. The SunAmerica Capital Appreciation
Fund, Inc. ("Capital Appreciation") was reorganized with, and its shareholders
received Class B shares of, the SunAmerica Value Fund ("Value Fund"). The
Reorganization was approved by the shareholders of the Funds or their
predecessors who were entitled to vote with respect thereto on September 23,
1993.
On March 16, 1994, the Board of Trustees of the Trust (the "Trustees")
approved changing the names of the Value Fund, Growth Fund and Emerging Growth
Fund to the Blue Chip Growth Fund, Mid-Cap Growth Fund and Small Company Growth
Fund, respectively, and such name changes became effective on June 7, 1994. On
March 16, 1994, the Trustees approved the creation of the Growth and Income
Fund.
On June 18, 1996, the Trustees authorized the designation of Class Z shares
of the Balanced Assets Fund and the Small Company Growth Fund. The offering of
such Class Z shares commenced on October 1, 1996.
On November 20, 1997, the Trustees approved the designation of Class C
shares of each of the Funds. The offering of such Class C shares of the Small
Company Growth Fund and Growth and Income Fund commenced on January 28,
1998.
B-2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are described
in the Trust's Prospectus. Certain types of securities in which the Funds may
invest and certain investment practices which the Funds may employ, which are
described under "Other Investment Practices and Restrictions" in the Prospectus
are discussed more fully below.
ILLIQUID SECURITIES. No more than 15% of the value of a Fund's net assets,
determined as of the date of purchase, may be invested in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
interest-rate swaps, currency swaps, caps, floors and collars, or other
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal restrictions
on resale because they have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), securities which are otherwise not
readily marketable and repurchase agreements having a maturity of longer than
seven days. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. Securities which have not been registered
under the Securities Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemptions
within seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. There will generally be a lapse of time between a mutual fund's decision
to sell an unregistered security and the registration of such security promoting
sale. Adverse market conditions could impede a public offering of such
securities. When purchasing unregistered securities, each of the Funds will
seek to obtain the right of registration at the expense of the issuer (except in
the case of Rule 144A securities).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act for which there is a readily available market may be deemed to be
liquid. The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Trustees. In reaching liquidity decisions the
Adviser will consider, inter alia, pursuant to guidelines and procedures
established by the Trustees, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security
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and the nature of the marketplace trades (i.e., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
Commercial paper issues in which a Fund's net assets may be invested
include securities issued by major corporations without registration under the
Securities Act in reliance on the exemption from such registration afforded by
Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-
called private placement exemption from registration which is afforded by
Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper
is restricted as to disposition under the federal securities laws in that any
resale must similarly be made in an exempt transaction. Section 4(2) paper is
normally resold to other institutional investors through or with the assistance
of investment dealers who make a market in Section 4(2) paper, thus providing
liquidity. Section 4(2) paper that is issued by a company that files reports
under the Securities Exchange Act of 1934 is generally eligible to be sold in
reliance on the safe harbor of Rule 144A described above. A Fund's 15%
limitation on investments in illiquid securities includes Section 4(2) paper
other than Section 4(2) paper that the Adviser has determined to be liquid
pursuant to guidelines established by the Trustees. The Trustees have delegated
to the Adviser the function of making day-to-day determinations of liquidity
with respect to Section 4(2) paper, pursuant to guidelines approved by the
Trustees that require the Adviser to take into account the same factors
described above for other restricted securities and require the Adviser to
perform the same monitoring and reporting functions.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with
banks, brokers or securities dealers. In such agreements, the seller agrees to
repurchase the security at a mutually agreed-upon time and price. The period of
maturity is usually quite short, either overnight or a few days, although it may
extend over a number of months. The repurchase price is in excess of the
purchase price by an amount which reflects an agreed-upon rate of return
effective for the period of time a Fund's money is invested in the security.
Whenever a Fund enters into a repurchase agreement, it obtains collateral having
a value equal to at least 102% (100% if such collateral is in the form of cash)
of the repurchase price, including accrued interest. The instruments held as
collateral are valued daily and if the value of the instruments declines, the
Fund will require additional collateral. If the seller defaults and the value
of the collateral securing the repurchase agreements declines, the Fund may
incur a loss. In addition, if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited. The Trustees have established guidelines to be used by the
Adviser in connection with transactions in repurchase agreements and will
regularly monitor each Fund's use of repurchase agreements. A Fund will not
invest in repurchase agreements maturing in more than seven days if the
aggregate of such investments along with other illiquid securities exceeds 15%
of the value of its net assets. However, there is no limit on the amount of a
Fund's net assets that may be subject to repurchase agreements having a maturity
of seven days or less for temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The Fund then invests
the proceeds from the transaction in another obligation in which the Fund is
authorized to invest. The Fund's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. A Fund will
enter into a reverse repurchase agreement only
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if the interest income from investment of the proceeds is expected to be greater
than the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. In order to minimize any risk
involved, the Fund will maintain with the Custodian a segregated account of cash
or liquid securities in an amount at least equal in value to its purchase
obligations under these agreements (including accrued interest). In the event
that the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
repurchase obligation, and the Fund's use of proceeds of the agreement may
effectively be restricted pending such decision. Reverse repurchase agreements
are considered to be borrowings and are subject to the percentage limitations on
borrowings. See "Investment Restrictions."
RISKS OF INVESTING IN LOWER RATED BONDS. Debt securities in which the Growth
and Income Fund may invest may be in the lower rating categories of recognized
rating agencies (that is, ratings of Ba or lower by Moody's Investors Service,
Inc. ("Moody's") or BB or lower by Standard & Poor's Ratings Services, a
Division of the McGraw-Hill Companies, Inc. ("S&P")(and comparable unrated
securities) (commonly known as "junk bonds"). For a description of these and
other rating categories, see Appendix A. No minimum rating standard is required
for a purchase by the Fund.
It should be noted that lower-rated securities are subject to risk factors
such as (a) vulnerability to economic downturns and changes in interest rates;
(b) sensitivity to adverse economic changes and corporate developments; (c)
redemption or call provisions which may be exercised at inopportune times; (d)
difficulty in accurately valuing or disposing of such securities; (e) federal
legislation which could affect the market for such securities; and (f) special
adverse tax consequences associated with investments in certain high-yield,
high-risk bonds.
High yield bonds, like other bonds, may contain redemption or call
provisions. If an issuer exercises these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in lower return for investors. Conversely, a high yield
bond's value will decrease in a rising interest rate market.
There is a thinly traded market for high yield bonds, and recent market
quotations may not be available for some of these bonds. Market quotations are
generally available only from a limited number of dealers and may not represent
firm bids from such dealers or prices for actual sales. As a result, a Fund may
have difficulty valuing the high yield bonds in their portfolios accurately and
disposing of these bonds at the time or price desired.
Ratings assigned by Moody's and S&P to high yield bonds, like other bonds,
attempt to evaluate the safety of principal and interest payments on those
bonds. However, such ratings do not assess the risk of a decline in the market
value of those bonds. In addition, ratings may fail to reflect recent events in
a timely manner and are subject to change. If a rating with respect to a
portfolio security is changed, the Adviser will determine whether the security
will be retained based upon the factors the Adviser considers in acquiring or
holding other securities in the portfolio. Investment in high yield bonds may
make achievement of the Fund's objective more dependent on the Adviser's own
credit analysis than is the case for higher-rated bonds.
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Market prices for high yield bonds tend to be more sensitive than those for
higher-rated securities due to many of the factors described above, including
the credit-worthiness of the issuer, redemption or call provisions, the
liquidity of the secondary trading market and changes in credit ratings, as well
as interest rate movements and general economic conditions. In addition, yields
on such bonds will fluctuate over time. An economic downturn could severely
disrupt the market for high yield bonds. In addition, legislation impacting
high yield bonds may have a materially adverse effect on the market for such
bonds. For example, federally insured savings and loan associations have been
required to divest their investments in high yield bonds.
The risk of default in payment of principal and interest on high yield
bonds is significantly greater than with higher-rated debt securities because
high yield bonds are generally unsecured and are often subordinated to other
obligations of the issuer, and because the issuers of high yield bonds usually
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates. Upon a default,
bondholders may incur additional expenses in seeking recovery.
As a result of all these factors, the net asset value of a Fund to the
extent it invests in high yield bonds, is expected to be more volatile than the
net asset value of funds which invest solely in higher-rated debt securities.
This volatility may result in an increased number of redemptions from time to
time. High levels of redemptions in turn may cause a fund to sell its portfolio
securities at inopportune times and decrease the asset base upon which expenses
can be spread.
SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. In addition to their primary
investments, each Fund may also invest up to 10% of its total assets in money
market instruments for liquidity purposes (to meet redemptions and expenses).
For temporary defensive purposes, each Fund may invest up to 100% of its total
assets in fixed-income securities, including corporate debt obligations and
money market instruments rated in one of the two highest categories by a
nationally recognized statistical rating organization (or determined by the
Adviser to be of equivalent quality). A description of securities ratings is
contained in the Appendix to this Statement of Additional Information.
Subject to the limitations described above, the following is a description
of the types of money market and fixed-income securities in which the Funds may
invest:
U.S. Government Securities: See the section entitled "U.S. Government
Securities" below.
Commercial Paper: Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by entities in order to finance
their current operations. Each Fund's commercial paper investments may include
variable amount master demand notes and floating rate or variable rate notes.
Variable amount master demand notes and variable amount floating rate notes are
obligations that permit the investment of fluctuating amounts by a Fund at
varying rates of interest pursuant to direct arrangements between a Fund, as
lender, and the borrower. Master demand notes permit daily fluctuations in the
interest rates while the interest rate under variable amount floating rate notes
fluctuates on a weekly basis. These notes permit daily changes in the amounts
borrowed. A Fund has the right to increase the amount under these notes at any
time up to
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the full amount provided by the note agreement, or to decrease the amount, and
the borrower may repay up to the full amount of the note without penalty.
Because these types of notes are direct lending arrangements between the lender
and the borrower, it is not generally contemplated that such instruments will be
traded and there is no secondary market for these notes. Master demand notes are
redeemable (and, thus, immediately repayable by the borrower) at face value,
plus accrued interest, at any time. Variable amount floating rate notes are
subject to next-day redemption 14 days after the initial investment therein.
With both types of notes, therefore, a Fund's right to redeem depends on the
ability of the borrower to pay principal and interest on demand. In connection
with both types of note arrangements, a Fund considers earning power, cash flow
and other liquidity ratios of the issuer. These notes, as such, are not
typically rated by credit rating agencies. Unless they are so rated, a Fund may
invest in them only if at the time of an investment the issuer has an
outstanding issue of unsecured debt rated in one of the two highest categories
by a nationally recognized statistical rating organization. The Funds will
generally purchase commercial paper only of companies of medium to large
capitalizations (i.e., $1 billion or more).
Certificates of Deposit and Bankers' Acceptances: Certificates of deposit
are receipts issued by a bank in exchange for the deposit of funds. The issuer
agrees to pay the amount deposited plus interest to the bearer of the receipt on
the date specified on the certificate. The certificate usually can be traded in
the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by another bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most maturities are six months or less.
The Funds will generally open interest-bearing accounts only with, or
purchase certificates of deposit, time deposits or bankers' acceptances only
from, banks or savings and loan associations whose deposits are federally-
insured and whose capital is at least $50 million.
Corporate Obligations: Corporate debt obligations (including master demand
notes). For a further description of variable amount master demand notes, see
the section entitled "Commercial Paper" above.
Repurchase Agreements: See the section entitled "Repurchase Agreements"
above.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and,
as such, are backed by the "full faith and credit" of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances. Each Fund may also invest in securities issued by
agencies of the U.S. government or instrumentalities of the U.S. government.
These obligations, including those which are guaranteed
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by federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. Obligations of the Government National
Mortgage Association ("GNMA"), the Farmers Home Administration and the Export-
Import Bank are backed by the full faith and credit of the United States. In the
case of securities not backed by the full faith and credit of the United States,
a Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim against
the United States if the agency or instrumentality does not meet its
commitments.
The Balanced Assets Fund may, in addition to the U.S. government securities
noted above, invest in mortgage-backed securities (including private mortgage-
backed securities), such as GNMA, FNMA or FHLMC certificates (as defined below),
which represent an undivided ownership interest in a pool of mortgages. The
mortgages backing these securities include conventional thirty-year fixed-rate
mortgages, fifteen-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. These certificates are in most cases pass-through
instruments, through which the holder receives a share of all interest and
principal payments, including prepayments, on the mortgages underlying the
certificate, net of certain fees.
The yield on mortgage-backed securities is based on the average expected
life of the underlying pool of mortgage loans. The actual life of any
particular pool will be shortened by any unscheduled or early payments of
principal and interest. Principal prepayments generally result from the sale of
the underlying property or the refinancing or foreclosure of underlying
mortgages. The occurrence of prepayments is affected by a wide range of
economic, demographic and social factors and, accordingly, it is not possible to
predict accurately the average life of a particular pool. Yield on such pools
is usually computed by using the historical record of prepayments for that pool,
or, in the case of newly-issued mortgages, the prepayment history of similar
pools. The actual prepayment experience of a pool of mortgage loans may cause
the yield realized by the Balanced Assets Fund to differ from the yield
calculated on the basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as does the value of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a comparable basis with other debt securities because of the
prepayment feature of pass-through securities. The reinvestment of scheduled
principal payments and unscheduled prepayments that the Balanced Assets Fund
receives may occur at higher or lower rates than the original investment, thus
affecting the yield of the Fund. Monthly interest payments received by the
Balanced Assets Fund have a compounding effect which may increase the yield to
shareholders more than debt obligations that pay interest semi-annually.
Because of those factors, mortgage-backed securities may be less effective than
U.S. Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. Accelerated prepayments adversely affect yields for
pass-through securities purchased at a premium (i.e., at a price in excess of
principal amount) and may involve additional risk of loss of principal because
the premium may not have been fully amortized at the time the obligation is
repaid. The opposite is true for pass-through securities purchased at a
discount. The Balanced Assets Fund may purchase mortgage-backed securities at a
premium or at a discount.
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The following is a description of GNMA, FNMA and FHLMC certificates, the
most widely available mortgage-backed securities:
GNMA Certificates. GNMA Certificates are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that the Balanced Assets Fund may purchase are the modified pass-
through type, which entitle the holder to receive timely payment of all interest
and principal payments due on the mortgage pool, net of fees paid to the issuer
and GNMA, regardless of whether or not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
("FHA") or the Farmers' Home Administration ("FMHA"), or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is authorized by the
National Housing Act and is backed by the full faith and credit of the United
States. The GNMA is also empowered to borrow without limitation from the U.S.
Treasury if necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates at a premium in the secondary market.
FHLMC Certificates. The Federal Home Loan Mortgage Corporation ("FHLMC")
issues two types of mortgage pass-through securities: mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs")
(collectively, "FHLMC Certificates"). PCs resemble GNMA Certificates in that
each PC represents a pro rata share of all interest and principal payments made
and owed on the underlying pool. The FHLMC guarantees timely monthly payment of
interest (and, under certain circumstances, principal) of PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith
and credit of the U.S. Government.
FNMA Certificates. The Federal National Mortgage Association ("FNMA")
issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates represent a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment
of interest and principal on FNMA Certificates. The FNMA guarantee is not
backed by the full faith and credit of the U.S. Government.
