<PAGE> 1
As filed with the Securities and Exchange Commission on June __, 1999
Securities Act File No. 33-14227
Investment Company Act File No. 811-5157
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 17 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 16 [X]
(Check appropriate box or boxes)
ANCHOR PATHWAY FUND
(Exact Name of Registrant as Specified in Charter)
1 SunAmerica Center
Los Angeles, CA 90067-6022
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (310) 772-6000
Robert M. Zakem
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address for Agent for Service)
Copy to:
Susan L. Harris, Esq.
Senior Vice President and General Counsel
SunAmerica Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
Margery K. Neale, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on June 25, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on June 25, 1999 pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<PAGE> 2
ANCHOR PATHWAY FUND
Supplement to the Prospectus dated January 29, 1999
The date of the Prospectus is hereby changed to June 25, 1999.
The following is each Series' return for the most recent calendar quarter ended
March 31, 1999. This information supplements the text which follows the
Risk/Return Bar Charts on pages 5 through 11 of the Prospectus.
<TABLE>
<CAPTION>
SERIES RETURN
------ ------
<S> <C>
Growth........................................................ 5.81%
International................................................. 8.92%
Growth-Income................................................. 2.77%
Asset Allocation.............................................. 1.61%
High-Yield Bond............................................... -0.39%
U.S. Government/AAA-Rated Securities.......................... -0.09%
Cash Management............................................... 1.08%
</TABLE>
The following supplements the information on page 18 of the Prospectus with
respect to the Investment Adviser:
Effective January,1999, the Fund's fiscal year end changed from
November 30 to February 28 (29 in a leap year). For the period
December 1, 1998 through February 28, 1999 (new fiscal year end),
each Series paid the Investment Adviser a fee equal to the following
percentage of average daily net assets:
<TABLE>
<CAPTION>
SERIES ANNUALIZED FEE
------ --------------
<S> <C>
Growth........................................................ 0.30%
International................................................. 0.60%
Growth-Income................................................. 0.30%
Asset Allocation.............................................. 0.31%
High-Yield Bond............................................... 0.32%
U.S. Government/AAA-Rated Securities.......................... 0.32%
Cash Management............................................... 0.33%
</TABLE>
<PAGE> 3
The following supplements the information on page 21 of the Prospectus with
respect to the Business Manager:
Effective January, 1999, the Fund's fiscal year end changed from
November 30 to February 28 (29 in a leap year). For the period
December 1, 1998 through February 28, 1999 (new fiscal year end),
each Series paid the Business Manager a fee equal to the following
percentage of average daily net assets:
<TABLE>
<CAPTION>
SERIES ANNUALIZED FEE
------ --------------
<S> <C>
Growth...................................................... 0.20%
International............................................... 0.24%
Growth-Income............................................... 0.20%
Asset Allocation............................................ 0.21%
High-Yield Bond............................................. 0.21%
U.S. Government/AAA-Rated Securities........................ 0.22%
Cash Management............................................. 0.22%
</TABLE>
The following replaces the information under the "Financial Highlights" section
on page 23 of the Prospectus:
The Fund's Financial Highlights, which are intended to help you
understand the Series' financial performance for the past five
years, are incorporated herein by reference to Fund's 1999 annual
report to shareholders which accompanies this Prospectus. The
Financial Highlights have been audited by PricewaterhouseCoopers
LLP, whose report, along with each Series' financial statements,
are incorporated by reference into the Statement of Additional
Information (SAI), which is available upon request. For a
description of the information contained in the Fund's annual
report and SAI please refer to section entitled "For More
Information" on page 24 of the Prospectus.
Dated: June 25, 1999
-2-
<PAGE> 4
----------------------------------------------
PROSPECTUS
JANUARY 29, 1999
----------------------------------------------
----------------------------------------------
[ANCHOR PATHWAY FUND]
----------------------------------------------
-- Growth Series
-- International Series
-- Growth-Income Series
-- Asset Allocation Series
-- High-Yield Bond Series
-- U.S. Government/AAA-Rated
Securities Series
-- Cash Management Series
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND HIGHLIGHTS............................................. 3
MORE INFORMATION ABOUT THE SERIES........................... 12
Investment Strategies..................................... 12
Glossary.................................................. 16
Investment Terminology................................. 16
Risk Terminology....................................... 17
MANAGEMENT.................................................. 18
ACCOUNT INFORMATION......................................... 22
FINANCIAL HIGHLIGHTS........................................ 23
FOR MORE INFORMATION........................................ 24
</TABLE>
2
<PAGE> 6
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following questions and answers are designed to give you an overview of
Anchor Pathway Fund (the "Fund"), and to provide you with information about the
Fund's seven investment portfolios, or "Series," and their investment goals and
principal strategies. More complete investment information is provided in the
chart, under "More Information About the Series," which is on page 12, and the
glossary that follows on page 16.
Q: WHAT ARE THE SERIES' INVESTMENT GOALS AND STRATEGIES?
A: Each Series operates as a separate mutual fund, and has its own investment
goal, which may not be changed without shareholder approval, and a strategy
for pursuing its goal. There can be no assurance that any Series' investment
goal will be met or that the net return on an investment in a Series will
exceed what could have been obtained through other investment or savings
vehicles.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
SERIES INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series growth of capital invests primarily in common stocks or
securities with common stock
characteristics that demonstrate the
potential for appreciation.
---------------------------------------------------------------------------------------------------
International long-term growth of capital invests primarily in common stocks or
Series securities with common stock
characteristics of issuers that are
domiciled outside the U.S., including
those domiciled in developing countries.
---------------------------------------------------------------------------------------------------
Growth-Income growth of capital and invests primarily in common stocks or
Series income securities with common stock
characteristics that demonstrate the
potential for solid growth and dividends.
---------------------------------------------------------------------------------------------------
Asset Allocation high total return invests in a diversified portfolio of
Series (including income and common stocks, bonds and money market
capital gains) consistent instruments; under normal market
with preservation of conditions the portfolio will include:
capital over the long-term 40%-80% in equity securities, 20%-50% in
fixed-income securities, and 0% to 40% in
money market instruments.
---------------------------------------------------------------------------------------------------
High-Yield Bond high current income with invests primarily in intermediate and
Series capital appreciation as a long-term corporate debt securities, with
secondary objective emphasis on higher yielding, higher risk,
lower rated or unrated corporate bonds,
which are commonly known as "junk bonds."
---------------------------------------------------------------------------------------------------
U.S. Government/ high current income invests primarily in a combination of
AAA-Rated consistent with prudent securities issued or guaranteed by the
Securities Series investment risk and U.S. government (i.e., backed by the full
preservation of capital faith and credit of the U.S.) and other
debt securities rated in the highest
rating category (or that are determined
to be of comparable quality by the
Investment Adviser).
---------------------------------------------------------------------------------------------------
Cash Management high current yield while invests primarily in high quality money
Series preserving capital market instruments.
---------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 7
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
A: The Growth, International and Growth-Income Series invest
primarily in equity securities. In addition, the Asset
Allocation Series invests significantly in equities. As with
any equity fund, the value of your investment in any of these
Series may fluctuate in response to stock market movements.
The High-Yield Bond and U.S. Government/AAA-Rated Securities
Series invest primarily in bonds. In addition, the Asset
Allocation Series invests significantly in bonds. As a result,
as with any bond fund, the value of your investment in these
Series may go up or down in response to changes in interest
rates or defaults (or even the potential for future default)
by bond issuers. In addition, there is a risk the securities
selected for any Series will underperform the markets
generally.
The High-Yield Bond Series invests primarily in high yield,
high risk securities, also known as "junk bonds," which are
considered speculative. The Growth, International,
Growth-Income and Asset Allocation Series may also invest in
junk bonds. While the Fund's Investment Adviser seeks to
diversify the Series and to engage in a credit analysis of
each junk bond issuer in which it invests, junk bonds carry a
substantial risk of default or may already be in default. The
market price for junk bonds may fluctuate more than
higher-quality securities and may decline significantly. In
addition, it may be more difficult for a Series to dispose of
junk bonds or to determine their value. Junk bonds may contain
redemption or call provisions that, if exercised during a
period of declining interest rates, may force a Series to
replace the security with a lower yielding security, which
would decrease the return on such Series.
While an investment in the Cash Management Series should
present the least market risk of any of the Series since it
invests only in high-quality short-term debt obligations, you
should be aware that an investment in the Cash Management
Series will be subject to changes in interest rates. You
should also be aware that your return on an investment in the
Cash Management Series will be affected by fees at the
contract level. The Cash Management Series does not seek to
maintain a stable net asset value of $1.00.
All of the Series may invest to some degree in foreign
securities. The Growth, International, Growth-Income, Asset
Allocation and High-Yield Bond Series may purchase foreign
securities denominated in currencies other than U.S. dollars.
The U.S. Government/AAA-Rated Securities and Cash Management
Series may purchase only foreign securities that are U.S.
dollar denominated and highly liquid. Investing outside the
U.S. presents special risks, particularly in certain
developing countries. While investing internationally may
reduce your risk by increasing the diversification of your
investment, the value of your investment may be affected by
fluctuating currency values, changing local and regional
economic, political and social conditions, greater market
volatility, differing securities regulations, and
administrative difficulties such as delays in clearing and
settling portfolio transactions. In addition, foreign
securities may not be as liquid as domestic securities.
In addition, shares of a Series are not bank deposits and are
not guaranteed or insured by any bank, government entity or
the Federal Deposit Insurance Corporation. As with any mutual
fund, there is no guarantee that a Series will be able to
achieve its investment goals. If the value of the assets of a
Series goes down, you could lose money.
"GROWTH" COMPANIES
are considered to have
a historical record of
above-average growth
rate; to have
significant growth
potential; to have
above-average earnings
growth or value or the
ability to sustain
earnings growth; to
offer proven or unusual
products or services;
or to operate in
industries experiencing
increasing demand.
"HIGH-QUALITY"
INSTRUMENTS
have a very strong
capacity to pay
interest and repay
principal; they reflect
the issuers' high
creditworthiness and
low risk of default.
4
<PAGE> 8
Q: HOW HAVE THE SERIES PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables provide some indication of
the risks of investing in the Series by showing changes in the Series'
performance from year to year, and compare the Series' average annual returns to
those of an appropriate market index for the calendar years presented. Fees and
expenses incurred at the contract level are not reflected in the bar chart. If
these amounts were reflected, returns would be less than those shown. Of course,
past performance is not necessarily an indication of how a Series will perform
in the future.
- --------------------------------------------------------------------------------
GROWTH SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH SERIES '1989' '1990' '1991' '1992' '1993' '1994' '1995' '1996' '1997' '1998'
- ------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
37.89% -3.96% 22.60% 24.46% 18.98% 0.46% 34.47% 14.56% 28.14% 36.35%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 29.38% (quarter ended 12/31/98) and the lowest return for a quarter
was -18.38% (quarter ended 09/30/90).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Growth Series 36.35% 22.01% 20.59% 18.77%
- -----------------------------------------------------------------------------------------------
S&P 500(R) Index* 28.52% 24.02% 19.16% 18.28%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 1.61% 2.37% 3.12% 3.24%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date is February 7, 1984. Except for the S&P 500(R), the since
inception returns for the comparative indices are based on the nearest
month-end inception date.
5
<PAGE> 9
- --------------------------------------------------------------------------------
INTERNATIONAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1996 1997 1998
6.99 0.71 34.48 -0.72 13.43 21.43 12.13 19.16
</TABLE>
During the 8-year period shown in the bar chart, the highest return for a
quarter was 16.81% (quarter ended 12/31/98) and the lowest return for a quarter
was -12.07% (quarter ended 09/30/98).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
International Series 19.16% 12.81% N/A 11.49%
- -----------------------------------------------------------------------------------------------
Morgan Stanley Capital International (MSCI)
EAFE Index* 20.33% 9.50% 5.85% 7.67%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 1.61% 2.37% 3.12% 2.82%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The MSCI EAFE Index is an arithmetic, market value-weighted average of
performance of over 900 securities on the stock exchanges of countries in
Europe, Australia and the Far East.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date is May 9, 1990. The since inception returns for the
comparative indices are based on the nearest month-end inception date.
6
<PAGE> 10
- --------------------------------------------------------------------------------
GROWTH-INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30.32% -4.51% 16.53% 17.57% 13.18% 0.86% 33.77% 19.14% 28.09% 17.82%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 17.68% (quarter ended 12/31/98) and the lowest return for a quarter
was -14.05% (quarter ended 09/30/90).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Growth-Income Series 17.82% 19.39% 16.69% 16.67%
- -----------------------------------------------------------------------------------------------
S&P 500(R) Index* 28.52% 24.02% 19.16% 18.28%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 1.61% 2.37% 3.12% 3.24%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date is February 7, 1984. Except for the S&P 500(R), the since
inception returns for the comparative indices are based on the nearest
month-end inception date.
7
<PAGE> 11
- --------------------------------------------------------------------------------
ASSET ALLOCATION SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997 1998
- -0.27 21.16 10.11 10.52 -0.52 30.86 15.77 20.65 10.04
</TABLE>
During the 9-year period shown in the bar chart, the highest return for a
quarter was 11.80% (quarter ended 12/31/98) and the lowest return for a quarter
was -9.62% (quarter ended 09/30/98).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION****
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Asset Allocation Series 10.04% 14.88% N/A 12.94%
- ------------------------------------------------------------------------------------------------
S&P 500(R) Index* 28.52% 24.02% 19.16% 18.96%
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Broad Investment-Grade
(BIG) Bond Index** 8.71% 7.30% 9.31% 9.42%
- ------------------------------------------------------------------------------------------------
Consumer Price Index*** 1.61% 2.37% 3.12% 3.05%
- ------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) is the Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices.
** The Salomon Smith Barney 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.
*** The Consumer Price Index (or Cost of Living Index) is published by the
U.S. Bureau of Labor Statistics and is an statistical measure of periodic
change in the price of goods and services in major expenditure groups.
