-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, m2ZdK+8Cbv9nG4W5NmLBgL4XzNhMfH0tgxkpyboy3fbuJghuFhFSo6usbXY8L98W uU+8YF/YJRW/AqI4X16O5A== 0000950109-95-002808.txt : 19950728 0000950109-95-002808.hdr.sgml : 19950728 ACCESSION NUMBER: 0000950109-95-002808 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19950727 EFFECTIVENESS DATE: 19950728 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INCOME FUNDS CENTRAL INDEX KEY: 0000795307 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 033-06502 FILM NUMBER: 95556591 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-04708 FILM NUMBER: 95556592 BUSINESS ADDRESS: STREET 1: 733 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123537651 FORMER COMPANY: FORMER CONFORMED NAME: SUNAMERICA INCOME PORTFOLIOS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INTEGRATED INCOME PORTFOLIOS DATE OF NAME CHANGE: 19900306 485B24E 1 FORM 485B24E As filed with the Securities and Exchange Commission on July 27, 1995 File Nos. 33-6502; 811-4708 ________________________________________________________________________________ ______________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _ Pre-Effective Amendment No. _ Post-Effective Amendment No. 20 X - and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _ Amendment No. 17 X - (Check appropriate box or boxes) SUNAMERICA INCOME FUNDS (Exact Name of Registrant as Specified in Charter) 733 Third Avenue - Third Floor New York, NY 10017 (Address of Principal Executive Office)(Zip Code) Registrant's telephone number, including area code: (800) 858-8850 Robert M. Zakem, Esq. Senior Vice President and General Counsel SunAmerica Asset Management Corp. 733 Third Avenue, Third Floor New York, NY 10017 (Name and Address of Agent for Service) Copy to: Margery K. Neale, Esq. Shereff, Friedman, Hoffman, & Goodman 919 Third Avenue New York, NY 10022 It is proposed that the filing will become effective (check appropriate box) _ immediately upon filing pursuant X on July 28, 1995 pursuant - to paragraph (b) to paragraph (b) _ 60 days after filing pursuant _ on (date) pursuant to paragraph to paragraph (a) (a) of Rule 485 ____________________ The Registrant has previously elected to register an indefinite number of shares of beneficial interest, par value $.01 per share under the Securities Act of 1933, pursuant to Rule 24f-2 under the Investment Company Act 1940. Registrant filed an amended Rule 24f-2 Notice for its fiscal year ended March 31, 1995 on May 16, 1995. ________________________________________________________________________________ ________________________________________________________________________________ CALCULATION OF REGISTRATION FEE
Title Amount Proposed Proposed of of Maximum Maximum Amount Securities Shares Offering Aggregate of Being Being Price Offering Registration Registered Registered Per Share Price Fee - ------------ ---------- --------- --------------- ------------- Beneficial 39,838,592 $7.53 $299,984,597.76 $100* Interest
$.01 Par Value * This calculation has been made pursuant to Rule 24e-2 under the Investment Company Act of 1940, as amended. Registrant, during its fiscal year ended March 31, 1995 redeemed or repurchased 94,729,023 shares. Of these shares, 54,928,942 were previously used for a reduction pursuant to Paragraph (c) of Rule 24f-2. 39,800,081 shares are being used for reduction pursuant to Paragraph (a) of Rule 24e-2 for purposes of this amendment. No previous filing, other than that described above, during Registrant's current fiscal year has utilized redeemed or repurchased shares for purposes of such a reduction. Minimum fee is $100. SUNAMERICA INCOME FUNDS CROSS REFERENCE SHEET Pursuant to Rule 481(a) Under the Securities Act of 1933 --------------------------------
PART A Item No. Registration Statement Caption Caption in Prospectus - ----------- ---------------------------------- --------------------------------- 1 Cover Page Cover Page 2 Synopsis Summary of Fund Expenses 3 Condensed Financial Information Financial Highlights; Performance Data 4 General Description of Registrant Investment Objectives and Policies; Investment Techniques and Risk Factors; Investment Restrictions; General Information 5 Management of the Fund Management of the Trust;Portfolio Transactions and Brokerage 5A Management's Discussion of Fund * Performance 6 Capital Stock and Other Dividends, Distributions and Taxes; Securities General Information 7 Purchase of Securities Being Purchase of Shares; Determination Offered of Net Asset Value 8 Redemption or Repurchase Redemption of Shares; Exchange Privilege 9 Pending Legal Proceedings Inapplicable PART B Caption in Statement Item No. Registration Statement Caption of Additional Information - ----------- ---------------------------------- --------------------------------- 10 Cover Page Cover Page 11 Table of Contents Table of Contents 12 General Information and History History of the Funds 13 Investment Objectives and Investment Objectives and Policies; Invesment Policies Restrictions; Portfolio Turnover; Appendix 14 Management of the Fund Trustees and Officers 15 Contact Persons and Principal Inapplicable Holders of Securities 16 Investment Advisory and Other Adviser, Personal Securities Services Trading, Distributor and Administrator; Additional Information 17 Brokerage Allocation Portfolio Transactions and Brokerage 18 Capital Stock and Other Securities Dividends, Distributions and Taxes; Description of Shares; Additional Information 19 Purchase, Redemption and Pricing Additional Information Regarding of Securities Being Offered Purchase of Shares; Additional Information Regarding Redemption of Shares; Determination of Net Asset Value; Retirement Plans; Additional Information 20 Tax Status Dividends, Distributions andTaxes 21 Underwriters Adviser, Personal Securities Trading, Distributor and Administrator 22 Calculation of Performance Data Performance Data 23 Financial Statements Financial Statements