Another type of mortgage-backed security in which the Balanced Assets Fund
may invest is a collateralized mortgage obligation ("CMO"). CMOs are fully
collateralized bonds which are the general obligations of the issuer thereof
(i.e., the U.S. government, a U.S. government instrumentality, or a private
issuer). Such bonds generally are secured by an assignment to a trustee
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(under the indenture pursuant to which the bonds are issued) of collateral
consisting of a pool of mortgages. Payments with respect to the underlying
mortgages generally are made to the trustee under the indenture. Payments of
principal and interest on the underlying mortgages are not passed through to the
holders of the CMOs as such (i.e., the character of payments of principal and
interest is not passed through, and therefore payments to holders of CMOs
attributable to interest paid and principal repaid on the underlying mortgages
do not necessarily constitute income and return of capital, respectively, to
such holders), but such payments are dedicated to payment of interest on and
repayment of principal of the CMOs. CMOs often are issued in two or more classes
with varying maturities and stated rates of interest. Because interest and
principal payments on the underlying mortgages are not passed through to holders
of CMOs, CMOs of varying maturities may be secured by the same pool of
mortgages, the payments on which are used to pay interest on each class and to
retire successive maturities in sequence. Unlike other mortgage-backed
securities, CMOs are designed to be retired as the underlying mortgages are
repaid. In the event of prepayment on such mortgages, the class of CMO first to
mature generally will be paid down. Therefore, although in most cases the issuer
of CMOs will not supply additional collateral in the event of such prepayment,
there will be sufficient collateral to secure CMOs that remain outstanding.
Certain CMOs may be deemed to be investment companies under the 1940 Act.
The Balanced Assets Fund intends to conduct operations in a manner consistent
with this view, and therefore generally may not invest more than 10% of its
total assets in such issuers without obtaining appropriate regulatory relief.
In reliance on recent Securities and Exchange Commission ("SEC") staff
interpretations, a Fund may invest in those CMOs and other mortgage-backed
securities that are not by definition excluded from the provisions of the 1940
Act, but have obtained exemptive orders from the SEC from such provisions.
The Balanced Assets Fund may also invest in stripped mortgage-backed
securities. Stripped mortgage-backed securities are often structured with two
classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. Stripped mortgage-backed securities
have greater market volatility than other types of U.S. government securities in
which a Fund invests. A common type of stripped mortgage-backed security has
one class receiving some of the interest and all or most of the principal (the
"principal only" class) from the mortgage pool, while the other class will
receive all or most of the interest (the "interest only" class). The yield to
maturity on an interest only class is extremely sensitive not only to changes in
prevailing interest rates, but also to the rate of principal payments, including
principal prepayments, on the underlying pool of mortgage assets, and a rapid
rate of principal payment may have a material adverse effect on the Fund's
yield. While interest-only and principal-only securities are generally regarded
as being illiquid, such securities may be deemed to be liquid if they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of the Fund's net asset value per share.
Only government interest only and principal only securities backed by fixed-rate
mortgages and determined to be liquid under guidelines and standards established
by the Trustees may be considered liquid securities not subject to a Fund's
limitation on investments in illiquid securities.
INVESTMENT IN SMALL, UNSEASONED COMPANIES. As described in the Prospectus, the
Small Company Growth Fund will invest, and the other Funds may each invest, in
the securities of small companies having market capitalizations under $1
billion. These securities may have a limited trading market,
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which may adversely affect their disposition and can result in their being
priced lower than might otherwise be the case. If other investment companies and
investors who invest in such issuers trade the same securities when a Fund
attempts to dispose of its holdings, the Fund may receive lower prices than
might otherwise be obtained.
Companies with market capitalization of $1 billion to $5 billion ("Mid-Cap
Companies") may also suffer more significant losses as well as realize more
substantial growth than larger, more established issuers. Thus, investments in
such companies tend to be more volatile and somewhat speculative.
WARRANTS. Each Fund may invest in warrants which give the holder of the warrant
a right to purchase a given number of shares of a particular issue at a
specified price until expiration. Such investments generally can provide a
greater potential for profit or loss than investments of equivalent amounts in
the underlying common stock. The prices of warrants do not necessarily move
with the prices of the underlying securities. If the holder does not sell the
warrant, he risks the loss of his entire investment if the market price of the
underlying stock does not, before the expiration date, exceed the exercise price
of the warrant plus the cost thereof. Investment in warrants is a speculative
activity. Warrants pay no dividends and confer no rights (other than the right
to purchase the underlying stock) with respect to the assets of the issuer.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase or sell
such securities on a "when-issued" or "delayed delivery" basis. Although a Fund
will enter into such transactions for the purpose of acquiring securities for
its portfolio or for delivery pursuant to options contracts it has entered into,
the Fund may dispose of a commitment prior to settlement. "When-issued" or
"delayed delivery" refers to securities whose terms and indenture are available
and for which a market exists, but which are not available for immediate
delivery. When such transactions are negotiated, the price (which is generally
expressed in yield terms) is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. During the
period between commitment by a Fund and settlement (generally within two months
but not to exceed 120 days), no payment is made for the securities purchased by
the purchaser, and no interest accrues to the purchaser from the transaction.
Such securities are subject to market fluctuation, and the value at delivery may
be less than the purchase price. A Fund will maintain a segregated account with
its Custodian, consisting of cash, or liquid securities at least equal to the
value of purchase commitments until payment is made. With respect to securities
sold on a delayed-delivery basis, a Fund will either segregate the securities
sold or liquid assets of a comparable value.
A Fund will engage in when-issued transactions in order to secure what is
considered to be an advantageous price and yield at the time of entering into
the obligation. When a Fund engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If a
Fund chooses to (i) dispose of the right to acquire a when-issued security prior
to its acquisition or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss. (At the time a Fund makes a
commitment to purchase or sell a security on a when-issued or forward commitment
basis, it records the transaction and reflects the value of the security
purchased, or if a sale, the proceeds to be received in determining its net
asset value.)
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To the extent a Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Fund enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and forward commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser before settlement will affect the value of
such securities and may cause a loss to a Fund.
When-issued transactions and forward commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Fund might sell securities in its
portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Fund might sell portfolio securities and purchase the same or similar
securities on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields.
FOREIGN SECURITIES. Investments in foreign securities offer potential benefits
not available from investments solely in securities of domestic issuers by
offering the opportunity to invest in foreign issuers that appear to offer
growth potential, or in foreign countries with economic policies or business
cycles different from those of the U.S., or to reduce fluctuations in portfolio
value by taking advantage of foreign stock markets that do not move in a manner
parallel to U.S. markets.
Each Fund may invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs), Global
Depository Receipts (GDRs) or other similar securities convertible into
securities of foreign issuers. ADRs are securities, typically issued by a U.S.
financial institution, that evidence ownership interests in a security or a pool
of securities issued by a foreign issuer and deposited with the depository. ADRs
may be sponsored or unsponsored. A sponsored ADR is issued by a depository
which has an exclusive relationship with the issuer of the underlying security.
An unsponsored ADR may be issued by any number of U.S. depositories. Holders of
unsponsored ADRs generally bear all the costs associated with establishing the
unsponsored ADR. The depository of an unsponsored ADR is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored ADR voting rights with respect to
the deposited securities or pool of securities. A Fund may invest in either
type of ADR. Although the U.S. investor holds a substitute receipt of ownership
rather than direct stock certificates, the use of the depository receipts in the
United States can reduce costs and delays as well as potential currency exchange
and other difficulties. The Fund may purchase securities in local markets and
direct delivery of these ordinary shares to the local depository of an ADR agent
bank in the foreign country. Simultaneously, the ADR agents create a
certificate which settles at the Fund's custodian in five days. The Fund may
also execute trades on the U.S. markets using existing ADRs. A foreign issuer
of the security underlying an ADR is generally not subject to the same reporting
requirements in the United States as a domestic issuer. Accordingly the
information available to a U.S. investor will be limited to the information the
foreign issuer is required to disclose in its own country and the market value
of an ADR may not reflect undisclosed material information concerning the issuer
of the underlying security. For purposes of a Fund's investment policies, the
Fund's investments in these types of securities will be deemed to be investments
in the underlying securities. Generally ADRs, in registered form, are dollar
denominated securities designed for use in the U.S. securities markets, which
represent and may be
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converted into the underlying foreign security. EDRs, in bearer form, are
designed for use in the European securities markets.
Investments in foreign securities, including securities of developing
countries, present special additional investment risks and considerations not
typically associated with investments in domestic securities, including
reduction of income by foreign taxes; fluctuation in value of foreign portfolio
investments due to changes in currency rates and control regulations (i.e.,
currency blockage); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers; less volume on foreign exchanges than on U.S. exchanges; greater
volatility and less liquidity on foreign markets than in the U.S.; less
regulation of foreign issuers, stock exchanges and brokers than the U.S.;
greater difficulties in commencing lawsuits; higher brokerage commission rates
than the U.S.; increased possibilities in some countries of expropriation,
confiscatory taxation, political, financial or social instability or adverse
diplomatic developments; and differences (which may be favorable or unfavorable)
between the U.S. economy and foreign economies.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, each Fund may lend portfolio securities in amounts up to 33a% of
total assets to brokers, dealers and other financial institutions, provided,
that such loans are callable at any time by the Fund and are at all times
secured by cash or equivalent collateral. In lending its portfolio securities,
a Fund receives income while retaining the securities' potential for capital
appreciation. The advantage of such loans is that a Fund continues to receive
the interest and dividends on the loaned securities while at the same time
earning interest on the collateral, which will be invested in short-term
obligations. A loan may be terminated by the borrower on one business day's
notice or by a Fund at any time. If the borrower fails to maintain the
requisite amount of collateral, the loan automatically terminates, and the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by the Adviser to be creditworthy. On termination of the loan, the
borrower is required to return the securities to a Fund; and any gain or loss in
the market price of the loaned security during the loan would inure to the Fund.
Each Fund will pay reasonable finders', administrative and custodial fees in
connection with a loan of its securities or may share the interest earned on
collateral with the borrower.
Since voting or consent rights which accompany loaned securities pass to
the borrower, each Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan.
INCOME ENHANCEMENT STRATEGIES. Each Fund may write (i.e., sell) call options
("calls") on securities that are traded on U.S. and foreign securities exchanges
and over-the-counter markets to enhance income through the receipt of premiums
from expired calls and any net profits from closing purchase transactions.
After any such sale up to 100% of a Fund's total assets may be subject to calls.
All such calls written by a Fund must be "covered" while the call is outstanding
(i.e., the Fund must own the securities subject to the call or other securities
acceptable for applicable escrow requirements). Calls on Futures (defined
below) used to enhance income must be covered by deliverable securities or by
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liquid assets segregated to satisfy the Futures contract. If a call written by
the Fund is exercised, the Fund forgoes any profit from any increase in the
market price above the call price of the underlying investment on which the call
was written. In addition, the Fund could experience capital losses which might
cause previously distributed short-term capital gains to be re-characterized as
a non-taxable return of capital to shareholders.
The Balanced Assets Fund also may write put options ("puts") which give the
holder of the option the right to sell the underlying security to the Fund at
the stated exercise price. A Fund will receive a premium for writing a put
option which increases the Fund's return. A Fund writes only covered put
options which means that so long as the Fund is obligated as the writer of the
option it will, through its custodian, have deposited and maintained cash or
liquid securities denominated in U.S. dollars or non-U.S. currencies with a
securities depository with a value equal to or greater than the exercise price
of the underlying securities. Puts on Futures (defined below) will be
considered "covered" if the a Fund owns an option to sell that Futures contract
having a strike price equal to or greater than the strike price of the "covered"
option, or if the Fund for the term of the option cash or other liquid assets at
all times equal in value to the exercise price of the put (less any initial
margin deposited by the Fund with its custodian with respect to such option).
HEDGING STRATEGIES. For hedging purposes as a temporary defensive maneuver,
each Fund may use interest rate futures contracts, foreign currency futures
contracts, and stock and bond index futures contracts (together, "Futures");
forward contracts on foreign currencies ("Forward Contracts"); and call and put
options on equity and debt securities, Futures, stock and bond indices and
foreign currencies (all the foregoing referred to as "Hedging Instruments").
Hedging Instruments may be used to attempt to: (i) protect against possible
declines in the market value of a Fund's portfolio resulting from downward
trends in the equity and debt securities markets (generally due to a rise in
interest rates); (ii) protect a Fund's unrealized gains in the value of its
equity and debt securities which have appreciated; (iii) facilitate selling
securities for investment reasons; (iv) establish a position in the equity and
debt securities markets as a temporary substitute for purchasing particular
equity and debt securities; or (v) reduce the risk of adverse currency
fluctuations.
A Fund's strategy of hedging with Futures and options on Futures will be
incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in the market value of a Fund's portfolio,
to permit a Fund to retain unrealized gains in the value of portfolio securities
which have appreciated, or to facilitate selling securities for investment
reasons, a Fund could: (i) sell Futures; (ii) purchase puts on such Futures or
securities; or (iii) write calls on securities held by it or on Futures. When
hedging to attempt to protect against the possibility that portfolio securities
are not fully included in a rise in value of the debt securities market, a Fund
could: (i) purchase Futures, or (ii) purchase calls on such Futures or on
securities. When hedging to protect against declines in the dollar value of a
foreign currency-denominated security, a Fund could: (i) purchase puts on that
foreign currency and on foreign currency Futures; (ii) write calls on that
currency or on such Futures; or (iii) enter into Forward Contracts at a lower
rate than the spot ("cash") rate. Additional information about the Hedging
Instruments the Funds may use is provided below.
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<PAGE>
OPTIONS
-------
Options on Securities. As noted above, each Fund may write and purchase
call and put options (including yield curve options) on equity and debt
securities.
When a Fund writes a call on a security it receives a premium and agrees to
sell the underlying security to a purchaser of a corresponding call on the same
security during the call period (usually not more than 9 months) at a fixed
price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. A Fund has retained
the risk of loss should the price of the underlying security decline during the
call period, which may be offset to some extent by the premium.
To terminate its obligation on a call it has written, a Fund may purchase a
corresponding call in a "closing purchase transaction." A profit or loss will
be realized, depending upon whether the net of the amount of the option
transaction costs and the premium received on the call written was more or less
than the price of the call subsequently purchased. A profit may also be
realized if the call expires unexercised, because a Fund retains the underlying
security and the premium received. If a Fund could not effect a closing
purchase transaction due to lack of a market, it would hold the callable
securities until the call expired or was exercised.
When a Fund purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period at a fixed exercise price. A Fund benefits only if the call is
sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the call price plus the transaction
costs and the premium paid and the call is exercised. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and a Fund will lose its premium payment and the right to
purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying investment at the exercise price
during the option period. Writing a put covered by segregated liquid assets
equal to the exercise price of the put has the same economic effect to a Fund as
writing a covered call. The premium a Fund receives from writing a put option
represents a profit as long as the price of the underlying investment remains
above the exercise price. However, a Fund has also assumed the obligation
during the option period to buy the underlying investment from the buyer of the
put at the exercise price, even though the value of the investment may fall
below the exercise price. If the put expires unexercised, a Fund (as the writer
of the put) realizes a gain in the amount of the premium. If the put is
exercised, a Fund must fulfill its obligation to purchase the underlying
investment at the exercise price, which will usually exceed the market value of
the investment at that time. In that case, a Fund may incur a loss, equal to
the sum of the sale price of the underlying investment and the premium received
minus the sum of the exercise price and any transaction costs incurred.
A Fund may effect a closing purchase transaction to realize a profit on an
outstanding put option it has written or to prevent an underlying security from
being put. Furthermore, effecting such a closing purchase transaction will
permit a Fund to write another put option to the extent that the exercise price
thereof is secured by the deposited assets, or to utilize the proceeds from the
sale of
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<PAGE>
such assets for other investments by the Fund. A Fund will realize a profit or
loss from a closing purchase transaction if the cost of the transaction is less
or more than the premium received from writing the option.
When a Fund purchases a put, it pays a premium and has the right to sell
the underlying investment to a seller of a corresponding put on the same
investment during the put period at a fixed exercise price. Buying a put on an
investment a Fund owns enables the Fund to protect itself during the put period
against a decline in the value of the underlying investment below the exercise
price by selling such underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and as a result the put is not exercised or
resold, the put will become worthless at its expiration date, and the Fund will
lose its premium payment and the right to sell the underlying investment
pursuant to the put. The put may, however, be sold prior to expiration (whether
or not at a profit.)