**** Inception date is March 31, 1989. Except for the S&P 500(R), the since
inception returns for the comparative indices are based on the nearest
month-end inception date.
8
<PAGE> 12
- --------------------------------------------------------------------------------
HIGH-YIELD BOND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
'1989' '1990' '1991' '1992' '1993' '1994' '1995' '1996' '1997' '1998'
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.62% 1.73% 26.32% 15.54% 16.04% -5.03% 20.07% 13.69% 12.82% 1.99%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 12.10% (quarter ended 03/31/91) and the lowest return for a quarter
was -6.98% (quarter ended 09/30/98).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION****
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
High-Yield Bond Series 1.99% 8.33% 10.81% 12.13%
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Long-Term High-Yield
Index* 9.23% 11.54% 12.32% 12.52%
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Broad Investment-
Grade (BIG) Bond Index** 8.71% 7.30% 9.31% 10.28%
- ------------------------------------------------------------------------------------------------
Consumer Price Index*** 1.61% 2.37% 3.12% 3.24%
- ------------------------------------------------------------------------------------------------
</TABLE>
* The Salomon Smith Barney Long-Term High-Yield Index generally represents
the performance of high-yield debt securities during various market
conditions.
** The Salomon Smith Barney 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.
*** The Consumer Price Index (or Cost of Living Index) is published by the
U.S. Bureau of Labor Statistics and is a statistical measure of periodic
change in the price of goods and services in major expenditure groups.
**** Inception date is February 7, 1984. The since inception returns for the
comparative indices are based on the nearest month-end inception date.
9
<PAGE> 13
- --------------------------------------------------------------------------------
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
'1989' '1990' '1991' '1992' '1993' '1994' '1995' '1996' '1997' '1998'
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.82% 8.50% 11.88% 11.74% 11.18% -3.85% 16.59% 3.01% 8.27% 8.02%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 6.06% (quarter ended 09/30/91) and the lowest return for a quarter
was -3.03% (quarter ended 03/31/94).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Series 8.02% 6.19% 8.58% 8.53%
- -----------------------------------------------------------------------------------------------
Salomon Smith Barney Treasury/ Government-
Sponsored/Mortgage Index* 8.76% 7.20% 9.18% 9.14%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 1.61% 2.37% 3.12% 3.17%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The Salomon Smith Barney Treasury/Government Sponsored/Mortgage Bond Index
is a market-capitalization weighted index and includes fixed-rate Treasury,
Government-Sponsored, and Mortgage issues with a maturity of one year or
longer. The minimum amount outstanding for U.S. Treasury and mortgage
issues is $1 billion for both entry and exit. For Government-sponsored
issues, the entry and exit amount is $100 million.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date is December 1, 1985. The since inception returns for the
comparative indices are based on the nearest month-end inception date.
10
<PAGE> 14
- --------------------------------------------------------------------------------
CASH MANAGEMENT SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
'1989' '1990' '1991' '1992' '1993' '1994' '1995' '1996' '1997' '1998'
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.92% 7.91% 5.23% 3.53% -0.52% 3.74% 5.52% 4.95% 5.03% 4.96%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 2.23% (quarter ended 06/30/89) and the lowest return for a quarter
was 0.60% (quarter ended 03/31/93).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1998) YEAR YEARS YEARS INCEPTION*
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Cash Management Series 4.96% 4.84% 5.22% 5.86%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Inception date is February 7, 1984.
11
<PAGE> 15
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE SERIES
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
Each Series has its own investment goal and a strategy for pursuing it. The
chart summarizes information about each Series' investment strategy. We have
included a glossary to define the investment and risk terminology used in the
chart and throughout this Prospectus.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
GROWTH INTERNATIONAL GROWTH-INCOME
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
What is the Series' growth of capital long-term growth of growth of capital and
investment goal? capital income
- ------------------------------------------------------------------------------------------
What are the common stocks or common stocks or common stocks or
Series' principal securities with securities with securities with
investments (under common stock common stock common stock
normal market characteristics that characteristics of characteristics that
conditions)? demonstrate the issuers domiciled demonstrate the
potential for outside the U.S., potential for solid
appreciation including those growth and dividends
domiciled in
developing countries
- ------------------------------------------------------------------------------------------
What are the - stock market - stock market - stock and bond
Series' principal volatility volatility market volatility
risks? - securities - securities - securities
selection selection selection
- foreign exposure
- illiquidity
- ------------------------------------------------------------------------------------------
What other
investments can the
Series use?
- Types of fixed
income
securities:
U.S. government Yes Yes Yes
securities
Investment grade Yes Yes Yes
corporate bonds
Junk bonds Yes Yes Yes
(up to 10%) (up to 5%) (up to 5%)
No No No
Inflation-indexed
bonds
Pass-through Yes Yes Yes
securities
- ------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
GROWTH INTERNATIONAL GROWTH-INCOME
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
What other
investments can the
Series use?
- Common stocks a principal a principal a principal
investment investment investment
(see above) (see above) (see above)
- Convertible Yes Yes Yes
securities
- Non-convertible Yes Yes Yes
preferred stocks
- Warrants Yes Yes Yes
- Short-term Yes Yes Yes
investments
- Defensive Yes Yes Yes
investments
- Foreign Yes a principal Yes
securities (up to 10%) investment (up to 10%)
(see above)
- Currency Yes Yes Yes
transactions
- Illiquid Yes Yes Yes
securities (up to 15%) (up to 15%) (up to 15%)
What other - interest rate - interest rate - interest rate
potential risks can fluctuations fluctuations fluctuations
affect the Series? - foreign exposure - illiquidity - foreign exposure
- illiquidity - hedging - illiquidity
- prepayment - prepayment - hedging
- issuer default - issuer default - prepayment
- credit quality - credit quality - issuer default
- credit quality
- ------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT/AAA-
RATED CASH MANAGEMENT
ASSET ALLOCATION HIGH-YIELD BOND SECURITIES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What is the Series' high total return high current income high current income high current yield
investment goal? (including income with capital consistent with while preserving
and capital gains) appreciation as a prudent investment capital
consistent with secondary objective risk and
preservation of preservation of
capital over the capital
long-term
- ---------------------------------------------------------------------------------------------------------
What are the common stocks, intermediate and securities issued high quality money
Series' principal bonds and money long-term corporate or guaranteed by market instruments
investments (under market instruments; debt securities, the U.S. government
normal market under normal market with emphasis on (i.e., backed by
conditions)? conditions the higher yielding, the full faith and
portfolio will higher risk, lower credit of the
include: 40%-80% in rated or unrated U.S.); and other
equity securities; corporate bonds debt securities
20%-50% in fixed (junk bonds) rated in the
income securities; highest rating
and 0%-40% in money category (or that
market instruments are determined to
be of comparable
quality by the
Investment
Adviser.)
- ---------------------------------------------------------------------------------------------------------
What are the - stock and bond - bond market - bond market - interest rate
Series' principal market volatility volatility volatility fluctuations
risks? - securities - securities - interest rate - securities
selection selection fluctuations selection
- interest rate - interest rate - prepayment
fluctuations fluctuations - securities
- issuer default - issuer default selection
- credit quality - credit quality
- illiquidity
- ---------------------------------------------------------------------------------------------------------
What other
investments can the
Series use?
- Types of fixed
income
securities:
U.S. government Yes Yes a principal a principal
securities investment investment
(see above) (see above)
Investment grade Yes Yes a principal Yes
corporate bonds investment
(see above)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT/AAA-
RATED CASH MANAGEMENT
ASSET ALLOCATION HIGH-YIELD BOND SECURITIES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What other
investments can the
Series use?
- Types of fixed
income
securities:
(cont'd)
Junk bonds Yes a principal No No
(up to 25% of investment
fixed-income (see above)
securities)
Inflation-indexed Yes Yes Yes No
bonds
Pass-through Yes Yes Yes Yes
securities
- Common stocks a principal Yes No No
investment (up to 25%)
(see above)
- Convertible Yes Yes No No
securities
- Non-convertible Yes Yes No No
preferred stocks
- Warrants Yes Yes No No
- Short-term Yes Yes Yes a principal
investments investment
(see above)
- Defensive Yes Yes Yes No
investments
- Foreign Yes Yes Yes Yes
securities (up to 10% in (up to 25%) (5%, only U.S. (only U.S. dollar
equity securities; dollar denominated denominated and
up to 5% in fixed and highly-liquid highly liquid
income securities) obligations) obligations)
- Currency Yes Yes No No
transactions
- Illiquid Yes Yes Yes Yes
securities (up to 15%) (up to 15%) (up to 15%) (up to 10%)
What other - foreign exposure - foreign exposure - foreign exposure - foreign exposure
potential risks can - illiquidity - prepayment - prepayment - prepayment
affect the Series? - prepayment
- issuer default
- credit quality
- ---------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 19
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
INVESTMENT TERMINOLOGY
FIXED INCOME SECURITIES, which issuers use to borrow money, provide consistent
interest or dividend payments. They include corporate bonds, notes, debentures,
preferred stocks, convertible securities, U.S. government securities and
mortgage-backed and asset-backed securities. The issuer of a senior fixed income
security is obligated to make payments on this security ahead of other payments
to security holders.
U.S. GOVERNMENT SECURITIES are issued or guaranteed by the U.S. government, its
agencies and instrumentalities. Some U.S. government securities are issued or
unconditionally guaranteed by the U.S. Treasury. They are of the highest
possible credit quality. While these securities are subject to variations in
market value due to fluctuations in interest rates, they will be paid in full if
held to maturity. Other U.S. government securities are neither direct
obligations of, nor 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.
An INVESTMENT GRADE fixed income security is rated in one of the top four
ratings categories by a debt rating agency (or is considered of comparable
quality by the Investment Adviser). The two best-known debt rating agencies are
Standard & Poor's Rating Services, a Division of The McGraw-Hill Companies, Inc.
and Moody's Investors Service, Inc. "Investment grade" refers to any security
rated "BBB" or above by Standard & Poor's or "Baa" or above by Moody's.
A JUNK BOND is a high yield, high risk bond that does not meet the credit
quality standards of investment grade securities.
The principal value of an INFLATION-INDEXED BOND is periodically adjusted
according to changes in the rate of inflation.
PASS-THROUGH SECURITIES involve various debt obligations that are backed by a
pool of mortgages or other assets. Principal and interest payments made on the
underlying asset pools are typically passed through to investors. Types of
pass-through securities include "mortgage-backed securities," "collateralized
mortgage obligations," "commercial mortgage-backed securities," and
"asset-backed securities."
EQUITY SECURITIES include common and preferred stocks, convertible securities,
warrants and rights.
COMMON STOCKS are units of ownership of a public corporation.
CONVERTIBLE SECURITIES are securities (such as bonds or preferred stocks) that
may be converted into common stock or other securities of the same or a
different company.
WARRANTS are rights to buy common stock of a company at a specified price during
the life of the warrant.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, repurchase agreements, commercial paper, bankers'
acceptances and certificates of deposit. These securities provide a Series with
sufficient liquidity to meet redemptions and cover expenses.
DEFENSIVE INVESTMENTS generally include cash and money market instruments. A
Series may make temporary defensive investments in response to adverse market,
economic, political or other conditions, and such investments may protect a
Series during a market downturn. When a Series takes a defensive position, it
may miss out on investment opportunities over the short term that could have
resulted from investing in accordance with its principal investment strategy. As
a result, a Series may not achieve its investment goal.
16
<PAGE> 20
FOREIGN SECURITIES are issued by companies located outside of the United States,
including developing countries. Foreign securities may include American
Depositary Receipts (ADRs) or other similar securities that convert into foreign
securities. Although there is no universally accepted definition, a developing
country is generally considered to be a country in the initial stages of its
industrialization cycle with a lower per capita gross national product.
CURRENCY TRANSACTIONS include the purchase and sale of currencies to facilitate
securities transactions, and forward currency contracts, which are used to hedge
against changes in currency exchange rates.
ILLIQUID SECURITIES are subject to legal or contractual restrictions that may
make them difficult to sell. A security that cannot easily be sold within seven
days will generally be considered illiquid. Certain restricted securities (such
as Rule 144A securities) are not generally considered illiquid because of their
established trading market.
RISK TERMINOLOGY
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Series' portfolio.
SECURITIES SELECTION: A strategy used by a Series, or securities selected by
its portfolio manager, may fail to produce the intended return.
INTEREST RATE FLUCTUATIONS: Volatility of the bond market is due principally to
changes in interest rates. As interest rates rise, bond prices typically fall;
and as interest rates fall, bond prices typically rise. Longer-term and lower
coupon bonds tend to be more sensitive to changes in interest rates.
CREDIT QUALITY: An issuer with a lower credit rating will be more likely than a
higher rated issuer to default or otherwise become unable to honor its financial
obligations. This type of issuer will typically issue JUNK BONDS, which, in
addition to the risk of default, may be more volatile, less liquid, more
difficult to value and more susceptible to adverse economic conditions or
investor perceptions than other bonds.
PREPAYMENT: Prepayment risk is the possibility that the principal of the loans
underlying mortgage-backed or other asset-backed securities may be prepaid at
any time. As a general rule, prepayments increase during a period of falling
interest rates and decrease during a period of rising interest rates. As a
result of prepayments, in periods of declining interest rates a Series may be
required to reinvest its assets in securities with lower interest rates. In
periods of increasing interest rates, prepayments generally may decline, with
the effect that the securities subject to prepayment risk held by a Series may
exhibit price characteristics of longer-term debt securities.
FOREIGN EXPOSURE: Investments in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as in the U.S.
Foreign investments will also be affected by local political or economic
developments and governmental actions. Consequently, foreign securities may be
less liquid, more volatile and more difficult to price than U.S. securities.
These risks may heighten when the issuer is in a developing market.
ILLIQUIDITY: Certain securities may be difficult or impossible to sell at the
time and the price that the seller would like.
HEDGING: Certain Series may enter into forward currency contracts to hedge
against changes in currency exchange rates. While entering into forward currency
transactions could minimize the risk of loss due to a decline in the value of
the hedged currency, it could also limit any potential gain that might result
from an increase in the value of the currency. The Series will generally not
attempt to protect against all potential changes in exchange rates.