PART C The information required to be included in Part C is set forth under the appropriate item, so numbered in Part C of this Registration Statement. * Included in the Annual Report to Shareholders for the fiscal year ended March 31, 1995. SUNAMERICA INCOME FUNDS 733 THIRD AVENUE, NEW YORK, NY 10017-3204 GENERAL MARKETING AND SHAREHOLDER INFORMATION (800) 858-8850 SunAmerica Income Funds is an open-end diversified management investment company organized as a Massachusetts business trust (the "Trust") with five different investment funds (each, a "Fund" and collectively, the "Funds"). Each Fund is a separate series of the Trust with distinct investment objectives and/or strategies. Each Fund is advised or managed by SunAmerica Asset Management Corp. (the "Adviser"). An investor may invest in one or more of the following Funds: SunAmerica U.S. Government Securities Fund ("Government Securities Fund")-- seeks high current income consistent with relative safety of capital by investing primarily in securities issued or guaranteed by the U.S. government, or any agency or instrumentality thereof. The Government Securities Fund is neither insured nor guaranteed by the U.S. government. SunAmerica Federal Securities Fund ("Federal Securities Fund")--seeks current income, with capital appreciation as a secondary objective, by investing primarily in securities issued or guaranteed by the U.S. government or any agency or instrumentality thereof. Further, a significant portion of the Fund's assets will be invested in mortgage-backed securities. SunAmerica Diversified Income Fund ("Diversified Income Fund")--seeks a high level of current income consistent with moderate investment risk, with preservation of capital as a secondary objective. The Fund may invest a significant portion of its assets in lower-rated bonds, commonly referred to as "junk bonds." SunAmerica High Income Fund ("High Income Fund")--seeks maximum current income by investing primarily in high-yield, high-risk corporate bonds. The High Income Fund invests predominantly in lower-rated bonds, commonly referred to as "junk bonds." SunAmerica Tax Exempt Insured Fund ("Tax Exempt Insured Fund")--seeks as high a level of current income exempt from Federal income taxes as is consistent with preservation of capital. Although particular securities of the Fund may be insured as to the timely payment of principal and interest, the Fund is not insured by any independent parties or governmental entities. THE DIVERSIFIED INCOME FUND MAY, AND THE HIGH INCOME FUND WILL, INVEST IN LOWER-RATED BONDS COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES ARE SPECULATIVE AND MAY BE SUBJECT TO GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST THAN ARE INVESTMENTS IN HIGHER-RATED BONDS. BECAUSE INVESTMENT IN SUCH SECURITIES ENTAILS GREATER RISKS, AN INVESTMENT IN THE DIVERSIFIED INCOME FUND AND HIGH INCOME FUND SHOULD NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND MAY NOT BE APPROPRIATE FOR ALL INVESTORS. Each Fund currently offers Class A shares and Class B shares. The offering price is the next-determined net asset value per share, plus for each class a sales charge which, at the investor's option, may be (i) imposed at the time of purchase (Class A shares) or (ii) deferred (Class B shares and purchases of Class A shares in excess of $1 million). Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge ("CDSC") may be imposed on redemptions made within six years of purchase. Class B shares of each Fund will convert automatically to Class A shares on the first business day of the month seven years after the issuance of such Class B shares and at such time will be subject to the lower distribution fee applicable to Class A shares. Each Class makes distribution and account maintenance and service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"). See "Purchase of Shares." Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, any bank through which shares may be sold, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. This Prospectus explains concisely what you should know before investing in any of the Funds. Please read it carefully before investing and retain it for future reference. You can find more detailed information about the Funds in the Statement of Additional Information dated July 28, 1995, which is incorporated by reference into this Prospectus, and further information about the performance of the Funds in the Trust's Annual Report to Shareholders. The Statement of Additional Information and Annual Report to Shareholders may be obtained without charge by contacting the Trust at the address or telephone number listed above. - ------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- PROSPECTUS DATED JULY 28, 1995 SUMMARY OF FUND EXPENSES A general comparison of the sales arrangements and other non-recurring ex- penses applicable to Class A shares and Class B shares follows:
GOVERNMENT FEDERAL DIVERSIFIED TAX EXEMPT SECURITIES SECURITIES INCOME HIGH INCOME INSURED FUND FUND FUND FUND FUND ----------- ----------- ----------- ----------- ----------- CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS A B A B A B A B A B ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- SHAREHOLDER TRANSACTIONS EXPENSES Maximum Initial Sales Load(/1/)............. 4.75% None 4.75% None 4.75% None 4.75% None 4.75% None Maximum Sales Load on Reinvested Dividends.. None None None None None None None None None None Deferred Sales Load(/2/)............. None 4.00% None 4.00% None 4.00% None 4.00% None 4.00% Redemption Fees(/3/)... None None None None None None None None None None Exchange Fees.......... None None None None None None None None None None ANNUAL FUND OPERATING EXPENSES(/4/) (AS A PERCENTAGE OF AV- ERAGE NET ASSETS) Management Fees........ 0.64% 0.64% 0.50% 0.50% 0.65% 0.65% 0.75% 0.75% 0.50% 0.50% 12b-1 Fees(/5/)........ 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% Other Expenses......... .47% .51% .55% .53% .59% .47% .51% .41% .35% .42% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Operating Ex- pense(/6/)............. 1.46% 2.15% 1.40% 2.03% 1.59% 2.12% 1.61% 2.16% 1.20% 1.92% ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