Buying a put on an investment a Fund does not own permits the Fund either
to resell the put or buy the underlying investment and sell it at the exercise
price. The resale price of the put will vary inversely with the price of the
underlying investment. If the market price of the underlying investment is
above the exercise price and as a result the put is not exercised, the put will
become worthless on its expiration date. In the event of a decline in the stock
market, a Fund could exercise or sell the put at a profit to attempt to offset
some or all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to pay for
the underlying security, a Fund will deposit in escrow liquid assets with a
value equal to or greater than the exercise price of the underlying securities.
A Fund therefore forgoes the opportunity of investing the segregated assets or
writing calls against those assets. As long as the obligation of a Fund as the
put writer continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring a Fund to take delivery of the
underlying security against payment of the exercise price. A Fund has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the termination of
its obligation as the writer of the put. This obligation terminates upon
expiration of the put, or such earlier time at which a Fund effects a closing
purchase transaction by purchasing a put of the same series as that previously
sold. Once a Fund has been assigned an exercise notice, it is thereafter not
allowed to effect a closing purchase transaction.
Options on Foreign Currencies. Each Fund may write and purchase puts and
calls on foreign currencies. A call written on a foreign currency by a Fund is
"covered" if the Fund owns the underlying foreign currency covered by the call
or has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by the Fund) upon conversion or exchange of other foreign
currency held in its portfolio. A put option is "covered" if the Fund
segregates cash or liquid securities with a value at least equal to the exercise
price of the put option. A call written by a Fund on a foreign currency is for
cross-hedging purposes if it is not covered, but is designed to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, a
Fund collateralizes the option by segregating cash or liquid securities in an
amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily.
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<PAGE>
Options on Securities Indices. As noted above, each Fund may write and
purchase call and put options on securities indices. Puts and calls on broadly-
based securities indices are similar to puts and calls on securities except that
all settlements are in cash and gain or loss depends on changes in the index in
question (and thus on price movements in the securities market generally) rather
than on price movements in individual securities or Futures. When a Fund buys a
call on a securities index, it pays a premium. During the call period, upon
exercise of a call by a Fund, a seller of a corresponding call on the same
investment will pay the Fund an amount of cash to settle the call if the closing
level of the securities index upon which the call is based is greater than the
exercise price of the call. That cash payment is equal to the difference
between the closing price of the index and the exercise price of the call times
a specified multiple (the "multiplier") which determines the total dollar value
for each point of difference. When a Fund buys a put on a securities index, it
pays a premium and has the right during the put period to require a seller of a
corresponding put, upon the Fund's exercise of its put, to deliver to the Fund
an amount of cash to settle the put if the closing level of the securities index
upon which the put is based is less than the exercise price of the put. That
cash payment is determined by the multiplier, in the same manner as described
above as to calls.
FUTURES AND OPTIONS ON FUTURES
- ------------------------------
Futures. Upon entering into a Futures transaction, a Fund will be required
to deposit an initial margin payment with the futures commission merchant (the
"futures broker"). The initial margin will be deposited with the Fund's
custodian in an account registered in the futures broker's name; however, the
futures broker can gain access to that account only under specified conditions.
As the Future is marked-to-market to reflect changes in its market value,
subsequent margin payments, called variation margin, will be paid to or by the
futures broker on a daily basis. Prior to expiration of the Future, if a Fund
elects to close out its position by taking an opposite position, a final
determination of variation margin is made, additional cash is required to be
paid by or released to the Fund, and any loss or gain is realized for tax
purposes. All Futures transactions are effected through a clearinghouse
associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging purposes
to attempt to protect against the effects of interest rate changes on a Fund's
current or intended investments in fixed-income securities. For example, if a
Fund owned long-term bonds and interest rates were expected to increase, that
Fund might sell interest rate futures contracts. Such a sale would have much
the same effect as selling some of the long-term bonds in that Fund's portfolio.
However, since the Futures market is more liquid than the cash market, the use
of interest rate futures contracts as a hedging technique allows a Fund to hedge
its interest rate risk without having to sell its portfolio securities. If
interest rates did increase, the value of the debt securities in the portfolio
would decline, but the value of that Fund's interest rate futures contracts
would be expected to increase at approximately the same rate, thereby keeping
the net asset value of that Fund from declining as much as it otherwise would
have. On the other hand, if interest rates were expected to decline, interest
rate futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of long-
term bonds, a Fund could protect itself against the effects of the anticipated
rise in the value of long-term bonds without actually buying them until the
necessary cash became available or the market had stabilized. At that time, the
interest rate futures contracts could be liquidated and that Fund's cash
reserves could then be used to buy long-term bonds on the cash market.
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<PAGE>
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Fund's current or intended investments
from broad fluctuations in stock or bond prices. For example, a Fund may sell
stock or bond index futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by gains
on the Futures position. When a Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock or
bond index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions in
stock or bond index futures contracts will be closed out.
As noted above, each Fund may purchase and sell foreign currency futures
contracts for hedging or income enhancement purposes to attempt to protect its
current or intended investments from fluctuations in currency exchange rates.
Such fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities in the
currencies in which they are denominated remains constant. Each Fund may sell
futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the
resulting adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the Futures contracts. However, if the
value of the foreign currency increases relative to the dollar, the Fund's loss
on the foreign currency futures contract may or may not be offset by an increase
in the value of the securities since a decline in the price of the security
stated in terms of the foreign currency may be greater than the increase in
value as a result of the change in exchange rates.
Conversely, each Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing Futures contracts on
the relevant currency, which could offset, in whole or in part, the increased
cost of such securities resulting from a rise in the dollar value of the
underlying currencies. When a Fund purchases futures contracts under such
circumstances, however, and the price of securities to be acquired instead
declines as a result of appreciation of the dollar, the Fund will sustain losses
on its futures position which could reduce or eliminate the benefits of the
reduced cost of portfolio securities to be acquired.
Options on Futures. As noted above, the Funds may purchase and write
options on interest rate futures contracts, stock and bond index futures
contracts and foreign currency futures contracts. (Unless otherwise specified,
options on interest rate futures contracts, options on stock and bond index
futures contracts and options on foreign currency futures contracts are
collectively referred to as "Options on Futures.")
The writing of a call option on a Futures contract constitutes a partial
hedge against declining prices of the securities in a Fund's portfolio. If the
Futures price at expiration of the option is below the exercise price, the Fund
will retain the full amount of the option premium, which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a
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<PAGE>
put option on a Futures contract constitutes a partial hedge against increasing
prices of the securities or other instruments required to be delivered under the
terms of the Futures contract. If the Futures price at expiration of the put
option is higher than the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
a Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its Options on Futures positions, a Fund's losses from exercised
Options on Futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The Fund may purchase Options on Futures for hedging purposes, instead of
purchasing or selling the underlying Futures contract. For example, where a
decrease in the value of portfolio securities is anticipated as a result of a
projected market-wide decline or changes in interest or exchange rates, a Fund
could, in lieu of selling a Futures contract, purchase put options thereon. In
the event that such decrease occurs, it may be offset, in whole or part, by a
profit on the option. If the market decline does not occur, the Fund will
suffer a loss equal to the price of the put. Where it is projected that the
value of securities to be acquired by a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, a Fund could
purchase call Options on Futures, rather than purchasing the underlying Futures
contract. If the market advances, the increased cost of securities to be
purchased may be offset by a profit on the call. However, if the market
declines, the Fund will suffer a loss equal to the price of the call but the
securities which the Fund intends to purchase may be less expensive.
FORWARD CONTRACTS
- -----------------
A Forward Contract involves bilateral obligations of one party to purchase,
and another party to sell, a specific currency at a future date (which may be
any fixed number of days from the date of the contract agreed upon by the
parties), at a price set at the time the contract is entered into. These
contracts are traded in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. No price is paid
or received upon the purchase or sale of a Forward Contract.
A Fund may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities a Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition,
although Forward Contracts limit the risk of loss due to a decline in the value
of the hedged currencies, at the same time they limit any potential gain that
might result should the value of the currencies increase. A Fund will not
speculate with Forward Contracts or foreign currency exchange rates.
A Fund may enter into Forward Contracts with respect to specific
transactions. For example, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Fund
anticipates receipt of dividend payments in a foreign currency, the Fund
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<PAGE>
may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale of
the amount of foreign currency involved in the underlying transaction. A Fund
will thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.
A Fund may also use Forward Contracts to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when
a Fund believes that foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a Forward Contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a Forward Contract to buy that foreign currency for a fixed
dollar amount. In this situation a Fund may, in the alternative, enter into a
Forward Contract to sell a different foreign currency for a fixed U.S. dollar
amount where the Fund believes that the U.S. dollar value of the currency to be
sold pursuant to the forward contract will fall whenever there is a decline in
the U.S. dollar value of the currency in which portfolio securities of the Fund
are denominated ("cross-hedged").
The Fund will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Fund is not able to
cover its forward currency positions with underlying portfolio securities, the
Fund will segregate cash or liquid securities having a value equal to the
aggregate amount of the Fund's commitments under Forward Contracts entered into
with respect to position hedges and cross-hedges. If the value of the
segregated securities declines, additional cash or securities will be segregated
on a daily basis so that the value of the segregated assets will equal the
amount of the Fund's commitments with respect to such contracts. As an
alternative to segregating assets, a Fund may purchase a call option permitting
the Fund to purchase the amount of foreign currency being hedged by a forward
sale contract at a price no higher than the Forward Contract price or the Fund
may purchase a put option permitting the Fund to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the Forward Contract price. Unanticipated changes in currency prices may
result in poorer overall performance for a Fund than if it had not entered into
such contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency a Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
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<PAGE>
currency received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency a Fund is obligated to deliver. The
projection of short-term currency market movements is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Forward Contracts involve the risk that anticipated currency movements will not
be accurately predicted, causing a Fund to sustain losses on these contracts and
transactions costs.
At or before the maturity of a Forward Contract requiring a Fund to sell a
currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, a Fund may
close out a Forward Contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. A Fund would realize a
gain or loss as a result of entering into such an offsetting Forward Contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
offsetting contract.
The cost to a Fund of engaging in Forward Contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Fund must evaluate the credit
and performance risk of each particular counterparty under a Forward Contract.
Although a Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. A Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE
- --------------------------------------------------------------
The Fund's custodian, or a securities depository acting for the custodian,
will act as the Fund's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Fund has written
options or as to other acceptable escrow securities, so that no margin will be
required for such transaction. OCC will release the securities on the
expiration of the option or upon a Fund's entering into a closing transaction.
An option position may be closed out only on a market which provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. A Fund's option
activities may affect its turnover rate and brokerage commissions. The exercise
by a Fund of puts on securities will cause the sale of related investments,
increasing
B-21
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portfolio turnover. Although such exercise is within a Fund's control, holding a
put might cause the Fund to sell the related investments for reasons which would
not exist in the absence of the put. A Fund will pay a brokerage commission each
time it buys a put or call, sells a call, or buys or sells an underlying
investment in connection with the exercise of a put or call. Such commissions
may be higher than those which would apply to direct purchases or sales of such
underlying investments. Premiums paid for options are small in relation to the
market value of the related investments, and consequently, put and call options
offer large amounts of leverage. The leverage offered by trading in options
could result in a Fund's net asset value being more sensitive to changes in the
value of the underlying investments.
In the future, each Fund may employ Hedging Instruments and strategies that
are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Fund's investment objectives, legally
permissible and adequately disclosed.
REGULATORY ASPECTS OF HEDGING INSTRUMENTS
- -----------------------------------------
Each Fund must operate within certain restrictions as to its long and short
positions in Futures and options thereon under a rule (the "CFTC Rule") adopted
by the Commodity Futures Trading Commission (the "CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Fund from registration with the
CFTC as a "commodity pool operator" (as defined in the CEA) if it complies with
the CFTC Rule. In particular, the Fund may (i) purchase and sell Futures and
options thereon for bona fide hedging purposes, as defined under CFTC
regulations, without regard to the percentage of the Fund's assets committed to
margin and option premiums, and (ii) enter into non-hedging transactions,
provided that the Fund may not enter into such non-hedging transactions if,
immediately thereafter, the sum of the amount of initial margin deposits on the
Fund's existing Futures positions and option premiums would exceed 5% of the
fair value of its portfolio, after taking into account unrealized profits and
unrealized losses on any such transactions. Each Fund intends to engage in
Futures transactions and options thereon only for hedging purposes, Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.
Transactions in options by a Fund are subject to limitations established by
each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or brokers. Thus, the number of options which a Fund may write or
hold may be affected by options written or held by other entities, including
other investment companies having the same or an affiliated investment adviser.
Position limits also apply to Futures. An exchange may order the liquidation of
positions found to be in violation of those limits and may impose certain other
sanctions. Due to requirements under the 1940 Act, when a Fund purchases a
Future, the Fund will segregate cash or liquid securities in an amount equal to
the market value of the securities underlying such Future, less the margin
deposit applicable to it.
B-22
<PAGE>
TAX ASPECTS OF HEDGING INSTRUMENTS
- ----------------------------------
Each Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). One of the tests for
such qualification is that less than 30% of its gross income must be derived
from gains realized on the sale of stock or securities held for less than three
months. This limitation, which applies only to tax years beginning on, or
before, August 5, 1997, may limit the ability of a Fund to engage in options
transactions and, in general, to hedge investment risk.
POSSIBLE RISK FACTORS IN HEDGING
- --------------------------------
In addition to the risks discussed in the Prospectus and above, there is a
risk in using short hedging by selling Futures to attempt to protect against
decline in value of a Fund's portfolio securities (due to an increase in
interest rates) that the prices of such Futures will correlate imperfectly with
the behavior of the cash (i.e., market value) prices of the Fund's securities.
The ordinary spreads between prices in the cash and Futures markets are subject
to distortions due to differences in the natures of those markets. First, all
participants in the Futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close Futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
Futures markets. Second, the liquidity of the Futures markets depend on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the Futures markets could be reduced, thus producing distortion. Third, from
the point-of-view of speculators, the deposit requirements in the Futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the Futures markets may
cause temporary price distortions.
If a Fund uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Adviser then
determines not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Fund will realize a
loss on the Hedging Instruments that is not offset by a reduction in the price
of the debt securities purchased.
LEVERAGE. In seeking to enhance investment performance, the Small Company
Growth Fund, and Growth and Income Fund may increase their ownership of
securities by borrowing from banks at fixed rates of interest and investing the
borrowed funds, subject to the restrictions stated in the Prospectus. Any such
borrowing will be made only from banks and pursuant to the requirements of the
1940 Act and will be made only to the extent that the value of each Fund's
assets less its liabilities, other than borrowings, is equal to at least 300% of
all borrowings including the proposed borrowing. If the value of a Fund's
assets, so computed, should fail to meet the 300% asset coverage requirement,
the Fund is required, within three business days, to reduce its bank debt to the
extent necessary to meet such requirement and may have to sell a portion of its
investments at a time when independent investment judgment would not dictate
such sale. Interest on money borrowed is an
B-23
<PAGE>
expense the Fund would not otherwise incur, so that it may have little or no net
investment income during periods of substantial borrowings. Since substantially
all of a Fund's assets fluctuate in value, but borrowing obligations are fixed
when the Fund has outstanding borrowings, the net asset value per share of a
Fund correspondingly will tend to increase and decrease more when the Fund's
assets increase or decrease in value than would otherwise be the case. A Fund's
policy regarding use of leverage is a fundamental policy which may not be
changed without approval of the shareholders of the Fund.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated for each Fund by dividing (a) the
lesser of purchases or sales of portfolio securities for the fiscal year by (b)
the monthly average of the value of portfolio securities owned during the fiscal
year. For purposes of this calculation, securities which at the time of
purchase had a remaining maturity of one year or less are excluded from the
numerator and the denominator. Transactions in Futures or the exercise of calls
written by a Fund may cause the Fund to sell portfolio securities, thus
increasing its turnover rate. The exercise of puts also may cause a sale of
securities and increase turnover; although such exercise is within a Fund's
control, holding a protective put might cause the Fund to sell the underlying
securities for reasons which would not exist in the absence of the put. A Fund
will pay a brokerage commission each time it buys or sells a security in
connection with the exercise of a put or call. Some commissions may be higher
than those which would apply to direct purchases or sales of portfolio
securities.