17
<PAGE> 21
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER Capital Research and Management Company, a large and
experienced investment management organization founded in 1931, is the
investment adviser to the Fund and other funds, including those in The American
Funds Group. For the fiscal year ended November 30, 1998 each Series paid the
Investment Adviser an annual fee equal to the following percentage of average
daily net assets:
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Growth...................................................... 0.30%
International............................................... 0.60%
Growth-Income............................................... 0.30%
Asset Allocation............................................ 0.31%
High-Yield Bond............................................. 0.32%
U.S. Government/AAA-Rated Securities........................ 0.32%
Cash Management............................................. 0.33%
</TABLE>
The Investment Adviser is headquartered at 333 South Hope Street, Los Angeles,
California 90071.
The basic investment philosophy of the Investment Adviser is to seek fundamental
values at reasonable prices, using a system of multiple portfolio counselors in
managing mutual fund assets. Under this system, the portfolios of the Series are
divided into segments managed by individual counselors. Each counselor decides
how his or her segment will be invested, within the limits prescribed by each
Series' investment goal and the Investment Adviser's investment committee. In
addition, the Investment Adviser's research professionals make investment
decisions with respect to a portion of each Series' portfolio. The primary
portfolio counselor for each Series is set forth in the following table.
18
<PAGE> 22
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
-------------------------------------------------------------------------------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Timothy D. Armour Chairman and Chief Asset Allocation 16 16
Executive Officer, Series -- 2 years
Capital Research
Company*
-------------------------------------------------------------------------------------------------------------
David C. Barclay Senior Vice High-Yield Bond 11 18
President, Capital Series -- 10 years
Research Company*
-------------------------------------------------------------------------------------------------------------
Alan N. Berro Senior Vice Growth-Income 8 13
President, Capital Series -- 2 years
Research Company*
-------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice International 26 26
President and Series -- 6 years
Director, Capital
Research Company*
-------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice Growth Series -- 5 28 28
President and years (plus 5 years
Director, Capital as a research
Research and professional for the
Management Company Series prior to
becoming a portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice Growth Series -- 13 22 27
President and years
Director, Capital
Research and
Management Company
-------------------------------------------------------------------------------------------------------------
James K. Dunton Senior Vice Growth-Income 37 37
President and Series -- since the
Director, Capital Series began
Research and operations in 1984
Management Company
-------------------------------------------------------------------------------------------------------------
Abner D. Goldstine Senior Vice Asset Allocation 30 46
President and Series -- since the
Director, Capital series began
Research and operations in 1989;
Management Company High-Yield Bond
Series -- less than 1
year
-------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 23
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
-------------------------------------------------------------------------------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alwyn Heong Vice President- International 7 10
Investment Series -- 3 years
Management Group,
Capital Research
and Management
Company
-------------------------------------------------------------------------------------------------------------
Claudia P. Senior Vice Growth-Income 21 23
Huntington President, Capital Series -- 5 years
Research and (plus 5 years as a
Management Company research professional
for the Series prior
to becoming portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Executive Vice International 13 13
President and Series -- 5 years
Director, Capital
Research Company*
-------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice Growth-Income 24 27
President and Series -- 9 years
Director, Capital (plus 1 year as a
Research and research professional
Management Company for the Series prior
to becoming a
portfolio counselor
for the Series)
-------------------------------------------------------------------------------------------------------------
Donald D. O'Neal Vice President, Growth Series -- 7 13 13
Capital Research years (plus 4 years
and Management as a research
Company professional for the
Series prior to
becoming a portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
Victor M. Parachini Senior Vice Asset Allocation 22 37
President, Capital Series -- 2 years
Research and
Management Company
-------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
-------------------------------------------------------------------------------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John H. Smet Vice President, U.S. Government/ 16 17
Capital Research AAA-Rated Securities
and Management Series -- 6 years
Company
-------------------------------------------------------------------------------------------------------------
Susan M. Tolson Senior Vice High-Yield Bond 9 11
President and Series -- less than 1
Director, Capital year
Research Company*
-------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Company affiliated with Capital Research and Management Company.
BUSINESS MANAGER SunAmerica Asset Management Corp., which was organized in 1982
under the laws of Delaware, manages the business affairs and the administration
of the Fund. The Business Manager receives a monthly fee, accrued daily, based
on the average daily net assets of each Series of the Fund other than the
International Series, at the annual rate of 0.24% of that portion of each
Series' average daily net assets not exceeding $30 million, and 0.20%
thereafter. The Business Manager receives a monthly fee, accrued daily, based on
the average daily net assets of the International Series, at the annual rate of
0.24%. For the fiscal year ended November 30, 1998 each Series paid the Business
Manager a fee equal to the following percentage of average daily net assets:
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Growth...................................................... 0.20%
International............................................... 0.24%
Growth-Income............................................... 0.20%
Asset Allocation............................................ 0.21%
High-Yield Bond............................................. 0.21%
U.S. Government/AAA-Rated Securities........................ 0.22%
Cash Management............................................. 0.22%
</TABLE>
The Business Manager is located in The SunAmerica Center, 733 Third Avenue, New
York, New York 10017.
YEAR 2000 Many computer and computer-based systems cannot distinguish the year
2000 from the year 1900 because of the way they encode and calculate dates
(commonly known as the "Year 2000 Issue"). The 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. We recognize the
importance of the Year 2000 Issue and are taking appropriate steps necessary in
preparation for the year 2000. The Fund's management fully anticipates that
their systems will be adapted in time for the year 2000, and to further this
goal they have coordinated a plan to repair, adapt or replace their systems as
necessary. They have also obtained representations from their outside service
providers that they are doing the same. The Fund's management completed their
plan significantly by the end of the 1998 calendar year and expects to perform
appropriate systems testing during the 1999 calendar year. If the problem has
not been fully addressed, however, the Fund could be negatively impacted. The
Year 2000 Issue could also have a negative impact on the companies in which the
Fund invests, which could hurt the Fund's investment returns.
21
<PAGE> 25
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
Shares of the Series are not offered directly to the public. Instead, shares are
currently offered only to the Variable Separate Account, which is a separate
account of Anchor National Life Insurance Company. So if you would like to
invest in a Series, you must purchase a variable annuity contract from Anchor
National. You should be aware that the contracts involve fees and expenses that
are not described in this Prospectus, and that the contracts also may involve
certain restrictions and limitations. Certain Series may not be available in
connection with a particular contract. You will find information about
purchasing a variable annuity contract in the prospectus that offers the
contracts, which accompanies this Prospectus.
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each Series is
determined each business day at the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m., Eastern time) by dividing its net assets by
the number of its shares outstanding. 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.
The International Series may invest to a large extent in securities that are
primarily listed on foreign exchanges that trade on weekends or other days when
the Fund does not price its shares. As a result, the value of this Series'
shares may change on days when the Fund is not open for purchases or
redemptions.
BUY AND SELL PRICES The Variable Separate Account buys and sells shares of a
Series at NAV, without any sales or other charges.
EXECUTION OF REQUESTS The Fund is open on those days when the New York Stock
Exchange is open for regular trading. Buy and sell requests are executed at the
next NAV to be calculated after the request is accepted by the Fund. If the
order is received by the Fund before the Fund's close of business (generally
4:00 p.m., Eastern time), the order will receive that day's closing price. If
the order is received after that time, it will receive the next business day's
closing price.
During periods of extreme volatility or market crisis, a Series may temporarily
suspend the processing of sell requests, or may postpone payment of proceeds for
up to seven business days or longer, as allowed by federal securities laws.
DIVIDEND POLICIES AND TAXES
DISTRIBUTIONS Each Series annually declares and distributes substantially all
of its net investment income in the form of dividends and capital gains
distributions.
DISTRIBUTION REINVESTMENT The dividends and distributions will be reinvested
automatically in additional shares of the same Series on which they were paid.
TAXABILITY OF A SERIES Each Series intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended. As long as each Series is qualified as a regulated investment company,
it will not be subject to federal income tax on the earnings that it distributes
to its shareholders.
22
<PAGE> 26
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(SHARES OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
The Financial Highlights table for each Series is intended to help you
understand the Series' financial performance for the past 5 years. Certain
information reflects financial results for a single Series share. The total
returns in each table represent the rate that an investor would have earned on
an investment in the Series (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with each Series' financial statements, are included in the
Statement of Additional Information (SAI), which is available upon request.
<TABLE>
<CAPTION>
NET
REALIZED RATIO OF
& DIVIDENDS DIVIDENDS NET NET EXPENSES
NET ASSET UNREALIZED DECLARED FROM NET ASSET ASSETS TO
VALUE NET GAIN (LOSS) TOTAL FROM FROM NET REALIZED VALUE TOTAL END OF AVERAGE
PERIOD BEGINNING INVESTMENT ON INVESTMENT INVESTMENT GAIN ON END OF RETURN PERIOD NET
ENDED OF PERIOD INCOME(1) INVESTMENTS OPERATIONS INCOME INVESTMENTS PERIOD (2) (000'S) ASSETS
- ------ --------- ---------- ----------- ---------- ---------- ----------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH SERIES
11/30/94 $35.76 $0.19 $ 1.04 $ 1.23 ($0.25) ($2.66) $34.08 3.33% $712,602 0.55%
11/30/95 34.08 0.25 12.02 12.27 (0.20) (2.65) 43.50 37.93 897,275 0.55
11/30/96 43.50 0.18 5.10 5.28 (0.28) (6.22) 42.28 14.02 813,164 0.55
11/30/97 42.28 0.18 8.30 8.48 (0.21) (6.73) 43.82 23.78 801,230 0.54
11/30/98 43.82 0.15 10.18 10.33 (0.20) (8.62) 45.33 25.21 836,355 0.54
INTERNATIONAL SERIES
11/30/94 $12.57 $0.22 $ 0.81 $ 1.03 ($0.12) ($0.22) $13.26 8.17% $259,498 1.04%
11/30/95 13.26 0.26 1.11 1.37 (0.23) (0.50) 13.90 11.18 228,134 1.05
11/30/96 13.90 0.22 2.46 2.68 (0.46) (0.31) 15.81 20.03 249,144 1.02
11/30/97 15.81 0.17 1.78 1.95 (0.27) (1.22) 16.27 13.15 223,337 1.04
11/30/98 16.27 0.22 2.31 2.53 (0.27) (4.44) 14.09 14.56 193,763 1.03
GROWTH-INCOME SERIES
11/30/94 $28.23 $0.69 ($0.14) $ 0.55 ($0.76) ($1.56) $26.46 2.00% $765,971 0.55%
11/30/95 26.46 0.71 7.46 8.17 (0.76) (2.23) 31.64 33.47 882,143 0.55
11/30/96 31.64 0.67 5.87 6.54 (0.77) (2.10) 35.31 21.88 919,356 0.55
11/30/97 35.31 0.66 6.91 7.57 (0.75) (5.10) 37.03 24.62 950,432 0.54
11/30/98 37.03 0.62 4.91 5.53 (0.71) (6.80) 35.05 15.07 915,994 0.54
ASSET ALLOCATION SERIES
11/30/94 $13.66 $0.58 ($0.69) ($ 0.11) ($0.62) ($0.31) $12.62 (0.84)% $142,678 0.59%
11/30/95 12.62 0.55 3.16 3.71 (0.68) (0.38) 15.27 31.01 153,608 0.59
11/30/96 15.27 0.56 2.17 2.73 (0.63) (1.14) 16.23 19.34 153,060 0.58
11/30/97 16.23 0.55 2.00 2.55 (0.63) (1.65) 16.50 17.86 155,446 0.59
11/30/98 16.50 0.55 0.98 1.53 (0.61) (2.08) 15.34 9.28 134,069 0.58
HIGH-YIELD BOND SERIES
11/30/94 $15.67 $1.24 ($1.88) ($ 0.64) ($1.49) ($0.49) $13.05 (4.70)% $127,467 0.59%
11/30/95 13.05 1.26 0.99 2.25 (1.56) (0.13) 13.61 18.97 146,590 0.59
11/30/96 13.61 1.21 0.56 1.77 (1.53) -- 13.85 14.05 131,337 0.58
11/30/97 13.85 1.19 0.44 1.63 (1.43) -- 14.05 12.76 118,670 0.61
11/30/98 14.05 1.22 (0.73) 0.49 (1.39) (0.32) 12.83 3.22 100,061 0.60
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
11/30/94 $13.34 $0.90 ($1.43) ($ 0.53) ($1.11) ($0.17) $11.53 (4.17)% $149,368 0.58%
11/30/95 11.53 0.86 0.85 1.71 (1.20) (0.06) 11.98 15.95 134,938 0.59
11/30/96 11.98 0.80 (0.21) 0.59 (1.06) -- 11.51 5.49 108,852 0.59
11/30/97 11.51 0.76 (0.14) 0.62 (1.03) -- 11.10 6.09 81,609 0.63
11/30/98 11.10 0.68 0.23 0.91 (0.94) -- 11.07 8.70 79,685 0.63
CASH MANAGEMENT SERIES
11/30/94 $11.40 $0.40 $ -- $ 0.40 ($0.33) $ -- $11.47 3.56% $186,396 0.57%
11/30/95 11.47 0.61 0.01 0.62 (0.44) -- 11.65 5.53 100,872 0.58
11/30/96 11.65 0.55 -- 0.55 (0.82) -- 11.38 4.94 89,236 0.58
11/30/97 11.38 0.54 0.01 0.55 (0.62) -- 11.31 5.03 69,226 0.63
11/30/98 11.31 0.54 -- 0.54 (0.83) -- 11.02 5.04 63,826 0.63
<CAPTION>
RATIO OF
NET
INVESTMENT
INCOME TO
PERIOD AVERAGE PORTFOLIO
ENDED NET ASSETS TURNOVER
- ------ ---------- ---------
<S> <C> <C>
GROWTH SERIES
11/30/94 0.56% 33.79%
11/30/95 0.65 23.72
11/30/96 0.46 25.51
11/30/97 0.44 29.01
11/30/98 0.34 32.37
INTERNATIONAL SERIES
11/30/94 1.64% 21.68%
11/30/95 1.95 16.79
11/30/96 1.56 44.94
11/30/97 0.99 47.45
11/30/98 1.50 60.19
GROWTH-INCOME SERIES
11/30/94 2.54% 32.97%
11/30/95 2.52 18.81
11/30/96 2.07 23.72
11/30/97 1.88 30.06
11/30/98 1.76 32.42
ASSET ALLOCATION
SERIES
11/30/94 4.47% 48.53%
11/30/95 4.04 53.58
11/30/96 3.74 40.97
11/30/97 3.49 39.14
11/30/98 3.56 31.43
HIGH-YIELD BOND SERIES
11/30/94 8.76% 44.97%
11/30/95 9.66 31.64
11/30/96 9.09 36.99
11/30/97 8.68 64.49
11/30/98 9.18 78.82
U.S.
