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PROSPECTUS - JUNE 1, 1998
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"Dogs" of Wall Street Fund
The SunAmerica Center
733 Third Avenue, New York, NY 10017-3204
General Marketing and Shareholder Information
(800) 858-8850
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"Dogs" of Wall Street Fund (the "Fund") is a separate investment portfolio of
SunAmerica Equity Funds, an open-end management investment company (the
"Trust"). The Fund is advised and managed by SUNAMERICA ASSET MANAGEMENT CORP.
(the "Adviser").
The investment objective of the Fund is to seek total return (including capital
appreciation and current income) through a passively managed strategy involving
the annual selection of thirty high dividend yielding common stocks from the Dow
Jones Industrial Average and the broader market.
The Fund currently offers Class A, Class B and Class II 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), (ii) deferred (Class B shares and purchases of Class
A shares in excess of $1 million) or (iii) with elements of a sales charge that
is both imposed at the time of purchase and deferred (Class II shares). Class B
shares may be subject to a declining contingent deferred sales charge ("CDSC")
that may be imposed on redemptions made within six years of purchase. Class B
shares of the 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. Class II 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 Fund 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 the
Fund. Please read it carefully before investing and retain it for future
reference. You can find more detailed information about the Fund in the
Statement of Additional Information dated June 1, 1998, which is incorporated by
reference into this Prospectus. The Statement of Additional Information 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.
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2
TABLE OF CONTENTS
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<TABLE>
<C> <S>
COVER Prospectus
3 Summary of Fund Expenses
4 Investment Objective, Policies and
Restrictions
6 Historical Performance Information
7 Other Investment Techniques and Risk
Factors
8 Management of the Trust
10 Purchase of Shares
14 Redemption of Shares
15 Exchange Privilege
16 Portfolio Transactions, Brokerage and
Turnover
17 Determination of Net Asset Value
17 Performance Data
17 Dividends, Distributions and Taxes
19 General Information
</TABLE>
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3
SUMMARY OF FUND EXPENSES
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A general comparison of the sales arrangements and other expenses applicable to
Class A, Class B and Class II shares follows:
<TABLE>
<CAPTION>
"DOGS" OF WALL STREET
FUND
Class Class Class
A B II
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Initial Sales Load(1) 5.75% None 1.00%
Maximum Sales Load on Reinvested
Dividends None None None
Maximum Deferred Sales Load(2) None 4.00% 1.00%
Redemption Fees(3)(4) 1.50% 1.50% 1.50%
Exchange Fees(3) 1.50% 1.50% 1.50%
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ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees 0.35% 0.35% 0.35%
12b-1 Fees(5) 0.35% 1.00% 1.00%
Other Expenses(6) (net of fee
waivers/expense reimbursements) 0.25% 0.25% 0.25%
TOTAL OPERATING EXPENSES (NET OF
FEE WAIVERS/EXPENSE
REIMBURSEMENTS)(6) 0.95% 1.60% 1.60%
------ ------ ------
------ ------ ------
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</TABLE>
(1) The front-end sales charge on Class A shares decreases with the size of the
purchase to 0% for purchases of $1 million or more. See "Purchase of
Shares."
(2) Purchases of Class A shares in excess of $1 million 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 II shares applies only on redemptions made
within one year of purchase.
(3) If shares are redeemed or exchanged within 90 days of purchase, a 1.50% fee
(redemption fee or exchange fee, as the case may be) will be assessed on
the proceeds of any such transaction. This fee will be paid to the Fund.
(4) A $15.00 fee may be imposed for wire redemptions.
(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 Fund, such
as responding to shareholder inquiries, quoting net asset values, providing
current marketing material and attending to other shareholder matters.
Class B or Class II 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 the National Association of Securities Dealers, Inc.
(6) The Adviser has voluntarily agreed to waive fees or reimburse expenses, if
necessary, to keep operating expenses at or below an annual rate set forth
above under Total Operating Expenses. The information provided in the table
represents estimated amounts for the current fiscal year net of current fee
waivers/expense reimbursements. In the absence of such waivers and
reimbursements, other expenses are estimated to be 0.90%, 0.90%, and 0.90%,
respectively, and total operating expenses are estimated to be 1.60%,
2.25%, and 2.25%, respectively, for Class A, B and II, respectively.
EXAMPLE:
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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 YEARS 3 YEARS
-------------------
<S> <C> <C>
"DOGS" OF WALL STREET FUND
(Class A Shares) $ 67 $ 86
(Class B Shares)* $ 56 $ 80
(Class II Shares) $ 36 $ 60
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 YEARS 3 YEARS
-------------------
<S> <C> <C>
"DOGS" OF WALL STREET FUND
(Class A Shares) $ 67 $ 86
(Class B Shares)* $ 16 $ 50
(Class II Shares) $ 26 $ 60
</TABLE>
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* 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.
The foregoing examples should not be considered a representation of future
expenses. Actual expenses may be greater or less than those shown.
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4
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
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The investment objective of the Fund is to seek total return (including capital
appreciation and current income) through a passively managed strategy involving
the annual selection of thirty high dividend yielding common stocks from the Dow
Jones Industrial Average ("DJIA")(1) and the broader market. The thirty stocks
will consist of (1) the ten highest yielding stocks in the DJIA and (2) the
twenty other highest yielding stocks of the 400 largest industrial companies in
the U.S. markets that have market capitalizations of at least $1 billion and
have received one of the two highest rankings from an independently published
common stock ranking service on the basis of growth and stability of earnings
and dividends. The Adviser will employ the same methodology, using the same
analytical parameters and benchmarks, in selecting the thirty stocks each year.
There can be no assurance that the investment objective of the Fund will be
achieved.
The Fund's stock selection criteria is designed to implement a "value" oriented
philosophy of investing principally in securities believed to be undervalued in
the market. This philosophy reflects a contrarian approach, in that the
potential for superior relative performance is believed to be highest when
stocks of fundamentally solid companies are out of favor. The selection criteria
is calculated to identify stocks of large, well-known companies with solid
financial strength and generous dividend yields that have low price-earnings
ratios ("P/E ratios") and have been generally overlooked by the market.
Upon commencement of its operations, the Fund will invest in the thirty common
stocks selected according to the methodology described above. The initial thirty
stocks will be identified based on information as of December 31, 1997; they
will be purchased by the Fund in proportion to their relative market prices as
of commencement of Fund operations. Thereafter, the Adviser will annually
rebalance the Fund's holdings within the first month of each succeeding calendar
year according to the same selection criteria, based on information as of the
preceding December 31. The Adviser will rebalance the Fund's holdings to create
equal weightings among the thirty stocks selected by purchasing new stocks that
meet the selection criteria, selling stocks that no longer meet the selection
criteria, and adjusting its ownership of stocks that continue to meet the
criteria in order to achieve the proper weightings of each of the thirty stocks.
The Fund will employ a buy and hold strategy over the course of each year, which
ignores market timing and rejects active management. The Adviser anticipates
that the thirty stocks held by the Fund will remain the same throughout the
course of a year, despite any adverse developments concerning a particular
stock, an industry, the economy or the stock market generally. However, due to
purchases and redemptions of Fund shares during the year and changes in the
market value of the stock positions held by the Fund, it is likely that the
weightings of the stock positions in the Fund will fluctuate throughout the
course of the year.
As the Fund's shares are sold during the year, new cash received by the Fund
will first be used to the extent necessary to meet redemption requests. The
balance of any such cash will be invested weekly (or more frequently as the
Adviser deems necessary) in the thirty stocks selected for the Fund as of its
most recent rebalancing in proportion to the current weightings of such stocks
in the Fund's portfolio and without any intention to rebalance the Fund's
holdings on an interim basis. To the extent redemptions exceed available cash,
the Fund will generally meet redemption requests by selling stocks on a pro rata
basis (subject to rounding and avoidance of odd lots), based on the current
weightings of such stocks in the Fund's portfolio and without any intention to
rebalance the Fund's holdings on an interim basis.
The Adviser intends that the Fund will be at all times fully invested in the
stocks that are selected using the criteria described above; but reserves the
right to deviate from the investment strategy to the extent necessary to comply
with federal tax laws applicable to the Fund. In order to enhance
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(1) "Dow Jones Industrial Average" is a trademark of Dow Jones & Company, Inc.
("Dow Jones"). None of the Trust, the Fund or the Adviser is affiliated
with, nor is the Trust or the Fund sponsored by, Dow Jones. Dow Jones has
not participated in any way in the creation of the Trust or the Fund or in
the selection of the stocks included in the Fund, nor has Dow Jones reviewed
or approved any information included in this Prospectus.
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5
its income, the Fund may lend its securities and enter into repurchase
agreements. It may also seek to equitize uninvested cash through the use of
options and futures strategies. See "Other Investment Techniques and Risk
Factors."
The Fund has certain fundamental investment restrictions which are described in
the Statement of Additional Information. Except as specifically indicated, the
Fund's investment policies and strategies described herein are not fundamental
and may be changed by the Board of Trustees (the "Trustees") without the
approval of shareholders. The Fund is classified as non-diversified within the
meaning of the 1940 Act.
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6
HISTORICAL PERFORMANCE INFORMATION
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The following tables compare the actual performance of the Standard & Poor's
Composite Stock Price Index 500 (the "S&P 500") and the hypothetical results of
a model strategy employing the same stock selection criteria as the "Dogs" of
Wall Street Fund, rebalanced annually, for the historical periods indicated. The
S&P 500 is used as the performance comparison because (1) it is the performance
benchmark against which the Fund will be measured; and (2) it is the index most
widely recognized as representative of the performance of the U.S. stock market.
The Fund's actual performance may differ from that of the model strategy for the
following reasons: the Fund may not be fully invested at all times; appreciation
or depreciation in an individual stock's value may cause stocks held by the Fund
to be weighted unequally at any particular time; cash surpluses and deficits
from purchases and redemptions of Fund shares may cause the Adviser to buy and
sell stocks for the Fund between annual rebalancings; the Adviser may modify
slightly the Fund's investment strategy as federal tax laws require; and the
returns indicated for the model strategy exclude commission costs, advisory
fees, expenses and taxes that would be borne by the Fund. However, except as
described above, the Adviser can presently foresee no circumstances that would
cause deviation from the stock selection criteria used in managing the Fund. All
returns contained in the tables below reflect reinvestment of dividends and
other earnings. The hypothetical results of the model strategy are based on
statistical data gathered by the Adviser.
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PERFORMANCE COMPARISON OF S&P 500 AND
HYPOTHETICAL RESULTS OF THE STRATEGY FOR "DOGS" OF WALL STREET FUND
DECEMBER 31, 1988 - DECEMBER 31, 1997
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The following tables represent the hypothetical performance obtained by applying
the Fund's stock selection criteria retroactively to December 31, 1987. The
performance of the stock selection criteria does not represent the performance
of the Fund, nor does it reflect the advisory fees, commissions, expenses or
taxes which would be borne by the Fund. The Fund's performance, as well as that
of the S&P 500, would be lower if such fees and expenses were deducted. Past
performance of the stock selection criteria is not predictive of future
performance of such criteria or of the Fund.
<TABLE>
<CAPTION>
ANNUAL RESULTS
- ----------------------------------------------
"DOGS" OF WALL STREET
YEAR ENDED S&P 500 STRATEGY
- ----------------------------------------------
<S> <C> <C>
12/31/88 16.56% 34.4%
12/31/89 31.62% 32.3%
12/31/90 -3.10% -1.1%
12/31/91 30.40% 39.3%
12/31/92 7.61% 11.9%
12/31/93 10.06% 12.7%
12/31/94 1.32% 10.2%
12/31/95 37.55% 36.8%
12/31/96 22.95% 20.8%
12/31/97 33.35% 31.2%
</TABLE>
<TABLE>
<CAPTION>
SUMMARY RESULTS
- -------------------------------------------------------------
"DOGS" OF WALL STREET
S&P 500 STRATEGY
- -------------------------------------------------------------
<S> <C> <C>
Arithmetic average 18.83% 22.85%
Standard deviation of
return 14.42% 13.82%
1-yr 33.35% 31.20%
3-yr compounded* 31.14% 29.43%
5-yr compounded* 20.25% 21.91%
7-yr compounded* 19.74% 22.74%
10-yr compounded* 18.03% 22.13%
</TABLE>
---------------------------------------------------
* Quoted return is the average annual compounded
return for the most recent period ended December
31, 1997
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7
OTHER INVESTMENT TECHNIQUES AND RISK FACTORS
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As described above, it is the Adviser's intention that the Fund be at all times
fully invested in stocks. However, the Fund may at times invest in the following
securities. The stated percentage limitations are applied to an investment at
the time of purchase unless otherwise indicated.
SHORT-TERM INVESTMENTS. The Fund may invest in money market instruments pending
investment in the stocks selected through its investment strategy. 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 securities ratings.