- -------- (1) The front-end sales charge on Class A shares decreases with the size of the purchase to 0% for purchases of $1,000,000 or more. See "Purchase of Shares." (2) Purchases of Class A shares in excess of $1,000,000 will be subject to a contingent deferred sales charge on redemptions made within one year of purchase. The contingent deferred sales charge on Class B shares applies only if a redemption occurs within six years from their purchase date. (3) A $15.00 fee may be imposed for wire redemptions. (4) The information provided is based on data for the current fiscal year ended March 31, 1995. (5) 0.25% of the 12b-1 fee comprises an Account Maintenance and Service Fee. A portion of the Account Maintenance and Service Fee is allocated to member firms of the National Association of Securities Dealers, Inc. for continu- ous personal service by such members to investors in the Funds, such as re- sponding to shareholder inquiries, quoting net asset values, providing cur- rent marketing material and attending to other shareholder matters. Class B shareholders who own their shares for an extended period of time may pay more in Rule 12b-1 distribution fees than the economic equivalent of the maximum front-end sales charge permitted under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. (6) For the fiscal year ended March 31, 1995, the total operating expenses (be- fore waivers) for Government Securities Fund Class A and Class B, Federal Securities Fund Class A, High Income Fund Class B and Tax Exempt Insured Fund Class A were: 1.53%, 2.18%, 2.66%, 2.24% and 1.24%, respectively. All of the foregoing fee waivers or expense reimbursements are voluntary, and may be terminated by the Adviser at any time. 2 EXAMPLE: You would pay the following expenses on a $1,000 investment over various time periods assuming (1) a 5% annual rate of return and (2) redemption at the end of each time period. The 5% return and the expenses used in this example should not be considered indicative of actual or expected performance or expenses both of which will vary:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- GOVERNMENT SECURITIES FUND (Class A Shares)............................... $62 $91 $123 $214 (Class B Shares)*.............................. $62 $97 $135 $222 FEDERAL SECURITIES FUND (Class A Shares)............................... $61 $90 $120 $207 (Class B Shares)*.............................. $61 $94 $129 $212 DIVERSIFIED INCOME FUND (Class A Shares)............................... $63 $95 $130 $227 (Class B Shares)*.............................. $62 $96 $134 $225 HIGH INCOME FUND (Class A Shares)............................... $63 $96 $131 $230 (Class B Shares)*.............................. $62 $98 $136 $228 TAX EXEMPT INSURED FUND (Class A Shares)............................... $59 $84 $110 $186 (Class B Shares)*.............................. $60 $90 $124 $196
You would pay the following expenses on the same investment, assuming no redemption:
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- GOVERNMENT SECURITIES FUND (Class A Shares)............................... $62 $91 $123 $214 (Class B Shares)*.............................. $22 $67 $115 $222 FEDERAL SECURITIES FUND (Class A Shares)............................... $61 $90 $120 $207 (Class B Shares)*.............................. $21 $64 $109 $212 DIVERSIFIED INCOME FUND (Class A Shares)............................... $63 $95 $130 $227 (Class B Shares)*.............................. $22 $66 $114 $225 HIGH INCOME FUND (Class A Shares)............................... $63 $96 $131 $230 (Class B Shares)*.............................. $22 $68 $116 $228 TAX EXEMPT INSURED FUND (Class A Shares)............................... $59 $84 $110 $186 (Class B Shares)*.............................. $20 $60 $104 $196
The foregoing examples should not be considered a representation of past or future expenses. Actual expenses may be greater or less than those shown. - -------- * Class B shares convert to Class A shares on the first business day of the month following the seventh anniversary of the purchase of such Class B shares. Therefore, with respect to the 10-year expense information, years 8, 9 and 10 reflect the expenses attributable to ownership of Class A shares. 3 FINANCIAL HIGHLIGHTS The following information regarding selected per share data and ratios for the period July 1, 1993 to March 31, 1994, and for the year ended March 31, 1995 and for the three years in the period ended June 30, 1993 for the Government Securities Fund and for each of the years in the period ended March 31, 1995 for the Federal Securities Fund, has been audited by Price Waterhouse LLP, each Fund's independent accountants, whose reports on the financial statements containing such information for the five years in the period ended March 31, 1995 are included in each Fund's Annual Report to Shareholders. The information for the periods from inception to June 30, 1990 for the Government Securities Fund is derived from the Fund's financial statements, which have been audited by other independent accountants. These Financial Highlights should be read in conjunction with each Fund's financial statements and notes thereto, which are included in the Statement of Additional Information and are incorporated by reference herein. GOVERNMENT SECURITIES FUND
NET GAIN (LOSS) DISTRI- ON BUTIONS INVESTMENTS DISTRI- IN EXCESS NET NET ASSET NET (BOTH DIVIDENDS BUTION OF NET ASSET VALUE, INVEST- REALIZED TOTAL FROM FROM NET (FROM RETURN INVEST- TOTAL VALUE, BEGINNING MENT AND INVESTMENT INVESTMENT OTHER OF MENT DISTRI- END OF TOTAL PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME SOURCES) CAPITAL INCOME BUTIONS PERIOD RETURN(/2/) - ------------ --------- --------- ----------- ---------- ---------- -------- ------- --------- ------- ------ ----------- CLASS A ------- 10/01/93- 03/31/94(/1//1/) $ 8.68 $0.28 $(0.34) $(0.06) $(0.14) $ -- $(0.01) $(0.08) $(0.23) $8.39 (0.68)% 03/31/95 8.39 0.61 (0.30) 0.31 (0.47) -- -- -- (0.47) 8.23 3.89 CLASS B ------- 03/03/86- 06/30/86(/6/) $10.00 $0.17 $(0.07) $ 0.10 $(0.18) $ -- $ -- $ -- $(0.18) $9.92 0.30% 06/30/87(/6/) 9.92 0.74 (0.17) 0.57 (0.78) -- -- -- (0.78) 9.71 6.73 06/30/88(/6/) 9.71 0.88 (0.30) 0.58 (0.88) -- -- -- (0.88) 9.41 6.64 06/30/89(/6/) 9.41 0.87 (0.30) 0.57 (0.87) -- -- -- (0.87) 9.11 6.64 06/30/90(/6/) 9.11 0.84 (0.21) 0.63 (0.84) -- -- -- (0.84) 8.90 7.61 06/30/91(/6/) 8.90 0.82 -- 0.82 (0.73) (0.09) -- -- (0.82) 8.90 9.55 06/30/92(/6/) 8.90 0.73 (0.02) 0.71 (0.57) (0.16) -- -- (0.73) 8.88 8.33 06/30/93 8.88 0.64 (0.17) 0.47 (0.44) (0.17) -- -- (0.61) 8.74 5.49 07/01/93- 03/31/94 8.74 0.43 (0.40) 0.03 (0.24) -- (0.01) (0.13) (0.38) 8.39 0.25 03/31/95 8.39 0.56 (0.30) 0.26 (0.41) -- -- -- (0.41) 8.24 3.25 RATIO OF NET EXPENSES RATIO OF NET ASSETS, TO INVESTMENT PORT- END OF AVERAGE INCOME TO FOLIO YEAR NET AVERAGE TURN- PERIOD ENDED (000'S) ASSETS NET ASSETS OVER - ------------ --------- -------- ------------ ----- 10/01/93- 03/31/94(/1//1/) $ 76,586 1.35%(/3/)(/4/) 6.83%(/3/)(/4/) 35% 03/31/95 73,399 1.46(/5/) 7.50(/5/) 105 03/03/86- 06/30/86(/6/) $ 14,836 2.21%(/3/) 5.06%(/3/) 61% 06/30/87(/6/) 92,977 2.26 7.51 120 06/30/88(/6/) 191,413 2.04 9.26 95 06/30/89(/6/) 300,415 2.03 9.59 51 06/30/90(/6/) 425,890 1.98 9.45 31 06/30/91(/6/) 513,062 1.98(/7/) 9.31(/7/) 38 06/30/92(/6/) 1,075,668 1.92 8.21 54 06/30/93 1,259,845 1.82(/8/) 7.27(/8/) 73 07/01/93- 03/31/94 886,089 1.95(/3/)(/8/) 6.61(/3/)(/8/) 35 03/31/95 594,779 2.15(/1//0/) 6.80(/1//0/) 105