GOVERNMENT/AAA-RATED
SECURITIES SERIES
11/30/94 7.42% 16.95%
11/30/95 7.49 43.43
11/30/96 7.03 17.12
11/30/97 6.93 46.17
11/30/98 6.20 163.75
CASH MANAGEMENT SERIES
11/30/94 3.52% --%
11/30/95 5.32 --
11/30/96 4.81 --
11/30/97 4.87 --
11/30/98 4.91 --
</TABLE>
- ---------------
(1) Calculated based upon average shares outstanding
(2) Does not reflect expenses that apply to the separate accounts of Anchor
National Life Insurance Company. If such expenses had been included, total
return would have been lower for each period presented.
23
<PAGE> 27
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
The following documents contain more information about the Series and are
available free of charge upon request:
ANNUAL/SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on portfolio holdings. The annual report also
contains a written analysis of market conditions and investment
strategies that significantly affected a Series' performance for the
most recently completed fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional
information about the Series' policies, investment restrictions and
business structure. This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Series by
contacting:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 54299
Los Angeles, California 90054-0299
1-800-445-7862
Information about the Series (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission, Washington,
D.C. Call (800) SEC-0330 for information on the operation of the Public
Reference Room. Information about the Series is also available on the Securities
and Exchange Commission's web-site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing the Public Reference
Section of the Securities and Exchange Commission, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
[ANCHOR NATIONAL LOGO]
Anchor National Life Insurance Company
1 SunAmerica Center
Los Angeles, California 90067-6022
INVESTMENT COMPANY ACT
- - File No. 811-5157
24
<PAGE> 28
Statement of Additional Information
ANCHOR PATHWAY FUND
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the current Prospectus of the Anchor Pathway
Fund (the "Fund"), dated June 25, 1999. This Statement of Additional Information
incorporates the Prospectus by reference. Capitalized terms used herein but not
defined have the meanings assigned to them in the Prospectus. The Fund's audited
financial statements are incorporated into this Statement of Additional
Information by reference to its 1999 annual report to shareholders. You may
request a copy of the Prospectus and/or annual report at no charge by calling
(800) 445-7862 or writing the Fund at the address below.
P.O. Box 54299
Los Angeles, California 90054-0299
(800) 445-SUN2
June 25, 1999
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
- ----- ----
<S> <C>
The Fund....................................................................B-2
Investment Policies.........................................................B-3
Investment Restrictions....................................................B-15
Fund Officers and Trustees.................................................B-19
Investment Advisory Agreement..............................................B-23
Business Management Agreement..............................................B-25
Dividends, Distributions and Federal Taxes.................................B-26
Shareholder Voting Rights..................................................B-27
Price of Shares............................................................B-28
Execution of Portfolio Transactions........................................B-29
General Information........................................................B-32
Financial Statements.......................................................B-33
Appendix.............................................................Appendix-1
</TABLE>
THE FUND
The Fund, organized as a Massachusetts business trust on March 23,
1987, is a diversified, open-end management investment company. It was
established to provide a funding medium for Variable Separate Account (the
"Account"), a separate account of Anchor National Life Insurance Company (the
"Company"). The sole shareholder of the Fund is the Account. The Company may
issue variable life contracts that also will use the Fund as the underlying
investment. The offering of Fund shares to variable annuity and variable life
separate accounts is referred to as "mixed funding." It may be disadvantageous
for variable annuity separate accounts and variable life separate accounts to
invest in the Fund simultaneously. Although neither the Company nor the Fund
currently foresees such disadvantages either to variable annuity or variable
life contract owners, the Board of Trustees of the Fund would monitor events in
order to identify any material conflicts to determine what action, if any,
should be taken in response thereto. Shares of the Fund may be offered to
separate accounts of other life insurance companies that are affiliates of the
Company.
The Company is a wholly-owned subsidiary of SunAmerica Life
Insurance Company, an Arizona corporation, which is, in turn, wholly-owned by
SunAmerica Inc., a Maryland corporation, which is, in turn, wholly-owned by
American International Group, Inc., the leading U.S.-based international
insurance organization.
B-2
<PAGE> 30
INVESTMENT POLICIES
The investment objective and policies of each of the Series are
described in the Fund's Prospectus. Certain types of securities in which the
Series may invest and certain investment practices the Series may employ, which
are described under "More Information About the Series" in the Prospectus, are
discussed more fully below. The stated percentage limitations are applied to an
investment at the time of purchase unless indicated otherwise.
GENERAL
ILLIQUID AND RESTRICTED SECURITIES. Each of the Series may invest
no more than 15% (10% in the case of the Cash Management Series) of its net
assets, determined as of the date of purchase, in illiquid securities or in
other securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale. Historically,
illiquid securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), securities that are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities that 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
generally will 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 Series will seek to obtain the
right of registration at the expense of the issuer.
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 will not
be deemed to be illiquid under procedures adopted by the Fund's Board of
Trustees. Capital Research and Management Company ("CRMC" or the "Investment
Adviser"), will monitor the liquidity of such restricted securities. In reaching
liquidity
B-3
<PAGE> 31
decisions, the Investment Adviser will consider, inter alia, the following
factors: (1) the frequency of trades and quotes for the security; (2) the
number of dealers wishing to purchase or sell the security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
The Cash Management Series may invest in commercial paper issues,
which 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 afforded by Section 4(2)
of the Securities Act ("Section 4(2) paper"). In addition, each Series may
invest in 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, as amended, is generally eligible to be sold in reliance
on the safe harbor of Rule 144A described above. The Investment Adviser believes
that Section 4(2) commercial paper meets its criteria for liquidity and is quite
liquid. Each Series intends, therefore, to treat Section 4(2) commercial paper
as liquid and not subject to the investment limitation applicable to illiquid
securities.
MONEY MARKET INSTRUMENTS - These are shorter-term debt securities
maturing in one year or less including (1) commercial bank obligations
(certificates of deposit, interest bearing time deposits, bankers' acceptances
(time drafts on a commercial bank where the bank accepts an irrevocable
obligation to pay at maturity)), (2) savings association obligations
(certificates of deposit issued by mutual savings banks or savings and loan
associations), (3) commercial paper (short-term notes (up to 9 months) issued by
corporations or governmental bodies), and (4) corporate bonds and notes
(corporate obligations that mature, or that may be redeemed, in one year or
less). Although certain floating or variable rate obligations (securities whose
coupon rate changes at least annually and generally more frequently) have
maturities in excess of one year, they are also considered short-term debt
securities. For more information on money market instruments, see "Cash
Management Series," below.
FIXED INCOME SECURITIES - Fixed income securities are broadly
characterized as those that provide for periodic payments to the holder of the
security at a stated rate. Most fixed income securities, such as bonds,
represent indebtedness of the issuer and provide for repayment of principal at a
stated time in the future. Others do not provide for repayment of a principal
amount, although they may represent a priority over common stockholders in the
event of the issuer's liquidation. Many fixed income securities are subject to
scheduled retirement, or may be retired or "called" by the issuer prior to their
maturity dates. The interest rate on certain fixed income securities, known as
"variable rate obligations," is determined by reference to or is a percentage of
an objective standard, such as a bank's prime rate, the 90-day Treasury bill
rate, or the rate of return on commercial paper or bank certificates of deposit,
and is periodically adjusted. Certain variable rate obligations may have a
demand feature entitling the holder to resell the securities at a predetermined
amount. The interest rate on certain fixed
B-4
<PAGE> 32
income securities, called "floating rate instruments," changes whenever there
is a change in a designated base rate.
The market values of fixed income securities tend to vary
inversely with the level of interest rates -- when interest rates rise, their
values will tend to decline; when interest rates decline, their values generally
will tend to rise. The potential for capital appreciation with respect to
variable rate obligations or floating rate instruments will be less than with
respect to fixed-rate obligations. Long-term instruments are generally more
sensitive to these changes than short-term instruments. The market value of
fixed income securities and therefore their yield are also affected by the
perceived ability of the issuer to make timely payments of principal and
interest.
Up to 10% of the Growth Series' assets may be invested in straight
debt securities rated BB or below by Standard & Poor's Ratings Services, a
Division of the McGraw-Hill Companies, Inc. ("S&P") and Ba or below by Moody's
Investors Service, Inc. ("Moody's") or in unrated securities that are determined
to be of equivalent quality, provided the Investment Adviser determines that
these securities have characteristics similar to the equity securities eligible
for purchase by the Growth Series. These securities are commonly referred to as
"junk bonds" or "high-yield, high-risk" bonds, carry a higher degree of
investment risk than higher rated bonds and are considered speculative.
Up to 5% of the International Series' assets may be invested in
straight debt securities rated BB or below by S&P or Ba or below by Moody's or
in unrated securities that are determined to be of equivalent quality.
Up to 5% of the Growth-Income Series' assets may be invested in
straight debt securities rated BB or below by S&P and Ba or below by Moody's or
in unrated securities that are determined to be equivalent quality by the
Investment Adviser.
Up to 25% of the Asset Allocation Series' fixed-income assets may
be invested in securities rated BB or below by S&P or Ba or below by Moody's,
including securities rated as low as CC by S&P or Ca by Moody's.
The High-Yield Bond Series may invest without limitation in bonds
rated as low as Ca by Moody's or CC by S&P (or in bonds that are unrated but
determined to be of equivalent quality). In addition, the Series may invest up
to 10% of its total assets in bonds rated C by Moody's or D by S&P (or in bonds
that are unrated but determined by the Investment Adviser to be of equivalent
quality).
The U.S. Government/AAA-Rated Securities Series (the "Government/AAA
Series") may not purchase any security, other than a U.S. Government security,
not rated AAA by S&P or Aaa by Moody's (or that has not received a rating but is
determined to be of comparable quality by the Investment Adviser). However, if
the rating of a security currently held by the Series is reduced below AAA (or
Aaa), the Series is not required to dispose of the security.
B-5
<PAGE> 33
The Cash Management Series invests only in high-quality short-term
debt obligations.
See "Certain Risks Relates to High-Yield, High-Risk Bonds," below.
OTHER SECURITIES - Certain securities have both equity and debt
characteristics, such as non-convertible preferred stocks and convertible
securities. These securities may at times resemble equity more than debt and
vice versa. Non-convertible preferred stocks are similar to debt in that they
have a stated dividend rate akin to the coupon of a bond or note even though
they are often classified as equity securities. The prices and yields of
non-convertible preferred stocks generally move with changes in interest rates
and the issuer's credit quality, similar to the factors affecting debt
securities.
Bonds, preferred stocks, and other securities may sometimes be
converted into common stock or other securities at a stated exchange ratio.
These securities prior to conversion pay a fixed rate of interest or a dividend.
Because convertible securities have both debt and equity characteristics, their
value varies in response to many factors, including the value of the underlying
equity, general market and economic conditions, convertible market valuations,
as well as changes in interest rates, credit spreads, and the issuer's credit
quality.
CASH MANAGEMENT SERIES
The Cash Management Series seeks to achieve its investment
objective by investing in a diversified selection of money market instruments.
The other Series may also invest to various degrees in money market instruments.
The money market instruments in which a Series may invest include the following:
COMMERCIAL BANK OBLIGATIONS - Certificates of deposit
(interest-bearing time deposits), bankers' acceptances (time drafts drawn on a
commercial bank where the bank accepts an irrevocable obligation to pay at
maturity) and documented discount notes (corporate promissory discount notes
accompanied by a commercial bank guarantee to pay at maturity) representing
direct or contingent obligations of commercial banks with total assets in excess
of $1 billion, based on the latest published reports. The Cash Management Series
may also invest in obligations issued by commercial banks with total assets of
less than $1 billion if the principal amount of these obligations owned by the
Cash Management Series is fully insured by the U.S. Government.
SAVINGS ASSOCIATION OBLIGATIONS - Certificates of deposit
(interest-bearing time deposits) issued by savings banks or savings and loan
associations with assets in excess of $1 billion based on the latest published
reports. The Cash Management Series may also invest in obligations issued by
savings banks or savings and loan associations with total assets of less than $1
billion if the principal amount of these obligations owned by the Cash
Management Series is fully insured by the U.S. Government.
B-6
<PAGE> 34
COMMERCIAL PAPER - Short-term notes (up to 9 months) issued by
corporations or governmental bodies. The Cash Management Series may purchase
commercial paper only if judged by the Investment Adviser to be of suitable
investment quality. This includes commercial paper that is (a) rated in the two
highest categories by S&P and by Moody's or (b) other commercial paper deemed on
the basis of the issuer's creditworthiness to be of a quality appropriate for
the Cash Management Series. (No more than 5% of the Cash Management Series'
assets may be invested in commercial paper in the second highest rating
category; no more than the greater of 1% of the Cash Management Series' assets
or $1 million may be invested in such securities of any one issuer.) See the
Appendix at the end of this Statement of Additional Information for a
description of the ratings. The commercial paper in which the Cash Management
Series may invest includes variable amount master demand notes. Variable amount
master demand notes permit the Cash Management Series to invest varying amounts
at fluctuating rates of interest pursuant to the agreement in the master note.