REPURCHASE AGREEMENTS. Under these types of agreements, the Fund buys a
security 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). The Fund will only enter into repurchase agreements involving
securities in which it could otherwise invest and with selected banks and
securities dealers whose financial condition is monitored by the Adviser,
subject to the guidance of the Trustees. If the seller under the repurchase
agreement defaults, the Fund may incur a loss if the value of the collateral
securing the repurchase agreement has declined, and may incur disposition costs
in connection with liquidating the collateral. 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 the Fund's net
assets that may be subject to repurchase agreements having a maturity of seven
days or less for temporary defensive purposes.
WARRANTS. The 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).
LOANS OF PORTFOLIO SECURITIES. The 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, the 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 financially.
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 Fund may borrow
money for investment purposes and may pledge assets to secure such borrowings.
This is the speculative factor known as leverage. This practice may help the
Fund increase the net asset value of its shares in an amount greater than would
otherwise be the case when the market values of the securities purchased through
borrowing increase. In the event the return on an investment of 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 the Fund as a result of investing the borrowed monies. During periods of
substantial borrowings, the net asset value of the Fund's shares would be
reduced due to the added expense of interest on borrowed monies. The 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 the Fund may employ leverage will be
determined by the Adviser in light of changing facts and circumstances,
including general economic and market conditions, and will be subject to
applicable lending regulations of the Board of Governors of the Federal Reserve
Board. The Fund's policies regarding the use of leverage is a fundamental policy
which may not be changed without the approval of shareholders of the Fund.
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Under the 1940 Act, the value of the 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 the Fund's assets falls
below the 1940 Act requirement, the Fund must within three business days reduce
its borrowings to satisfy such requirement. To do this, the Fund may have to
sell a portion of its investments at a time when it may be disadvantageous to do
so.
OPTIONS AND FUTURES STRATEGIES. The Fund may seek to gain exposure to equity
securities through the use of options and futures strategies, including interest
rate futures and stock and bond index futures (together, "Futures"); and call
and put options on equity and debt securities, Futures, and stock and bond
indices. The Fund will not use Futures and options on Futures for speculation.
All puts and calls on securities, interest rate Futures or stock and bond index
Futures or options on such Futures purchased or sold by the Fund will be listed
on a national securities or commodities exchange or on U.S. over-the-counter
markets.
SPECIAL RISKS OF OPTIONS AND FUTURES STRATEGIES. Participation in the options
or Futures markets involves investment risks and transaction costs to which the
Fund would not be subject absent the use of these strategies. If the Adviser's
predictions of movements in the direction of the securities and interest rate
markets are inaccurate, the adverse consequences to the Fund may leave the Fund
in a worse position than if such strategies were not used. Risks inherent in the
use of options, 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 and securities prices; (2) imperfect correlation
between the price of options and Futures contracts and options thereon and
movements in the prices of the securities being hedged; (3) the fact that skills
needed to use these strategies 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 favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. A transaction is "covered" when the Fund owns the 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 information concerning the use of Options and Futures and the
regulatory requirements relating thereto.
MANAGEMENT OF THE TRUST
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TRUSTEES. The Trustees of the Trust are responsible for the overall supervision
of the operation of the Trust and the Fund and perform various duties imposed on
trustees of investment companies by the 1940 Act and by the Commonwealth of
Massachusetts.
THE ADVISER. The Adviser selects and manages the investments of the Fund,
provides various administrative services and supervises the Fund's daily
business affairs, subject to general review by the Trustees. The Adviser is an
indirect wholly owned subsidiary of SunAmerica Inc. ("SunAmerica"), an
investment-grade financial services company which, as of March 31, 1998, held
more than $55 billion in assets. SunAmerica's principal executive offices are
located at 1 SunAmerica Center, Los Angeles, CA 90067-6022. In addition to
managing the Trust and serving as adviser and manager to the other investment
series of the Trust, the Adviser serves as adviser, manager and/or administrator
for Anchor Pathway Fund, Anchor Series Trust, Seasons Series Trust, Style Select
Series, Inc., SunAmerica Income Funds, SunAmerica Money Market Funds, Inc., and
SunAmerica Series Trust. The Adviser managed, advised and/or administered assets
of approximately $14.5 billion as of March 31, 1998 for investment companies,
individuals, pension accounts, and corporate and trust accounts.
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9
Pursuant to the Investment Advisory and Management Agreement entered into
between the Adviser and the Trust, on behalf of the Fund, the Fund pays the
Adviser a fee, payable monthly, computed daily at the annual rate of 0.35% of
the Fund's average daily net assets, for the services performed, on behalf of
the Fund and the facilities furnished by the Adviser.
The Adviser's Domestic Equity Team is responsible for managing the Fund. The
Team is composed of eight investment professionals and traders. Francis D.
Gannon has supervisory responsibility for the Fund. He joined the Adviser as an
equity analyst in 1993 and holds a B.A. in English and Economics and a M.A. in
English from Boston College.
THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an
indirect wholly owned subsidiary of SunAmerica, acts as distributor of the
shares of the Fund pursuant to the Distribution Agreement between the
Distributor and the Trust on behalf of the 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
Distributor 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 and
Class II shares; (ii) additional compensation with respect to the sale of Class
A, Class B or Class II shares; or (iii) financial assistance to broker-dealers
in connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding the Fund (and/or other
series of the Trust), 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. Compensation may also include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In addition, the
following types of non-cash compensation may be offered through sales contests:
(i) travel mileage on major air carriers; (ii) tickets for entertainment events
(such as concerts or sporting events); or (iii) merchandise (such as clothing,
trophies, clocks, pens or other electronic equipment). Broker-dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
receipt of such compensation may be prohibited by the laws of any state or any
self-regulatory agency, such as, for example, the National Association of
Securities Dealers, Inc. Dealers who receive bonuses or other incentives may be
deemed to be underwriters under the Securities Act of 1933.
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
investment companies of the type contemplated by the Distribution Plans (as
described below). The Trustees will consider appropriate modifications to the
operations of the Fund, including discontinuance of payments under the
Distribution Plans to banks and other depository institutions, in the event such
institutions can no longer provide the services called for under their
agreements. 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.
DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment company
directly or indirectly to pay expenses associated with the distribution of its
shares in accordance with a plan adopted by the investment company's board of
directors and approved by its shareholders. Pursuant to such rule, the Trustees
have adopted Distribution Plans hereinafter referred to as the "Class A Plan,"
the "Class B Plan," and the "Class II 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.
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10
The Distribution Plans provide that each class of shares of the Fund may 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 providing
continuing account maintenance. 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 the Fund by their customers.
Under the Class A Plan, the Distributor may receive payments from the Fund at
the annual rate of up to 0.10% of the average daily net assets of the Fund's
Class A shares to compensate the Distributor and certain securities firms for
providing sales and promotional activities for distributing that class of
shares. Under the Class B and Class II Plans, the Distributor also may receive
payments from the Fund at the annual rate of up to 0.75% of the average daily
net assets of the Fund's Class B and Class II shares, respectively, to
compensate the Distributor and certain securities firms for providing sales and
promotional activities for distributing each such class of shares. The
distribution costs for which the Distributor may be reimbursed out of such
distribution fees include fees paid to broker-dealers that have sold Fund
shares, commissions, and other expenses such as those incurred for sales
literature, prospectus printing and distribution and compensation to
wholesalers. It is possible that in any given year the amount paid to the
Distributor under one or more of the Distribution Plans may exceed the
Distributor's distribution costs as described above.
THE ADMINISTRATOR. The Trust has entered into a Service Agreement under the
terms of which SunAmerica Fund Services, Inc. ("SAFS" or the "Administrator"),
an indirect wholly owned subsidiary of SunAmerica, assists the Transfer Agent in
providing shareholder services. Pursuant to the Service Agreement, as
compensation for services rendered, SAFS receives a fee from the 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
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GENERAL. Shares of the Fund are sold at the net asset value next calculated
after receipt of a purchase order, plus a sales charge, which, at the election
of the investor, either (i) may be imposed at the time of purchase (Class A
shares), (ii) may be imposed on a deferred basis (Class B shares and certain
Class A shares) or (iii) may contain certain elements of a sales charge that is
imposed at the time of purchase and that is deferred (Class II shares).
The minimum initial investment in the Fund is $500 and the minimum subsequent
investment is $100. However, for (i) wrap or certain other advisory accounts for
the benefit of clients of broker-dealers, financial institutions, registered
investment advisers or financial planners adhering to certain standards
established by the Distributor and (ii) Individual Retirement Accounts ("IRAs"),
Keogh Plan accounts and accounts for other qualified plans, the minimum 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 financial
adviser for help in determining which class of shares is most appropriate for
them.
Generally, investors making large investments, qualifying for a reduced initial
sales charge, might consider Class A shares because there is a lower
distribution fee than Class B and Class II shares. Investors who purchase $1
million or more of shares of the Fund should only purchase Class A shares.
Investors making small investments might consider Class B because 100% of the
purchase price is invested immediately. Similarly, such an investor with a
shorter investment horizon may wish to consider Class II. Dealers may receive
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 II shares have
a shorter CDSC period than Class B shares, Class II shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
Upon making an investment in shares of the Fund, an open account will be
established under
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which shares of the applicable Fund and additional shares acquired 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") (collectively, the
"Transfer Agent"). Shareholders will not be issued certificates for their shares
unless they specifically so request in writing but no certificate is issued for
fractional shares. Shareholders receive regular statements from the Transfer
Agent that report each transaction affecting their accounts. Further information
may be obtained by calling Shareholder/Dealer Services at (800) 858-8850.
CLASS A SHARES. Class A shares are offered at net asset value plus an initial
sales charge, which varies with the size of the purchase as follows:
<TABLE>
<CAPTION>
SALES CONCESSION OF
CHARGE DEALERS
--------------------- -------------
% OF % OF % OF
OFFERING NET 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 million
or more. In addition, subject to the conditions listed below, shares may be
purchased at net asset value, without payment of a sales charge, by employee
benefit plans qualified under Sections 401 or 457 of the Internal Revenue Code
of 1986, as amended (the "Code"), or employee benefit plans created pursuant to
Section 403(b) of the Code and sponsored by nonprofit organizations defined
under Section 501(c)(3) of the Code (collectively, "Plans"). A Plan will qualify
for purchases at net asset value provided that (a) the initial amount invested
in one or more of the investment portfolios of the Trust (or in combination with
the shares of other funds in the SunAmerica Mutual Funds, which consist of the
SunAmerica Equity Funds, SunAmerica Income Funds, Style Select Series and
SunAmerica Money Market Fund) is at least $1 million, (b) the sponsor signs a $1
million Letter of Intent, (c) such shares are purchased by an employer-sponsored
plan with at least 100 eligible employees or (d) the purchases are by trustees
or other fiduciaries for certain employer-sponsored plans, the trustee,
fiduciary or administrator for which has an agreement with the Distributor with
respect to such purchases and all such transactions for the plan are executed
through a single omnibus account. Nevertheless, the Distributor will pay a
commission to any dealer who 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 following their purchase will be subject to a CDSC at the rate
of 1.00% of the lesser of the net asset value of the shares being redeemed
(exclusive of reinvested 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 commission 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 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 wrap or
certain other advisory accounts for the benefit of clients of broker-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 contacting
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 Fund. For more
information about "Combined Purchase
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Privilege," "Rights of Accumulation," the "Letter of Intent," "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
redemptions 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
redeemed. 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 redemption
is first of any shares of a class other than Class B that are not themselves
subject to a CDSC, 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 purchase of shares, all payments during a month are
aggregated and deemed to have been made on the first day of the month. The
following table sets forth the rates of the CDSC.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF 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>
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 II SHARES. Class II shares are offered at net asset value plus an initial
sales charge as follows:
<TABLE>
<CAPTION>
SALES CHARGE CONCESSION
- ---------------------------------------- OF DEALERS
-------------------
% OF % OF % OF
OFFERING PRICE NET AMOUNT INVESTED OFFERING PRICE
- ------------------- ------------------- -------------------
<S> <C> <C>
1.00% 1.01% 1.00%
</TABLE>
Certain redemptions of Class II 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 II 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 individual
account or a joint tenant where the surviving joint tenant is the deceased's
spouse; (b) requested within one year after the shareholder of an individual
account or of a joint tenant on a spousal joint tenant account becomes disabled;
or the initial determination of disability of a shareholder; (c) taxable
distributions or loans to participants made by qualified retirement plans or
retirement accounts (not including rollovers) for which the Adviser serves as
fiduciary (e.g., prepares all necessary tax reporting documents); provided that,
in the case of a taxable distribution, the plan participant or accountholder has
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
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originally individually managed by the Adviser and had paid an investment
advisory fee to the Adviser. See the Statement of Additional Information for
further information concerning conditions with respect to (a) and (b) above. 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, concomitantly reducing gain or increasing loss. For
information on the imposition and waiver of the CDSC contact Shareholder/Dealer
Services at (800) 858-8850.