The following table sets forth the portfolio turnover rates for the fiscal
years ended September 30, 1997 and 1996.
PORTFOLIO TURNOVER
<TABLE>
<CAPTION>
FUND 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced Assets Fund 149% 187%
- -----------------------------------------------------------------------------------------------
Blue Chip Growth Fund 211% 269%
- -----------------------------------------------------------------------------------------------
Growth and Income Fund 200% 161%
- -----------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 332% 307%
- -----------------------------------------------------------------------------------------------
Small Company Growth Fund 343% 240%
- -----------------------------------------------------------------------------------------------
</TABLE>
High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by a Fund.
High portfolio turnover may also involve a possible increase in short-term
capital gains or losses.
B-24
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of investment restrictions that are
fundamental policies and may not be changed without the approval of the holders
of a majority of that Fund's outstanding voting securities. A "majority of the
outstanding voting securities" of a Fund for this purpose means the lesser of
(i) 67% of the shares of the Fund represented at a meeting at which more than
50% of the outstanding shares are present in person or represented by proxy or
(ii) more than 50% of the outstanding shares. Unless otherwise indicated, all
percentage limitations apply to each Fund on an individual basis, and apply only
at the time the investment is made; any subsequent change in any applicable
percentage resulting from fluctuations in value will not be deemed an investment
contrary to these restrictions. Under these restrictions, no Fund may:
(1) With respect to 75% of its total assets, invest more than 5% of its total
assets (taken at market value at the time of each investment) in the
securities of any one issuer or purchase more than 10% of the outstanding
voting securities of any one company or more than 10% of any class of a
company's outstanding securities, except that these restrictions shall not
apply to securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities ("U.S. government securities").
(2) Invest more than 5% of its total assets (taken at market value at the time
of each investment) in securities of companies having a record, together
with predecessors, of less than three years of continuous operations,
except that this restriction shall not apply to U.S. government securities.
(3) Purchase securities on margin, borrow money or pledge their assets, except
that the Small Company Growth Fund and Growth and Income Fund may borrow
money to purchase securities as set forth in the Prospectus and Statement
of Additional Information and each Fund may borrow from a bank for
temporary or emergency purposes in amounts not exceeding 5% (taken at the
lower of cost or current value) of its total assets (not including the
amount borrowed) and pledge its assets to secure such borrowings. Further,
to the extent that an investment technique engaged in by the Growth and
Income Fund required pledging of assets, the Fund may pledge assets in
connection with such transactions. For purposes of this restriction and
restriction (5) below, collateral arrangements with respect to the options,
financial futures and options thereon described in the Prospectus and
Statement of Additional Information are not deemed to constitute a pledge
or loan of assets.
(4) Invest more than 25% of each Fund's assets in the securities of issuers
engaged in the same industry.
(5) Engage in arbitrage transactions, buy or sell commodities or commodity
contracts or real estate or interests in real estate, except that each Fund
may (a) purchase or sell financial futures and options thereon for hedging
purposes, as described in the Prospectus and Statement of Additional
Information, under policies developed by the Trustees and (b) purchase and
sell marketable securities which are secured by real estate and marketable
securities of companies which invest or deal in real estate.
B-25
<PAGE>
(6) Act as underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Funds may be deemed to be
underwriters under certain Federal securities laws.
(7) Make loans, except through (i) repurchase agreements, (ii) loans of
portfolio securities, or (iii) the purchase of portfolio securities
consistent with a Fund's investment objectives and policies, as described
in the Prospectus.
(8) Make short sales of securities or maintain a short position, except that
each Fund may effect short sales against the box.
(9) Issue senior securities as defined in the 1940 Act, except that each Fund
may enter into repurchase agreements, lend its portfolio securities and
borrow money from banks, as described in restriction (3).
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a vote of shareholders. Each Fund may
not:
(10) Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 15% of a
Fund's net assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and
sold to "qualified institutional buyers" as defined in Rule 144A, which the
Adviser has determined to be liquid pursuant to guidelines established by
the Trustees, will not be considered illiquid for purposes of this 15%
limitation on illiquid securities.
(11) Invest in securities of other registered investment companies, except by
purchases in the open market, involving only customary brokerage
commissions and as a result of which not more than 10% of its total assets
---
(determined at the time of investment) would be invested in such
securities, or except as part of a merger, consolidation or other
acquisition.
TRUSTEES AND OFFICERS
The following table lists the Trustees and executive officers of the Trust,
their ages, business addresses, and principal occupations during the past five
years. The SunAmerica Mutual Funds ("SAMF") consist of SunAmerica Equity Funds,
SunAmerica Income Funds, SunAmerica Money Market Funds, Inc. and Style Select
Series, Inc. An asterisk indicates those Trustees who are interested persons of
the Trust within the meaning of the 1940 Act.
B-26
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position with the Fund During Past 5 Years
- --------------------- ---------------------- -------------------
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
S. James Coppersmith, 64 Trustee Director/Trustee of the Boston Stock
Emerson College Exchange, Uno Restaurant Corp., Waban
100 Beacon Street Corp., Kushner-Locke Co., Chyron Inc.;
Boston, MA 02116 Chairman of the Board of Emerson
College; formerly, President and
General Manager, WCVB-TV, a division of
the Hearst Corp. from 1982 to 1994
(retired); Director/Trustee of SAMF and
Anchor Series Trust ("AST").
- ----------------------------------------------------------------------------------------------------
Samuel M. Eisenstat, 57 Chairman of the Board Attorney in private practice; President
430 East 86th Street and Chief Executive Officer, Abjac
New York, NY 10028 Energy Corporation; Director/Trustee of
Atlantic Realty Trust, UMB Bank and
Trust (a subsidiary of United Mizrachi
Bank), North European Royalty Trust,
Volt Information Sciences Funding, Inc.
(a subsidiary of Volt Information
Sciences, Inc.) and Venture Partners
International (an Israeli venture
capital fund); Chairman of the Boards
of Directors/ Trustees of SAMF and AST.
- ----------------------------------------------------------------------------------------------------
Stephen J. Gutman, 54 Trustee Partner and Chief Operating Officer of
515 East 79th Street B.B. Associates LLC (menswear specialty
New York, NY 10021 retailing and other activities) since
May 1989; Director/Trustee of SAMF and
AST.
- ----------------------------------------------------------------------------------------------------
</TABLE>
B-27
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Peter Harbeck*, 44 Trustee and President Director and President, SunAmerica
The SunAmerica Center Asset Management Corp. ("SAAMCo");
733 Third Avenue Director, SunAmerica Capital Services,
New York, NY 10017-3204 Inc. ("SACS"), since February 1993;
Director and President, SunAmerica Fund
Services, Inc.("SAFS"), since May 1988;
President, SAMF and AST; Executive Vice
President and Chief Operating Officer,
SAAMCo, from May 1988 to August 1995;
Executive Vice President, SACS, from
November 1991 to August 1995; Director,
Resources Trust Company.
- ----------------------------------------------------------------------------------------------------
Peter McMillan III*, 39 Trustee Executive Vice President and Chief
1 SunAmerica Center Investment Officer, SunAmerica
Los Angeles, CA 90067 Investments, Inc., since August 1989;
Director/Trustee of SAMF; Director,
Resources Trust Company.
- ----------------------------------------------------------------------------------------------------
Sebastiano Sterpa, 68 Trustee Founder of Sterpa Realty Inc., a full
Suite 200 service real estate firm, since 1962;
200 West Glenoaks Blvd. Chairman of the Sterpa Group, real
Glendale, CA 91202 estate investments and management
company, since 1962; Director/ Trustee
of SAMF.
- ----------------------------------------------------------------------------------------------------
Francis D. Gannon, 30 Vice President Vice President and Portfolio Manager,
The SunAmerica Center SAAMCo, since May 1997; Co-Portfolio
733 Third Avenue Manager, from November 1996 to May
New York, NY 10017-3204 1997; previously, Assistant Vice
President and Equity Analyst, from 1993
to 1997.
- ----------------------------------------------------------------------------------------------------
Nancy Kelly, 46 Vice President Vice President and Head Trader, SAAMCo,
The SunAmerica Center since 1994; formerly, Vice President,
733 Third Avenue Whitehorne & Co. Ltd., from 1991 to
New York, NY 10017-3204 1994; Sales Trader, Lynch Jones & Ryan,
from 1992 to 1994.
- ----------------------------------------------------------------------------------------------------
Audrey L. Snell, 44 Vice President Senior Vice President and Equity
The SunAmerica Center Portfolio Manager, SAAMCo, since March
733 Third Avenue 1991.
New York, NY 10017-3204
- ----------------------------------------------------------------------------------------------------
</TABLE>
B-28
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Gerard P. Sullivan, 37 Vice President Vice President, SAAMCo, since February
The SunAmerica Center 1995; Portfolio Manager, since July
733 Third Avenue 1996; Portfolio Manager for the SAAMCo
New York, NY 10017-3204 equity and Co-Portfolio Manager of the
balanced SAAMCo components of the
Multi-Managed Growth, Moderate Growth,
Income/Equity and Income Portfolios of
Seasons Series Trust, since March 1997;
formerly, Portfolio Manager, Texas
Commerce Investment Management, from
July 1993 to February 1995.
- ----------------------------------------------------------------------------------------------------
Peter C. Sutton, 33 Treasurer Senior Vice President, SAAMCo, since
The SunAmerica Center April 1997; Treasurer, SAMF and AST,
733 Third Avenue since February 1996; Vice President,
New York, NY 10017-3204 SunAmerica Series Trust and Anchor
Pathway Fund, since October 1994; Vice
President, Seasons Series Trust, since
April 1997; formerly, Vice President,
SAAMCo, from 1994 to 1997; Controller,
SAMF and AST, from March 1993 to
February 1996; Assistant Controller,
SAMF, from 1990 to 1993.
- ----------------------------------------------------------------------------------------------------
Robert M. Zakem, 40 Secretary and Chief Senior Vice President and General
The SunAmerica Center Compliance Officer Counsel, SAAMCo, since April 1993;
733 Third Avenue Executive Vice President, General
New York, NY 10017-3204 Counsel and Director, SACS, since
February 1993; Vice President, General
Counsel and Assistant Secretary, SAFS,
since January 1994; Vice President,
SunAmerica Series Trust, Anchor Pathway
and Seasons Series Trust; Assistant
Secretary, SunAmerica Series Trust and
Anchor Pathway Fund, since September
1993; Assistant Secretary, Seasons
Series Trust, since April 1997;
formerly, Vice President and Associate
General Counsel, SAAMCo, from March
1992 to April 1993.
- ----------------------------------------------------------------------------------------------------
</TABLE>
B-29
<PAGE>
Trustees and officers of the Trust are also trustees and officers of some
or all of the other investment companies managed, administered or advised by the
Adviser, and distributed by SunAmerica Capital Services, Inc. ("SACS" or the
"Distributor") and other affiliates of SunAmerica Inc.
The Trust pays each Trustee who is not an interested person of the Trust or
the Adviser (each a "disinterested" Trustee) annual compensation in addition to
reimbursement of out-of-pocket expenses in connection with attendance at
meetings of the Trustees. Specifically, each Disinterested Trustee receives a
pro rata portion (based upon the Trust's net assets) of an aggregate of $40,000
in annual compensation for acting as director or trustee to the SunAmerica
Mutual Funds and AST. In addition, Mr. Eisenstat receives an aggregate of
$2,000 in annual compensation for serving as Chairman of the Boards of the
retail funds in the SunAmerica Mutual Funds. Officers of the Trust receive no
direct remuneration in such capacity from the Trust or any of the Funds.
In addition, each disinterested Trustee also serves on the Audit Committee
of the Board of Trustees. Each member of the Audit Committee receives an
aggregate of $5,000 in annual compensation for serving on the Audit Committees
of the SunAmerica Mutual Funds and AST. With respect to the Trust, each member
of the committee receives a pro rata portion of the $5,000 annual compensation,
based on the relative net assets of the Trust. The Trust also has a Nominating
Committee, comprised solely of disinterested Trustees, which recommends to the
Trustees those persons to be nominated for election as Trustees by shareholders
and selects and proposes nominees for election by Trustees between shareholders'
meetings. Members of the Nominating Committee serve without compensation.
The Trustees (and Directors) of the SunAmerica Mutual Funds have adopted
the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the
"Retirement Plan") effective January 1, 1993 for the unaffiliated Trustees. The
Retirement Plan provides generally that if a disinterested Trustee who has at
least 10 years of consecutive service as a disinterested Trustee of any of the
SunAmerica Mutual Funds (an "Eligible Trustee") retires after reaching age 60
but before age 70 or dies while a Trustee, such person will be eligible to
receive a retirement or death benefit from each SunAmerica mutual fund with
respect to which he or she is an Eligible Trustee. As of each birthday, prior
to the 70th birthday, each Eligible Trustee will be credited with an amount
equal to (i) 50% of his or her regular fees (excluding committee fees) for
services as a disinterested Trustee of each SunAmerica mutual fund for the
calendar year in which such birthday occurs, plus (ii) 8.5% of any amounts
credited under clause (i) during prior years. An Eligible Trustee may receive
any benefits payable under the Retirement Plan, at his or her election, either
in one lump sum or in up to fifteen annual installments.
As of December 31, 1997, the Trustees and officers of the Trust owned in
the aggregate, less than 1% of the Trust's total outstanding shares.
The following table sets forth information summarizing the compensation of
each disinterested Trustee for his services as Trustee for the fiscal year ended
September 30, 1997. Neither the Trustees who are interested persons of the
Trust nor any officers of the Trust receive any compensation.
B-30
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR TOTAL COMPENSATION
COMPENSATION RETIREMENT BENEFITS ESTIMATED ANNUAL FROM REGISTRANT AND
TRUSTEE FROM ACCRUED AS PART OF BENEFITS UPON FUND COMPLEX PAID
REGISTRANT FUND EXPENSES* RETIREMENT TO TRUSTEES*
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
S. James Coppersmith $15,420 $37,556 $29,670 $65,000
- --------------------------------------------------------------------------------------------------------
Samuel M. Eisenstat $16,139 $33,061 $46,089 $69,000
- --------------------------------------------------------------------------------------------------------
Stephen J. Gutman $15,420 $34,187 $60,912 $65,000
- --------------------------------------------------------------------------------------------------------
Sebastiano Sterpa $15,577 $23,021 $7,900 $43,333**
- --------------------------------------------------------------------------------------------------------
</TABLE>
* Information is as of September 30, 1997 for the five investment companies in
the complex which pay fees to these directors/trustees. The complex
consists of the SunAmerica Mutual Funds and Anchor Series Trust.
** Mr. Sterpa is not a trustee of Anchor Series Trust.
As of December 31, 1997, Eli Broad, Los Angeles, CA 90067 and SAAMCo, New
York, NY 10017 owned of record 5% and 8%, respectively, of Growth and Income
Fund Class A shares.
ADVISER, PERSONAL TRADING,
DISTRIBUTOR AND ADMINISTRATOR
THE ADVISER. The Adviser, organized as a Delaware corporation in 1982, is
located at The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, and
acts as adviser to each of the Funds pursuant to the Investment Advisory and
Management Agreement dated September 23, 1993 as amended May 20, 1994 (the
"Advisory Agreement") with the Trust, on behalf of each Fund. The Adviser is an
indirect wholly owned subsidiary of SunAmerica Inc. (formerly, Broad Inc.).
SunAmerica Inc., is incorporated in the State of Maryland and maintains its
principal executive offices at 1 SunAmerica Center, Los Angeles, CA 90067-6022,
telephone (310) 772-6000.