These are direct lending obligations between the lender and borrower, they are
generally not traded, and there is no secondary market. Such instruments are
payable with accrued interest in whole or in part on demand. The amounts of the
instruments are subject to daily fluctuations as the participants increase or
decrease the extent of their participation. Investments in these instruments are
limited to those that have a demand feature enabling the Cash Management Series
unconditionally to receive the amount invested from the issuer upon seven or
fewer days' notice. Generally, the Cash Management Series attempts to invest in
instruments having a one-day notice provision. In connection with master demand
note arrangements, the Investment Adviser, subject to the direction of the
Trustees, monitors on an ongoing basis the earning power, cash flow and other
liquidity ratios of the borrower, and its ability to pay principal and interest
on demand. The Investment Adviser also considers the extent to which the
variable amount master demand notes are backed by bank letters of credit. These
notes generally are not rated by Moody's or S&P and the Cash Management Series
may invest in them only if it is determined that at the time of investment the
notes are of comparable quality to the other commercial paper in which the
Series may invest. Master demand notes are considered to have a maturity equal
to the repayment notice period unless the Investment Adviser has reason to
believe that the borrower could not make timely repayment upon demand.
CORPORATE BONDS AND NOTES - The Cash Management Series may
purchase corporate obligations that mature or that may be redeemed in one year
or less. These obligations originally may have been issued with maturities in
excess of one year. The Cash Management Series may invest only in corporate
bonds or notes of issuers having outstanding short-term securities rated in the
top two rating categories by S&P and Moody's. See the Appendix attached hereto
for a description of investment-grade ratings by S&P and Moody's.
FLOATING RATE OBLIGATIONS - These securities have a coupon rate
that changes at least annually and generally more frequently. The coupon rate is
set in relation to money market rates. The obligations, issued primarily by
banks, other corporations, governments and semi-governmental bodies, may have a
maturity in excess of one year. In some cases, the coupon rate may vary with
changes in the yield on Treasury bills or notes or with changes in LIBOR (London
Interbank Offering Rate). The Investment Adviser considers floating rate
obligations to be liquid investments because a number of U.S. and foreign
securities dealers make active markets in these securities.
B-7
<PAGE> 35
ASSET ALLOCATION SERIES AND U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
GNMA CERTIFICATES, FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS - The Asset
Allocation Series and Government/AAA Series will - and each Series may -
purchase certificates issued by the Government National Mortgage Association
("GNMA"). The Government/AAA Series expects to invest substantially in these
securities. These certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans that are issued by lenders such as
mortgage bankers, commercial banks, savings and loan associations and securities
broker-dealers (or separate trusts or affiliates of such institutions
established to issue these securities), and are either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A pool of
these mortgages is assembled and, after being approved by GNMA, is offered to
investors through securities dealers. The timely payment of interest and
principal on each mortgage is guaranteed by GNMA and backed by the full faith
and credit of the United States Government. Principal is paid back monthly by
the borrower over the term of the loan. Because both interest and principal
payments (including prepayments) are passed through to the holder of the
certificate, GNMA certificates are called "pass-through" securities.
The Federal National Mortgage Association ("FNMA"), a federally
chartered and privately owned corporation, issues pass-through securities
representing interests in a pool of conventional mortgage loans. FNMA guarantees
the timely payment of principal and interest, but this guarantee is not backed
by the full faith and credit of the U.S. Government. The Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the U.S.
Government, issues participation certificates that represent an interest in a
pool of conventional mortgage loans. FHLMC guarantees the timely payment of
interest and the ultimate collection of principal and maintains reserves to
protect holders against losses due to default, but the certificates are not
backed by the full faith and credit of the U.S. Government. As is the case with
GNMA certificates, the actual maturity of and realized yield on particular FNMA
and FHLMC pass-through securities will vary based on the prepayment experience
of the underlying pool of mortgages.
Certain securities issued by the U.S. Government instrumentalities
and certain federal agencies are neither direct obligations of, nor are they
guaranteed by, the 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 Federal Land Banks, Farmer's
Home Administration, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and Federal Home Loan Banks.
MORTGAGE-RELATED SECURITIES - The Series may invest in
mortgage-related securities issued by financial institutions such as commercial
banks, savings and loan associations, mortgage
B-8
<PAGE> 36
bankers and securities broker-dealers (or separate trusts or affiliates of such
institutions established to issue the securities) including collateralized
mortgage obligations ("CMOs") and mortgage-backed bonds. CMOs (including real
estate mortgage investment conduits as authorized under the Internal Revenue
Code of 1986, as amended (the "Code")) are issued in series that are made up of
a group of bonds that together are fully collateralized directly or indirectly
by a pool of mortgages on which the payments of principal and interest are
dedicated to payment of principal and interest on the bonds in the series. Each
class of bonds in the series has a different maturity than the other classes of
bonds in the series and may bear a different coupon rate. The different
maturities come from the fact that all principal payments, both regular
principal payments as well as any prepayments of principal, are passed through
first to the holders of the class with the shortest maturity until it is
completely retired. Thereafter, principal payments are passed through to the
next class of bonds in the series, until all the classes have been paid off. As
a result, an acceleration in the rate of prepayments that may be associated
with declining interest rates shortens the expected life of each class, with
the greatest impact on those classes with the shortest maturities. Similarly,
should prepayments slow down, as may happen in times of rising interest rates,
the expected life of each class lengthens, again with the greatest impact on
those classes with the shortest maturities. In the case of some CMO series,
each class may receive a differing proportion of the monthly interest and
principal payments on the underlying collateral. In these series the classes
having proportionately greater interests on principal repayments generally
would be more affected by acceleration (or slowing) in the rate of prepayments.
Mortgage-backed bonds are general obligations of the issuer fully
collateralized directly or indirectly by a pool of mortgages. The mortgages
serve as collateral for the issuer's payment obligations on the bonds, but
interest and principal payments on the mortgages are not passed through either
directly (as with GNMA certificates and FNMA and FHLMC pass-through securities)
or on a modified basis (as with CMOs). Accordingly, a change in the rate of
prepayments on the pool of mortgages could change the effective maturity of a
CMO but not that of a mortgage-backed bond (although, like many bonds,
mortgage-backed bonds can provide that they are callable by the issuer prior to
maturity).
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES AND REVERSE
REPURCHASE AGREEMENTS - The Government/AAA Series is authorized to enter into
reverse repurchase agreements. A reverse repurchase agreement is the sale of a
security by the Government/AAA Series and its agreement to repurchase the
security at a specified time and price. The Government/AAA Series segregates
liquid assets, which will be marked to market daily in an amount sufficient to
cover its obligations under reverse repurchase agreements with broker-dealers
(but no collateral is required on reverse repurchase agreements with banks).
Under the Investment Company Act of 1940, as amended (the "1940 Act"), reverse
repurchase agreements may be considered borrowings by the Government/AAA
Series. The use of reverse repurchase agreements by the Government/AAA Series
creates leverage that increases the Government/AAA Series' investment risk. If
the income and gains on securities purchased with the proceeds of reverse
repurchase agreements exceed the cost of the agreements, the Government/AAA
Series' earnings and net asset value will increase faster than otherwise would
be the case; conversely, if the income and gains fail to exceed the costs,
earnings and net asset value would decline faster than otherwise would be the
case.
B-9
<PAGE> 37
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES AND RISKS OF INVESTING
IN VARIOUS COUNTRIES - The U.S. Government/AAA-Rated Securities Series may
purchase obligations of non-U.S. corporations or governmental entities, provided
they are U.S. dollar denominated and highly liquid. Accordingly, while the risks
described below (under "Risks of Investing in Various Countries") are still
present, they are present to a lesser extent.
ASSET ALLOCATION SERIES, HIGH-YIELD BOND SERIES AND U.S. GOVERNMENT/AAA-RATED
SECURITIES SERIES
LOANS OF PORTFOLIO SECURITIES - The Asset Allocation Series,
High-Yield Bond Series and Government/AAA Series are authorized to lend
portfolio securities to broker-dealers or to other institutional investors whose
financial condition is monitored by the Investment Adviser. The borrower must
maintain collateral with the Fund's custodian consisting of cash or equivalent
collateral that is equal to at least 102% of the market value, determined daily,
of the loaned securities. Each Series may at any time call a loan of its
portfolio securities and obtain the return of the loaned securities. The Series
receives any interest paid on the loaned securities and a fee or a portion of
the interest earned on the collateral. Each Series will limit its loans of
portfolio securities to an aggregate of 10% of the value of its total assets,
determined at the time any such loan is made.
PORTFOLIO TRADING OF FIXED-INCOME SECURITIES - The Series intend
to engage in portfolio trading of fixed-income securities when it is believed
that the sale of a fixed-income security owned and the purchase of another
security of better value can enhance principal and/or increase income. A
security may be sold to avoid any prospective decline in market value in light
of what is evaluated as an expected rise in prevailing yields, or a security may
be purchased in anticipation of a market rise (a decline in prevailing yields).
A security also may be sold and a comparable security purchased coincidentally
in order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities.
ROLL TRANSACTIONS - The Asset Allocation Series, the High-Yield
Bond Series and the Government/AAA Series, may engage in "roll" transactions. A
"roll" transaction is the sale of mortgage-backed securities or other securities
together with a commitment to purchase similar, but not identical securities at
a future date. The Series intend to treat "roll" transactions as two separate
transactions; one involving the purchase of a security and a separate
transaction involving the sale of a security. To the extent the Series do not
enter into "roll" transactions for financing purposes, they may treat these
transactions as not falling within the definition of borrowing set forth in
Section 2(a)(23) of the 1940 Act. The Series will segregate liquid assets, which
will be marked to market daily, in an amount sufficient to meet their payment
obligations in these transactions. Although these transactions will not be
entered into for leveraging purposes, to the extent a Series' aggregate
commitments under these transactions exceed its holding of cash and securities
that do not fluctuate in value (such as short-term money market instruments),
the Series temporarily will be in a leveraged position, as set forth in Section
18 of the 1940 Act, (i.e., it will have an amount greater than its net assets
subject to market risk). Should the market value of a Series' portfolio
securities decline while the Series is in a leveraged position, greater
depreciation of its net assets would likely occur than
B-10
<PAGE> 38
were it not in such a position. As the Series' aggregate commitments under
these transactions increase, the opportunity for leverage similarly increases.
INFLATION-INDEXED BONDS - The Asset Allocation Series, High-Yield Bond
Series, and Government/AAA Series may invest in inflation-indexed bonds issued
by governments, their agencies or instrumentalities and corporations. The
principal value of this type of bond is periodically adjusted according to
changes in the rate of inflation. The interest rate is generally fixed at
issuance; however, interest payments are based on an inflation adjusted
principal value. For example, in a period of falling inflation, principal value
will be adjusted downward, reducing the interest payable.
Repayment of the original bond principal upon maturity (as
adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Series may
also invest in other bonds that may or may not provide a similar guarantee. If a
guarantee of principal is not provided, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
GROWTH SERIES, INTERNATIONAL SERIES, GROWTH-INCOME SERIES, ASSET ALLOCATION
SERIES, AND HIGH-YIELD BOND SERIES
CURRENCY TRANSACTIONS -The Growth Series, International Series,
Growth-Income Series, Asset Allocation Series and High-Yield Bond Series have
the ability to enter into forward currency contracts to protect against changes
in currency exchange rates. A forward currency contract is an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. The Series will segregate liquid assets,
which will be marked to market daily to meet its forward contract commitments to
the extent required by the Securities and Exchange Commission (the
"Commission").
The High-Yield Bond Series may also enter into exchange-traded
futures contracts relating to foreign currencies in connection with investments
in securities of foreign issuers in anticipation of, or to protect against,
fluctuations in exchange rates. In addition, forward currency contracts may be
used by the Series to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. An exchange traded futures
contract relating to foreign currency is similar to a forward foreign currency
contract but has a standardized size and exchange rate. Although currency
contracts typically will involve the purchase and sale of a foreign currency
against the U.S. dollar, a Series also may enter into currency contracts not
involving the U.S. dollar. In connection with these futures transactions, the
Fund has filed a notice of eligibility with the Commodity Futures Trading
Commission (the "CFTC") that exempts the Series from CFTC registration as a
"commodity pool operator" as defined under the Commodities Exchange Act.
Pursuant to this notice, these Series will observe certain CFTC guidelines with
respect to its futures transactions that, among other things, limit initial
margin deposits in connection with the use of
B-11
<PAGE> 39
futures contracts and related options for purposes other than "hedging" (as
defined by CFTC rules) to 5% of a Series' assets.
The High-Yield Bond Series may attempt to accomplish objectives similar
to those involved in its currency contracts by purchasing put or call options on
currencies. A put option gives the Series, as purchaser, the right (but not the
obligation) to sell a specified amount of currency at the exercise price until
the expiration of the option. A call option gives the Series, as purchaser, the
right (but not the obligation) to purchase a specified amount of currency at the
exercise price until its expiration. The Series might purchase a currency put
option, for example, to protect itself during the contract period against a
decline in the U.S. dollar value of a currency in which it holds or anticipates
holding securities. If the currency's value should decline against the U.S.
dollar, the loss in currency value should be offset, in whole or in part, by an
increase in the value of the put. If the value of the currency instead should
rise against the U.S. dollar, any gain to the Series would be reduced by the
premium it had paid for the put option. A currency call option might be
purchased, for example, in anticipation of, or to protect against, a rise in the
value against the U.S. dollar of a currency in which a Series anticipates
purchasing securities.
Currency options may be either listed on an exchange or traded
over-the-counter ("OTC options"). Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation), and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated strike
prices and expiration dates. A Series will not purchase an OTC option unless it
believes that daily valuations for such options are readily obtainable. OTC
options differ from exchange-traded options in that OTC options are transacted
with dealers directly and not through a clearing corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the dealer.
Since no exchange is involved, OTC options are valued on the basis of a quote
provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time.
Certain provisions of the Code may affect the extent to which the
Series may enter into forward contracts. Such transactions may also affect, for
U.S. federal income tax purposes, the character and timing of income, gain or
loss recognized by the Series.