FEDERAL SECURITIES FUND
NET GAIN (LOSS) DISTRI- ON BUTIONS INVESTMENTS IN EXCESS NET NET ASSET NET (BOTH DIVIDENDS OF NET ASSET VALUE, INVEST- REALIZED TOTAL FROM FROM NET DISTRIBUTION INVEST- TOTAL VALUE, BEGINNING MENT AND INVESTMENT INVESTMENT FROM CAPITAL MENT DISTRI- END OF TOTAL PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(/2/) - ------------ --------- ------- ----------- ---------- ---------- ------------ --------- ------- ------ ----------- CLASS A ------- 10/11/93- 03/31/94(/1//1/) $10.58 $0.22(/1/) $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% 03/31/95 10.22 0.60(/1/) (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 CLASS B ------- 03/31/86(/1//4/) $10.18 $0.97 $ 0.87 $ 1.84 $(1.21) $ -- $ -- $(1.21) $10.81 $19.19 03/31/87(/1//4/) 10.81 0.84 (0.01) 0.83 (0.90) (0.10) -- (1.00) 10.64 6.99 03/31/88(/1//4/) 10.64 0.82 (0.49) 0.33 (0.84) -- -- (0.84) 10.13 3.50 03/31/89(/1//4/) 10.13 0.84 (0.45) 0.39 (0.84) -- -- (0.84) 9.68 3.67 03/31/90(/1//4/) 9.68 0.80 0.23 1.03 (0.80) -- -- (0.80) 9.91 10.95 03/31/91(/1//4/) 9.91 0.77 0.44 1.21 (0.77) -- -- (0.77) 10.35 12.78 03/31/92(/1//4/) 10.35 0.77 0.29 1.06 (0.77) -- -- (0.77) 10.64 10.57 03/31/93(/1//4/) 10.64 0.70 0.14 0.84 (0.64) -- -- (0.64) 10.84 8.06 03/31/94 10.84 0.62(/1/) (0.71) (0.09) (0.49) (0.03) (0.01) (0.53) 10.22 (0.89) 03/31/95 10.22 0.63(/1/) (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 NET RATIO OF NET ASSETS, RATIO OF INVESTMENT PORT- END OF EXPENSES INCOME TO FOLIO PERIOD TO AVERAGE AVERAGE TURN- PERIOD ENDED (000'S) NET ASSETS NET ASSETS OVER - ------------ -------- ---------- ------------ ----- 10/11/93- 03/31/94(/1//1/) $ 592 1.39%(/3/)(/1//2/) 4.68%(/3/)(/1//2/) 68% 03/31/95 6,259 1.40(/1//3/) 6.90(/1//3/) 267 03/31/86(/1//4/) $138,950 1.84% 8.72% 43% 03/31/87(/1//4/) 220,616 1.74 8.00 26 03/31/88(/1//4/) 186,573 1.82 8.12 22 03/31/89(/1//4/) 163,942 1.78 8.41 17 03/31/90(/1//4/) 141,277 1.92 8.06 21 03/31/91(/1//4/) 129,108 1.93 7.67 23 03/31/92(/1//4/) 120,454 1.90 7.32 57 03/31/93(/1//4/) 121,267 1.85 6.36 97 03/31/94 81,011 1.98 5.79 68 03/31/95 65,631 2.03 6.33 267
- ------- (1) Calculated based upon average shares outstanding. (2) Total Return is not annualized and does not reflect sales load. (3) Annualized. (4) Net of expense reimbursement equivalent to .10% of average net assets in fiscal 1994. (5) Net of expense reimbursement equivalent to .07% of average net assets in fiscal 1995. (6) Shares of SunAmerica U.S. Government Securities Fund have been redesignated as Class B shares of U.S. Government Securities Fund. (7) Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1991. (8) Net of expense reimbursement equivalent to .02% of average net assets in fiscal 1993. (9) Net of expense reimbursement equivalent to .06% of average net assets in fiscal 1994. (10) Net of expense reimbursement equivalent to .03% of average net assets in fiscal 1995. (11) Commencement of sale of respective class of shares. (12) Net of expense reimbursement equivalent to 6.74% of average net assets in fiscal 1994. (13) Net of expense reimbursement equivalent to 1.26% of average net assets in fiscal 1995. (14) Shares of SunAmerica Federal Securities Fund have been redesignated as Class B shares of Federal Securities Fund. 4 The following information regarding selected per share data and ratios for each of the periods through March 31, 1995 for the Diversified Income Fund and the High Income Fund, has been audited by Price Waterhouse LLP, each Fund's independent accountants, whose reports on the financial statements containing such information for the five years in the period ended March 31, 1995 are included in each Fund's Annual Report to Shareholders. These Financial Highlights should be read in conjunction with each Fund's financial statements and notes thereto, which are included in the Statement of Additional Information and are incorporated by reference herein. DIVERSIFIED INCOME FUND
NET GAIN (LOSS) ON NET NET NET ASSET INVESTMENTS DIVIDENDS ASSET ASSETS, RATIO OF VALUE, NET (BOTH REALIZED TOTAL FROM FROM NET VALUE, END OF EXPENSES BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD TO AVERAGE PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(/1/) (000'S) NET ASSETS - ------------ --------- ---------- -------------- ---------- ---------- ------ ----------- -------- ---------- CLASS A ------- 10/05/93 - 10/31/93(/3/) $5.05 $0.02(/2/) $ 0.01 $ 0.03 $(0.01) $5.07 0.65% $ 762 1.40%(/4/) 11/01/93 - 3/31/94 5.07 0.13(/2/) (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42(/4/)(/5/) 03/31/95 4.79 0.43(/2/) (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 CLASS B ------- 4/06/91 - 10/31/91(/6/)(/7/) $5.29 $0.28 $(0.08) $ 0.20 $(0.28) $5.21 3.40% $ 39,790 0.00%(/4/)(/8/) 10/31/92(/6/)(/7/) 5.21 0.42 (0.41) 0.01 (0.40) 4.82 0.16 35,409 0.74(/9/) 10/31/93(/6/)(/7/) 4.82 0.38(/2/) 0.24 0.62 (0.37) 5.07 13.35 102,519 1.78(/1//0/) 11/01/93 - 3/31/94 5.07 0.15(/2/) (0.27) (0.12) (0.16) 4.79 (2.52) 174,072 2.11(/4/) 03/31/95 4.79 0.40(/2/) (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 RATIO OF NET INVESTMENT INCOME TO AVERAGE NET PORTFOLIO PERIOD ENDED ASSETS TURNOVER - ------------ ------------------- --------- 10/05/93 - 10/31/93(/3/) 8.92%(/4/) 249% 11/01/93 - 3/31/94 8.25(/4/)(/5/) 48 03/31/95 9.58 160 4/06/91 - 10/31/91(/6/)(/7/) 8.87%(/4/)(/8/) 8% 10/31/92(/6/)(/7/) 7.81(/9/) 191 10/31/93(/6/)(/7/) 7.53(/1//0/) 249 11/01/93 - 3/31/94 7.48(/4/) 48 03/31/95 8.98 160
HIGH INCOME FUND