ASSET PROTECTION PLAN (OPTIONAL). Anchor National Life Insurance Company (the
"Life Company"), an affiliate of the Adviser and the Distributor, offers an
Asset Protection Plan to certain investors in the Fund. The benefits of this
optional term life insurance (payable on the death of the insured) will relate
to the amounts paid to purchase Fund shares and to the value of the Fund shares
held for the benefit of the insured persons. However, to the extent such
purchased shares are redeemed prior to death, coverage with respect to such
shares will terminate.
Purchasers of the Asset Protection Plan are required to authorize periodic
redemptions of Fund shares to pay the premiums for such coverage. Such
redemptions will not be subject to CDSCs, but will have the same tax
consequences as any other Fund redemptions.
The Asset Protection Plan will be available to eligible persons who enroll for
the coverage within a limited time period after shares in the Fund are initially
purchased or transferred. In addition, coverage cannot be made available unless
the Life Company knows for whose benefit shares are purchased. For instance,
coverage cannot be made available for shares registered in the name of your
broker unless the broker provides the Life Company with information regarding
the beneficial owners of such shares. In addition, coverage is available only to
shares purchased on behalf of natural persons under the age of 75 years;
coverage is not available with respect to shares purchased for a retirement
account. Other restrictions on the coverage apply. This coverage may not be
available in all states and may be subject to additional restrictions or
limitations. Purchasers of shares should also make themselves familiar with the
impact on the Asset Protection Plan coverage of purchasing additional shares,
reinvestment of dividends and capital gains distributions and redemptions.
Please call (800) 858-8850 for more information, including the cost of the Asset
Protection Plan option.
ADDITIONAL PURCHASE INFORMATION. All purchases are confirmed to each
shareholder. 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 Fund 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 basis. Purchases
can be made via electronic funds transfer through the Automated Clearing House
or by physical draft check. Purchases made via physical draft check require an
authorization card to be filed with the shareholder's bank.
Checks should be made payable to the "`Dogs' of Wall Street Fund" or to
"SunAmerica Funds." If the payment is for a retirement plan account for which
the Adviser serves as fiduciary, please indicate on the check that payment is
for such an account. Payments to open new accounts should be mailed to
SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica Center,
733 Third Avenue, New York, New York 10017-3204, together with 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. SAFS
reserves the right to reject any check made payable other than in the manner
indicated above. Under certain circumstances, the
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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.
Shares will be priced at the net asset value next-determined after the order is
received by the Distributor or SAFS. See "Additional Information Regarding
Purchase of Shares" in the Statement of Additional Information for more
information regarding these services and the procedures involved and when orders
are deemed to be placed.
Investors may purchase Class A shares of the 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
proceeds. See "Net Asset Value Transfer Program" in the Statement of Additional
Information for more details regarding this privilege.
REDEMPTION OF SHARES
---------------------------------------------------------------------
Shares of the 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
redemption request in proper form. Any capital gain or loss realized by a
shareholder 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
Fund may suspend repurchases or postpone payment for up to seven days or longer,
as permitted by the federal securities laws.
In order to discourage market timers and other short-term investors whose
redemption activity could disrupt the orderly management of the Fund and
adversely affect other shareholders, the Fund will impose a redemption fee equal
to 1.5% of redemption proceeds on all redemptions of shares within 90 days of
purchase. The fee is payable to the Fund and not the Distributor.
REGULAR REDEMPTION. Shareholders may redeem their shares by sending a written
request to SunAmerica Fund Services, Inc., 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 shareholder(s) and mailed to the address of record. All
written requests for redemption of shares with a value of $100,000 or more, or
those mailed to an address other than the address of record, must be endorsed by
the shareholder(s) with signature(s) guaranteed by an "eligible guarantor
institution" which includes: banks, brokers, dealers, credit unions, securities
and exchange associations, clearing agencies and savings associations.
Guarantees must be signed by an authorized signatory of the eligible guarantor
and the words "Signature Guaranteed" must appear with the signature. 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 Fund, 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 the Fund next-determined after the repurchase order is
received, less any applicable CDSC. Repurchase orders received by the
Distributor after the Fund's close of business will be priced based on the next
business day's close. Dealers may charge for their services in connection with
the repurchase, but neither the Fund nor the Distributor imposes any such
charge. The offer to
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repurchase may be suspended at any time, as described below.
TELEPHONE REDEMPTION. The Trust accepts telephone requests for redemption of
shares with a value of less than $100,000. The proceeds of a telephone
redemption may be sent by check payable to the shareholder(s) and mailed to the
address 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)
appearing 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.
OTHER REDEMPTION INFORMATION. At various times, the Fund may be requested to
redeem shares for which it has not yet received good payment. The Fund may delay
or cause to be delayed the mailing of a redemption check until such time as good
payment (e.g., cash or certified check drawn on a United States bank) has been
collected for the purchase of such shares, which will not exceed 15 days.
Because of the high cost of maintaining smaller shareholder accounts, the Fund
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 Fund may impose a $2.00 monthly
charge on accounts below the minimum account size.
If a shareholder redeems shares of any class of the Fund and then within one
year from the date of redemption decides the shares should not have been
redeemed, the shareholder may use all or any part of the redemption proceeds to
reinstate, free of sales charges (Class A and Class II shares) and with the
crediting of any CDSC paid with respect to such reinstated shares at the time of
redemption (Class B and Class II shares), all or any part of the redemption
proceeds in shares of the Fund at the then-current net asset value.
Reinstatement may affect the tax status of the prior redemption.
EXCHANGE PRIVILEGE
---------------------------------------------------------------------
GENERAL. Shareholders of the Fund may exchange their shares for the same class
of shares of any other investment portfolio of the Trust or other funds in the
SunAmerica Family of Mutual Funds that offer such class at the respective net
asset value per share. In addition, Class II shares of the Fund can be exchanged
for Class C shares of any other investment portfolio of the Trust or other funds
in the SunAmerica Family of Mutual Funds. Before making an exchange, a
shareholder should obtain and review the prospectus of the fund whose shares are
being acquired. All exchanges are subject to applicable minimum initial or
subsequent investment requirements. All exchanges can only be effected if the
shares to be acquired are qualified for sale in the state in which the
shareholder resides. Exchanges of shares generally will constitute a taxable
transaction except for IRAs, Keogh Plans and other qualified or tax-exempt
accounts. The exchange privilege may be terminated or modified upon 60 days'
written notice. Further information about the exchange privilege may be obtained
by calling Shareholder/Dealer Services at (800) 858-8850.
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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, applicable
to such redemptions. In such event, the period for which the original shares
were held prior to the exchange will be "tacked" with the holding period of the
shares acquired in the exchange for purposes of determining whether the 1% CDSC
is applicable upon a redemption of any of such shares.
A shareholder who acquires Class B or Class II shares through an exchange from
another SunAmerica 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 to Class A shares. In the event
that any Class B shares exchanged for Class B shares of the Fund have a lower
CDSC schedule, the lower schedule will apply upon redemption of such shares from
the Fund.
RESTRICTIONS ON EXCHANGES. Because excessive trading (including short-term
"market timing" trading) can hurt the Fund's performance and adversely affect
other shareholders, the Fund will impose an exchange fee equal to 1.5% of
exchange proceeds on all exchanges of shares within 90 days of purchase. In
addition, the Fund may refuse any exchange sell order (1) if it appears to be a
market timing transaction involving a significant portion of the Fund's assets
or (2) from any shareholder account if previous use of the exchange privilege is
considered excessive. Accounts under common ownership or control, including, but
not limited to, those with the same taxpayer identification number and those
administered so as to redeem or purchase shares based upon certain predetermined
market indications, will be considered one account for this purpose.
Also, the Fund reserves the right to refuse any exchange purchase order if, in
the judgment of the Adviser, the Fund would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. A shareholder's purchase exchange may be
restricted or refused if the Fund receives or anticipates simultaneous orders
affecting significant portions of the Fund's assets. In particular, a pattern of
exchanges that coincide with a "market timing" strategy may be disruptive to the
Fund and may therefore be refused.
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
Fund, 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 includes
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 the 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
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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.
The 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 addition,
high portfolio turnover may result in increased short-term capital gains, which,
when distributed to shareholders, are treated as ordinary income. The Fund
anticipates that its portfolio turnover rate will be less than 100%.
DETERMINATION OF NET ASSET VALUE
---------------------------------------------------------------------
The Fund is open for business on any day the NYSE is open for regular trading.
Shares are valued each day as of the close of regular trading on the NYSE
(generally, 4:00 P.M., Eastern time). The Fund calculates the net asset value of
each class of its shares separately by dividing the total value of each class's
net assets by the shares outstanding of 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
---------------------------------------------------------------------
The 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 indicate
future performance.
Total return performance data may be advertised by the 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 assumes the
reinvestment of all dividends and distributions and includes sales charges and
recurring fees that are charged to shareholder accounts. The Fund's
advertisements may also reflect total return performance data calculated by
means of cumulative, aggregate, average, year-to-date, or other total return
figures. Further, the Fund may advertise total return performance for periods of
time in addition to those noted above.
Although expenses for Class B and Class II shares may be higher than those for
Class A shares, the performance of Class B and Class II shares may be higher
than the performance of Class A shares after giving effect to the impact of the
sales charges and 12b-1 fees applicable to each class of shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
---------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, 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 shareholders
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 aspaid in December of the
previous year. With respect to capital gain distributions, the Fund's policy is
to offset any prior year capital loss carry forward against any realized capital
gains, and accordingly, no distribution of capital gains will be made until
gains have been realized in excess of any such loss carry forward. Dividends and
distributions are paid in additional shares based on the
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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 the 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 the Adviser Mutual Fund at the then-current net
asset value of such Fund(s).
TAXES. The Fund intends to qualify and elect to be taxed as a regulated
investment company under the Code. While so qualified, the Trust and the Fund
will not be subject to U.S. Federal income tax on the portion of its investment
company taxable income and net capital gains distributed to its shareholders.
For Federal income tax purposes, dividends of net investment income and
distributions 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. Recent legislation created several categories of capital gains. To the
extent the Fund's income is derived from certain dividends received from
domestic corporations, a portion of the dividends paid to corporate shareholders
of such Fund will be eligible for the 70% dividends received deduction.
Ordinary income dividends paid by the Fund to shareholders who are non-resident
aliens or foreign entities generally will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
No gain or loss will be recognized by Class B shareholders on the conversion of
their Class B shares into Class A shares. A shareholder's basis in the Class A
shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class A shares will
include the holding period for the converted Class B shares.
A shareholder who holds shares as a capital asset (i.e., generally, for
investment) generally will recognize a capital gain or loss upon the sale or
exchange of such shares. 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, capital gain taxable at the maximum rate of 28% if such shares
were held for more than 12, but not more than 18 months, and capital 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 capital loss will be a
long-term capital loss if such shares were held for more than one year. However,
any loss realized by a shareholder who held shares for six months or less will
be treated 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.
If a shareholder exercises the exchange privilege within 90 days of acquiring
such shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent the sales charge paid to the fund
reduces any charges the shareholder would have owed upon the purchase of the new
shares in the absence of the exchange privilege. Instead, such sales charge will
be treated as an amount paid for the new shares. See "Exchange Privilege."
A loss realized on a sale or exchange of shares of the Fund will be disallowed
if other Fund shares are acquired (whether through the automatic reinvestment of
dividends or otherwise) within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Under certain provisions of the Code, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gains, distributions and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no
<PAGE>
[LOGO]
19
certified taxpayer identification number is on file with the Fund or who, to the
Fund's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that the investor is not otherwise subject to backup withholding.
Statements as to the tax status of distributions to shareholders of the Fund
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 regarding
the foreign tax consequences of ownership of interests in the Fund. See
"Dividends, Distributions and Taxes" in the Statement of Additional Information.