GROWTH SERIES, INTERNATIONAL SERIES, GROWTH-INCOME SERIES, ASSET ALLOCATION
SERIES AND HIGH-YIELD BOND SERIES
CERTAIN RISK FACTORS RELATING TO HIGH-YIELD, HIGH-RISK BONDS - The
Growth Series, International Series, Growth-Income Series, Asset Allocation
Series and High-Yield Bond Series may invest in high-yield, high-risk bonds.
These bonds present certain risks, discussed below:
Sensitivity to Interest Rate and Economic Changes - High-yield,
high-risk bonds are very sensitive to adverse economic changes and
corporate developments. During an economic downturn or substantial period
of rising interest rates, highly leveraged issuers may experience
financial stress that would adversely affect their ability to service
their principal
B-12
<PAGE> 40
and interest payment obligations, to meet projected business goals, and
to obtain additional financing. If the issuer of a bond defaulted on its
obligations to pay interest or principal or entered into bankruptcy
proceedings, the Series may incur losses or expenses in seeking recovery
of amounts owed to it. In addition, periods of economic uncertainty and
changes can be expected to result in increased volatility of market
prices of high-yield bonds and the Series' net asset value.
Payment Expectations - High-yield, high-risk bonds may contain
redemption or call provisions. If an issuer exercised these provisions in
a declining interest rate market, the Series would have to replace the
security with a lower yielding security, resulting in a decreased return
for investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Series' assets. If
the Series experiences unexpected net redemptions, this may force it to
sell high-yield bonds without regard to their investment merits, thereby
decreasing the asset base upon which expenses can be spread and possibly
reducing the Series' rate of return.
Liquidity and Valuation - There may be little trading in the
secondary market for particular bonds, which may affect adversely the
Series' ability to value accurately or dispose of such bonds. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high-yield bonds,
especially in a thin market.
WARRANTS AND RIGHTS - Warrants are usually issued together with
bonds or preferred stocks. Warrants generally entitle the holder to buy a
proportionate amount of common stock at a specified price, usually higher than
the current market price. Warrants may be issued with an expiration date or in
perpetuity. Rights are similar to warrants except that they normally entitle
the holder to purchase common stock at a lower price than the current market
price. Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering. Rights generally expire in
less than four weeks.
RISKS OF INVESTING IN VARIOUS COUNTRIES - The Growth,
International, Growth-Income, Asset Allocation, Cash Management and the
High-Yield Bond Series may invest in securities of issuers domiciled outside the
U.S., which may be denominated in currencies other than the U.S. dollar,
pursuant to the percentage limitations listed in the Prospectus.
Investing outside the U.S. involves special risks, particularly in
certain developing countries, caused by, among other things: fluctuating
currency values; different accounting, auditing, and financial reporting
regulations and practices in some countries; changing local and regional
economic, political, and social conditions; expropriation or confiscatory
taxation; foreign taxation or income from foreign sources; greater market
volatility; differing securities market structures; and various administrative
difficulties such as delays in clearing and settling portfolio transactions or
in receiving payment of dividends. However, in the opinion of the Investment
Adviser, investing outside the U.S. also can reduce certain portfolio risks due
to greater diversification opportunities. Although there is no universally
accepted definition, a developing country is generally a country
B-13
<PAGE> 41
with a low or middle income economy or that is in the early stages of its
industrialization cycle. Developing countries may change over time depending on
market and economic conditions. Historically, the markets of developing
countries have been more volatile than the markets of developed countries.
Additional costs could be incurred in connection with the Series'
investment activities outside the U.S. Brokerage commissions are generally
higher outside the U.S., and the Series will bear certain expenses in connection
with their currency transactions. Furthermore, increased custodian costs may be
associated with the maintenance of assets in certain jurisdictions.
The U.S. Government/AAA Series may purchase obligations of foreign
corporation or governmental entities, provided they are U.S. dollar denominated
and highly liquid.
With respect to its non-U.S. holdings, pursuant to California
Department of Insurance diversification guidelines, a Series will invest in
securities with issuers located in at least five different non-U.S. countries at
all times with no country representing more than 20% of the Series' non-U.S.
assets. However, this minimum number of countries is reduced to four when
non-U.S. country investments comprise less than 80% of the Series' net assets;
to three countries when less than 60% of net assets; to two countries when less
than 40% of net assets; and to one country when less than 60% of net assets.
An additional 15% of a Series' non-U.S. assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany. This policy is not deemed
a fundamental policy and therefore may be changed without shareholder approval.
HIGH-YIELD BOND SERIES
LOAN PARTICIPATIONS - Loan participations, which can also include
loan assignments, typically involve loans made by a syndicate of banks to U.S.
and non-U.S. corporate or governmental borrowers for a variety of purposes. The
underlying loans may be secured or unsecured and will vary in term and legal
structure. Typically, price quotations with respect to loan participations are
available from the originating bank (the bank that makes the underlying loan).
The originating bank also serves as the market maker for the resale of loan
participations. When purchasing such instruments, the Series may assume the
credit risks associated with the original bank lender as well as the credit
risks associated with the borrower. In addition, if the loan is foreclosed, the
Series could be part owner of any collateral, and could bear the costs and
liabilities of owning and disposing of the collateral. Loan participations
generally are not rated by major rating agencies and may not be protected by
the securities laws. Also loan participations may be liquid or illiquid. To the
extent these instruments are illiquid, the Series may have difficulty
determining their value or selling the instruments as generally there is no
secondary market. The Series will purchase these instruments only to the extent
that such a purchase would be consistent with its investment policies regarding
debt securities and/or illiquid securities.
In determining whether to purchase a particular loan
participation, the Investment Adviser will take into account all relevant
factors including the instrument's potential volatility, liquidity and risks
(including whether the Series could be put in an undesirable position as lender
and/or owner of the collateral).
B-14
<PAGE> 42
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions for each
Series that cannot be changed without approval by a majority of its outstanding
shares. Such majority is defined as the vote of the lesser of (i) 67 percent or
more of the outstanding shares of the Series present at a meeting, if the
holders of more than 50 percent of the outstanding shares of the Series are
present in person or by proxy or (ii) more than 50 percent of the outstanding
shares of the Series.
INVESTMENT RESTRICTIONS OF THE CASH MANAGEMENT SERIES
The Cash Management Series has adopted the following restrictions
that are fundamental policies. These fundamental policies, as well as the Cash
Management Series' investment objective, cannot be changed without approval by a
majority of its outstanding shares. All percentage limitations expressed in the
following investment restrictions are measured immediately after the relevant
transaction is made. The Cash Management Series may not:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer, provided that this limitation shall apply only to
75% of the value of the Series' total assets, and, provided further, that the
limitation shall not apply to obligations of the government of the U.S. or of
any corporation organized as an instrumentality of the U.S. under a general act
of Congress. The short-term obligations of commercial banks are excluded from
this 5% limitation with respect to 25% of the Series' total assets.
2. As to 75% of its total assets, purchase more than 10% of the
outstanding voting class of securities of an issuer.
3. Invest more than 25% of the Series' total assets in the securities
of issuers in the same industry. Obligations of the U.S. Government, its
agencies and instrumentalities, are not subject to this 25% limitation on
industry concentration. In addition, the Series may, if deemed advisable, invest
more than 25% of its assets in the obligations of domestic commercial banks.
4. Make loans to others except for the purchase of the debt
securities listed above under its Investment Policies. The Series may, however,
enter into repurchase agreements.
5. Borrow money, except from banks for temporary purposes, and then
in an amount not in excess of 5% of the value of the Series' total assets.
Moreover, in the event that the asset coverage for such borrowings falls below
300%, the Series will reduce within three days the amount of its borrowings in
order to provide for 300% asset coverage.
6. Sell securities short except to the extent that the Series
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
7. Act as underwriter of securities issued by others, engage in
distribution of securities for others, or make investments in other companies
for the purpose of exercising control or management.
The following additional restrictions are not fundamental policies and
may be changed by the Trustees without a vote of shareholders. The Cash
Management Series may not:
8. Enter into any repurchase agreement maturing in more than seven
days or invest in any other illiquid security if, as a result, more than 10% of
the Series' total assets would be so invested. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act that
B-15
<PAGE> 43
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 Investment Adviser has determined to be liquid pursuant to
guidelines established by the Trustees, will not be considered illiquid for
purposes of this limitation on illiquid securities.
9. Pledge or hypothecate its assets.
10. Invest in puts, calls, straddles, spreads or any combination
thereof, except as permitted by the Prospectus and Statement of Additional
Information, as amended from time to time.
11. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
Notwithstanding investment restriction Number 1 above, in order to comply
with Rule 2a-7 under the 1940 Act, the Cash Management Series has adopted a more
restrictive policy (which may be changed by the Trustees without shareholder
approval) of investing no more than 5% of its assets (measured at the time of
purchase) in the securities of any one issuer (other than the U.S. government);
provided however, that the Cash Management Series may invest, as to 25% of its
assets, more than 5% of its assets in certain high-quality securities (as
defined in the Rule) of a single issuer for a period of up to three business
days. The purchase by the Cash Management Series of securities that have "put"
or "stand-by" commitment features are not considered "puts" for purposes of
investment restriction Number 10 above.
INVESTMENT RESTRICTIONS OF THE GROWTH SERIES, THE INTERNATIONAL SERIES, THE
GROWTH-INCOME SERIES, THE ASSET ALLOCATION SERIES AND THE HIGH-YIELD BOND SERIES
The Growth Series, the International Series, the Growth-Income Series,
the Asset Allocation Series and the High-Yield Bond Series have each adopted the
following investment restrictions that are fundamental policies. These
fundamental policies, as well as each Series' investment objective, cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the respective Series. All percentage limitations expressed in the
following investment restrictions are measured immediately after the relevant
transaction is made. The Growth Series, the International Series, the
Growth-Income Series, the Asset Allocation Series and the High-Yield Bond Series
may not:
1. Invest more than 5% of the value of the total assets of the Series
in the securities of any one issuer, provided that this limitation shall apply
only to 75% of the value of the Series' total assets and, provided further, that
the limitation shall not apply to obligations of the government of the United
States or of any corporation organized as an instrumentality of the U.S. under a
general Act of Congress. The short-term obligations of commercial banks are
excluded from this 5% limitation with respect to 25% of the Series' total
assets.
B-16
<PAGE> 44
2. As to 75% of its total assets, purchase more than 10% of the
outstanding voting class of securities of an issuer.
3. Invest more than 25% of the Series' total assets in the securities
of issuers in the same industry. Obligations of the U.S. Government, its
agencies and instrumentalities are not subject to this 25% limitation on
industry concentration. The Series may, if deemed advisable, invest more than
25% of its assets in the obligations of domestic commercial banks.
4. Invest in real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein).
5. Purchase commodities or commodity contracts; except that the
International Series, the Asset Allocation Series and the High-Yield Bond Series
may engage in transactions involving currencies (including forward and futures
contracts or put and call options).
6. Make loans to others except for (a) the purchase of debt
securities; (b) entering into repurchase agreements; and (c) the lending of its
portfolio securities.
7. Borrow money, except to the extent permitted by applicable law.
8. Purchase securities on margin.
The following additional restrictions are not fundamental policies and
may be changed by the Trustees without a vote of shareholders. The Growth
Series, the International Series, the Growth-Income Series, the Asset Allocation
Series and the High-Yield Bond Series may not:
9. 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 Series' total 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
Investment Adviser has determined to be liquid pursuant to guidelines
established by the Trustees, will not be considered illiquid for purposes of
this limitation on illiquid securities.
10. Pledge or hypothecate its assets.
11. Invest in puts, calls, straddles, spreads or any combination
thereof, except as permitted by the Prospectus and Statement of Additional
Information, as amended from time to time.
12. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
B-17
<PAGE> 45
13. Invest in companies for the purpose of exercising control or
management.
14. Engage in underwriting of securities issued by others, except to
the extent it may be deemed to be acting as an underwriter in the purchase and
resale of portfolio securities.
15. Sell securities short, except to the extent permitted by
applicable law.
INVESTMENT RESTRICTIONS OF THE U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
The Government/AAA Series has adopted the following investment
restrictions that are fundamental policies. These fundamental policies, as well
as the Government/AAA Series' investment objective, cannot be changed without
approval of a majority of its outstanding shares. All percentage limitations
expressed in the following investment restrictions are measured immediately
after the relevant transaction is made. The Government/AAA Series may not:
1. Purchase any security (other than securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities ("U.S. government
securities")) if, immediately after and as a result of such investment, more
than 5% of the value of the Government/AAA Series' total assets would be
invested in securities of the issuer.
2. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in the same
industry, except that this limitation shall not apply to U.S. government
securities or other securities to the extent they are backed by or represent
interests in U.S. government securities or U.S. government-guaranteed mortgages.
3. Invest in companies for the purpose of exercising control or
management.
4. Buy or sell real estate or commodities or commodity contracts in
the ordinary course of its business; however, the Government/AAA Series may
purchase or sell readily marketable debt securities secured by real estate or
interests therein or issued by companies that invest in real estate or interests
therein, including real estate investment trusts.
5. Engage in the business of underwriting securities of other
issuers, except to the extent that the disposal of an investment position may
technically cause the Series to be considered an underwriter as that term is
defined under the Securities Act.
6. Make loans to others except for (a) the purchase of debt
securities; (b) entering into repurchase agreements; and (c) the lending of its
portfolio securities.
7. Sell securities short, except to the extent that the
Government/AAA Series contemporaneously owns or has the right to acquire at no
additional cost securities identical to those sold short.
B-18
<PAGE> 46
8. Purchase securities on margin, except that the Series may obtain
necessary short-term credits for the clearance of purchases and sales of
securities.
9. Borrow money, except from banks for temporary or emergency
purposes not in excess of 5% of the value of the Government/AAA Series' total
assets, except that the Series may enter into reverse repurchase agreements.