Under the Advisory Agreement, the Adviser manages the investment of the
assets of each Fund and obtains and evaluates economic, statistical and
financial information to formulate and implement investment policies for each
Fund. Any investment program undertaken by the Adviser will at all times be
subject to the policies and control of the Trustees. The Adviser also provides
certain administrative services to each Fund.
Except to the extent otherwise specified in the Advisory Agreement, each
Fund pays, or causes to be paid, all other expenses of the Trust and each of the
Funds, including, without limitation, charges and expenses of any registrar,
custodian, transfer and dividend disbursing agent; brokerage commissions; taxes;
engraving and printing of share certificates; registration costs of the Funds
and their shares under Federal and state securities laws; the cost and expense
of printing, including
B-31
<PAGE>
typesetting, and distributing Prospectuses and Statements of Additional
Information respecting the Funds, and supplements thereto, to the shareholders
of the Funds; all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
all expenses incident to any dividend, withdrawal or redemption options; fees
and expenses of legal counsel and independent accountants; membership dues of
industry associations; interest on borrowings of the Funds; postage; insurance
premiums on property or personnel (including Officers and Trustees) of the Trust
which inure to its benefit; extraordinary expenses (including, but not limited
to, legal claims and liabilities and litigation costs and any indemnification
relating thereto); and all other costs of the Trust's operation.
As compensation for its services to the Funds, the Adviser receives a fee
from each Fund, payable monthly, computed daily at the annual rate of.75% on the
first $350 million of such Fund's average daily assets, .70% on the next $350
million of net assets and .65% on net assets over $700 million.
The following table sets forth the total advisory fees incurred by each
Fund pursuant to the Advisory Agreement or waived by the Adviser for the fiscal
years ended September 30, 1997, 1996 and 1995.
ADVISORY FEES
<TABLE>
<CAPTION>
ADVISORY ADVISORY
FEES* FEES WAIVED
- ---------------------------------------------------------------------------------------------------------
FUND 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Assets
Fund $2,430,522 $2,282,018 $1,821,586 -- -- --
- ---------------------------------------------------------------------------------------------------------
Blue Chip
Growth Fund $701,489 $644,774 $565,835 -- -- --
- ---------------------------------------------------------------------------------------------------------
Growth and Income
Fund $531,071 $91,558 $32,455 $147,159 $91,558 $32,455
- ---------------------------------------------------------------------------------------------------------
Mid-Cap
Growth Fund $416,078 $375,398 $294,505 -- -- --
- ---------------------------------------------------------------------------------------------------------
Small Company
Growth Fund $1,955,511 $1,487,650 $819,449 -- -- --
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Without giving effect to voluntary fee waivers.
B-32
<PAGE>
The following table sets forth the fee waivers and expense reimbursements
made to the Funds by the Adviser for the fiscal years ended September 30, 1997,
1996 and 1995.
FEE WAIVERS AND EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
FUND 1997 1996 1995
========================================================================================================
CLASS A CLASS B CLASS Z CLASS A CLASS B CLASS A CLASS B
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Assets -- -- $9,394 -- -- -- --
========================================================================================================
Blue Chip Growth -- -- -- -- -- $13,179 --
========================================================================================================
Growth and Income $80,226 $71,140 -- $73,696 $56,264 $95,986 $55,267
========================================================================================================
Mid-Cap Growth -- -- -- -- $66 -- $10,554
========================================================================================================
Small Company Growth -- -- $9,971 -- -- -- --
========================================================================================================
</TABLE>
The Advisory Agreement continues in effect with respect to each Fund from
year to year provided that such continuance is approved annually by vote of a
majority of the Trustees including a majority of the disinterested Trustees.
The Advisory Agreement may be terminated with respect to a Fund at any time,
without penalty, on 60 days' written notice by the Trustees, by the holders of a
majority of the respective Fund's outstanding voting securities or by the
Adviser. The Advisory Agreement automatically terminates with respect to each
Fund in the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
Under the terms of the Advisory Agreement, the Adviser is not liable to
the Funds, or their shareholders, for any act or omission by it or for any
losses sustained by the Funds or their shareholders, except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
PERSONAL TRADING. The Trust and the Adviser have adopted a written Code of
Ethics (the "Code") which prescribes general rules of conduct and sets forth
guidelines with respect to personal securities trading by "Access Persons"
thereof. An Access Person as defined in the Code is an individual who is a
trustee, director, officer, general partner or advisory person of the Trust or
the Adviser. The guidelines on personal securities trading include: (i)
securities being considered for purchase or sale, or purchased or sold, by any
Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii)
private placements, (iv) blackout periods, (v) short-term trading profits, (vi)
gifts, and (vii) services as a director. These guidelines are substantially
similar to those contained in the Report of the Advisory Group on Personal
Investing issued by the Investment Company Institute's Advisory Panel. The
Adviser reports to the Board of Trustees on a quarterly basis, as to whether
there were any violations of the Code by Access Persons of the Trust or the
Adviser during the quarter.
THE DISTRIBUTOR. The Trust, on behalf of each Fund, has entered into a
distribution agreement (the "Distribution Agreement") with the Distributor, a
registered broker-dealer and an indirect wholly owned subsidiary of SunAmerica
Inc., to act as the principal underwriter of the shares of each Fund. The
address of the Distributor is The SunAmerica Center, 733 Third Avenue, New York,
NY 10017-
B-33
<PAGE>
3204. The Distribution Agreement provides that the Distributor has the exclusive
right to distribute shares of the Funds through its registered representatives
and authorized broker-dealers. The Distribution Agreement also provides that the
Distributor will pay the promotional expenses, including the incremental cost of
printing prospectuses, annual reports and other periodic reports respecting each
Fund, for distribution to persons who are not shareholders of such Fund and the
costs of preparing and distributing any other supplemental sales literature.
However, certain promotional expenses may be borne by the Funds (see
"Distribution Plans" below).
SACS serves as Distributor of Class Z shares, with respect to the Small
Company Growth and Balanced Assets Funds, and incurs the expenses of
distributing the Funds= Class Z shares under the Distribution Agreement, none of
which expenses are reimbursed or paid by the Trust.
Continuance of the Distribution Agreement with respect to each Fund is
subject to annual approval by vote of the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust. The Trust and the
Distributor each has the right to terminate the Distribution Agreement with
respect to a Fund on 60 days' written notice, without penalty. The Distribution
Agreement will terminate automatically in the event of its assignment as defined
in the 1940 Act and the rules thereunder.
The Distributor may, from time to time, pay additional commissions or
promotional incentives to brokers, dealers or other financial services firms
that sell shares of the Funds. In some instances, such additional commissions,
fees or other incentives may be offered only to certain firms, including Royal
Alliance Associates, Inc., SunAmerica Securities, Inc., Keogler Morgan &
Company, Financial Service Corporation and Advantage Capital Corporation,
affiliates of the Distributor, that sell or are expected to sell during
specified time periods certain minimum amounts of shares of the Funds, or of
other funds underwritten by the Distributor. In addition, the terms and
conditions of any given promotional incentive may differ from firm to firm.
Such differences will, nevertheless, be fair and equitable, and based on such
factors as size, geographic location, or other reasonable determinants, and will
in no way affect the amount paid to any investor.
DISTRIBUTION PLANS. As indicated in the Prospectus, the Trustees of the Trust
and the shareholders of Class A, Class B and Class C shares of each Fund have
adopted Distribution Plans (the "Class A Plan," the "Class B Plan," and the
"Class C Plan," and collectively, the "Distribution Plans") pursuant to Rule
12b-1 under the 1940 Act. There is no Distribution Plan in effect for Class Z
shares. Reference is made to "Management of the Trust - Distribution Plans" in
the Prospectus for certain information with respect to the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from a Fund
at an annual rate of up to 0.10% of average daily net assets of such Fund's
Class A shares to compensate the Distributor and certain securities firms for
providing sales and promotional activities for distributing that class of
shares. Under the Class B and Class C Plans, the Distributor may receive
payments from a Fund at the annual rate of up to 0.75% of the average daily net
assets of such Fund's Class B 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
B-34
<PAGE>
have sold Fund shares, commissions and other expenses such as sales literature,
prospectus printing and distribution and compensation to wholesalers. It is
possible that in any given year the amount paid to the Distributor under any of
the Distribution Plans will exceed the Distributor's distribution costs as
described above. The Distribution Plans provide that each class of shares of
each Fund may also pay the Distributor an account maintenance and service fee of
up to 0.25% of the aggregate average daily net assets of such class of shares
for payments to broker-dealers for providing continuing account maintenance. In
this regard, some payments are used to compensate broker-dealers with trail
commissions or account maintenance and service fees in an amount up to 0.25% per
year of the assets maintained in a Fund by their customers.
The following table sets forth the distribution and account maintenance
and service fees the Distributor received from the Funds for the fiscal years
ended September 30, 1997, 1996 and 1995.
DISTRIBUTION AND ACCOUNT MAINTENANCE AND SERVICE FEES
<TABLE>
<CAPTION>
FUND 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Assets
Fund $545,512 $1,681,853 $478,455 $1,675,676 $237,888 $1,749,100
- ----------------------------------------------------------------------------------------------------------
Blue Chip Growth
Fund $202,327 $357,241 $164,198 $390,560 $42,755 $632,288
- ----------------------------------------------------------------------------------------------------------
Growth and
Income Fund $127,978 $342,443 $25,462 $49,329* $11,338*** $10,876**
- -----------------------------------------------------------------------------------------------------------
Mid-Cap Growth
Fund $148,384 $130,813 $136,912 $109,353 $115,641 $62,270
- ----------------------------------------------------------------------------------------------------------
Small Company
Growth Fund $545,065 $1,045,469 $408,943 $815,125 $187,524 $556,816
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* For the fiscal year ended 9/30/96, the Distributor waived fees in the
amount of $3,265 for the Growth and Income Fund.
** For the fiscal year ended 9/30/95 the Distributor waived fees in the
amount of $16,747 for the Growth and Income Fund.
*** For the period 7/1/94 (commencement of operations) through 9/30/95.
Continuance of the Distribution Plans with respect to each Fund is subject
to annual approval by vote of the Trustees, including a majority of the
Independent Trustees. A Distribution Plan may not be amended to increase
materially the amount authorized to be spent thereunder with respect to a class
of shares of a Fund, without approval of the shareholders of the affected class
of shares of the Fund. In addition, all material amendments to the Distribution
Plans must be approved by the Trustees in the manner described above. A
Distribution Plan may be terminated at any time with respect to a Fund without
payment of any penalty by vote of a majority of the Independent Trustees or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the affected class of shares of the Fund. So long as the Distribution
Plans are in effect, the election and nomination of the Independent Trustees of
the Trust shall be committed to the discretion of the Independent Trustees. In
the Trustees' quarterly review of the Distribution Plans, they will consider the
continued appropriateness of, and the level of, compensation provided in the
Distribution Plans.
B-35
<PAGE>
In their consideration of the Distribution Plans with respect to a Fund, the
Trustees must consider all factors they deem relevant, including information as
to the benefits of the Fund and the shareholders of the relevant class of the
Fund.
THE ADMINISTRATOR. The Trust has entered into a Service Agreement, under the
terms of which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly owned
subsidiary of SunAmerica Inc., acts as a servicing agent assisting State Street
Bank and Trust Company ("State Street") in connection with certain services
offered to the shareholders of each of the Funds. Under the terms of the
Service Agreement, SAFS may receive reimbursement of its costs in providing such
shareholder services. SAFS is located at The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
Pursuant to the Service Agreement, as compensation for services rendered,
SAFS receives a fee from each Fund, computed and payable monthly based upon an
annual rate of 0.22% of average daily net assets. This fee represents the full
cost of providing shareholder and transfer agency services to the Trust. From
this fee, SAFS pays a fee to State Street, and its affiliate, National Financial
Data Services ("NFDS" and with State Street, the "Transfer Agent") (other than
out-of-pocket charges of the Transfer Agent which are paid by the Trust). No
portion of such fee is paid or reimbursed by Class Z shares. Class Z shares,
however, will pay all direct transfer agency fees and out-of pocket expenses.
For further information regarding the Transfer Agent, see the section entitled
"Additional Information" below.
The Service Agreement dated September 23, 1993 as amended August 21, 1996,
continues in effect from year to year provided that such continuance is approved
annually by vote of a majority of the Trustees including a majority of the
disinterested Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Adviser is responsible for decisions
to buy and sell securities for each Fund, selection of broker-dealers and
negotiation of commission rates. Purchases and sales of securities on a
securities exchange are effected through brokers-dealers who charge a negotiated
commission for their services. Orders may be directed to any broker-dealer
including, to the extent and in the manner permitted by applicable law, an
affiliated brokerage subsidiary of the Adviser.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission (although the price of the security usually includes a profit to the
dealer). In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
The Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order.
However, the Adviser may select broker-dealers which provide it with research
services and may cause a Fund to pay such broker-dealers
B-36
<PAGE>
commissions which exceed those that other broker-dealers may have charged, if in
its view the commissions are reasonable in relation to the value of the
brokerage and/or research services provided by the broker-dealer. Certain
research services furnished by brokers may be useful to the Adviser with clients
other than the Trust. No specific value can be determined for research services
furnished without cost to the Adviser by a broker. The Adviser is of the opinion
that because the material must be analyzed and reviewed by its staff, its
receipt does not tend to reduce expenses, but may be beneficial in supplementing
the Adviser's research and analysis. Therefore, it may tend to benefit the Funds
by improving the quality of the Adviser's investment advice. The investment
advisory fees paid by the Funds are not reduced because the Adviser receives
such services. When making purchases of underwritten issues with fixed
underwriting fees, the Adviser may designate the use of broker-dealers who have
agreed to provide the Adviser with certain statistical, research and other
information.
Subject to applicable law and regulations, consideration may also be given
to the willingness of particular brokers to sell shares of a Fund as a factor in
the selection of brokers for transactions effected on behalf of a Fund, subject
to the requirement of best price and execution.
Although the objectives of other accounts or investment companies which
the Adviser manages may differ from those of the Funds, it is possible that, at
times, identical securities will be acceptable for purchase by one or more of
the Funds and one or more other accounts or investment companies which the
Adviser manages. However, the position of each account or company in the
securities of the same issue may vary with the length of the time that each
account or company may choose to hold its investment in those securities. The
timing and amount of purchase by each account and company will also be
determined by its cash position. If the purchase or sale of a security is
consistent with the investment policies of one or more of the Funds and one or
more of these other accounts or companies is considered at or about the same
time, transactions in such securities will be allocated in a manner deemed
equitable by the Adviser. The Adviser may combine such transactions, in
accordance with applicable laws and regulations, where the size of the
transaction would enable it to negotiate a better price or reduced commission.
However, simultaneous transactions could adversely affect the ability of a Fund
to obtain or dispose of the full amount of a security, which it seeks to
purchase or sell, or the price at which such security can be purchased or sold.
The following tables set forth the brokerage commissions paid by the Funds
and the amounts of the brokerage commissions which were paid to affiliated
broker-dealers by the Funds for the fiscal years ended September 30, 1997, 1996
and 1995.