GENERAL INFORMATION
---------------------------------------------------------------------
REPORTS TO SHAREHOLDERS. The Trust sends to its shareholders audited annual and
unaudited semi-annual reports for the Fund. The financial statements appearing
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 company, commonly referred to as a mutual fund. The Trust consists of
six investment series, including the Fund. The other five series, which are not
being offered pursuant to this Prospectus, are: the SunAmerica Balanced Assets
Fund, the SunAmerica Blue Chip Growth Fund, the SunAmerica Growth and Income
Fund, the SunAmerica Mid-Cap Growth Fund and the SunAmerica Small Company Growth
Fund. Information relating to these five series is set forth in a prospectus
dated January 28, 1998, as amended June 1, 1998, and is available without charge
by calling the Trust at (800) 858-8850. 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 required
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 shareholders of
record holding at least 10% of the Trust's outstanding shares. Each share of the
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 the Fund is
entitled to participate equally with the other shares of that Fund in dividends
and other distributions and the proceeds of any liquidation, except that, due to
the differing expenses borne by the classes, such dividends and proceeds are
likely to be lower for Class B and Class II 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 certain
circumstances may be held personally liable as partners for the obligations 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 personally
liable for any Trust obligation. Thus the risk of a shareholder being personally
liable, as a partner for obligations of the Trust, is limited to the unlikely
circumstance in which the Trust itself would be unable to meet its obligations.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP has been
selected as independent accountants for the Fund. The firm of Shereff, Friedman,
Hoffman & Goodman, LLP has been selected as legal counsel for the Fund.
YEAR 2000 READINESS. Many services provided to the Fund and its shareholders by
the Adviser, Distributor and Administrator rely on the smooth functioning of
their computer and computer-based systems as well as those of their outside
service providers. Many computer and computer-based systems cannot distinguish
the year 2000 from the year 1900 because of the way systems
<PAGE>
[LOGO]
20
encode and calculate dates. This Year 2000 Issue could potentially have an
adverse impact on the handling of security trades, the payment of interest and
dividends, pricing and account services. The Adviser, Distributor and
Administrator recognize the importance of the Year 2000 Issue and are taking
appropriate steps necessary in preparation of year 2000. The Adviser,
Distributor and Administrator fully anticipate that their systems and those of
their outside service providers will be adapted in time for the year 2000, and
to further this goal they have coordinated a plan to repair, adapt or replace
systems that are not Year 2000 compliant, and have obtained similar
representations from their outside service providers. The Adviser, Distributor
and Administrator expect to significantly complete their plan by the end of the
1998 calendar year, and perform appropriate systems testing during the 1999
calendar year.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund or Trust should be
directed to the Trust at the telephone number or address on the cover page of
this Prospectus. For questions concerning share ownership, dividends, transfer
of ownership or share redemption, contact SunAmerica Fund Services, Inc., Mutual
Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, NY
10017-3204, or call Shareholder/Dealer Services at (800) 858-8850.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS,
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL
INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR
THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY
NOT LAWFULLY BE MADE.
<PAGE>
"DOGS" OF WALL STREET FUND
SUNAMERICA EQUITY FUNDS
Statement of Additional Information
dated June 1, 1998
The SunAmerica Center General Marketing and
733 Third Avenue, Shareholder Information
New York, NY 10017-3204 (800) 858-8850
"Dogs" of Wall Street Fund (the "Fund") is a separate investment portfolio of
SunAmerica Equity Funds (the "Trust"), 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 Fund is advised and managed by SunAmerica
Asset Management Corp. (the "Adviser").
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Trust's Prospectus dated June 1, 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 OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
History of The Trust........................................ B-2
Investment Objective and Policies........................... B-2
Investment Restrictions..................................... B-15
Trustees and Officers....................................... B-17
Adviser, Personal Trading, Distributor and Administrator.... B-21
Portfolio Transactions and Brokerage........................ B-24
Additional Information Regarding Purchase of Shares......... B-26
Additional Information Regarding Redemption of Shares....... B-31
Determination of Net Asset Value............................ B-32
Performance Data............................................ B-32
Dividends, Distributions and Taxes.......................... B-36
Retirement Plans............................................ B-39
Description of Shares....................................... B-40
Additional Information...................................... B-42
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>
HISTORY OF THE TRUST
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." On March 17, 1998, the Trustees approved the creation
of the "Dogs" of Wall Street Fund, one of the six separate investment portfolios
of the Trust (collectively the "Funds").
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund, certain types of securities in which the
Fund may invest and certain investment practices which the Fund may employ, are
described in the Prospectus and are discussed more fully below.
CORPORATE TRANSACTIONS INVOLVING PORTFOLIO COMPANIES. The Fund will employ a
buy and hold strategy over the course of each year, which ignores market timing
and rejects active management. The Adviser anticipates that the thirty stocks
held by the Fund will remain the same throughout the course of a year, despite
any adverse developments concerning a particular stock, an industry, the economy
or the stock market generally. In the event a corporate transaction such as a
reorganization, merger, acquisition or bankruptcy affects the issuer of
securities in the Fund's portfolio, the Fund generally will not alter its
portfolio holdings in an active manner. For example, if as a result of a merger,
a stock held in the Fund's portfolio is automatically exchanged for a stock of
another company, the Fund will hold the newly acquired stock until such time as
the Fund's entire portfolio is rebalanced; however, the Fund would not add to
this position when it invests new cash flow. In the event that the Fund were to
receive cash in exchange for its entire position in an issuer upon a corporate
event, the Fund would not replace the issuer in its portfolio, but would hold
only 29 stocks for the balance of the calendar year.
DIVERSIFICATION. The Fund is classified as "non-diversified" for purposes of
the 1940 Act, which means that the Fund is not limited by the 1940 Act with
regard to the portion of its assets that may be invested in the securities of a
single issuer. To the extent the Fund makes investments in excess of 5% of its
assets in the securities of a particular issuer, its exposure to the risks
associated with that issuer is increased. Because the Fund invests in a limited
number of issuers, the performance of particular securities may adversely affect
the performance of the Fund or subject the Fund to greater price volatility than
that experienced by diversified investment companies.
The Fund intends to maintain the required level of diversification and otherwise
conduct its operations in order to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"). To
qualify as a regulated investment company, the Fund must, among other things,
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, U.S. government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other regulated
B-2
<PAGE>
investment companies). In the unlikely event application of the Fund's
strategy would result in a violation of these requirements of the Code, the
Fund would be required to deviate from its strategy to the extent necessary
to avoid losing its status as a regulated investment company.
ILLIQUID SECURITIES. No more than 15% of the value of the Fund's net assets,
determined as of the date of purchase, may be invested in illiquid securities
including repurchase agreements which have a maturity of
longer than seven days, 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, the Fund 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 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).
B-3
<PAGE>
Commercial paper issues in which the Fund's net assets may be invested
include securities issued by major corporations without registration under
the Securities Act in reliance on the exemption from such registration
afforded by Section 3(a)(3) thereof, and commercial paper issued in reliance
on the so-called private placement exemption from registration 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. The Fund's 15% limitation on investments in
illiquid securities includes Section 4(2) paper other than Section 4(2) paper
that the Adviser has determined to be liquid pursuant to guidelines
established by the 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. The 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 the Fund's money is invested in the security.
Whenever the Fund enters into a repurchase agreement, it obtains collateral
having a value equal to at least 102% (100% if such collateral is in the form of
cash) of the repurchase price, including accrued interest. The instruments held
as collateral are valued daily and if the value of the instruments declines, the
Fund will require additional collateral. If the seller 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 the Fund's use of repurchase agreements. The Fund will not invest in
repurchase agreements maturing in more than seven days if the aggregate of such
investments along with other illiquid securities exceeds 15% of the value of its
net assets. However, there is no limit on the amount of the Fund's net assets
that may be subject to repurchase agreements having a maturity of seven days or
less for temporary defensive purposes.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, the Fund sells a security and
agrees to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The Fund then invests the
proceeds from the transaction in another obligation in which the Fund is
authorized to invest. The Fund's investment of the proceeds of a reverse
repurchase agreement is the speculative factor known as leverage. The Fund will
enter into a reverse repurchase agreement only if the interest income from
investment of the proceeds is expected to be greater than the interest
B-4
<PAGE>
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 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."
SHORT-TERM INSTRUMENTS. The Fund may invest in money market instruments pending
investment in the stocks selected through its investment strategy. Money market
instruments include securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, repurchase agreements, commerical paper, bankers'
acceptances and certificates of deposit. 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 securities in which the Fund may invest:
U.S. GOVERNMENT SECURITIES: The Fund may invest in securities issued or
guaranteed by the U.S. government, which include the following: (1) direct
obligations 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")
certificates and Federal Housing Administration debentures). For those
securities, the payment of principal and interest is unconditionally
guaranteed by the U.S. government. They are of the highest possible credit
quality. These securities are subject to variations in market value due to
fluctuations in interest rates, but if held to maturity, are guaranteed by
the U.S. government to be paid in full.
The Fund may also invest in securities issued by U.S. government
instrumentalities and certain federal agencies that are neither direct
obligations of, nor are they guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some are
backed by specific types of collateral; some are supported by the issuer's
right to borrow from the Treasury; some are supported by the discretionary
authority of the Treasury to purchase certain obligations of the issuer; and
others are supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to, the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal Land Banks, Farmers
Home Administration, Central Bank for Cooperatives, Federal Intermediate
Credit Banks and Federal Home Loan Banks.
COMMERCIAL PAPER: Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by entities in order to finance their
current operations. The Fund's commercial paper investments may include variable
amount master demand notes and floating rate or variable rate notes. Variable
amount master demand notes and variable amount floating rate notes are
obligations that permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the
B-5
<PAGE>
borrower. Master demand notes permit daily fluctuations in the
interest rates while the interest rate under variable amount floating rate notes
fluctuates on a weekly basis. These notes permit daily changes in the amounts
borrowed. The Fund has the right to increase the amount under these notes at any
time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the note without
penalty. Because these types of notes are direct lending arrangements between
the lender and the borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for these notes.
Master demand notes are redeemable (and, thus, immediately repayable by the
borrower) at face value, plus accrued interest, at any time. Variable amount
floating rate notes are subject to next-day redemption 14 days after the initial
investment therein. With both types of notes, therefore, the Fund's right to
redeem depends on the ability of the borrower to pay principal and interest on
demand. In connection with both types of note arrangements, the Fund considers
earning power, cash flow and other liquidity ratios of the issuer. These notes,
as such, are not typically rated by credit rating agencies. Unless they are so
rated, the Fund may invest in them only if at the time of an investment the
issuer has an outstanding issue of unsecured debt rated in one of the two
highest categories by a nationally recognized statistical rating organization.
The Fund will generally purchase commercial paper only of companies of medium to
large capitalizations (I.E., $1 billion or more).
CERTIFICATES OF DEPOSIT AND BANKERS' 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 Fund 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.
REPURCHASE AGREEMENTS: See the section entitled "Repurchase Agreements" above.
WARRANTS. The Fund may invest in warrants which give the holder of the warrant
a right to purchase a given number of shares of a particular issue at a
specified price until expiration. 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,
B-6
<PAGE>
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. The Fund may purchase or sell such
securities on a "when-issued" or "delayed delivery" basis. Although the Fund
will enter into such transactions for the purpose of acquiring securities for
its portfolio or for delivery pursuant to options contracts it has entered into,
the fund may dispose of a commitment prior to settlement. "When-issued" or
"delayed delivery" refers to securities whose terms and indenture are available
and for which a market exists; but which are not available for immediate
delivery. When such transactions are negotiated, the price (which is generally
expressed in yield terms) is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date. During the
period between commitment by the Fund and settlement (generally with two months
but not to exceed 120 days), no payment is made for the securities purchased by
the purchaser, and no interest accrues to the purchaser from the transaction.
Such securities are subject to market fluctuation, and the value at delivery may
be less than the purchase price. The Fund will maintain a segregated account,
consisting of cash, or liquid securities at least equal to the value of purchase
commitments until payment is made. With respect to securities sold on a
delayed-delivery basis, the Fund will either segregate the securities sold or
liquid assets of a comparable value.
The Fund will engage in when-issued transactions in order to secure what is
considered to be an advantageous price and yield at the time of entering into
the obligations. When the Fund engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If the
Fund chooses to (i) dispose of the right to acquire a when-issued security prior
to its acquisition or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss. (At the time the Fund makes a
commitment to purchase or sell a security on a when-issued or forward commitment
basis, it records the transaction and reflects the value of the security
purchased, or if a sale, the proceeds to be received in determining its net
asset value.)
To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling
securities consistent with its investment objectives and policies and not for
the purposes of investment leverage. The 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 the Fund.
When-issued transactions and forward commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, the Fund might sell securities in its
portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, the Fund might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields.