10. Write, purchase or sell puts, calls or combinations thereof.
The following additional restrictions are not fundamental policies and
may be changed by the Trustees without a vote of shareholders. The
Government/AAA Series may not:
11. Enter into any repurchase agreement maturing in more than seven
days or invest or invest in any other illiquid security if, as a result, more
than 15% of the Series' total 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
Investment Adviser has determined to be liquid pursuant to guidelines
established by the Trustees, will not be considered illiquid for purposes of
this limitation on illiquid securities.
12. Mortgage, pledge, or hypothecate any of its assets, provided that
this restriction shall not apply to the sale of securities pursuant to a reverse
repurchase agreement.
13. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
FUND OFFICERS AND TRUSTEES
The Trustees and executive officers of the Fund, their ages and principal
occupations for the past five years are set forth below. Each Trustee also
serves as a trustee of Seasons Series Trust and SunAmerica Series Trust. Unless
otherwise noted, the address of each executive officer and trustee is 1
SunAmerica Center, Los Angeles, California 90067-6022.
B-19
<PAGE> 47
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Age and Address Position with the Fund During Past Five Years
- --------------------------------- ----------------------------------- ----------------------------------------------------
James K. Hunt, *47 Trustee, Chairman and President Executive Vice President, SunAmerica Investments,
Inc. (1993 to Present); President, SunAmerica
Corporate Finance, (since January 1994); Trustee,
Chairman and President, SunAmerica Series Trust
(since 1994) and Seasons Series Trust (since 1994).
- --------------------------------- ----------------------------------- ----------------------------------------------------
Monica C. Lozano, 42 Trustee Associate Publisher, La Opinion (newspaper
publishing concern) (since 1995); Director, First
Interstate Bank of California (1994-1996); Editor,
La Opinion (1991-1995). Trustee, SunAmerica
Series Trust and Seasons Series Trust (since
January 1999).
- --------------------------------- ----------------------------------- ----------------------------------------------------
Allan L. Sher, 67 Trustee Retired; Trustee, SunAmerica Series Trust (since
1994) and Seasons Series Trust (since 1997).
- --------------------------------- ----------------------------------- ----------------------------------------------------
William M. Wardlaw, 52 Trustee Principal, Freeman Spogli & Co. (investment
banking) (1988-Present), Vice President and
Director, MCC International Holdings (cable)
(since April 1998); Trustee, SunAmerica Series
Trust and Seasons Series Trust.
- --------------------------------- ----------------------------------- ----------------------------------------------------
Scott L. Robinson, 53 Senior Vice President, Treasurer Senior Vice President and Controller, SunAmerica
and Controller Inc. (since 1991); Senior Vice President of Anchor
National (since 1988); Senior Vice President,
Treasurer and Controller, SunAmerica Series Trust
(since 1993) and Seasons Series Trust (since
1997); Joined SunAmerica Inc. in 1978
- --------------------------------- ----------------------------------- ----------------------------------------------------
</TABLE>
B-20
<PAGE> 48
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Age and Address Position with the Fund During Past Five Years
- --------------------------------- ----------------------------------- ----------------------------------------------------
Susan L. Harris, 42 Vice President, Counsel and Senior Vice President (since November 1995),
Secretary Secretary (since 1989) and General
Counsel-Corporate Affairs (since December 1994),
SunAmerica Inc.; Senior Vice President and
Secretary, Anchor National (since 1990); Vice
President, Counsel and Secretary, SunAmerica
Series Trust (since 1993) and Seasons Series Trust
(since 1997); Joined SunAmerica Inc. in 1985.
- --------------------------------- ----------------------------------- ----------------------------------------------------
Peter C. Sutton, 34 Vice President and Assistant Senior Vice President, SunAmerica Asset Management
The SunAmerica Center Treasurer Corp. ("SAAMCo") (since April 1997); Treasurer
733 Third Avenue (since February 1996), SunAmerica Mutual Funds,
New York, NY 10017-3204 Anchor Series Trust and Style Select Series, Inc.
(since 1996); Vice President and Assistant
Treasurer, SunAmerica Series Trust and Seasons
Series Trust (since 1994); formerly, Vice
President, SAAMCo (1994-1997); Controller,
SunAmerica Mutual Funds and Anchor Series Trust
(March 1993 to February 1996); Assistant
Controller, SunAmerica Mutual Funds and Anchor
Series Trust (1990-1993); Joined SAAMCo in 1985.
- --------------------------------- ----------------------------------- ----------------------------------------------------
</TABLE>
B-21
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Age and Address Position with the Fund During Past Five Years
- --------------------------------- ----------------------------------- ----------------------------------------------------
Robert M. Zakem, 41 Vice President and Assistant Secretary, SunAmerica
The SunAmerica Center Series Trust (since 1993) and Seasons Series Trust
733 Third Avenue Vice President and Assistant (since 1997); Secretary and Chief Compliance
New York, NY 10017-3204 Secretary Officer, SunAmerica Mutual Funds and Anchor Series
Trust (since 1993) and Style Select Series (since
1996); Senior Vice President and General Counsel,
SAAMCo (since April 1993); Executive Vice
President, General Counsel and Director,
SunAmerica Capital Services, Inc. (since February
1993); Vice President, General Counsel and
Assistant Secretary, SunAmerica Fund Services,
Inc. (since January 1994).
- --------------------------------- ----------------------------------- ----------------------------------------------------
</TABLE>
- ----------------------
- ----------------------
* A Trustee who may be deemed to be an "interested person" of the Fund as that
term is defined in the 1940 Act.
As of June 1, 1999, the officers and Trustees as a group owned an
aggregate of less than 1% of the shares of each Series.
The Trustees of the Fund are responsible for the overall
supervision of the operation of the Fund and each Series and perform various
duties imposed on trustees of investment companies by the 1940 Act and under the
Fund's Declaration of Trust. The Fund pays no salaries or compensation to any of
its officers, all of whom are officers or employees of the Company or its
affiliates. An annual fee of $8,000, plus $1,250 for each meeting attended, and
expenses are paid to each Trustee who is not an officer or employee of the
Company or its affiliates for attendance at meetings of the Board of Trustees.
All other Trustees receive no remuneration from the Trust.
The following table sets forth information summarizing the
compensation of each Trustee of the Fund for their services as Trustees for the
fiscal year ended November 30, 1998.
B-22
<PAGE> 50
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION PENSION OR RETIREMENT BENEFITS FROM REGISTRANT AND FUND
TRUSTEE FROM REGISTRANT ACCRUED AS PART OF FUND EXPENSES COMPLEX PAID TO TRUSTEES*
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
RICHARDS D. BARGER** $13,000 - $24,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
NORMAN J. METCALFE** $13,000 - $24,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
ALLAN L. SHER $13,000 - $24,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
WILLIAM M. WARDLAW $11,750 - $21,750
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
</TABLE>
- -----------------
* Information is as of November 30, 1998 for the three investment companies
in the complex (the Fund, Seasons Series Trust and SunAmerica
Series Trust) that pay fees to the Trustees.
** Messrs. Barger and Metcalfe served as Trustees until October, 1998.
The following table sets forth information summarizing the compensation
of each of the Trustees for their services as Trustee for the period December 1,
1998 through February 28, 1999 (new fiscal year end).
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION PENSION OR RETIREMENT BENEFITS FROM REGISTRANT AND FUND
TRUSTEE FROM REGISTRANT ACCRUED AS PART OF FUND EXPENSES COMPLEX PAID TO TRUSTEES*
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
<S> <C> <C>
MONICA C. LOZANO* $3,250 - $6,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
ALLAN SHER $3,250 - $6,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
WILLIAM WARDLAW $3,250 - $6,000
- ----------------------------------- -------------------------------- --------------------------------- ---------------------------
</TABLE>
* Ms. Lozano became a Trustee as of January 1, 1999.
INVESTMENT ADVISORY AGREEMENT
The Fund is advised by CRMC of Los Angeles, California, which is a
wholly-owned subsidiary of the Capital Group Companies, Inc., and is
headquartered at 333 South Hope Street, Los Angeles California 90071. The
Amended and Restated Investment Advisory Agreement between
B-23
<PAGE> 51
the Fund and the Investment Adviser, dated March 14, 1990, provides that the
Investment Adviser shall determine what securities are purchased or sold by the
Fund.
The Investment Advisory Agreement continues in effect with respect to
each Series from year to year provided that such continuance is specifically
approved at least annually by (i) the Board of Trustees, or by the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
each Series, and (ii) the vote of a majority of Trustees who are not parties to
the Agreement or interested persons (as defined in the 1940 Act) of any such
party, cast in person, at a meeting called for the purpose of voting on such
approval. The Agreement also provides that it may be terminated by either party
without penalty upon 60 days' written notice to the other party. The Agreement
provides for automatic termination upon assignment.
As compensation for its services, the Investment Adviser receives from
the Fund a fee, accrued daily and payable monthly, based on the net assets of
each Series. For all the Series except the International Series, the fee is
equal to 0.36% (on an annualized basis) of that portion of each Series' average
daily net assets not exceeding $30 million, plus 0.30% of that portion of the
Series' average daily net assets in excess of $30 million. The Investment
Adviser receives a fee, accrued daily and payable monthly, based on the net
assets of the International Series, at the annual rate of 0.66% of that portion
of the Series' average daily net assets not exceeding $60 million, plus 0.58% of
that portion of the Series' average daily net assets in excess of $60 million.
The following tables set forth the total advisory fees received by
the Investment Adviser from each Series pursuant to the Investment Advisory
Agreement for the fiscal years ended November 30, 1998, 1997 and 1996 and for
the period December 1, 1998 through February 28, 1999 (new fiscal year end).
ADVISORY FEES
<TABLE>
<CAPTION>
FUND 1999+ 1998 1997 1996
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
GROWTH SERIES $676,000 $2,453,000 $2,411,000 $2,478,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
INTERNATIONAL SERIES $303,000 $1,283,000 $1,504,000 $1,412,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
GROWTH-INCOME SERIES $692,000 $2,854,000 $2,809,000 $2,672,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
ASSET ALLOCATION SERIES $102,000 $456,000 $481,000 -$472,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
HIGH-YIELD BOND SERIES $76,000 $353,000 $394,000 -$421,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
U.S. GOVERNMENT/AAA-RATED
SECURITIES SERIES $62,000 $253,000 $292,000 -$380,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
CASH MANAGEMENT SERIES $56,000 $228,000 $264,000 $318,000
- ---------------------------------- ------------------------ ---------------------- ----------------------- ---------------------
</TABLE>
+ For the period December 1, 1998 through February 28, 1999 (new fiscal
year end).
B-24
<PAGE> 52
BUSINESS MANAGEMENT AGREEMENT
SunAmerica Asset Management Corp. (the "Business Manager"), organized in
1982 under the laws of Delaware, provides administrative services to the Fund.
The Business Manager is an indirect wholly-owned subsidiary of Anchor National
Life Insurance Company, an indirect subsidiary of SunAmerica Inc., an
investment-grade financial services company. SunAmerica Inc. is wholly-owned by
American International Group, Inc., the leading U.S.-based international
insurance organization, which, through its affiliates, is also engaged in a
range of financial services activities. The Business Management Agreement
between the Fund and the Business Manager, dated January 1, 1999, provides that
the Business Manager will manage the business affairs of the Fund and perform
the administrative functions required of a registered investment company at all
times in accordance with the organizational documents and current prospectus of
the Fund.
As compensation for its services, the Business Manager receives a fee,
accrued daily and payable monthly, based on the net assets of each Series of the
Fund other than the International Series, at the annual rate of 0.24% of that
portion of each Series' average daily net assets not exceeding $30 million, plus
0.20% on that portion of the Series' average daily net assets in excess of $30
million. The Business Manager receives a monthly fee, accrued daily, based on
the average daily net assets of the International Series at the annual rate of
0.24%.
The following tables set forth the total administrative fees paid by the
Fund to the Business Manager and its predecessor, Anchor Investment Adviser,
Inc., pursuant to the Business Management Agreement for the fiscal years ended
November 30, 1998, 1997 and 1996 and for the period December 1, 1998 through
February 28, 1999 (new fiscal year end).
BUSINESS MANAGEMENT FEES
<TABLE>
<CAPTION>
FUND 1999+ 1998 1997 1996
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
GROWTH SERIES $451,000 $1,635,000 $1,607,000 $1,653,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
INTERNATIONAL SERIES $120,000 $511,000 $602,000 -$564,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
GROWTH-INCOME SERIES $461,000 $1,903,000 $1,873,000 $1,781,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
ASSET ALLOCATION SERIES $68,000 $304,000 $320,000 -$314,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
HIGH-YIELD BOND SERIES $50,000 $236,000 $263,000 -$281,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
U.S. GOVERNMENT/AAA-RATED
SECURITIES SERIES $41,000 $169,000 $195,000 $253,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
CASH MANAGEMENT SERIES $38,000 $152,000 $176,000 -$212,000
- -------------------------------- ---------------------- ------------------------- ------------------------ ---------------------
</TABLE>
+ For the period December 1, 1998 through February 28, 1999 (new fiscal
year end).
B-25
<PAGE> 53
The Business Management Agreement provides that it will continue in
effect for two years after initial approval, unless terminated, and may be
renewed from year to year thereafter as to each Series provided that such
continuance is specifically approved at least annually by (i) the Board of
Trustees of the Fund, or a vote of the majority (as defined in the 1940 Act) of
the outstanding voting securities of each Series, and (ii) the vote of a
majority of Trustees who are not parties to the Management Agreement or
interested persons (as defined in said Act) of any such party, cast in person at
a meeting called for the purpose of voting on such approval. The Business
Management Agreement also provides that it may be terminated by either party
without penalty upon 60 days' written notice to the other party. The Agreement
provides for its automatic termination upon assignment.