NET GAIN (LOSS) ON NET NET NET ASSET INVESTMENTS DIVIDENDS DISTRIBUTION ASSET ASSETS, VALUE, NET (BOTH REALIZED TOTAL FROM FROM NET FROM VALUE, END OF BEGINNING INVESTMENT AND INVESTMENT INVESTMENT REALIZED END OF TOTAL YEAR PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS--NET PERIOD RETURN(/1/) (000'S) - ------------ --------- ---------- -------------- ---------- ---------- ------------ ------ ----------- -------- CLASS A ------- 09/19/86- 03/31/87(11)(12) $10.14 $0.57 $(0.05) $ 0.52 $0.57 $-- $10.09 5.08% $ 8,272 03/31/88(11)(12) 10.09 1.20 (1.03) 0.17 (1.16) (.03) 9.07 1.28 17,709 03/31/89(11)(12) 9.07 1.14 (0.12) 1.02 (1.11) -- 8.98 11.21 37,122 03/31/90(/1//1/)(/1//2/) 8.98 1.05 (1.86) (0.81) (1.06) -- 7.11 (10.45) 23,162 03/31/91(/1//1/)(/1//2/) 7.11 0.88 (0.27) 0.61 (0.88) -- 6.84 9.51 19,347 03/31/92(/1//1/)(/1//2/) 6.84 0.95 1.28 2.23 (1.00) -- 8.07 35.27 22,607 03/31/93(/1//1/)(/1//2/) 8.07 0.95 0.18 1.13 (1.08) -- 8.12 15.05 30,715 03/31/94(/1//1/)(/1//2/) 8.12 0.87(/2/) (0.14) 0.73 (0.82) -- 8.03 9.14 33,724 03/31/95 8.03 0.78(/2/) (1.03) (0.25) (0.83) -- 6.95 (2.91) 40,585 CLASS B ------- 10/01/93 - 03/31/94 $8.18 $0.38(/2/) $(0.17) $ 0.21 $(0.35) $ 8.04 2.46% $131,713 08/31/95 8.04 0.73(/2/) (1.02) (0.29) (0.79) -- 6.96 (3.42) 153,034 RATIO OF EXPENSES RATIO OF NET TO INVESTMENT AVERAGE INCOME TO NET AVERAGE NET PORTFOLIO PERIOD ENDED ASSETS ASSETS TURNOVER - ------------ -------- ------------ --------- 09/19/86- 03/31/87(11)(12) 1.50%(/1//5/)(/4/) 10.02%(/1//5/)(/4/) 43% 03/31/88(11)(12) 1.65(/1//5/) 11.55(/1//5/) 55 03/31/89(11)(12) 1.76 12.43 135 03/31/90(/1//1/)(/1//2/) 1.94 12.59 112 03/31/91(/1//1/)(/1//2/) 1.90 12.77 95 03/31/92(/1//1/)(/1//2/) 1.57 13.19 208 03/31/93(/1//1/)(/1//2/) 1.77 11.08 232 03/31/94(/1//1/)(/1//2/) 1.72 10.34 290 03/31/95 1.61 10.82 196 10/01/93 - 03/31/94 2.15%(/4/)(/1//3/) 9.07%(/4/)(/1//3/) 290% 08/31/95 2.16(/1//4/) 10.26(/1//4/) 196
- ------- (1)Total Return is not annualized and does not reflect sales load. (2)Calculated based upon average shares outstanding. (3)Commencement of sale of respective class of shares. (4)Annualized. (5)Net of expense reimbursement equivalent to .62% of average net assets in fiscal 1994. (6)Shares of SunAmerica Diversified Income Fund have been redesignated as Class B shares of Diversified Income Fund. (7)Restated to reflect 1.889180183-for-1 stock split effective December 16, 1992. (8)Net of expense reimbursement equivalent to 2.31% of average net assets in fiscal 1991. (9)Net of expense reimbursement equivalent to 1.25% of average net assets in fiscal 1992. (10)Net of expense reimbursement equivalent to .38% of average net assets in fiscal 1993. (11)Shares of SunAmerica High Yield Portfolio have been redesignated as Class A shares of High Income Fund. (12)Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993. (13)Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1994. (14)Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1995. (15) Net of expense reimbursement and fee waiver equivalent to .42% for the fiscal year ended March 31, 1988 and 4.45% for the period ended March 31, 1987. 5 The following information regarding selected per share data and ratios for the periods through March 31, 1995 for the Tax Exempt Insured Fund, has been audited by Price Waterhouse LLP, the Fund's independent accountants, whose report on the financial statements containing such information for the five years in the period ended March 31, 1995 is included in the Fund's Annual Report to Shareholders. These Financial Highlights should be read in conjunction with the Fund's financial statements and notes thereto, which are included in the Statement of Additional Information and are incorporated by reference herein. TAX EXEMPT INSURED FUND
NET GAIN (LOSS) ON INVESTMENTS NET NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS VALUE NET REALIZED TOTAL FROM FROM NET VALUE END OF RATIO OF EXPENSES PERIOD BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD TO AVERAGE NET ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS - ----------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- ------------------ CLASS A ------- 11/22/85- 10/31/86(2) $11.91 $0.81 $0.56 $ 1.37 $(0.81) $12.47 11.60% $131,503 0.77%(/6/)(/1//0/) 10/31/87(2) 12.47 0.86 (1.16) (0.30) (0.86) 11.31 (2.78) 112,681 0.98(/2/) 10/31/88(2) 11.31 0.82 0.87 1.69 (0.82) 12.18 15.27 111,476 1.30 10/31/89(2) 12.18 0.82 0.09 0.91 (0.82) 12.27 7.53 105,834 1.32 10/31/90(2) 12.27 0.82 (0.07) 0.75 (0.82) 12.20 6.28 89,950 1.31 10/31/91(2) 12.20 0.81 0.21 1.02 (0.81) 12.41 8.62 95,246 1.32 10/31/92(2) 12.41 0.79 (0.07) 0.72 (0.80)(/3/) 12.33 5.93 110,364 1.25 10/31/93(2) 12.33 0.70(/4/) 0.50 1.20 (0.74) 12.79 9.95 191,350 1.10(/5/) 11/01/93- 3/31/94 12.79 0.26(/4/) (0.84) (0.58) (0.26) 11.95 (4.61) 165,216 1.28(/6/)(/7/) 03/31/95 11.95 0.63(4) 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20(9) CLASS B ------- 10/04/93- 10/31/93(/8/) $12.84 $0.02(/4/) $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(/6/) 11/01/93- 3/31/94 12.79 0.22(/4/) (0.83) (0.61) (0.23) 11.95 (4.84) 20,765 2.12(/6/) 03/31/95 11.95 0.54(4) 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 RATIO OF NET INVESTMENT PERIOD INCOME TO AVERAGE PORTFOLIO ENDED NET ASSETS TURNOVER - --------------- ------------------ --------- 11/22/85- 10/31/86(2) 7.12%(/6/)(/1//0/) 21% 10/31/87(2) 7.06(/9/) 23 10/31/88(2) 6.85 20 10/31/89(2) 6.68 10 10/31/90(2) 6.70 0 10/31/91(2) 6.57 16 10/31/92(2) 6.26 21 10/31/93(2) 5.56(/5/) 26 11/01/93- 3/31/94 4.99(/6/)(/7/) 52 03/31/95 5.32(9) 162 10/04/93- 10/31/93(/8/) 4.09%(/6/) 26% 11/01/93- 3/31/94 4.17(/6/) 52 03/31/95 4.60 162
- -------- (1) Total return is not annualized and does not reflect sales load. (2) Shares of SunAmerica Tax Exempt Insured Fund have been redesignated as Class A shares of Tax Exempt Insured Fund. (3) Prior year amounts reclassified to net investment income. (4) Calculated based upon average shares outstanding. (5) Net of expense reimbursement equivalent to .10% of average net assets in fiscal 1993. (6) Annualized. (7) Net of expense reimbursement equivalent to .11% of average net assets in fiscal 1994. (8) Commencement of sale of respective class of shares. (9) Net of expense reimbursement equivalent to .04% of average net assets in fiscal 1995. (10) Net of fee waiver equivalent to .27% and .55% of average net assets in fiscal 1987 and 1986, respectively. 