B-7
<PAGE>
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend portfolio securities in amounts up to 33 1/3% of
total assets to brokers, dealers and other financial institutions, provided,
that such loans are callable at any time by the Fund and are at all times
secured by cash or equivalent collateral. In lending its portfolio securities,
the Fund receives income while retaining the securities' potential for capital
appreciation. The advantage of such loans is that the Fund continues to receive
the interest and dividends on the loaned securities while at the same time
earning interest on the collateral, which will be invested in short-term
obligations. A loan may be terminated by the borrower on one business day's
notice or by the Fund at any time. If the borrower fails to maintain the
requisite amount of collateral, the loan automatically terminates, and the Fund
could use the collateral to replace the securities while holding the borrower
liable for any excess of replacement cost over collateral. As with any
extensions of credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will 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 the Fund; and any gain or loss
in the market price of the loaned security during the loan would inure to the
Fund. The Fund will pay reasonable finders', administrative and custodial fees
in connection with a loan of its securities or may share the interest earned on
collateral with the borrower.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
OPTIONS AND FUTURES STRATEGIES. The Fund may seek to gain exposure to equity
securities and enhance income through the use of the following options and
futures strategies. The Fund may write (I.E., sell) call options ("calls") on
securities that are traded on U.S. 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 the
Fund's total assets may be subject to calls. All such calls written by the
Fund must be "covered" while the call is outstanding (I.E., the Fund must own
the securities subject to the call or other securities acceptable for
applicable escrow requirements). Calls on Futures (defined below) used to
enhance income must be covered by deliverable securities or by liquid assets
segregated to satisfy the Futures contract. If a call written by the Fund is
exercised, the Fund forgoes any profit from any increase in the market price
above the call price of the underlying investment on which the call was
written.
In addition, the Fund could experience capital losses which might cause
previously distributed short-term capital gains to be re-characterized as a
non-taxable return of capital to shareholders.
The Fund may also use interest rate futures contracts, and stock and bond
index futures contracts (together, "Futures"); and call and put options on
equity and debt securities, Futures and stock and bond indices (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 the Fund's portfolio resulting from downward trends in the equity and debt
securities markets
B-8
<PAGE>
(generally due to a rise in interest rates); (ii) protect
the Fund's unrealized gains in the value of its equity and debt securities
which have appreciated; (iii) facilitate selling securities for investment
reasons; or (iv) establish a position in the equity and debt securities
markets as a temporary substitute for purchasing particular equity and debt
securities.
The Fund's strategy of hedging with Futures and options on Futures will be
incidental to its activities in the underlying cash market. When hedging to
attempt to protect against declines in the market value of the Fund's portfolio,
to permit the Fund to retain unrealized gains in the value of portfolio
securities which have appreciated, or to facilitate selling securities for
investment reasons, the Fund could: (i) sell Futures; (ii) purchase puts on such
Futures or securities; or (iii) write calls on securities held by it or on
Futures. When hedging to attempt to protect against the possibility that
portfolio securities are not fully included in a rise in value of the debt
securities market, the Fund could: (i) purchase Futures, or (ii) purchase calls
on such Futures or on securities. Additional information about the Hedging
Instruments the Fund may use is provided below.
OPTIONS
OPTIONS ON SECURITIES. As noted above, the Fund may write and purchase call and
put options on equity and debt securities.
When the Fund writes a call on a security it receives a premium and agrees to
sell the underlying security to a purchaser of a corresponding call on the same
security during the call period (usually not more than 9 months) at a fixed
price (which may differ from the market price of the underlying security),
regardless of market price changes during the call period. The 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, the Fund may purchase a
corresponding call in a "closing purchase transaction." A profit or loss will be
realized, depending upon whether the net of the amount of the option transaction
costs and the premium received on the call written was more or less than the
price of the call subsequently purchased. A profit may also be realized if the
call expires unexercised, because the Fund retains the underlying security and
the premium received. If the Fund could not effect a closing purchase
transaction due to lack of a market, it would hold the callable securities until
the call expired or was exercised.
When the Fund purchases a call (other than in a closing purchase transaction),
it pays a premium and has the right to buy the underlying investment from a
seller of a corresponding call on the same investment during the call period at
a fixed exercise price. The Fund benefits only if the call is sold at a profit
or if, during the call period, the market price of the underlying investment is
above the sum of the call price plus the transaction costs and the premium paid
and the call is exercised. If the call is not exercised or sold (whether or not
at a profit), it will become worthless at its expiration date and the Fund will
lose its premium payment and the right to purchase the underlying investment.
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<PAGE>
A put option on securities gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying investment at the exercise price
during the option period. Writing a put covered by segregated liquid assets
equal to the exercise price of the put has the same economic effect to the
Fund as writing a covered call. The premium the Fund receives from writing a
put option represents a profit as long as the price of the underlying
investment remains above the exercise price. However, the Fund has also
assumed the obligation during the option period to buy the underlying
investment from the buyer of the put at the exercise price, even though the
value of the investment may fall below the exercise price. If the put expires
unexercised, the Fund (as the writer of the put) realizes a gain in the
amount of the premium. If the put is exercised, the Fund must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, the Fund may incur a loss, equal to the sum of the sale price of the
underlying investment and the premium received minus the sum of the exercise
price and any transaction costs incurred.
The Fund may effect a closing purchase transaction to realize a profit on an
outstanding put option it has written or to prevent an underlying security from
being put. Furthermore, effecting such a closing purchase transaction will
permit the Fund to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by the Fund. The Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
When the Fund purchases a put, it pays a premium and has the right to sell the
underlying investment to a seller of a corresponding put on the same investment
during the put period at a fixed exercise price. Buying a put on an investment
the Fund owns enables the Fund to protect itself during the put period against a
decline in the value of the underlying investment below the exercise price by
selling such underlying investment at the exercise price to a seller of a
corresponding put. If the market price of the underlying investment is equal to
or above the exercise price and as a result the put is not exercised or resold,
the put will become worthless at its expiration date, and the Fund will lose its
premium payment and the right to sell the underlying investment pursuant to the
put. The put may, however, be sold prior to expiration (whether or not at a
profit.)
Buying a put on an investment the Fund does not own permits the Fund either to
resell the put or buy the underlying investment and sell it at the exercise
price. The resale price of the put will vary inversely with the price of the
underlying investment. If the market price of the underlying investment is above
the exercise price and as a result the put is not exercised, the put will become
worthless on its expiration date. In the event of a decline in the stock market,
the Fund could exercise or sell the put at a profit to attempt to offset some or
all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to pay for the
underlying security, the Fund will deposit in escrow liquid assets with a value
equal to or greater than the exercise price of the underlying securities. The
Fund therefore forgoes the opportunity of investing the segregated assets or
writing calls against those assets. As long as the obligation of the Fund as the
put writer continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the Fund to take delivery of the
underlying security against payment of the exercise price. The Fund has no
control over when it may be required to purchase the
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<PAGE>
underlying security, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as the writer of the put. This
obligation terminates upon expiration of the put, or such earlier time at
which the Fund effects a closing purchase transaction by purchasing a put of
the same series as that previously sold. The Fund has been assigned an
exercise notice, it is thereafter not allowed to effect a closing purchase
transaction.
OPTIONS ON SECURITIES INDICES. As noted above, the Fund may write and
purchase call and put options on securities indices. Puts and calls on
broadly-based securities indices are similar to puts and calls on securities
except that all settlements are in cash and gain or loss depends on changes
in the index in question (and thus on price movements in the securities
market generally) rather than on price movements in individual securities or
Futures. When the Fund buys a call on a securities index, it pays a premium.
During the call period, upon exercise of a call by the Fund, a seller of a
corresponding call on the same investment will pay the Fund an amount of cash
to settle the call if the closing level of the securities index upon which
the call is based is greater than the exercise price of the call. That cash
payment is equal to the difference between the closing price of the index and
the exercise price of the call times a specified multiple (the "multiplier")
which determines the total dollar value for each point of difference. When
the Fund buys a put on a securities index, it pays a premium and has the
right during the put period to require a seller of a corresponding put, upon
the Fund's exercise of its put, to deliver to the Fund an amount of cash to
settle the put if the closing level of the securities index upon which the
put is based is less than the exercise price of the put. That cash payment is
determined by the multiplier, in the same manner as described above as to
calls.
FUTURES AND OPTIONS ON FUTURES
FUTURES. Upon entering into a Futures transaction, the Fund will be required
to deposit an initial margin payment with the futures commission merchant
(the "futures broker"). The initial margin will be deposited with the Fund's
custodian in an account registered in the futures broker's name; however, the
futures broker can gain access to that account only under specified
conditions. As the Future is marked-to-market to reflect changes in its
market value, subsequent margin payments, called variation margin, will be
paid to or by the futures broker on a daily basis. Prior to expiration of the
Future, if the Fund elects to close out its position by taking an opposite
position, a final determination of variation margin is made, additional cash
is required to be paid by or released to the Fund, and any loss or gain is
realized for tax purposes. All Futures transactions are effected through a
clearinghouse associated with the exchange on which the Futures are traded.
Interest rate futures contracts are purchased or sold for hedging purposes to
attempt to protect against the effects of interest rate changes on the Fund's
current or intended investments in fixed-income securities. For example, if
the Fund owned long-term bonds and interest rates were expected to increase,
the 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 the 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 the 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 the Fund's
interest rate futures contracts would be expected to increase at
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<PAGE>
approximately the same rate, thereby keeping the net asset value of the 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, the 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 the Fund's cash reserves could
then be used to buy long-term bonds on the cash market.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect the Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example, the
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 the 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.
OPTIONS ON FUTURES. As noted above, the Fund may purchase and write options
on interest rate futures contracts and stock and bond index futures
contracts. (Unless otherwise specified, options on interest rate futures
contracts and options on stock and bond index futures contracts are
collectively referred to as "Options on Futures.")
The writing of the call option on a Futures contract constitutes a partial
hedge against declining prices of the securities in the Fund's portfolio. If
the Futures price at expiration of the option is below the exercise price,
the Fund will retain the full amount of the option premium, which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. The writing of a put option on a Futures contract
constitutes a partial hedge against increasing prices of the securities or
other instruments required to be delivered under the terms of the Futures
contract. If the Futures price at expiration of the put option is higher than
the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
securities which the Fund intends to purchase. If a put or call option the
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, the 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, the
Fund could, in lieu of selling a Futures contract, purchase put options
thereon.
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In the event that such decrease occurs, it may be offset, in whole or part,
by a profit on the option. If the market decline does not occur, the Fund
will suffer a loss equal to the price of the put. Where it is projected that
the value of securities to be acquired by the Fund will increase prior to
acquisition, due to a market advance or changes in interest or exchange
rates, the Fund could purchase call Options on Futures, rather than
purchasing the underlying Futures contract. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the
call. However, if the market declines, the Fund will suffer a loss equal to
the price of the call but the securities which the Fund intends to purchase
may be less expensive.
ADDITIONAL INFORMATION ABOUT OPTIONS AND FUTURES AND THEIR USE
The Fund's custodian, or a securities depository acting for the custodian,
will act as the Fund's escrow agent, through the facilities of the Options
Clearing Corporation ("OCC"), as to the securities on which the Fund has
written options or as to other acceptable escrow securities, so that no
margin will be required for such transaction. OCC will release the securities
on the expiration of the option or upon the Fund's entering into a closing
transaction.
An option position may be closed out only on a market 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. The
Fund's option activities may affect its turnover rate and brokerage
commissions. The exercise by the Fund of puts on securities will cause the
sale of related investments, increasing portfolio turnover. Although such
exercise is within the Fund's control, holding a put might cause the Fund to
sell the related investments for reasons which would not exist in the absence
of the put. The Fund will pay a brokerage commission each time it buys a put
or call, sells a call, or buys or sells an underlying investment in
connection with the exercise of a put or call. Such commissions may be higher
than those 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 the Fund's net asset value being more sensitive to changes in
the value of the underlying investments.
In the future, the Fund may employ Hedging Instruments and strategies that
are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with the Fund's investment objectives,
legally permissible and adequately disclosed.
REGULATORY ASPECTS OF OPTIONS AND FUTURES
The Fund must operate within certain restrictions as to its long and short
positions in Futures and options thereon under a rule (the "CFTC Rule")
adopted by the Commodity Futures Trading Commission (the "CFTC") under the
Commodity Exchange Act (the "CEA"), which excludes the Fund from registration
with the CFTC as a "commodity pool operator" (as defined in the CEA) if it
complies with the CFTC Rule. In particular, the Fund may (i) purchase and
sell Futures and options thereon for bona fide hedging purposes, as defined
under CFTC regulations, without regard to the percentage of the Fund's assets
committed to margin and option premiums, and (ii) enter into non-hedging
transactions, provided that the Fund may not enter into such non-hedging
transactions
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<PAGE>
if, immediately thereafter, the sum of the amount of initial margin deposits
on the Fund's existing Futures positions and option premiums would exceed 5%
of the fair value of its portfolio, after taking into account unrealized
profits and unrealized losses on any such transactions. The Fund intends to
engage in Futures transactions and options thereon only for hedging purposes,
margin deposits may consist of cash or securities acceptable to the broker
and the relevant contract market.