B-37
<PAGE>
1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO AFFILIATED PERCENTAGE PAID TO
FUND BROKERAGE BROKER-DEALERS AFFILIATED BROKER-DEALERS
COMMISSIONS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $777,773 -- --
- -----------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $398,417 -- --
- -----------------------------------------------------------------------------------------------------
Growth and Income Fund $354,892 -- --
- -----------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $310,572 -- --
- -----------------------------------------------------------------------------------------------------
Small Company Growth Fund $1,096,605 -- --
- -----------------------------------------------------------------------------------------------------
</TABLE>
1996 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO AFFILIATED PERCENTAGE PAID TO
FUND BROKERAGE BROKER-DEALERS AFFILIATED BROKER-DEALERS
COMMISSIONS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $952,056 $21,450 2.3%
- -----------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $424,304 $0 0.0%
- -----------------------------------------------------------------------------------------------------
Growth and Income Fund $66,513 $2,130 3.2%
- -----------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $238,176 $3,150 1.3%
- -----------------------------------------------------------------------------------------------------
Small Company Growth Fund $408,277 $11,880 2.9%
- -----------------------------------------------------------------------------------------------------
</TABLE>
1995 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO AFFILIATED PERCENTAGE PAID TO
FUND BROKERAGE BROKER-DEALERS AFFILIATED BROKER-DEALERS
COMMISSIONS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $758,880 $13,735 1.8%
- -----------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $479,902 $7,125 1.5%
- -----------------------------------------------------------------------------------------------------
Growth and Income Fund $19,916 $0 0.0%
- -----------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $255,418 $250 0.1%
- -----------------------------------------------------------------------------------------------------
Small Company Growth Fund $338,503 $0 0.0%
- -----------------------------------------------------------------------------------------------------
</TABLE>
B-38
<PAGE>
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Shares of each of the Funds are sold at the respective net asset value
next determined after receipt of a purchase order, plus a sales charge, which,
at the election of the investor, may be imposed either (i) at the time of
purchase (Class A shares), or (ii) on a deferred basis (Class B and Class C
shares, and certain Class A shares).
The following tables set forth the front-end sales concessions with
respect to Class A shares of each Fund, the amount of the front-end sales
concessions which was reallowed to affiliated broker-dealers, and the contingent
deferred sales charges with respect to Class B shares of each Fund, received by
the Distributor for the fiscal years ended September 30, 1997, 1996 and 1995.
1997
<TABLE>
<CAPTION>
FRONT-END SALES AMOUNT REALLOWED TO CONTINGENT DEFERRED
FUND CONCESSIONS- CLASS AFFILIATED SALES CHARGE-
A SHARES BROKER-DEALERS CLASS B SHARES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $666,236 $501,649 $299,683
- -----------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $68,915 $42,671 $54,673
- -----------------------------------------------------------------------------------------------------------
Growth and Income Fund $707,401 $367,498 $44,335
- -----------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $81,231 $44,483 $44,557
- -----------------------------------------------------------------------------------------------------------
Small Company Growth Fund $1,315,944 $536,682 $262,423
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1996
<TABLE>
<CAPTION>
FRONT-END SALES AMOUNT REALLOWED TO CONTINGENT DEFERRED
FUND CONCESSIONS- CLASS AFFILIATED SALES CHARGE-
A SHARES BROKER-DEALERS CLASS B SHARES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $1,139,306 $830,997 $303,405
- -----------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $84,051 $48,653 $37,223
- -----------------------------------------------------------------------------------------------------------
Growth and Income Fund $384,542 $188,254 $1,820
- -----------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $185,300 $125,403 $15,696
- -----------------------------------------------------------------------------------------------------------
Small Company Growth Fund $2,007,194 $1,156,919 $118,032
- -----------------------------------------------------------------------------------------------------------
</TABLE>
B-39
<PAGE>
1995
<TABLE>
<CAPTION>
FRONT-END SALES AMOUNT REALLOWED TO CONTINGENT DEFERRED
FUND CONCESSIONS- CLASS AFFILIATED SALES CHARGE-
A SHARES BROKER-DEALERS CLASS B SHARES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Assets Fund $565,677 $411,596 $367,583
- -----------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund $33,816 $27,360 $88,628
- -----------------------------------------------------------------------------------------------------------
Growth and Income Fund $22,142 $14,608 $1,965
- -----------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund $104,245 $69,230 $40,076
- -----------------------------------------------------------------------------------------------------------
Small Company Growth Fund $602,843 $317,796 $105,710
- -----------------------------------------------------------------------------------------------------------
</TABLE>
CONTINGENT DEFERRED SALES CHARGES ("CDSCS") APPLICABLE TO CERTAIN CLASS B
SHARES. Class B shares of the Small Company Growth Fund and the Balanced Assets
Fund issued to shareholders in exchange for shares of Old Emerging Growth and
Old Balanced Assets, respectively, in the Reorganization, are subject to the
CDSC schedule that applied to redemptions of shares of these funds at the time
of reorganization. Upon a redemption of these shares, the shareholder will
receive credit for the periods both prior to and after the Reorganization during
which the shares were held. The following table sets forth the rates of the
CDSC applicable to these shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS
- ------------------------------------ -------------------------------
- ----------------------------------------------------------------------------------------------
<S> <C>
First 5%
- ----------------------------------------------------------------------------------------------
Second 4%
- ----------------------------------------------------------------------------------------------
Third 3%
- ----------------------------------------------------------------------------------------------
Fourth 2%
- ----------------------------------------------------------------------------------------------
Fifth 1%
- ----------------------------------------------------------------------------------------------
Sixth and thereafter 0%
- ----------------------------------------------------------------------------------------------
</TABLE>
Any Class B shares purchased after the date of the Reorganization (other
than through the reinvestment of dividends and distributions, which are not
subject to the CDSC) will be subject to the CDSC schedule reflected in the
Prospectus.
CONVERSION FEATURE APPLICABLE TO CERTAIN CLASS B SHARES. Shareholders of Class
B shares of the Small Company Growth Fund and the Balanced Assets Fund issued in
exchange for shares of Old Emerging Growth and Old Balanced Assets,
respectively, in the Reorganization, will receive credit for the periods both
prior to and after the Reorganization during which the shares were held, for
purposes of computing the seven year holding period applicable to the conversion
feature.
WAIVER OF CDSC. As discussed under "Purchase of Shares" in the Prospectus,
CDSCs may be waived on redemptions of Class B and Class C shares under certain
circumstances. The conditions set forth below are applicable with respect to
the following situations with the proper documentation:
B-40
<PAGE>
DEATH. CDSCs may be waived on redemptions within one year following the
death (i) of the sole shareholder on an individual account, (ii) of a joint
tenant where the surviving joint tenant is the deceased's spouse, or (iii) of
the beneficiary of a Uniform Gifts to Minors Act, Uniform Transfers to Minors
Act or other custodial account. The CDSC waiver is also applicable in the case
where the shareholder account is registered as community property. If, upon the
occurrence of one of the foregoing, the account is transferred to an account
registered in the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year of the death. If
the Class B shares are not redeemed within one year of the death, they will
remain Class B shares and be subject to the applicable CDSC, when redeemed.
DISABILITY. CDSCs may be waived on redemptions occurring within one year
after the sole shareholder on an individual account or a joint tenant on a
spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of
the Code). To be eligible for such waiver, (i) the disability must arise after
the purchase of shares and (ii) the disabled shareholder must have been under
age 65 at the time of the initial determination of disability. If the account
is transferred to a new registration and then a redemption is requested, the
applicable CDSC will be charged.
PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of a Fund
through dealers which have entered into selected dealer agreements with the
Distributor. An investor's dealer who has entered into a distribution
arrangement with the Distributor is expected to forward purchase orders and
payment promptly to the Fund. Orders received by the Distributor before the
Fund=s close of business will be executed at the offering price determined at
the close of regular trading on the New York Stock Exchange ("NYSE") that day.
Orders received by the Distributor after the Fund=s close of business will be
executed at the offering price determined after the close of regular trading of
the NYSE on the next trading day. The Distributor reserves the right to cancel
any purchase order for which payment has not been received by the fifth business
day following the investment. A Fund will not be responsible for delays caused
by dealers.
PURCHASE BY CHECK. Checks should be made payable to the specific Fund or to
"SunAmerica Funds." If the payment is for a retirement plan account for which
SunAmerica serves as fiduciary, please note on the check that payment is for
such an account. In the case of a new account, purchase orders by check must be
submitted directly by mail to SunAmerica Fund Services, Inc., Mutual Fund
Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-
3204, together with payment for the purchase price of such shares and a
completed New Account Application. Payment for subsequent purchases should be
mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas
City, Missouri 64141-6373 and the shareholder's Fund account number should
appear on the check. For fiduciary retirement plan accounts, both initial and
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York
10017-3204. Certified checks are not necessary but checks are accepted subject
to collection at full face value in United States funds and must be drawn on a
bank located in the United States. Upon receipt of the completed New Account
Application and payment check, the Transfer Agent will purchase full and
fractional shares of the applicable Fund at the net asset value next computed
after the check is received, plus the applicable sales charge. Subsequent
purchases of shares of each Fund may be purchased directly through the Transfer
Agent. SAFS reserves the right to reject any check made payable other than
B-41
<PAGE>
in the manner indicated above. Under certain circumstances, the Fund will accept
a multi-party check (e.g., a check made payable to the shareholder by another
party and then endorsed by the shareholder to the Fund in payment for the
purchase of shares); however, the processing of such a check may be subject to a
delay. The Fund does not verify the authenticity of the endorsement of such
multi-party check, and acceptance of the check by the Fund should not be
considered verification thereof. Neither the Fund nor its affiliates will be
held liable for any losses incurred as a result of a fraudulent endorsement.
There are restrictions on the redemption of shares purchased by check for which
funds are being collected. (See "Redemption of Shares" in the Prospectus.)
PURCHASE THROUGH SAFS. SAFS will effect a purchase order on behalf of a
customer who has an investment account upon confirmation of a verified credit
balance at least equal to the amount of the purchase order (subject to the
minimum $500 investment requirement for wire orders). If such order is received
at or prior to the Fund=s close of business, the purchase of shares of a Fund
will be effected on that day. If the order is received after the Fund=s close
of business, the order will be effected on the next business day.
PURCHASE BY FEDERAL FUNDS WIRE. An investor may make purchases by having his or
her bank wire Federal funds to the Trust's Transfer Agent. Federal funds
purchase orders will be accepted only on a day on which the Trust and the
Transfer Agent are open for business. In order to insure prompt receipt of a
Federal funds wire, it is important that these steps be followed:
1. You must have an existing SunAmerica Fund Account before wiring funds.
To establish an account, complete the New Account Application and send
it via facsimile to SunAmerica Fund Services, Inc. at: (212) 551-5343.
2. Call SunAmerica Fund Services' Shareholder/Dealer Services, toll free at
(800) 858-8850, extension 5125 to obtain your new account number.
3. Instruct the bank to wire the specified amount to the Transfer Agent:
State Street Bank and Trust Company, Boston, MA, ABA# 0110-00028; DDA#
99029712, SunAmerica [name of Fund, Class __] (include shareholder name
and account number).
WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A SHARES. To
the extent that sales are made for personal investment purposes, the sales
charge is waived as to Class A shares purchased by current or retired officers,
directors, and other full-time employees of SunAmerica and its affiliates, as
well as members of the selling group and family members of the foregoing. In
addition, the sales charge is waived with respect to shares purchased by certain
qualified retirement plans or employee benefit plans (other than IRAs), which
are sponsored or administered by SunAmerica or an affiliate thereof. Such plans
may include certain employee benefit plans qualified under Sections 401 or 457
of the Code, or employee benefit plans created pursuant to Section 403(b) of the
Code and Sponsored by nonprofit organizations defined under Section 501(c)(3) of
the Code (collectively, the "Plans"). A Plan will qualify for purchases at net
asset value provided that (a) the initial amount invested in one or more of the
Portfolios (or in combination with the shares of other SunAmerica Mutual Funds)
is at least $1,000,000, (b) the sponsor signs a $1,000,000 Letter of Intent, (c)
such shares are purchased by an employer-sponsored plan with at least 100
eligible employees, or (d) the purchases are by trustees or other fiduciaries
for certain employer-sponsored plans, the trustee, fiduciary or administrator
which has an agreement with the Distributor with respect to such purchases and
all such transactions for the plan are executed through a single omnibus
B-42
<PAGE>
account. Further, the sales charge is waived with respect to shares purchased
by "wrap accounts" for the benefit of clients of broker-dealers, financial
institutions or financial planners adhering to the following standards
established by the Distributor: (i) the broker-dealer, financial institution or
financial planner charges its client(s) an advisory fee based on the assets
under management on an annual basis, and (ii) such broker-dealer, financial
institution or financial planner does not advertise that shares of the Funds may
be purchased by clients at net asset value. Shares purchased under this waiver
may not be resold except to the Fund. Shares are offered at net asset value to
the foregoing persons because of anticipated economies in sales effort and sales
related expenses. Reductions in sales charges apply to purchases or shares by a
"single person" including an individual; members of a family unit comprising
husband, wife and minor children; or a trustee or other fiduciary purchasing for
a single fiduciary account. Complete details concerning how an investor may
purchase shares at reduced sales charges may be obtained by contacting the
Distributor.
REDUCED SALES CHARGES (CLASS A SHARES ONLY). As discussed under "Purchase of
Shares" in the Prospectus, investors in Class A shares of a Fund may be entitled
to reduced sales charges pursuant to the following special purchase plans made
available by the Trust.
COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the
sales charge reductions or eliminations by combining purchases of Fund shares
into a single transaction:
(i) an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act (which includes corporations which are corporate affiliates of each
other);
(ii) an individual, his or her spouse and their minor children,
purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust estate or
single fiduciary account (including a pension, profit-sharing, or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Code);
(iv) tax-exempt organizations qualifying under Section 501(c)(3) of the
Code (not including 403(b) plans);
(v) employee benefit plans of a single employer or of affiliated
employers, other than 403(b) plans; and
(vi) group purchases as described below.
A combined purchase currently may also include shares of other funds in the
SunAmerica Mutual Funds (other than money market funds) purchased at the same
time through a single investment dealer, if the dealer places the order for such
shares directly with the Distributor.
RIGHTS OF ACCUMULATION. A purchaser of Fund shares may qualify for a
reduced sales charge by combining a current purchase (or combined purchases as
described above) with shares previously purchased and still owned; provided the
cumulative value of such shares (valued at cost or current net asset value,
whichever is higher), amounts to $50,000 or more. In determining the shares
previously purchased, the calculation will include, in addition to other Class A
shares of the particular Fund that were previously purchased, shares of the
other classes of the same Fund, as well as shares
B-43
<PAGE>
of any class of any other Fund or of any of the other Funds advised by the
Adviser, as long as such shares were sold with a sales charge or acquired in
exchange for shares purchased with such a sales charge.
The shareholder's dealer, if any, or the shareholder, must notify the
Distributor at the time an order is placed of the applicability of the reduced
charge under the Right of Accumulation. Such notification must be in writing by
the dealer or shareholder when such an order is placed by mail. The reduced
sales charge will not be granted if: (a) such information is not furnished at
the time of the order; or (b) a review of the Distributor's or the Transfer
Agent's records fails to confirm the investor's represented holdings.
LETTER OF INTENT. A reduction of sales charges is also available to an
investor who, pursuant to a written Letter of Intent which is set forth in the
New Account Application, establishes a total investment goal in Class A shares
of one or more Funds to be achieved through any number of investments over a
thirteen-month period, of $50,000 or more. Each investment in such Funds made
during the period will be subject to a reduced sales charge applicable to the
goal amount. The initial purchase must be at least 5% of the stated investment
goal and shares totaling 5% of the dollar amount of the Letter of Intent will be
held in escrow by the Transfer Agent, in the name of the investor. Shares of
any class of shares of any Fund, or of other funds advised by the Adviser which
impose a sales charge at the time of purchase, which the investor intends to
purchase or has previously purchased during a 30-day period prior to the date of
execution of the Letter of Intent and still owns, may also be included in
determining the applicable reduction; provided, the dealer or shareholder
notifies the Distributor of such prior purchase(s).