6 INVESTMENT OBJECTIVES AND POLICIES The investment objective of the Government Securities Fund, Diversified Income Fund and Tax Exempt Insured Fund is high current income. The investment objective of the Federal Securities Fund is current income. The investment objective of the High Income Fund is maximum current income. Each Fund seeks to achieve its investment objective through investment primarily in fixed income securities, as described below. There can be no assurance that the investment objective of a Fund will be achieved. Except as specifically indicated, the investment policies and strategies described herein are not fundamental policies of the Funds and may be changed by the Board of Trustees (the "Trustees") without the approval of shareholders. Each Fund's respective investment objective and fundamental investment restrictions, however, may not be changed without approval of shareholders of the affected Fund. See "Investment Restrictions." GOVERNMENT SECURITIES FUND The investment objective of the Government Securities Fund is to produce high current income consistent with relative safety of capital. The Fund seeks to achieve its investment objective by investing primarily in securities issued or guaranteed by the U.S. government, or any agency or instrumentality thereof ("U.S. government securities"). See, "Investment Techniques and Risk Factors--U.S. Government Securities" for a description of the various types of U.S. government securities in which the Fund may invest. Under normal circumstances, the Fund's strategy is to invest its assets in such a way so as to minimize the impact of interest rate volatility. Under normal market conditions, at least 65% of the Fund's assets will be invested in U.S. government securities, including certain "mortgage-backed securities". See, "Investment Techniques and Risk Factors--Mortgage-Backed Securities" and the Statement of Additional Information for a description of mortgage-backed securities. Also, in addition to its primary investments, the Fund may invest in short-term investments, including short-term U.S. government securities, repurchase agreements secured by U.S. government securities, and high quality money market instruments (including commercial paper and bankers acceptances). In general, the Adviser anticipates that, over the long term, the Fund's investments will consist primarily of U.S. government securities. However, when interest rates are rising or as a temporary defensive strategy, the Fund may invest a greater portion of its assets in such short-term investments. The Adviser considers both the rate of return and the risk of loss in making investments. While the Adviser anticipates that, over the long term, the Fund will consist primarily of U.S. government securities, when interest rates are rising or for temporary defensive purposes, the Fund may also invest relatively greater portions of its assets in short-term investments. The investment approach of the Adviser will be characterized by gradual, measured changes, rather than dramatic shifts, in the maturity structure of the Fund to reflect what the Adviser believes to be measurable interest rate trends. The Adviser will select debt securities with longer maturities during periods of lower interest rates and securities with shorter maturities when interest rates are rising. Declining interest rates generally encourage strong bond markets; rising interest rates correspondingly tend to foster weak bond markets. As the bond market weakens, liquidity of a portfolio becomes increasingly important. For example, in an uncertain market with no clear trend in interest rates, liquidity is a critical factor and effective portfolio maturities may be reduced to two years or less. In a stable bond market, liquidity would be only a moderate concern and the maturities may be lengthened to approximately eight to ten years. In a strong bond market, liquidity would generally be a minor consideration and maturities may range from ten to thirty years. FEDERAL SECURITIES FUND The investment objective of the Federal Securities Fund is to produce high current income, with capital appreciation as a secondary objective. The Fund seeks to achieve its objective by investing primarily in securities issued or guaranteed by the U.S. government, or any agency or instrumentality thereof ("U.S. government securities"). See, 7 "Investment Techniques and Risk Factors--U.S. Government Securities" for a description of the various types of U.S. government securities. Under normal circumstances, the Fund's strategy is to invest its assets in such a way so as to maximize capital appreciation in a declining interest rate environment. Under normal market conditions, at least 80% of the Fund's assets will be invested in U.S. government securities, including "mortgage-backed securities". See, "Investment Techniques and Risk Factors--Mortgage-Backed Securities" and the Statement of Additional Information for a description of mortgage-backed securities. Also, in addition to its primary investments, the Fund may invest in short-term investments, including short-term U.S. government securities, repurchase agreements secured by U.S. government securities, and high quality money market instruments (including commercial paper and bankers acceptances); privately issued collateralized mortgage obligations; and corporate debt securities. In general, the Adviser anticipates that, over the long term, the Fund's investments will consist primarily of U.S. government securities. However, when interest rates are rising or as a temporary defensive strategy, the Fund may invest a greater portion of its assets in such other types of investments. The investment approach of the Adviser will be characterized by gradual, measured changes, rather than dramatic shifts, in the maturity structure of the Fund to reflect what the Adviser believes to be measurable interest rate trends. The Adviser will select debt securities with longer maturities during periods of lower interest rates and securities with shorter maturities when interest rates are rising. DIVERSIFIED INCOME FUND The investment objective of the Diversified Income Fund is to produce a high level of current income consistent with moderate investment risk, with preservation of capital as a secondary objective. The Diversified Income Fund invests in a diversified portfolio of securities consisting of: (i) securities issued by the U.S. government, or any of its agencies or instrumentalities; (ii) foreign government and corporate debt securities; and (iii) securities issued by