Transactions in options by the Fund are subject to limitations established by
each of the exchanges governing the maximum number of options 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 the Fund may
write or hold may be affected by options written or held by other entities,
including other investment companies having the same or an affiliated
investment adviser. Position limits also apply to Futures. An exchange may
order the liquidation of positions found to be in violation of those limits
and may impose certain other sanctions. Due to requirements under the 1940
Act, when the Fund purchases a Future, the Fund will segregate cash or liquid
securities in an amount equal to the market value of the securities
underlying such Future, less the margin deposit applicable to it.
POSSIBLE RISK FACTORS IN OPTIONS AND FUTURE STRATEGIES
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 the Fund's portfolio securities (due to an
increase in interest rates) that the prices of such Futures will correlate
imperfectly with the behavior of the cash (I.E., market value) prices of the
Fund's securities. The ordinary spreads between prices in the cash and
Futures markets are subject to distortions due to differences in the natures
of those markets. First, all participants in the Futures markets are subject
to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close Futures contracts
through offsetting transactions 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 the Fund uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual
debt securities (long hedging) by buying Futures and/or calls on such Futures
or on debt securities, it is possible that the market may decline; if the
Adviser then determines not to invest in such securities at that time because
of concerns as to possible further market decline or for other reasons, the
Fund will realize a loss on the Hedging Instruments that is not offset by a
reduction in the price of the debt securities purchased.
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<PAGE>
LEVERAGE. In seeking to enhance investment performance, the Fund may
increase its 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 the Fund's assets less its liabilities, other than
borrowings, is equal to at least 300% of all borrowings including the
proposed borrowing. If the value of the Fund's assets, so computed, should
fail to meet the 300% asset coverage requirement, the Fund is required,
within three business days, to reduce its bank debt to the extent necessary
to meet such requirement and may have to sell a portion of its investments at
a time when independent investment judgment would not dictate such sale.
Interest on money borrowed is an expense the Fund would not otherwise incur,
so that it may have little or no net investment income during periods of
substantial borrowings. Since substantially all of the Fund's assets
fluctuate in value, but borrowing obligations are fixed when the Fund has
outstanding borrowings, the net asset value per share of the Fund
correspondingly will tend to increase and decrease more when the Fund's
assets increase or decrease in value than would otherwise be the case. The
Fund's policy regarding use of leverage is a fundamental policy which may not
be changed without approval of the shareholders of the Fund.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of investment restrictions that are
fundamental policies and may not be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities. A
"majority of the outstanding voting securities" of the Fund for this purpose
means the lesser of (i) 67% of the shares of the Fund represented at a
meeting at which more than 50% of the outstanding shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding
shares. Unless otherwise indicated, all percentage limitations apply to the
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, the Fund may not:
(1) Purchase securities on margin, borrow money or pledge their assets, except
that the Fund may borrow money to purchase securities as set forth in the
Prospectus and Statement of Additional Information and the Fund may borrow
from a bank for temporary or emergency purposes and pledge its assets to
secure such borrowings. Further, to the extent that an investment technique
engaged in by the Fund required pledging of assets, the Fund may pledge
assets in connection with such transactions. For purposes of this
restriction and restriction (7) 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.
(2) Invest more than 25% of the Fund's assets in the securities of issuers
engaged in the same industry except that the Fund may invest more than 25%
of its assets in the securities of issuers in the same industry to the
extent such investment would be selected according to its stock selection
criteria.
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(3) Engage in arbitrage transactions, buy or sell commodities or commodity
contracts or real estate or interests in real estate, except that the Fund
may (a) purchase or sell financial futures and options thereon, 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.
(4) Act as underwriter, except to the extent that in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter under certain Federal securities laws.
(5) Make loans, except through (i) repurchase agreements, (ii) loans of
portfolio securities, or (iii) the purchase of portfolio securities
consistent with the Fund's investment objective and policies, as described
in the Prospectus.
(6) Make short sales of securities or maintain a short position, except that
the Fund may effect short sales against the box.
(7) Issue senior securities as defined in the 1940 Act, except that the Fund may
enter into repurchase agreements, lend its portfolio securities and borrow
money from banks, as described in restriction (1).
The following additional restrictions are not fundamental policies and may be
changed by the Trustees without a vote of shareholders. The Fund may not:
(1) Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 15% of the
Fund's net assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and
sold to "qualified institutional buyers" as defined in Rule 144A, which the
Adviser has determined to be liquid pursuant to guidelines established by
the Trustees, will not be considered illiquid for purposes of this 15%
limitation on illiquid securities.
(2) 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.
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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.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION WITH THE FUND PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- -------------------------------------- ------------------------------ ---------------------------------------------------------
<S> <C> <C>
S. James Coppersmith, 65 Trustee Director/Trustee of the Boston Stock Exchange, Uno
Emerson College Restaurant Corp., Waban Corp., Kushner-Locke Co., Chyron
100 Beacon Street Inc.; Chairman of the Board of Emerson College;
Boston, MA 02116 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, 58 Chairman of the Board Attorney in private practice; President and Chief
430 East 86th Street Executive Officer, Abjac Energy Corporation;
New York, NY 10028 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, 55 Trustee Partner and Chief Operating Officer of B.B. Associates
515 East 79th Street LLC (menswear specialty retailing and other activities)
New York, NY 10021 since May 1989; Director/Trustee of SAMF and AST.
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Peter Harbeck*, 44 Trustee and President Director and President, SunAmerica Asset Management Corp.
The SunAmerica Center ("SAAMCo"); Director, SunAmerica Capital Services, Inc.
733 Third Avenue ("SACS"), since February 1993; Director and President,
New York, NY 10017-3204 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*, 40 Trustee Executive Vice President and Chief Investment Officer,
1 SunAmerica Center SunAmerica Investments, Inc., since August 1989;
Los Angeles, CA 90067 Director/Trustee of SAMF; Director, Resources Trust
Company.
Sebastiano Sterpa, 68 Trustee Founder of Sterpa Realty Inc., a full service real estate
Suite 200 firm, since 1962; Chairman of the Sterpa Group, real
200 West Glenoaks Blvd. estate investments and management company, since 1962;
Glendale, CA 91202 Director/Trustee of SAMF.
Francis D. Gannon, 30 Vice President Vice President and Portfolio Manager, SAAMCo, since May
The SunAmerica Center 1997; Co-Portfolio Manager, from November 1996 to May
733 Third Avenue 1997; previously, Assistant Vice President and Equity
New York, NY 10017-3204 Analyst, from 1993 to 1997.
B-18
<PAGE>
Nancy Kelly, 46 Vice President Vice President and Head Trader, SAAMCo, since 1994;
The SunAmerica Center formerly, Vice President, Whitehorne & Co. Ltd., from
733 Third Avenue 1991 to 1994; Sales Trader, Lynch Jones & Ryan, from
New York, NY 10017-3204 1992 to 1994.
Peter C. Sutton, 33 Treasurer Senior Vice President, SAAMCo, since April 1997;
The SunAmerica Center Treasurer, SAMF and AST, since February 1996; Vice
733 Third Avenue President, SunAmerica Series Trust and Anchor Pathway
New York, NY 10017-3204] 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 Compliance Senior Vice President and General Counsel, SAAMCo, since
The SunAmerica Center Officer April 1993; Executive Vice President, General Counsel
733 Third Avenue and Director, SACS, since February 1993; Vice President,
New York, NY 10017-3204 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.
</TABLE>
Trustees and officers of the Trust are also trustees and officers of some or
all of the other investment companies managed, administered or advised by the
Adviser, and distributed by 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.
B-19
<PAGE>
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 the Fund.
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 disinterested Trustees.
The Retirement Plan provides generally that if a disinterested Trustee who
has at least 10 years of consecutive service as a disinterested Trustee of
any of the SunAmerica Mutual Funds (an "Eligible Trustee") retires after
reaching age 60 but before age 70 or dies while a Trustee, such person will
be eligible to receive a retirement or death benefit from each SunAmerica
mutual fund with respect to which he or she is an Eligible Trustee. As of
each birthday, prior to the 70th birthday, 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 February 28, 1998, 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-20
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT ESTIMATED FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED ANNUAL AND FUND
FROM AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
TRUSTEE REGISTRANT EXPENSES* RETIREMENT 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 February 28, 1998, no person owned of record or beneficially 5% or more of
any class of the Fund's 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 the Fund pursuant to the Investment Advisory and
Management Agreement dated September 23, 1993 as amended June 15 and May 21,
1998 (the "Advisory Agreement") with the Trust, on behalf of the Fund. The
Adviser is an indirect wholly owned subsidiary of SunAmerica Inc. SunAmerica
Inc., is incorporated in the State of Maryland and maintains its principal
executive offices at 1 SunAmerica Center, Los Angeles, CA 90067-6022,
telephone (310) 772-6000.
Under the Advisory Agreement, the Adviser manages the investment of the assets
of the Fund and obtains and evaluates economic, statistical and financial
information to formulate and implement investment policies for the 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 the Fund.
Except to the extent otherwise specified in the Advisory Agreement, the Fund
pays, or causes to be paid, all other expenses of the Trust and the Fund,
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 and qualification costs of the
Fund and their shares under Federal and state securities laws; the cost and
expense of printing, including
B-21
<PAGE>
typesetting, and distributing Prospectuses and Statements of Additional
Information respecting the Fund, and supplements thereto, to the shareholders
of the Fund; 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 Fund; 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 Fund, the Adviser receives a fee from
the Fund, payable monthly, computed daily at the annual rate of .35% of the
Fund's average daily net assets.
The Advisory Agreement continues in effect with respect to the Fund after an
initial two-year term 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 the Fund at any time, without penalty, on 60 days' written notice by
the Trustees, by the holders of a majority of the Fund's outstanding voting
securities or by the Adviser. The Advisory Agreement automatically terminates
with respect to 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
Fund, or its shareholders, for any act or omission by it or for any losses
sustained by the Fund or its 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 which prescribes general rules of conduct and sets forth guidelines with
respect to personal securities trading by "Access Persons" thereof. An Access
Person as defined in the Code of Ethics is an individual who is a trustee,
director, officer, general partner or advisory person of the Trust or the
Adviser. The guidelines on personal securities trading include: (i) securities
being considered for purchase or sale, or purchased or sold, by any Investment
Company advised by the Adviser, (ii) Initial Public Offerings, (iii) private
placements, (iv) blackout periods, (v) short-term trading profits, (vi) gifts,
and (vii) services as a director. These guidelines are substantially similar to
those contained in the Report of the Advisory Group on Personal Investing issued
by the Investment Company Institute's Advisory Panel. The Adviser reports to the
Board of Trustees on a quarterly basis, as to whether there were any violations
of the Code of Ethics by Access Persons of the Trust or the Adviser during the
quarter.
THE DISTRIBUTOR. The Trust, on behalf of the 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 the Fund. The address
of the Distributor is The SunAmerica Center, 733 Third Avenue, New York, NY
10017-3204. The Distribution Agreement provides that the Distributor has the
exclusive right to distribute shares of the Fund through its registered
representatives and authorized broker-dealers. The Distribution Agreement also
provides that the Distributor will pay the promotional expenses,
B-22
<PAGE>
including the incremental cost of printing prospectuses, annual reports and
other periodic reports respecting the Fund, for distribution to persons who
are not shareholders of the Fund and the costs of preparing and distributing
any other supplemental sales literature. However, certain promotional
expenses may be borne by the Fund (see "Distribution Plans" below).
Continuance of the Distribution Agreement with respect to the Fund is 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 the
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 Fund. In some instances, such additional commissions,
fees or other incentives may be offered only to certain firms, including Royal
Alliance Associates, Inc., SunAmerica Securities, Inc., Keogler Morgan &
Company, Financial Service Corporation and Advantage Capital Corporation,
affiliates of the Distributor, that sell or are expected to sell during
specified time periods certain minimum amounts of shares of the Fund, or of
other funds underwritten by the Distributor. In addition, the terms and
conditions of any given promotional incentive may differ from firm to firm. Such
differences will, nevertheless, be fair and equitable, and based on such factors
as size, geographic location, or other reasonable determinants, and will in no
way affect the amount paid to any investor.
DISTRIBUTION PLANS. As indicated in the Prospectus, the Trustees of the
Trust and the shareholders of Class A, Class B, and Class II shares of the
Fund have adopted Distribution Plans (the "Class A Plan," the "Class B Plan"
and the "Class II Plan" and collectively, the "Distribution Plans") pursuant
to Rule 12b-1 under the 1940 Act. Reference is made to "Management of the
Trust--Distribution Plans" in the Prospectus for certain information with
respect to the Distribution Plans.