The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amounts of the investment goal. In the event the
investment goal is not achieved within the thirteen-month period, the investor
is required to pay the difference between the sales charge otherwise applicable
to the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
is authorized by the Letter of Intent to liquidate a sufficient number of
escrowed shares to obtain such difference. If the goal is exceeded and
purchases pass the next sales charge break-point, the sales charge on the entire
amount of the purchase that results in passing that break-point, and on
subsequent purchases, will be subject to a further reduced sales charge in the
same manner as set forth above under "Rights of Accumulation," but there will be
no retroactive reduction of sales charges on previous purchases. At any time
while a Letter of Intent is in effect, a shareholder may, by written notice to
the Distributor, increase the amount of the stated goal. In that event, shares
of the applicable Funds purchased during the previous 90-day period and still
owned by the shareholder will be included in determining the applicable sales
charge. The 5% escrow and the minimum purchase requirement will be applicable
to the new stated goal. Investors electing to purchase shares of one or more of
the Funds pursuant to this purchase plan should carefully read such Letter of
Intent.
REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may
purchase Class A shares of the Funds under the combined purchase privilege as
described above.
To receive a rate based on combined purchases, group members must purchase
Class A shares of a Fund through a single investment dealer designated by the
group. The designated dealer must transmit each member's initial purchase to
the Distributor, together with payment and completed New Account Application.
After the initial purchase, a member may send funds for the purchase of Class A
shares directly to the Transfer Agent. Purchases of a Fund's shares are made at
the public offering
B-44
<PAGE>
price based on the net asset value next determined after the Distributor or the
Transfer Agent receives payment for the Class A shares. The minimum investment
requirements described above apply to purchases by any group member.
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide its
designated investment dealer access to the group's membership by means of
written communication or direct presentation to the membership at a meeting on
not less frequently than an annual basis; (vi) the group or its investment
dealer will provide annual certification, in form satisfactory to the Transfer
Agent, that the group then has at least 25 members and that at least ten members
participated in group purchases during the immediately preceding 12 calendar
months; and (vii) the group or its investment dealer will provide periodic
certification, in form satisfactory to the Transfer Agent, as to the eligibility
of the purchasing members of the group.
Members of a qualified group include: (i) any group which meets the
requirements stated above and which is a constituent member of a qualified
group; (ii) any individual purchasing for his or her own account who is carried
on the records of the group or on the records of any constituent member of the
group as being a good standing employee, partner, member or person of like
status of the group or constituent member; or (iii) any fiduciary purchasing
shares for the account of a member of a qualified group or a member's
beneficiary. For example, a qualified group could consist of a trade
association which would have as its members individuals, sole proprietors,
partnerships and corporations. The members of the group would then consist of
the individuals, the sole proprietors and their employees, the members of the
partnership and their employees, and the corporations and their employees, as
well as the trustees of employee benefit trusts acquiring a Fund's shares for
the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the
Distributor. The Trust reserves the right to revise the terms of or to suspend
or discontinue group sales with respect to shares of the Funds at any time.
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares of
a Fund at net asset value to the extent that the investment represents the
proceeds from a redemption of a non-SunAmerica mutual fund in which the investor
either (a) paid a front-end sales load or (b) was subject to, or paid a CDSC on
the redemption proceeds. Nevertheless, the Distributor will pay a commission to
any dealer who initiates or is responsible for such an investment, in the amount
of .50% of the amount invested, subject, however, to forfeiture in the event of
a redemption during the first year from the date of purchase. In addition, it
is essential that a NAV Transfer Program Form accompany the New Account
Application to indicate that the investment is intended to participate in the
Net Asset Value Transfer Program (formerly, Exchange Program for Investment
Company Shares). This program may be revised or terminated without notice by
the Distributor. For current information, contact Shareholder/Dealer Services
at (800) 858-8850.
B-45
<PAGE>
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption of Fund shares.
If the Trustees determine that it would be detrimental to the best
interests of the remaining shareholders of a Fund to make payment wholly or
partly in cash, the Trust, having filed with the SEC a notification of election
pursuant to Rule 18f-1 on behalf of each of the Funds, may pay the redemption
price in whole, or in part, by a distribution in kind of securities from a Fund
in lieu of cash. In conformity with applicable rules of the SEC, the Funds are
committed to pay in cash all requests for redemption, by any shareholder of
record, limited in amount with respect to each shareholder during any 90-day
period to the lesser of (i) $250,000, or (ii) 1% of the net asset value of the
applicable Fund at the beginning of such period. If shares are redeemed in
kind, the redeeming shareholder would incur brokerage costs in converting the
assets into cash. The method of valuing portfolio securities is described below
in the section entitled "Determination of Net Asset Value," and such valuation
will be made as of the same time the redemption price is determined.
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular
trading. Shares are valued each day as of the close of regular trading on the
NYSE (generally, 4:00 p.m., Eastern time). Each Fund calculates the net asset
value of each class of its shares separately by dividing the total value of each
class's net assets by the shares outstanding of such class.
Stocks are stated at value based upon closing sales prices reported on
recognized securities exchanges or, for listed securities having no sales
reported and for unlisted securities, upon last reported bid prices. Non-
convertible bonds, debentures, other long-term debt securities and short-term
securities with original or remaining maturities in excess of 60 days, are
normally valued at prices obtained for the day of valuation from a bond pricing
service of a major dealer in bonds, when such prices are available; however, in
circumstances in which the Manager deems it appropriate to do so, an over-the-
counter or exchange quotation at the mean of representative bid or asked prices
may be used. Securities traded primarily on securities exchanges outside the
United States are valued at the last sale price on such exchanges on the day of
valuation, or if there is no sale on the day of valuation, at the last-reported
bid price. If a security=s price is available from more than one foreign
exchange, a Fund uses the exchange that is the primary market for the security.
Short-term securities with 60 days or less to maturity are amortized to maturity
based on their cost to the Trust if acquired within 60 days of maturity or, if
already held by the Trust on the 60th day, are amortized to maturity based on
the value determined on the 61st day. Options traded on national securities
exchanges are valued as of the close of the exchange on which they are traded.
Futures and options traded on commodities exchanges are valued at their last
sale price as of the close of such exchange. Other securities are valued on the
basis of last sale or bid price (if a last sale price is not available) in what
is, in the opinion of the Manager, the broadest and most representative market,
that may be either a securities exchange or the over-the-counter market. Where
quotations are not readily available, securities are valued at fair value as
determined in good faith in accordance with procedures adopted by the Board of
Trustees. The fair value of all other assets is added to the value of
securities to arrive at the respective Fund's total assets.
A Fund's liabilities, including proper accruals of expense items, are
deducted from total assets.
B-46
<PAGE>
PERFORMANCE DATA
Each Fund may advertise performance data that reflects various measures of
total return and the Balanced Assets Fund may advertise data that reflects
yield. An explanation of the data presented and the methods of computation that
will be used are as follows.
A Fund's performance may be compared to the historical returns of various
investments, performance indices of those investments or economic indicators,
including, but not limited to, stocks, bonds, certificates of deposit, money
market funds and U.S. Treasury Bills. Certain of these alternative investments
may offer fixed rates of return and guaranteed principal and may be insured.
Average annual total return is determined separately for Class A, Class B,
Class C and Class Z shares in accordance with a formula specified by the SEC.
Average annual total return is computed by finding the average annual compounded
rates of return for the 1-, 5-, and 10-year periods or for the lesser included
periods of effectiveness. The formula used is as follows:
P(1 + T)n = ERV
P = a hypothetical initial purchase payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10- year periods at the end
of the 1-, 5-, or 10-year periods (or fractional portion thereof).
The above formula assumes that:
1. The maximum sales load (i.e., either the front-end sales load in the
case of the Class A shares or the deferred sales load that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of the Class B or Class C shares) is
deducted from the initial $1,000 purchase payment;
2. All dividends and distributions are reinvested at net asset value; and
3. Complete redemption occurs at the end of the 1-, 5-, or 10- year periods
or fractional portion thereof with all nonrecurring charges deducted
accordingly.
B-47
<PAGE>
The Funds' average annual total return for the 1-, 5- and 10-year periods
(or from date of inception, if sooner) ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
SINCE ONE FIVE TEN
CLASS A SHARES INCEPTION YEAR YEARS YEARS
- -------------- --------- ---- ----- -----
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Assets Fund 12.15%1 17.64% N/A N/A
- --------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund 14.48%1 25.32% N/A N/A
- --------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 12.93%2 14.55% 15.08% 11.13%
- ---------------------------------------------------------------------------------------------------------
Small Company Growth 15.41%2 13.89% 22.20% 14.96%
- ---------------------------------------------------------------------------------------------------------
Growth and Income Fund 24.74%3 26.46% N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
________________
(1) From date of September 24, 1993.
(2) From date of inception of January 27, 1987.
(3) From date of inception of July 1, 1994.
<TABLE>
<CAPTION>
SINCE ONE FIVE TEN
CLASS B SHARES INCEPTION YEAR YEARS YEARS
- -------------- --------- ---- ----- -----
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Assets Fund 12.56%1 20.09% 14.00% 9.96%
- ---------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund 12.11%1 28.02% 17.44% 8.87%
- ---------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund 11.15%2 16.65% N/A N/A
- --------------------------------------------------------------------------------------------------------
Small Company Growth Fund 17.89%2 16.08% N/A N/A
- --------------------------------------------------------------------------------------------------------
Growth and Income Fund 25.94%4 29.30% N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
________________
(1) From dates of inception of April 15, 1985 and March 13, 1985, respectively.
(2) From date of September 24, 1993.
(3) From date of inception of June 15, 1994.
(4) From date of inception of July 1, 1994.
Each Fund may advertise cumulative, rather than average return, for each
class of its shares for periods of time other than the 1-, 5-, and 10-year
periods or fractions thereof, as discussed above. Such return data will be
computed in the same manner as that of average annual total return, except that
the actual cumulative return will be computed.
COMPARISONS
Each Fund may compare its total return or yield to similar measures as
calculated by various publications, services, indices, or averages. Such
comparisons are made to assist in evaluating an investment in a Fund. The
following references may be used:
a) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average),
and 20 transportation company stocks (Dow Jones Transportation Average).
Comparisons of performance assume reinvestment of dividends.
B-48
<PAGE>
b) Standard & Poor's 500 Stock Index or its component indices -- an
unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40
utilities stocks, and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
Standard & Poor's 100 Stock Index -- an unmanaged index based on the
prices of 100 blue chip stocks, including 92 industrials, one utility, two
transportation companies, and five financial institutions. The Standard &
Poor's 100 Stock Index is a smaller, more flexible index for options trading.
c) The New York Stock Exchange composite or component indices -- unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index or its component indices -- represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
e) Lipper: Mutual Fund Performance Analysis, Fixed Income Analysis, and
Mutual Fund Indices -- measures total return and average current yield for the
mutual fund industry. Ranks individual mutual fund performance over specified
time periods assuming reinvestment of all distributions, exclusive of sales
charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.,
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, Principia, and other publications and
information services provided by Morningstar, Inc. -- analyzes price, risk and
total return for the mutual fund industry.
h) Financial publications: Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, Money, Pension and Investment Age,
United Mutual Fund Selector, and Wiesenberger Investment Companies Service, and
other publications containing financial analyses which rate mutual fund
performance over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics -- a statistical measure of periodic change in the
price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
- - historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates as published in the U.S.
Savings & Loan League Fact Book.
l) Shearson-Lehman Municipal Bond Index and Government/Corporate Bond
Index -- unmanaged indices that track a basket of intermediate and long-term
bonds. Reflect total return and yield and assume dividend reinvestment.
B-49
<PAGE>
m) Salomon GNMA Index published by Salomon Brothers Inc. -- Market value
of all outstanding 30-year GNMA Mortgage Pass-Through Securities that includes
single family and graduated payment mortgages.
Salomon Mortgage Pass-Through Index published by Salomon Brothers
Inc. -- Market value of all outstanding agency mortgage pass-through securities
that includes 15- and 30-year FNMA, FHLMC and GNMA Securities.
n) Value Line Geometric Index -- broad based index made up of
approximately 1700 stocks each of which have an equal weighting.
o) Morgan Stanley Capital International EAFE Index -- an arithmetic,
market value-weighted average of the performance of over 900 securities on the
stock exchanges of countries in Europe, Australia and the Far East.
p) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds
and 33 preferred stocks. The original list of names was generated by screening
for convertible issues of $100 million or more in market capitalization. The
index is priced monthly.
q) Salomon Brothers High Grade Corporate Bond Index -- consists of
publicly issued, non-convertible corporate bonds rated "AA" or "AAA". It is a
value-weighted, total return index, including approximately 800 issues.
r) Salomon Brothers Broad Investment Grade Bond Index -- is a market-
weighted index that contains approximately 4700 individually priced investment
grade corporate bonds rated "BBB" or better, U.S. Treasury/agency issues and
mortgage pass-through securities.
s) Salomon Brother World Bond Index -- measures the total return
performance of high-quality securities in major sectors of the international
bond market. The index covers approximately 600 bonds from 10 currencies:
Australian Dollars Netherlands Guilders
Canadian Dollars Swiss Francs
European Currency Units UK Pound Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
t) J.P. Morgan Global Government Bond Index -- a total return, market
capitalization-weighted index, rebalanced monthly, consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, the United Kingdom, and the United States.
u) Shearson Lehman LONG-TERM Treasury Bond Index -- is comprised of all
bonds covered by the Shearson Lehman Hutton Treasury Bond Index with maturities
of 10 years or greater.
v) NASDAQ Industrial Index -- is comprised of more than 3,000 industrial
issues. It is a value-weighted index calculated on pure change only and does
not include income.
B-50
<PAGE>
w) The MSCI Combined Far East Free ex Japan Index -- a market
capitalization weighted index comprised of stocks in Hong Kong, Indonesia,
Korea, Malaysia, Philippines, Singapore and Thailand. Korea is included in this
index at 20% of its market capitalization.
x) First Boston High Yield Index -- generally includes over 180 issues
with an average maturity range of seven to ten years with a minimum
capitalization of $100 million. All issues are individually trader-priced
monthly.
y) Morgan Stanley Capital International World Index -- An arithmetic,
market value-weighted average of the performance of over 1,470 securities list
on the stock exchanges of countries in Europe, Australia, the Far East, Canada
and the United States.
z) Russell 3000 and 2000 Index -- represents the top 3,000 and the next
2,000 stocks traded on the New York Stock Exchange, American Stock Exchange and
National Association of Securities Dealers Automated Quotations, by market
capitalizations.
In assessing such comparisons of performance, an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to a Fund's portfolio, that the averages are generally
unmanaged and that the items included in the calculations of such averages may
not be identical to the formula used by a Fund to calculate its figures.
Specifically, a Fund may compare its performance to that of certain indices
which include securities with government guarantees. However, a Fund's shares
do not contain any such guarantees. In addition, there can be no assurance that
a Fund will continue its performance as compared to such other standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if any, and
the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed to the registered
holders at least annually. With respect to capital gain distributions, each
Fund=s policy is to offset any prior year capital loss carry forward against any
realized capital gains, and accordingly, no distribution of capital gains will
be made until gains have been realized in excess of any such loss carry forward.
Dividends and distributions will be paid in additional Fund shares based on
the net asset value at the Fund=s close of business on the Ex or, unless the
shareholder notifies the Fund at least five business days prior to the payment
date to receive such distributions in excess of $10 in cash.
TAXES. Each Fund is qualified and intends to remain qualified and elects to be
treated as a regulated investment company under Subchapter M of the Code for
each taxable year. In order to be qualified as a regulated investment company,
each Fund generally must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, proceeds from loans of stock or
securities and certain other related income; (b) solely for tax years beginning
before August 6, 1997, derive less than 30% of its gross income from the sale or
other disposition of stock or securities held less than 3 months; and (c)
diversify its holdings so that, at the end of each fiscal quarter, (i) 50% of
the market value of each Fund's assets is represented by cash, government
securities, securities of other regulated investment companies and other
securities limited, in respect of any one issuer, to an amount no greater than
5% of each Fund's assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than government
securities or the securities of other regulated investment companies).
B-51
<PAGE>
As a regulated investment company, each Fund will not be subject to U.S.
Federal income tax on its income and capital gains which it distributes as
dividends or capital gains distributions to shareholders provided that it
distributes to shareholders at least 90% of its investment company taxable
income for the taxable year. Each Fund intends to distribute sufficient income
to meet this qualification requirement.