The Fund pays certain expenses not assumed by the Business Manager
including, but not limited to, expenses of shareholder meetings; reports to
shareholders and the printing of proxies and prospectuses; insurance premiums;
legal and auditing fees; dividend disbursement expenses; the expenses of
issuance, transfer and redemption of shares; custodian fees; printing and
preparation of registration statements; taxes; and the compensation of trustees
who are not interested persons of the Fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
Federal Taxes - Each Series is qualified and intends to remain qualified
and elect to be treated as a regulated investment company under Subchapter M
under the Code. To remain qualified as a regulated investment company, a Series
generally must, among other things, (a) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stocks, securities or foreign currencies, or
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stocks, securities or currencies; (b) diversify its holdings so that, at the end
of each fiscal quarter, (i) 50% of the market value of the Series' assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to 5% of the Series' net assets and to not more than
10% of the voting securities of any one issuer (other than government
securities) and (ii) not more than 25% of the value of its assets are invested
in the securities of any one issuer (other than government securities or the
securities of other regulated investment companies); and (c) distribute at least
90% of its investment company taxable income (including short-term capital
gains).
Each Series will comply with asset diversification regulations prescribed
by the U.S. Treasury Department under the Code. In general, these regulations
effectively provide that, as of the end of each calendar quarter or within 30
days thereafter, no more that 55% of the total assets of the Series may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. For this purpose, all securities of the same issuer are considered
a single investment, but each U.S. agency or
B-26
<PAGE> 54
instrumentality is treated as a separate issuer. There are also alternative
diversification tests that may be satisfied by the Series under the
regulations. Each Series intends to comply with the diversification
regulations. If a Series fails to comply with these regulations, the contracts
invested in that Series will not be treated as annuity, endowment or life
insurance contracts under the Code.
Income received by a Series from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which a Series will be subject, since the amount of that
Series' assets to be invested in various countries is not known. Shareholders
are urged to consult their tax advisors regarding specific questions as to
Federal, state and local taxes. The U.S. Government/AAA-Rated Securities
Series had capital loss carry-forwards of $1,548,666 at February 28, 1999. To
the extent not yet utilized, such losses will be available to each of the
Series to offset future gains through 2005. The utilization of such losses will
be subject to annual limitations under the Code.
SHAREHOLDER VOTING RIGHTS
All shares of the Fund have equal voting rights and may be voted in the
election of Trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing Trustees unless and until
such time as fewer than a majority of the Trustees holding office have been
elected by shareholders. At that time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. The Trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
Trustee when requested to do so by the record holders of 10 percent of the
outstanding shares of the Fund. A Trustee may be removed after the holders of
record of not less than two-thirds of the outstanding shares have declared that
the Trustee be removed either by declaration in writing or by votes cast in
person or by proxy. Except as set forth above, the Trustees shall continue to
hold office and may appoint successor Trustees, provided that immediately after
the appointment of any successor Trustee, at least two-thirds of the Trustees
have been elected by the shareholders. Shares do not have cumulative voting
rights. Thus, holders of a majority of the shares voting for the election of
Trustees can elect all the Trustees. No amendment may be made to the
Declaration of Trust without the affirmative vote of a majority of the
outstanding shares of the Fund, except that amendments to conform the
Declaration to the requirements of applicable federal laws or regulations or
the regulated investment company provisions of the Code may be made by the
Trustees without the vote or consent of shareholders. If not terminated by the
vote or written consent of a majority of its outstanding shares, the Fund will
continue indefinitely.
B-27
<PAGE> 55
In matters affecting only a particular Series, the matter shall have been
effectively acted upon by a majority vote of that Series even though: (1) the
matter has not been approved by a majority vote of any other Series; or (2) the
matter has not been approved by a majority vote of the Fund as a whole.
PRICE OF SHARES
Shares of the Fund are currently offered only to the Variable Separate
Account. The Fund is open for business on any day the NYSE is open for regular
trading. The price paid for shares is the net asset value per share calculated
once daily at the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). Each Series calculates the net asset value of its shares
separately by dividing the total value of its net assets by its shares
outstanding.
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 Investment 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, a Series 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 Fund if acquired
within 60 days of maturity or, if already held by the Fund 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 Investment
Adviser, 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 Series' total assets. A Series' liabilities, including proper
accruals of expense items, are deducted from total assets.
B-28
<PAGE> 56
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the Fund's portfolio securities transactions are placed by the
Investment Adviser. The Investment Adviser strives to obtain the best available
prices in its portfolio transactions taking into account the costs and
promptness of executions. When circumstances relating to a proposed transaction
indicate that a particular broker (either directly or through their
correspondent clearing agents) is in a position to obtain the best price and
execution, the order is placed with that broker. This may or may not be a broker
who has provided investment research statistical, or other related services to
the Investment Adviser or has sold shares of the Fund or other funds served by
the Investment Adviser or Business Manager. The Fund does not consider that it
has an obligation to obtain the lower available commission rate to the exclusion
of price, service and qualitative considerations.
A factor in the selection of brokers is the receipt of research services
- -- analyses and reports concerning issuers, industries, securities, economic
factors and trends -- and other statistical and factual information. Research
and other statistical and factual information provided by brokers is considered
to be in addition to and not in lieu of services required to be performed by the
Investment Adviser.
The extent to which commissions may reflect the value of research
services cannot be presently determined. To the extent that research services of
value are provided by broker-dealers with or through whom the Investment Adviser
places the Fund's portfolio transactions, the Investment Adviser may be relieved
of expenses it might otherwise bear. Research services furnished by
broker-dealers could be useful and of value to the Investment Adviser in serving
other clients as well as the Fund and research services obtained by the
Investment Adviser as a result of the placement of portfolio brokerage of other
clients could be useful and of value in serving the Fund.
There are occasions on which portfolio transactions for the Fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other Funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either advantageous
or disadvantageous to the Fund, they are effected only when the Investment
Adviser believes that to do so is in the interest of the Fund. When such
concurrent authorizations occur, the objective is to allocate the executions in
an equitable manner. The Fund does not intend to pay a mark-up in exchange for
research in connection with principal transactions.
Purchases and sales of money market and other fixed income instruments
usually are principal transactions. Normally, no brokerage commissions are paid
by the Fund for such purchases. Money market instruments are generally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters include an underwriting commission
or concession and purchases from dealers serving as market makers include the
spread
B-29
<PAGE> 57
between the bid and asked price. 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). Where transactions are made in the
over-the-counter market, the Series deals with the primary market makers unless
more favorable prices are obtainable.
The policy of the Fund with respect to brokerage practices is reviewed by
the Board of Trustees from time to time. Because of the possibility of further
regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be modified.
The following tables set forth the brokerage commissions paid by
the Series and the amount of the brokerage commissions that were paid to
affiliated broker-dealers by the Series for the fiscal years ended November 30,
1998, 1997 and 1996 and for the period December 1, 1998 through February 28,
1999 (new fiscal year end).
BROKERAGE COMMISSIONS
DECEMBER 1, 1998 THROUGH FEBRUARY 28, 1999 (NEW FISCAL YEAR END)
<TABLE>
<CAPTION>
PERCENTAGE OF AMOUNT
AGGREGATE PERCENTAGE PAID TO OF TRANSACTIONS
BROKERAGE AMOUNT PAID TO AFFILIATED INVOLVING PAYMENT OF
SERIES COMMISSIONS AFFILIATED BROKER-DEALERS BROKER-DEALERS COMMISSIONS
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
GROWTH SERIES $98,452 $420 0.43% 0.20%
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
INTERNATIONAL SERIES $50,195 - - -
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
GROWTH-INCOME SERIES $162,830 $3,100 1.90% 0.85%
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
ASSET ALLOCATION SERIES $21,342 - - -
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
HIGH-YIELD BOND SERIES - - - -
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
U.S. GOVERNMENT/AAA-RATED
SECURITIES SERIES - - - -
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
CASH MANAGEMENT SERIES - - - -
- --------------------------------- -------------------- -------------------------- ----------------------- -----------------------
</TABLE>
B-30
<PAGE> 58
1998 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AMOUNT PAID TO AFFILIATED
AGGREGATE BROKER- PERCENTAGE PAID TO
SERIES BROKERAGE COMMISSIONS DEALERS AFFILIATED BROKER-DEALERS
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
<S> <C> <C> <C>
GROWTH SERIES $537,003 $4,400 0.82%
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
INTERNATIONAL SERIES $485,903 -- --
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
GROWTH-INCOME SERIES $615,135 $5,605 0.91%
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
ASSET ALLOCATION SERIES $57,341 -- --
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
HIGH-YIELD BOND SERIES $100 -- --
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES -- -- --
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
CASH MANAGEMENT SERIES -- -- --
- --------------------------------------- ----------------------------- ------------------------------ ----------------------------
</TABLE>
1997 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AMOUNT PAID TO AFFILIATED
AGGREGATE BROKER- PERCENTAGE PAID TO AFFILIATED
SERIES BROKERAGE COMMISSIONS DEALERS BROKER-DEALERS
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
<S> <C> <C> <C>
GROWTH SERIES $447,407 $1,175 0.26%
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
INTERNATIONAL SERIES $593,093 -- --
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
GROWTH-INCOME SERIES $645,724 $10,961 1.70%
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
ASSET ALLOCATION SERIES $78,768 $1,250 1.59%
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
HIGH-YIELD BOND SERIES -- -- --
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
U.S. GOVERNMENT/AAA-RATED SECURITIES
SERIES -- -- --
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
CASH MANAGEMENT SERIES -- -- --
- ------------------------------------- ------------------------- --------------------------------- -------------------------------
</TABLE>
B-31
<PAGE> 59
1996 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AMOUNT PAID TO
AGGREGATE AFFILIATED PERCENTAGE PAID TO
SERIES BROKERAGE COMMISSIONS BROKER-DEALERS AFFILIATED BROKER-DEALERS
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
<S> <C> <C> <C>
GROWTH SERIES $545,267 $4,076 0.75%
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
INTERNATIONAL SERIES $501,956 -- --
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
GROWTH-INCOME SERIES $574,225 $4,220 0.74%
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
ASSET ALLOCATION SERIES $79,496 $120 0.15%
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
HIGH-YIELD BOND SERIES -- -- --
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES -- -- --
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
CASH MANAGEMENT SERIES -- -- --
- ------------------------------------------ ----------------------- ------------------------------- ------------------------------
</TABLE>
GENERAL INFORMATION
CUSTODIAN - State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, serves as the Fund's
custodian. In this capacity, State Street maintains the portfolio securities
held by the Fund, administers the purchase and sale of portfolio securities and
performs certain other duties. State Street also serves as transfer agent and
dividend disbursing agent for the Fund.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL - PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036, is the Fund's
independent accountants. PricewaterhouseCoopers LLP performs an annual audit of
the Fund's financial statements and provides tax consulting, tax return
preparation and accounting services relating to filings with the Commission. The
firm of Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, NY
10022, provides legal services to the Fund.
REPORTS TO SHAREHOLDERS - Contract owners are provided at least
semiannually with reports showing the investment portfolio, financial statements
and other information.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Shareholders of a
Massachusetts business trust may, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The risk of a
shareholder of the Fund incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. The Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Fund and provides that
notice of the disclaimer must be given in each agreement, obligation or
B-32
<PAGE> 60
instrument entered into or executed by the Fund or Trustees. The Declaration of
Trust provides for indemnification of any shareholder held personally liable for
the obligations of the Fund and also provides for the Fund to reimburse the
shareholder for all legal and other expenses reasonably incurred in connection
with any such claim or liability.
Under the Declaration of Trust, the Trustees or officers are not
liable for actions or failure to act; however, they are not protected from
liability by reason of their willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their office. The
Fund provides indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
REGISTRATION STATEMENT - A registration statement has been filed
with the Commission under the Securities Act and the 1940 Act. The Prospectus
and this Statement of Additional Information do not contain all information set
forth in the registration statement, its amendments and exhibits thereto, that
the Fund has filed with the Commission, Washington, D.C., to all of which
reference is hereby made.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the Annual Report at no charge by
calling (800) 445-7862 or writing the Fund at P.O. Box 54299, Los Angeles,
California 90054-0299.
B-33
<PAGE> 61
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER AND BAND RATINGS
COMMERCIAL PAPER RATINGS -- Moody's employs the designations
"Prime-1," "Prime-2" and "Prime-3" to indicate commercial paper having the
highest capacity for timely repayment. Issuers rated Prime-1 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; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Issues rated Prime-2 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.
S&P's ratings of commercial paper are graded into four categories
ranging from "A" for the highest quality obligations to "D" for the lowest. A --
Issues assigned its highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with 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 will be denoted with a plus (+) sign designation. A-2 --
Capacity for timely payments on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
CORPORATE DEBT SECURITIES -- Moody's rates the long-term debt
securities issued by various entities from "Aaa" to "C." Aaa -- Best quality.
These securities carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a larger, 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 these issues. Aa --
High quality by all standards. They are rated lower than the best bond because
margins of protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risks appear somewhat greater. A -- Upper medium
grade obligations. These bonds possess many favorable investment attributes.
Factors giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment sometime in
the future. Baa -- medium grade obligations. 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
Appendix-1
<PAGE> 62
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well. Ba -- Have speculative elements; future cannot be
considered as well assured. The protection of interest and principal payments
may be very moderate and thereby not well safeguarded during both good and bad
times over the future. Bonds in this class are characterized by uncertainty of
position. B -- Generally lack characteristics of the desirable investment;
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 -- Of poor standing.
Issues may be in default or there may be present elements of danger with respect
to principal or interest. Ca -- Speculative in a high degree; often in default
or have other marked shortcomings. C -- Lowest rated class of bonds; can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
S&P rates the long-term securities debt of various entities in
categories ranging from "AAA" to "D" according to quality. AAA -- Highest
rating. Capacity to pay interest and repay principal is extremely strong. AA --
High grade. Very strong capacity to pay interest and repay principal. Generally,
these bonds differ from AAA issues only in a small degree. A -- Have a strong
capacity to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of change in circumstances and economic
conditions than debt in higher rated categories. BBB -- Regarded as having
adequate capacity to pay interest and repay principal. These bonds normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C -- Regarded, on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicated the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 -- Reserved for income bonds on which
no interest is being paid. D -- In default and payment of interest and or
principal is in arrears.
Appendix-2