The Distribution Plans provide that each class of shares of the Fund may 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 providing
continuing account maintenance. In this regard, some payments are used to
compensate broker-dealers with trail commissions or account maintenance and
service fees in an amount up to 0.25% per year of the assets maintained in the
Fund by their customers. Under the Class B and Class II Plans, the Distributor
also may receive payments from the Fund at the annual rate of up to 0.75% of the
average daily net assets of such Fund's Class B and Class II shares to
compensate the Distributor and certain securities firms for providing sales and
promotional activities for distributing that class of shares. The distribution
costs for which the Distributor may be reimbursed out of such distribution fees
include fees paid to broker-dealers that have sold Fund shares, commissions and
other expenses such as sales literature, prospectus printing and distribution
and compensation to wholesalers. 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.
B-23
<PAGE>
Continuance of the Distribution Plans with respect to the 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
the Fund, without approval of the shareholders of the affected class of shares
of the Fund. In addition, all material amendments to the Distribution Plans must
be approved by the Trustees in the manner described above. A Distribution Plan
may be terminated at any time with respect to the 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. In their consideration of the Distribution Plans with
respect to the 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 the Fund. Under the terms of the Service
Agreement, SAFS may receive reimbursement of its costs in providing such
shareholder services. SAFS is located at The SunAmerica Center, 733 Third
Avenue, New York, NY 10017-3204.
Pursuant to the Service Agreement, as compensation for services rendered, SAFS
receives a fee from the Fund, computed and payable monthly based upon an annual
rate of 0.22% of average daily net assets. This fee represents the full cost of
providing shareholder and transfer agency services to the 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). For
further information regarding the Transfer Agent, see the section entitled
"Additional Information Regarding Purchase of Shares" below.
The Service Agreement dated September 23, 1993, as amended August 21, 1996 and
May 19, 1998, 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
The Adviser is responsible for decisions to buy and sell securities for the
Fund, selection of broker-dealers and negotiation of commission rates. Purchases
and sales of securities on a securities exchange are effected through
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.
B-24
<PAGE>
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 the Fund to pay such broker-dealers 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 Fund by
improving the quality of the Adviser's investment advice. The investment
advisory fees paid by the Fund 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 the Fund as a factor in
the selection of brokers for transactions effected on behalf of the Fund,
subject to the requirement of best price and execution.
Although the objectives of other accounts or investment companies which the
Adviser manages may differ from those of the Fund, it is possible that, at
times, identical securities will be acceptable for purchase by the Fund and one
or more other accounts or investment companies 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 the Fund and one or more of these other accounts or
companies is considered at or about the same time, transactions in such
securities will be allocated in a manner deemed equitable by the Adviser. The
Adviser may combine such transactions, in accordance with applicable laws and
regulations, where the size of the transaction would enable it to negotiate a
better price or reduced commission. However, simultaneous transactions could
adversely affect the ability of the Fund to obtain or dispose of the full amount
of a security, which it seeks to purchase or sell, or the price at which such
security can be purchased or sold.
B-25
<PAGE>
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Shares of the Fund are sold at the respective net asset value next determined
after receipt of a purchase order, plus a sales charge, which, at the
election of the investor, either (i) may be imposed at the time of purchase
(Class A shares), (ii) may be imposed on a deferred basis (Class B shares and
certain Class A shares) or (iii) may contain certain elements of a sales
charge that is imposed at the time of purchase and that is deferred (Class II
shares).
WAIVER OF CDSC. As discussed under "Purchase of Shares" in the Prospectus,
CDSCs may be waived on redemptions of Class B and Class II shares under certain
circumstances. The conditions set forth below are applicable with respect to the
following situations with the proper documentation:
DEATH. CDSCs may be waived on redemptions within one year following the death
(i) of the sole shareholder on an individual account, (ii) of a joint tenant
where the surviving joint tenant is the deceased's spouse, or (iii) of the
beneficiary of a Uniform Gifts to Minors Act, Uniform Transfers to Minors Act or
other custodial account. The CDSC waiver is also applicable in the case where
the shareholder account is registered as community property. If, upon the
occurrence of one of the foregoing, the account is transferred to an account
registered in the name of the deceased's estate, the CDSC will be waived on any
redemption from the estate account occurring within one year of the death. If
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 the 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. The Fund will not be responsible for delays caused
by dealers.
PURCHASE BY CHECK. Checks should be made payable to the " 'Dogs' of Wall Street
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
B-26
<PAGE>
Services, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third
Avenue, New York, New York 10017-3204, together with payment for the purchase
price of such shares and a completed New Account Application. Payment for
subsequent purchases should be mailed to SunAmerica Fund Services, Inc., c/o
NFDS, P.O. Box 419373, Kansas City, Missouri 64141-6373 and the shareholder's
Fund account number should appear on the check. For fiduciary retirement plan
accounts, both initial and subsequent purchases should be mailed to
SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica
Center, 733 Third Avenue, New York, New York 10017-3204. Certified checks are
not necessary but checks are accepted subject to collection at full face
value in United States funds and must be drawn on a bank located in the
United States. Upon receipt of the completed New Account Application and
payment check, the Transfer Agent will purchase full and fractional shares of
the Fund at the net asset value next computed after the check is received,
plus the applicable sales charge. Subsequent purchases of shares of the Fund
may be purchased directly through the Transfer Agent. SAFS reserves the right
to reject any check made payable other than in the manner indicated above.
Under certain circumstances, the Fund will accept a multi-party check (E.G.,
a check made payable to the shareholder by another party and then endorsed by
the shareholder to the Fund in payment for the purchase of shares); however,
the processing of such a check may be subject to a delay. The Fund does 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 the 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 ["Dogs" of Wall Street Fund, Class ](include
shareholder name and account number).
B-27
<PAGE>
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
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 Fund 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 the 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;
B-28
<PAGE>
(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 Fund that were previously purchased, shares of the other classes of the
Fund, as well as shares of any other Funds of the Trust or of 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 series of the Trust to be achieved through any number of investments
over a thirteen-month period, of $50,000 or more. Each investment in such
portfolio 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 other Funds of the Trust, 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).
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<PAGE>
The Letter of Intent does not obligate the investor to purchase, nor the
Trust to sell, the indicated amounts of the investment goal. In the event the
investment goal is not achieved within the thirteen-month period, the
investor is required to pay the difference between the sales charge otherwise
applicable to the purchases made during this period and sales charges
actually paid. Such payment may be made directly to the Distributor or, if
not paid, the Distributor is authorized by the Letter of Intent to liquidate
a sufficient number of escrowed shares to obtain such difference. If the goal
is exceeded and purchases pass the next sales charge break-point, the sales
charge on the entire amount of the purchase that results in passing that
break-point, and on subsequent purchases, will be subject to a further
reduced sales charge in the same manner as set forth above under "Rights of
Accumulation," but there will be no retroactive reduction of sales charges on
previous purchases. At any time while a Letter of Intent is in effect, a
shareholder may, by written notice to the Distributor, increase the amount of
the stated goal. In that event, shares of the Fund purchased during the
previous 90-day period and still owned by the shareholder will be included in
determining the applicable sales charge. The 5% escrow and the minimum
purchase requirement will be applicable to the new stated goal. Investors
electing to purchase shares of the Fund pursuant to this purchase plan should
carefully read such Letter of Intent.
REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may
purchase Class A shares of the Fund under the combined purchase privilege as
described above.
To receive a rate based on combined purchases, group members must purchase Class
A shares of the Fund through a single investment dealer designated by the group.
The designated dealer must transmit each member's initial purchase to the
Distributor, together with payment and completed New Account Applica-
tion. After the initial purchase, a member may send funds for the purchase of
Class A shares directly to the Transfer Agent. Purchases of the Fund's shares
are made at the public offering price based on the net asset value next
determined after the Distributor or the Transfer Agent receives payment for the
Class A shares. The minimum investment requirements described above apply to
purchases by any group member.
Qualified groups include the employees of a corporation or a sole
proprietorship, members and employees of a partnership or association, or other
organized groups of persons (the members of which may include other qualified
groups) provided that: (i) the group has at least 25 members of which at least
ten members participate in the initial purchase; (ii) the group has been in
existence for at least six months; (iii) the group has some purpose in addition
to the purchase of investment company shares at a reduced sales charge; (iv) the
group's sole organizational nexus or connection is not that the members are
credit card customers of a bank or broker-dealer, clients of an investment
adviser or security holders of a company; (v) the group agrees to provide 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.
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<PAGE>
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 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 Fund at any time.
NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares of
the Fund at net asset value to the extent that the investment represents the
proceeds from a redemption of a non-SunAmerica mutual fund in which the
investor either (a) paid a front-end sales load or (b) was subject to, or
paid a CDSC on the redemption proceeds. 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.
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 the 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 the Fund, may pay the redemption price in whole, or in part,
by a distribution in kind of securities from the Fund in lieu of cash. In
conformity with applicable rules of the SEC, the Fund is committed to pay in
cash all requests for redemption, by any shareholder of record, limited in
amount with respect to each shareholder during any 90-day period to the lesser
of (i) $250,000, or (ii) 1% of the net asset value of the Fund at the beginning
of such period. If shares are redeemed in kind, the redeeming shareholder would
incur brokerage costs in converting the assets into cash. The method of valuing
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.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund is open for business on any day the NYSE is open for regular trading.
Shares are valued each day as of the close of regular trading on the NYSE
(generally, 4:00 p.m., Eastern time). The Fund calculates the net asset value of
each class of its shares separately by dividing the total value of each class's
net assets by the shares outstanding of such class.
Stocks are stated at value based upon closing sales prices reported on
recognized securities exchanges or, for listed securities having no sales
reported and for unlisted securities, upon last reported bid prices.
Non-convertible bonds, debentures, other long-term debt securities and
short-term securities with original or remaining maturities in excess of 60
days, are normally valued at prices obtained for the day of valuation from a
bond pricing service of a major dealer in bonds, when such prices are
available; however, in circumstances in which the Adviser deems it
appropriate to do so, an over-the-counter or exchange quotation at the mean
of representative bid or asked prices may be used. Securities traded
primarily on securities exchanges outside the United States are valued at the
last sale price on such exchanges on the day of valuation, or if there is no
sale on the day of valuation, at the last-reported bid price. If a security's
price is available from more than one foreign exchange, the Fund uses the
exchange that is the primary market for the security. Short-term securities
with 60 days or less to maturity are amortized to maturity based on their
cost to the 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 Advisor, 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.
The Fund's liabilities, including proper accruals of expense items, are deducted
from total assets.
PERFORMANCE DATA
The Fund may advertise performance data that reflects various measures of total
return. An explanation of the data presented and the methods of computation that
will be used are as follows.
The Fund's performance may be compared to the historical returns of various
investments, performance indices of those investments or economic indicators,
including, but not limited to, stocks, bonds, certificates of deposit, money
market funds and U.S. Treasury Bills. Certain of these alternative investments
may offer fixed rates of return and guaranteed principal and may be insured.
Average annual total return is determined separately for Class A, Class B and
Class II shares in accordance with a formula specified by the SEC. Average
annual total return is computed by finding
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<PAGE>
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:
n
P(1+T) = 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., the front-end sales load in the case of the
Class A or Class II 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 II shares) is deducted
from the initial $1,000 purchase payment;
2. All dividends and distributions are reinvested at net asset value; and
3. Complete redemption occurs at the end of the 1-, 5-, or 10- year periods or
fractional portion thereof with all nonrecurring charges deducted
accordingly.
The Fund may advertise cumulative, rather than average return, for each class of
its shares for periods of time other than the 1-, 5-, and 10-year periods or
fractions thereof, as discussed above. Such return data will be computed in the
same manner as that of average annual total return, except that the actual
cumulative return will be computed.
COMPARISONS
The Fund may compare its total return or yield to similar measures as calculated
by various publications, services, indices, or averages. Such comparisons are
made to assist in evaluating an investment in the Fund. The following references
may be used:
(a) Dow Jones Composite Average or its component averages -- an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks (Dow Jones Transportation
Average). Comparisons of performance assume reinvestment of dividends.
(b) Standard & Poor's 500 Composite Stock Price Index or its component
indices -- an unmanaged index composed of 400 industrial stocks, 40
financial stocks, 40 utilities stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
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<PAGE>
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-34
<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:
<TABLE>
<S> <C>
Australian Dollars Netherlands Guilders
Canadian Dollars Swiss Francs
European Currency Units UK Pound Sterling
French Francs U.S. Dollars
Japanese Yen German Deutsche Marks
</TABLE>
(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.
B-35
<PAGE>
(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.
(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 the Fund's portfolio, that the averages are generally
unmanaged and that the items included in the calculations of such averages
may not be identical to the formula used by the Fund to calculate its
figures. Specifically, the Fund may compare its performance to that of
certain indices which include securities with government guarantees. However,
the Fund's shares do not contain any such guarantees. In addition, there can
be no assurance that the Fund will continue its performance as compared to
such other standards.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income, if any, and
the excess of net realized long-term capital gains over net capital losses
("capital gain distributions"), if any, will be distributed to the registered
holders at least annually. With respect to capital gain distributions, the
Fund's policy is to offset any prior year capital loss carry forward against any
realized capital gains, and accordingly, no distribution of capital gains will
be made until gains have been realized in excess of any such loss carry forward.