Under the Code, amounts not distributed on a timely basis in accordance
with a calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, each Fund must distribute during each calendar
year (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses for the 12-month period ending on October
31 of the calendar year, and (3) all ordinary income and net capital gains for
the previous years that were not distributed during such years. To avoid
application of the excise tax, each Fund intends to make distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the calendar year if declared by each Fund
in October, November or December of such year, payable to shareholders of record
on a date in such month and paid by each Fund during January of the following
year. Any such distributions paid during January of the following year will be
taxable to shareholders as of such December 31, rather than the date on which
the distributions are received.
Distributions of net investment income and short-term capital gains are
taxable to the shareholder as ordinary dividend income regardless of whether the
shareholder receives such distributions in additional shares or in cash. The
portion of such dividends received from each Fund that will be eligible for the
dividends received deduction for corporations will be determined on the basis of
the amount of each Fund's gross income, exclusive of capital gains from sales of
stock or securities, which is derived as dividends from domestic corporations,
other than certain tax-exempt corporations and certain real estate investment
trusts, and will be designated as such in a written notice to shareholders
mailed not later than 60 days after the end of each fiscal year. Distributions
of net capital gains, if any, are taxable as capital gains regardless of whether
the shareholder receives such distributions in additional shares or in cash or
how long the investor has held his or her shares, and are not eligible for the
dividends received deduction for corporations.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending upon its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will
be treated as short-term capital gain if the shares were held for not more than
12 months, gain taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and gain taxable at the maximum rate
of 20%, if such shares were held for more than 18 months. In the case of a
corporation, any such capital gain will be treated as long-term capital gain,
taxable at the same rates as ordinary income, if such shares were held for more
than 12 months. Any such loss will be long-term capital loss if the shares have
been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(whether through dividend reinvestment or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of.
Any loss realized by a shareholder on the sale of shares of a Fund held by the
shareholder for six months or less will be treated for tax purposes as a long-
term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
Under certain circumstances (such as the exercise of an exchange
privilege), the tax effect of sales load charges imposed on the purchase of
shares in a regulated investment company is deferred if the shareholder does not
hold the shares for at least 90 days.
B-52
<PAGE>
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which a Fund will be subject, since the amount of that Fund's
assets to be invested in various countries is not known. It is not anticipated
that any Fund will qualify to pass through to its shareholders the ability to
claim as a foreign tax credit their respective shares of foreign taxes paid by
such Fund.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues interest or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time such Fund actually collects such receivables or pays such liabilities
are treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts, sale of currencies or dispositions
of debt securities denominated in a foreign currency attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition generally also are
treated as ordinary gain or loss. These gains, referred to under the Code as
"Section 988" gains or losses, increase or decrease the amount of each Fund's
investment company taxable income available to be distributed to its
shareholders as ordinary income.
The Code includes special rules applicable to the listed non-equity
options, regulated futures contracts, and options on futures contracts which a
Fund may write, purchase or sell. Such options and contracts are classified as
Section 1256 contracts under the Code. The character of gain or loss resulting
from the sale, disposition, closing out, expiration or other termination of
Section 1256 contracts, except forward foreign currency exchange contracts, is
generally treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by a Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market"). Over-
the-counter options are not classified as Section 1256 contracts and are not
subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by a Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. When call
options written, or put options purchased, by a Fund are exercised, the gain or
loss realized on the sale of the underlying securities may be either short-term
or long-term, depending on the holding period of the securities. In determining
the amount of gain or loss, the sales proceeds are reduced by the premium paid
for the puts or increased by the premium received for calls.
A substantial portion of each Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle consisting
of a listed option, futures contract, or option on a futures contract and of
U.S. Government securities would constitute a "mixed straddle" under the Code.
The Code generally provides with respect to straddles (i) "loss deferral" rules
which may postpone recognition for tax purposes of losses from certain closing
purchase transactions or other dispositions of a position in the straddle to the
extent of unrealized gains in the offsetting position, (ii) "wash sale" rules
which may postpone recognition for tax purposes of losses where a position is
sold and a new offsetting position is acquired within a prescribed period, (iii)
"short sale" rules which may terminate the holding period of securities owned by
a Fund when offsetting positions are established and which may convert certain
losses from short-term to long-term, and (iv) "conversion transaction" rules
which recharacterize capital gains as ordinary income. The Code provides that
certain elections may be made for mixed straddles that can alter the character
of the capital gain or loss recognized upon disposition of positions which form
part of a straddle. Certain other elections also are provided in the Code; no
determination has been reached to make any of these elections. Newly-
B-53
<PAGE>
enacted Code Section 1259 will require the recognition of gain (but not loss) if
a Fund makes a "constructive sale" of an appreciated financial position (e.g.,
stock). A Fund generally will be considered to make a constructive sale of an
appreciated financial position if it sells the same or substantially identical
property short, enters into a futures or forward contract to deliver the same or
identical property short, or enters into other similar transactions.
The Growth and Income Fund may purchase debt securities (such as zero-
coupon or pay-in-kind securities) that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as earned by a
Fund and therefore is subject to the distribution requirements of the Code.
Because the original issue discount earned by the Fund in a taxable year may not
be represented by cash income, the Fund may have to dispose of other securities
and use the proceeds to make distributions to shareholders.
A Fund may be required to backup withhold U.S. Federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide their correct taxpayer identification number or fail to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against a shareholder's U.S. Federal
income tax liability.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations currently in effect.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, state and local taxes. In addition, foreign investors
should consult with their own tax advisors regarding the particular tax
consequences to them of an investment in each Fund. Qualification as a
regulated investment company under the Code for tax purposes does not entail
government supervision of management and investment policies.
RETIREMENT PLANS
Shares of each Fund are eligible to be purchased in conjunction with
various types of qualified retirement plans. The summary below is only a brief
description of the Federal income tax laws for each plan and does not purport to
be complete. Further information or an application to invest in shares of a
Fund by establishing any of the retirement plans described below may be obtained
by calling Retirement Plans at (800) 858-8850. However, it is recommended that
a shareholder considering any retirement plan consult a tax adviser before
participating.
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code permit
business employers and certain associations to establish pension and profit
sharing plans for employees. Shares of a Fund may be purchased by those who
would have been covered under the rules governing old H.R. 10 (Keogh) Plans, as
well as by corporate plans. Each business retirement plan provides tax
advantages for owners and participants. Contributions made by the employer are
tax-deductible, and participants do not pay taxes on contributions or earnings
until withdrawn.
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code, to purchase
shares of a Fund and, subject to certain limitations, exclude the amount of
purchase payments from gross income for tax purposes.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA). Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program, including
Simplified Employee Pension Plans, commonly
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referred to as SEP-IRA. These IRA's are subject to limitations with respect to
the amount that may be contributed, the eligibility of individuals, and the time
in which distributions would be allowed to commence. In addition, certain
distributions from some other types of retirement plans may be placed on a tax-
deferred basis in an IRA.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION. This plan was introduced by a
provision of the Tax Reform Act of 1986 as a unique way for small employers to
provide the benefit of retirement planning for their employees. Contributions
are deducted from the employee's paycheck before tax deductions and are
deposited into an IRA by the employer. These contributions are not included in
the employee's income and therefore are not reported or deducted on his or her
tax return.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES ("SIMPLE IRA"). This plan was
introduced by a provision of the Small Business Job Protection Act of 1996 to
provide small employers with a simplified tax-favored retirement plan.
Contributions are deducted from the employee=s paycheck before taxes and are
deposited into a SIMPLE IRA by the employer, who must make either matching
contributions or non-elective contributions. Contributions are tax-deductible
for the employer and participants do not pay taxes on contributions on earnings
until they are withdrawn.
ROTH IRA. This plan, introduced by Section 302 of the Taxpayer Relief Act of
1997, generally permits individuals with adjusted gross income of up to $95,000,
and married couples with joint adjusted gross income of up to $150,000, to
contribute to a "Roth IRA." Contributions are not tax-deductible, but
distribution of assets (contributions and earnings) held in the account for at
least five years may be distributed tax-free under certain qualifying
conditions.
EDUCATION IRA. Established by the Taxpayer Relief Act of 1997, under Section
530 of the Code, this plan permits individuals to contribute to an IRA on behalf
of any child under the age of 18. Contributions are not tax-deductible but
distributions are tax-free if used for qualified educational expenses.
DESCRIPTION OF SHARES
Ownership of the Trust is represented by transferable shares of beneficial
interest. The Declaration of Trust of the Trust (the "Declaration of Trust")
permits the Trustees to issue an unlimited number of full and fractional shares,
$.01 par value, and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Trust.
Currently, five series of shares of the Trust have been authorized pursuant
to the Declaration of Trust: the Balanced Assets Fund, the Blue Chip Growth
Fund, the Mid-Cap Growth Fund, the Small Company Growth Fund and the Growth and
Income Fund. The Blue Chip Growth Fund and the Mid-Cap Growth Fund have each
been divided into two classes of shares, designated as Class A and Class B
shares. The Growth and Income Fund has been divided into three classes of
shares, designated as Class A, Class B and Class C shares. The Balanced Assets
Fund has been divided into three classes of shares, designated as Class A, Class
B and Class Z shares. The Small Company Growth Fund has been divided into four
classes of shares, designated as Class A, Class B, Class C and Class Z shares.
The Trustees may authorize the creation of additional series of shares so as to
be able to offer to investors additional investment portfolios within the Trust
that would operate independently from the Trust's present portfolios, or to
distinguish among shareholders, as may be necessary, to comply with future
regulations or other unforeseen circumstances. Each series of the Trust's
shares represents the interests of the shareholders of that series in a
particular portfolio of Trust assets. In addition, the Trustees may
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authorize the creation of additional classes of shares in the future, which may
have fee structures different from those of existing classes and/or may be
offered only to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The
Trustees have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Trustees, and appoint
their own successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting can,
if they choose, elect all Trustees being elected, while the holders of the
remaining shares would be unable to elect any Trustees. Although the Trust need
not hold annual meetings of shareholders, the Trustees may call special meetings
of shareholders for action by shareholder vote as may be required by the 1940
Act or the Declaration of Trust. Also, a shareholders meeting must be called,
if so requested in writing by the holders of record of 10% or more of the
outstanding shares of the Trust. In addition, the Trustees may be removed by
the action of the holders of record of two-thirds or more of the outstanding
shares. All series of shares will vote with respect to certain matters, such as
election of Trustees. When all series of shares are not affected by a matter to
be voted upon, such as approval of investment advisory agreements or changes in
a Fund's policies, only shareholders of the series affected by the matter may be
entitled to vote.
All classes of shares of a given series are identical in all respects,
except that (i) each class may bear differing amounts of certain class-specific
expenses, (ii) Class A shares are subject to an initial sales charge, a
distribution fee and an ongoing account maintenance and service fee, (iii) Class
B and Class C shares are each subject to a CDSC, a distribution fee and an
ongoing account maintenance and service fee, (iv) Class B shares convert
automatically to Class A shares on the first business day of the month seven
years after the purchase of such Class B Shares, (v) each class has voting
rights on matters that pertain to the Rule 12b-1 plan adopted with respect to
such class, except that under certain circumstances, the holders of Class B
shares may be entitled to vote on material changes to the Class A Rule 12b-1
plan, (vi) Class Z shares are not subject to any sales charge or any
distribution, account maintenance or service fee, and (vii) each class of shares
will be exchangeable only into the same class of shares of any other Fund or
other funds in the SunAmerica Family of Mutual Funds that offers that class.
All shares of the Trust issued and outstanding and all shares offered by the
Prospectus when issued, are fully paid and non-assessable. Shares have no
preemptive or other subscription rights and are freely transferable on the books
of the Trust. In addition, shares have no conversion rights, except as
described above.
The Declaration of Trust provides that no Trustee, officer, employee or
agent of the Trust is liable to the Trust or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Trust, except as such liability may arise from his or
its own bad faith, willful misfeasance, gross negligence or reckless disregard
of his duties. It also provides that all third persons shall look solely to the
Trust's property for satisfaction of claims arising in connection with the
affairs of the Trust. With the exceptions stated, the Declaration of Trust
provides that a Trustee, officer, employee or agent is entitled to be
indemnified against all liability in connection with the affairs of the Trust.
The Trust shall continue, without limitation of time, subject to the provisions
in the Declaration of Trust concerning termination by action of the
shareholders.
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<PAGE>
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE
- ---------------------------------------
The following is the offering price calculation for Class A and Class B
shares of the Funds, based on the value of each Fund's net assets as of
September 30, 1997.
<TABLE>
<CAPTION>
Balanced Assets Fund Blue Chip Growth Fund
-------------------- ---------------------
Class A Class B Class Z H Class A Class B
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Assets................. $169,201,480 $173,434,497 $53,088 $67,812,714 $37,632,714
Number of Shares Outstanding....... 9,149,250 9,383,565 2,871 3,353,686 1,919,060
Net Asset Value Per Share (net
assets divided by number of
shares)........................... $18.49 $18.48 $18.49 $20.22 $19.61
Sales Charge for Class A Shares:
5.75% of offering price (6.10% of
net asset value per share)*....... $1.13 $ ** $ ** $1.23 $ **
Offering Price..................... $19.62 $18.48 $18.49 $21.45 $19.61
</TABLE>
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class Z shares are not subject to an initial charge. Class B
shares may be subject to a contingent deferred. sales charge on redemption
of shares within six years of purchase.
H The offering of Class Z shares commenced on October 1, 1996.
<TABLE>
<CAPTION>
Growth and Income Fund Mid-Cap Growth Fund
---------------------- -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Assets............... $47,219,337 $55,529,583 $46,050,759 $13,779,272
Number of Shares Outstanding... 3,511,301 4,157,247 2,228,633 686,796
Net Asset Value Per Shares (net
assets divided by number of
shares)........................ $13.45 $13.36 $20.66 $20.06
Sales Charge for Class A Shares:
5.75% of offering price (6.10% of
net asset value per share)*...... $0.82 $ ** $1.26 $ **
Offering Price..................... $14.27 $13.36 $21.92 $20.06
</TABLE>
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B shares are not subject to an initial charge but may be subject to a
contingent deferred sales charge on redemption of shares within six years
of purchase.
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<PAGE>
<TABLE>
<CAPTION>
Small Company Growth Fund
-------------------------
Class A Class B Class Z
------- ------- -------
<S> <C> <C> <C>
Net Assets.............. $185,222,183 $124,437,541 $948,586
Number of Shares Outstanding... 6,552,664 4,537,277 33,348
Net Asset Value Per Shares (net
assets divided by number of shares)... $28.27 $27.43 $28.45
Sales Charge for Class A Shares:
5.75% of offering price (6.10% of
net asset value per share)*........ $1.72 $ ** $ **
Offering Price...................... $29.99 $27.43 $28.45
</TABLE>
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class Z shares are not subject to an initial charge.
REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited semi-
annual reports to shareholders of each of the Funds. In addition, the Transfer
Agent sends a statement to each shareholder having an account directly with the
Trust to confirm transactions in the account.
CUSTODIAN AND TRANSFER AGENCY. State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent
for the Funds and in those capacities maintains certain financial and accounting
books and records pursuant to agreements with the Trust. Transfer agent
functions are performed for State Street, by National Financial Data Services,
P.O. Box 419572, Kansas City, MO 64141-6572, an affiliate of State Street.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177 Avenue of
the Americas, New York, NY 10036, has been selected to serve as the Trust's
independent accountants and in that capacity examines the annual financial
statements of the Trust. The firm of Shereff, Friedman, Hoffman & Goodman, LLP,
919 Third Avenue, New York, NY 10022, has been selected as legal counsel to the
Trust.
FINANCIAL STATEMENTS
Set forth following this Statement of Additional Information are the
financial statements of SunAmerica Equity Funds with respect to Registrant's
fiscal year ended September 30, 1997.
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