domestic corporations, including lower-rated high-yield securities, without regard to the maturities of such securities. Under normal conditions, at least 65% of the Fund's total assets will be invested in income-producing securities, and the Fund's assets will be invested in each of the three categories. In addition, the Fund will generally have no more than 75% of its total assets invested in any one category. Distributable income may fluctuate as the Fund shifts assets among the three categories. See "Investment Techniques and Risk Factors" and the Statement of Additional Information for a description of the types of securities in which the Fund may invest, including mortgage-backed securities, asset-backed securities, zero coupon securities, participation interests, and foreign securities. The higher yields and high income sought by the Fund are generally obtainable from securities in the lower rating categories of the established rating services. Such securities are rated "Baa" or lower by Moody's Investors Service, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's Corporation ("S&P"). The Fund may invest in securities rated as low as "C" by Moody's or "D" by S&P. See the Appendix to the Statement of Additional Information for a description of securities ratings. Such ratings indicate that the obligations are speculative and may be in default. The Fund is not obligated to dispose of securities whose issuers subsequently are in default or if the rating of such securities is reduced. The Fund may also invest in unrated securities which, in the opinion of the Adviser, offer comparable yields and risks as those securities which are rated. See "Investment Techniques and Risk Factors--High Yield/High Risk Securities" below. HIGH INCOME FUND The investment objective of High Income is to produce maximum current income. The Fund seeks to achieve its investment objective by investing primarily in high-yield, high-risk corporate bonds which generally are unrated or carry ratings lower than those assigned to investment grade bonds by S&P or Moody's. High yield is ordinarily associated with unrated bonds or bonds in the lower rating categories of the established rating services (securities rated "Baa" or lower by Moody's or "BBB" or lower by S&P). See the Appendix to the Statement of Additional Information for a description of securities ratings. While providing higher yields, such bonds, whether rated or unrated, are subject to greater risks than 8 lower-yielding, higher-rated, fixed income securities. See "Investment Techniques and Risk Factors--High Yield/High Risk Securities" below. The market value of bonds generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market value of bonds, and a decline in interest rates will tend to increase their value. In addition, bonds with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than bonds with shorter maturities. Fluctuations in the market value of bonds subsequent to their acquisition will not affect cash income from such bonds, but will be reflected in net asset value. Although the bonds in which the High Income Fund will principally invest will be in the lower rating categories and have speculative characteristics, it will not invest in bonds rated less than "B" by Moody's or S&P unless the Adviser believes, as a result of its own analysis as described below, that the financial condition of the issuer or the protection afforded to the particular bonds is stronger than would otherwise be indicated by such low ratings. The Adviser will select not only rated bonds, but may also select unrated bonds that offer, in its opinion, an above-average yield without undue risk. The High Income Fund may invest in instruments rated "Ca," "C" or "D" if the Adviser believes that the opportunity for gain is greater than the risk of such an investment. See "Investment Techniques and Risk Factors--High Yield/High Risk Securities" below and the Appendix to the Statement of Additional Information for a description of some of the risks associated with investing in lower-rated securities. The weighted average ratings by Moody's as a percentage of all bonds held in the High Income Fund's portfolio during the fiscal year ended March 31, 1995 were "Ba3," 5.3%; "Ba2," 1.0%; "B1," 11.7%; "B2," 21.0%; "B3," 47.2%; "Caa," 9.8%; "Ca," 1.3%; and the balance 2.7% in unrated bonds. When prevailing economic conditions cause a narrowing of the spreads between the yields derived from medium- to lower-rated or comparable unrated bonds and those derived from higher-rated bonds, the High Income Fund may invest in higher-rated bonds which provide comparable yields but less risk. The yields derived from higher rated bonds may be lower than yields derived from medium- to lower-rated bonds. The Adviser considers both the opportunity for gain and the risk of loss in selecting investments. Consistent with the primary objective, the Adviser anticipates that, under normal conditions, at least 80% of the High Income Fund's total assets will be invested in bonds, as described above. The remaining assets may be invested in other debt instruments, including U.S. government securities and short-term investments. In addition, up to 5% of the High Income Fund's total assets may be invested in common and preferred stock and other equity securities that are acquired as part of a unit consisting of a combination of fixed-income and equity securities. See "Investment Techniques and Risk Factors" for a description of the types of securities in which the Fund may invest. TAX EXEMPT INSURED FUND The investment objective of the Tax Exempt Insured Fund is to produce as high a level of current income exempt from Federal income taxes as is consistent with preservation of capital. The Tax Exempt Insured Fund seeks to achieve its objective by investing under normal market conditions at least 80% of its total assets in Municipal Bonds, the income of which is exempt from Federal income taxes, and at least 65% of its total assets in Municipal Bonds that, in addition to having income which is exempt from Federal income tax, also are insured as to the scheduled payment of principal and interest for as long as such bonds are held by the Fund, without regard to the maturities of such securities. The Fund's policy of investing 80% of its total assets in Municipal Bonds, the income of which is exempt from Federal income taxes, is a fundamental policy of the Fund which may not be changed without the approval of the Fund's shareholders. The Fund will not invest more than 25% of its total assets in Municipal Securities the issuers of which are located in the same state. Further, the Fund will not invest in Municipal Securities rated below the four highest ratings categories of Moody's or S&P, or, if unrated, deemed by the Adviser to be of comparable quality. On a temporary defensive basis or due to market conditions, the Fund may invest up to 100% of its total assets in Municipal Notes and Short-Term Taxable Securities (neither of which are insured), as well as in repurchase agreements collateralized by such securities. See the Appendix to the Statement of Additional Information for more information with respect to ratings. 