Dividends and distributions will be paid in additional Fund shares based on the
net asset value at the Fund's close of business on the Ex date, unless the
shareholder notifies the Fund at least five business days prior to the payment
date to receive such distributions in excess of $10 in cash.
TAXES. The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Code for each taxable year. In
order to be qualified as a regulated investment company, the Fund generally
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, proceeds from loans of stock or securities and certain
other related
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<PAGE>
income; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) 50% of the market value of the Fund's assets is represented by
cash, government securities, securities of other regulated investment
companies and other securities limited, in respect of any one issuer, to an
amount no greater than 5% of the Fund's assets and not greater than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than government securities or the securities of other regulated
investment companies).
As a regulated investment company, the 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. The 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, the Fund must distribute during each calendar year (1) at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year, (2) at least 98% of its capital gains in excess
of its capital losses for the 12-month period ending on October 31 of the
calendar year, and (3) all ordinary income and net capital gains for the
previous years that were not distributed during such years. To avoid application
of the excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid
on December 31 of the calendar year if declared by the Fund in October, November
or December of such year, payable to shareholders of record on a date in such
month and paid by the Fund during January of the following year. Any such
distributions paid during January of the following year will be taxable to
shareholders as of such December 31, rather than the date on which the
distributions are received.
Generally, a loss realized by the Fund upon the sale or disposition of stock or
securities will be disallowed if the Fund acquires substantially identical stock
or securities within a 61-day period beginning 30 days before and ending 30 days
after the date that the stock or securities are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
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 the Fund that will be eligible
for the dividends received deduction for corporations generally will be
determined on the basis of the amount of the Fund's gross income, exclusive
of capital gains from sales of stock or securities, which is derived as
dividends from domestic corporations 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, taxable at the same rates as ordinary income
if the shares were held
B-37
<PAGE>
for not more than 12 months, capital gain taxable at the maximum rate of 28%
if such shares were held for more than 12 but not more than 18 months, and
capital 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 the 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.
The Code includes special rules applicable to the listed non-equity options,
regulated futures contracts, and options on futures contracts which the Fund may
write, purchase or sell. Such options and contracts are classified as Section
1256 contracts under the Code. The character of gain or loss resulting from the
sale, disposition, closing out, expiration or other termination of Section 1256
contracts, except forward foreign currency exchange contracts, is generally
treated as long-term capital gain or loss to the extent of 60% thereof and
short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for Federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transactions in over-the-counter
options generally constitute short-term capital gains or losses. When call
options written, or put options purchased, by the Fund are exercised, the gain
or loss realized on the sale of the underlying securities may be either
short-term or long-term, depending on the holding period of the securities. In
determining the amount of gain or loss, the sales proceeds are reduced by the
premium paid for the puts or increased by the premium received for calls.
A substantial portion of the Fund's transactions in options, futures contracts
and options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle consisting of a listed option,
futures contract, or option on a futures contract and of U.S. Government
securities would constitute a "mixed straddle" under the Code. The Code
generally provides with respect to straddles (i) "loss deferral" rules which may
postpone recognition for tax purposes of losses from certain closing purchase
transactions or other dispositions of a position in the straddle to the extent
of unrealized gains in the offsetting position, (ii) "wash sale" rules which may
postpone recognition for tax purposes of losses where a position is sold and a
new offsetting position is acquired within a prescribed period, (iii) "short
sale" rules which may terminate the holding period of securities owned by the
Fund when offsetting positions are established and which may convert certain
losses from short-term to long-term, and (iv) "conversion transaction" rules
which recharacterize capital gains as ordinary income. The Code provides that
certain elections may be made for mixed straddles that can alter the character
of the
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<PAGE>
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-enacted
Code Section 1259 will require the recognition of gain (but not loss) if the
Fund makes a "constructive sale" of an appreciated financial position (E.G.,
stock). The Fund generally will be considered to make a constructive sale of
an appreciated financial position if it sells the same or substantially
identical property short, enters into a futures or forward contract to
deliver the same or identical property short, or enters into other similar
transactions.
The Fund may 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.
Ordinary income dividends paid by the Fund to shareholders who are non-resident
aliens or foreign entities generally will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law. Nonresident shareholders are
urged to consult their own tax advisers concerning the applicability of the
United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury regulations currently in effect. Shareholders are urged
to consult their tax advisors regarding specific questions as to Federal, state
and local taxes. In addition, foreign investors should consult with their own
tax advisors regarding the particular tax consequences to them of an investment
in the Fund. Qualification as a regulated investment company under the Code for
tax purposes does not entail government supervision of management and investment
policies.
RETIREMENT PLANS
Shares of the Fund are eligible to be purchased in conjunction with various
types of qualified retirement plans. The summary below is only a brief
description of the Federal income tax laws for each plan and does not purport to
be complete. Further information or an application to invest in shares of the
Fund by establishing any of the retirement plans described below may be obtained
by calling Retirement Plans at (800) 858-8850. However, it is recommended that a
shareholder considering any retirement plan consult a tax adviser before
participating.
PENSION AND PROFIT-SHARING PLANS. Sections 401(a) and 401(k) of the Code permit
business employers and certain associations to establish pension and profit
sharing plans for employees. Shares of the Fund may be purchased by those who
would have been covered under the rules governing old H.R. 10 (Keogh) Plans, as
well as by corporate plans. Each business retirement plan provides tax
advantages for owners and participants. Contributions made by the employer are
tax-deductible, and participants do not pay taxes on contributions or earnings
until withdrawn.
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<PAGE>
TAX-SHELTERED CUSTODIAL ACCOUNTS. Section 403(b)(7) of the Code permits public
school employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code, to purchase
shares of the Fund and, subject to certain limitations, exclude the amount of
purchase payments from gross income for tax purposes.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA). Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program, including
Simplified Employee Pension Plans, commonly referred to as SEP-IRA. These IRA's
are subject to limitations with respect to the amount that may be contributed,
the eligibility of individuals, and the time in which distributions would be
allowed to 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 certain qualifying 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, six series or Funds of the Trust have been authorized pursuant to the
Declaration of Trust: the "Dogs" of Wall Street Fund, the SunAmerica Balanced
Assets Fund, the SunAmerica Blue
B-40
<PAGE>
Chip Growth Fund, the SunAmerica Mid-Cap Growth Fund, the SunAmerica Small
Company Growth Fund and the SunAmerica Growth and Income Fund. This Statement
of Additional Information relates only to the "Dogs" of Wall Street Fund. The
"Dogs" of Wall Street Fund has been divided into three classes of shares,
designated as Class A, Class B and Class II shares. The Trustees may
authorize the creation of additional series of shares so as to be able to
offer to investors additional investment portfolios within the Trust that
would operate independently from the Trust's present portfolios, or to
distinguish among shareholders, as may be necessary, to comply with future
regulations or other unforeseen circumstances. Each series of the Trust's
shares represents the interests of the shareholders of that series in a
particular portfolio of Trust assets. In addition, the Trustees may authorize
the creation of additional classes of shares in the future, which may have
fee structures different from those of existing classes and/or may be offered
only to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The
Trustees have terms of unlimited duration (subject to certain removal
procedures) and have the power to alter the number of Trustees, and appoint
their own successors, provided that at all times at least a majority of the
Trustees have been elected by shareholders. The voting rights of shareholders
are not cumulative, so that holders of more than 50% of the shares voting
can, if they choose, elect all Trustees being elected, while the holders of
the remaining shares would be unable to elect any Trustees. Although the
Trust need not hold annual meetings of shareholders, the Trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholders
meeting must be called, if so requested in writing by the holders of record
of 10% or more of the outstanding shares of the Trust. In addition, the
Trustees may be removed by the action of the holders of record of two-thirds
or more of the outstanding shares. All series of shares will vote with
respect to certain matters, such as election of Trustees. When all series of
shares are not affected by a matter to be voted upon, such as approval of
investment advisory agreements or changes in one of the Fund's policies, only
shareholders of the series affected by the matter may be entitled to vote.
All classes of shares of the Fund 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 and an ongoing account
maintenance and service fee, (iii) Class B shares are subject to a CDSC, a
distribution fee and an ongoing account maintenance and service fee, (iv) Class
II shares are subject to an initial sales charge, a CDSC, a distribution fee and
an ongoing account maintenance and service fee, (v) Class B shares convert
automatically to Class A shares on the first business day of the month seven
years after the purchase of such Class B shares, (vi) each class has voting
rights on matters that pertain to the Rule 12b-1 plan adopted with respect to
such class, except that under certain circumstances, the holders of Class B
shares may be entitled to vote on material changes to the Class A Rule 12b-1
plan, and (vii) each class of shares will be exchangeable only into the same
class of any of the other Funds or other funds in the SunAmerica Family of
Mutual Funds that offers that class except that Class II shares of the Fund will
be exchangeable into the same class or Class C shares of the other Funds or the
other funds in the SunAmerica Family of Mutual Funds that offers these classes.
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.
B-41
<PAGE>
The Declaration of Trust provides that no Trustee, officer, employee or agent of
the Trust is liable to the Trust or to a shareholder, nor is any Trustee,
officer, employee or agent liable to any third persons in connection with the
affairs of the Trust, except as such liability may arise from his or its own bad
faith, willful misfeasance, gross negligence or reckless disregard of his
duties. It also provides that all third persons shall look solely to the Trust's
property for satisfaction of claims arising in connection with the affairs of
the Trust. With the exceptions stated, the Declaration of Trust provides that a
Trustee, officer, employee or agent is entitled to be indemnified against all
liability in connection with the affairs of the Trust. The Trust shall continue,
without limitation of time, subject to the provisions in the Declaration of
Trust concerning termination by action of the shareholders.
ADDITIONAL INFORMATION
COMPUTATION OF OFFERING PRICE PER SHARE
The following is the offering price calculation for each Class of shares of
the Fund. The Class A, Class B and Class II calculations are based on the
estimated value of the Fund's net assets and number of shares outstanding on
the date such shares are first offered for sale to the public investors.
<TABLE>
<CAPTION>
Focus Portfolio
---------------
Class A Class B Class II
------- ------- --------
<S> <C> <C> <C>
Net Assets. . . . . . . . . . . . . . . . . $12,500 $12,500 $12,500
Number of Shares Outstanding. . . . . . . . 1000 1000 1000
Net Asset Value Per Share (net assets
divided by number of shares). . . . . . . . $12.50 $12.50 $12.50
Sales charge for Class A Shares:
5.75% of offering price (6.10% of net
asset value per share)*. . . . . . . . . . $0.76 -- --
Sales charge for Class II Shares:
1.00% of offering price (1.01% of net
asset value per share)*. . . . . . . . . . -- -- $0.13
Offering Price. . . . . . . . . . . . . . . $13.26 -- $12.63
</TABLE>
- ---------------
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is
applicable.
B-42
<PAGE>
REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited
semi-annual reports to shareholders of the Fund. In addition, the Transfer Agent
sends a statement to each shareholder having an account directly with the 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 Fund 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.
B-43
<PAGE>
APPENDIX
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate,
and therefore not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Appendix-1
<PAGE>
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of the generic
rating category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation
-- Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Appendix-2
<PAGE>
Issuers rated PRIME-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in level of
debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating categories.
If an issuer represents to Moody's that its commercial paper obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within parentheses beneath
the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength
of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in
the total rating assessment. Moody's makes no representation and gives no
opinion on the legal validity or enforceability of any support arrangement.
You are cautioned to review with your counsel any questions regarding
particular support arrangements.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of
earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8)
recognition by management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such
obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standards & Poor's corporate or municipal rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligers such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of
Appendix-3
<PAGE>
default capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation: (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for
debt in higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having
predominantly speculative characteristics with respect to capacity
to pay interest and repay principal. BB indicates the least degree
of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposure
to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payment. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but presently
has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions
would likely impair capacity or willingness to pay interest and
repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
CCC Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payments of interest and repayments of
principal. In the event of adverse business, financial or
Appendix-4
<PAGE>
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The CCC rating category is also used
for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C
rating may be used to cover a situation where a bankruptcy petition
has been filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or minus (-): The ratings of AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within these
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood or risk of default upon failure of such completion.
The investor should exercise judgment with respect to such likelihood and
risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp.
or the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard
& Poor's does not rate a particular type of obligation as a matter
of policy.
Debt Obligations of Issuers outside the United States and its territories
are rated on the same
Appendix-5
<PAGE>
basis as domestic corporate and municipal issues. The ratings measure the
credit worthiness of the obligor but do not take into account currency
exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of not more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest.
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative
degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effect of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
Appendix-6