9 "Municipal Securities" include long-term (i.e., maturing in over 10 years) and medium-term (i.e., maturing in from 3 to 10 years) municipal bonds ("Municipal Bonds") as well as short-term (i.e., maturing in 1 day to 3 years) municipal notes and tax-exempt commercial paper ("Municipal Notes"), and in each case refers to debt obligations issued by or on behalf of states, territories and possessions of the United States and by the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest from which is, in the opinion of bond counsel at the time of issuance, exempt from Federal income tax. A portion of the Municipal Bonds in which the Fund invests may be issued by state, county, city or agency authorities established for the purpose of purchasing residential mortgages ("Municipal Housing Bonds"). To the extent practicable, the Fund will invest in insured Municipal Housing Bonds that are secured by residential mortgages, when such mortgages are either insured by the Federal Housing Authority ("FHA") or guaranteed by the Veteran's Administration ("VA") of the United States government. Although the Fund will attempt to diversify its holdings of Municipal Housing Bonds geographically, there may be similar factors affecting the ability of the mortgagors on the mortgages underlying such securities to maintain payments under the mortgages. Such factors could include changes in national and state policies relating to transfer payments, such as unemployment insurance and welfare, and adverse economic developments, in particular, those affecting less skilled and low income workers. Insurance Feature. As discussed above, the Fund will invest at least 65% of its total assets in Municipal Bonds that, at the time of purchase, either (1) are insured under a Mutual Fund Insurance Policy issued to the Fund by Financial Guaranty Insurance Company ("Financial Guaranty") or another insurer or (2) are insured under an insurance policy obtained by the issuer or underwriter of such Municipal Bonds at the time of original issuance thereof (a "New Issue Insurance Policy"). If a Municipal Bond already is covered by a New Issue Insurance Policy when acquired by the Fund, then coverage will not be duplicated by a Mutual Fund Insurance Policy; if a Municipal Bond is not covered by a New Issue Insurance Policy then it will be covered by a Mutual Fund Insurance Policy purchased by the Fund. The Fund may also purchase other Municipal Bonds or Municipal Notes that are insured. However, in general, Municipal Notes presently are not issued with New Issue Insurance Policies, and the Fund generally does not expect to cover Municipal Notes under its Mutual Fund Insurance Policies. Accordingly, the Fund does not presently expect that any significant portion of the Municipal Notes it purchases will be covered by insurance. For the fiscal year ended March 31, 1995, the premiums for a Mutual Fund Insurance Policy were .02% of the average net assets of the Fund. It should be noted that insurance is not a substitute for the basic credit of an issuer, but supplements the existing credit and provides additional security therefor. Moreover, while insurance coverage for the Municipal Bonds held by the Fund reduces credit risk by insuring that the Fund will receive payment of principal and interest, it does not protect against market fluctuations caused by changes in interest rates and other factors. Financial Guaranty. Financial Guaranty is a wholly-owned subsidiary of FGIC Corporation, a Delaware holding company. Financial Guaranty, domiciled in the State of New York, commenced its business of providing insurance and financial guarantees for a variety of investment instruments in January 1984. FGIC Corporation is a wholly-owned subsidiary of General Electric Capital Corporation. Neither FGIC Corporation nor General Electric Capital Corporation is obligated to pay the debts of or the claims against Financial Guaranty. The information relating to Financial Guaranty contained herein has been furnished by Financial Guaranty. No representation is made herein as to the accuracy or adequacy of such information subsequent to the date hereof. The Fund may purchase insurance from Financial Guaranty or from other insurers. The use of insurance will result in a lower yield to shareholders of the Fund than would be the case if non-insured securities were purchased. INVESTMENT TECHNIQUES AND RISK FACTORS U.S. GOVERNMENT SECURITIES. Each Fund may invest in securities issued or guaranteed as to principal or interest by the U.S. government or its 10 agencies or instrumentalities. Direct obligations of the U.S. Treasury include bills, notes and bonds, which principally differ in their interest rates, maturities and times of issuance. Such securities are back by the "full faith and credit" of the United States. Securities issued or guaranteed by agencies or instrumentalities are supported by (i) the full faith and credit of the United States, such as obligations of the Government National Mortgage Association ("Ginnie Mae"), the Farmers Home Administration or the Export- Import Bank; (ii) the limited authority of the issuer to borrow from the U.S. Treasury, such as obligations of the Student Loan Marketing Association, the Federal Home Loan Mortgage Association ("Freddie Mac"), or the Tennessee Valley Authority; and (iii) the authority of the U.S. government to purchase certain obligations of the issuer, such as obligations of the Federal National Mortgage Association ("Fannie Mae"), the Federal Farm Credit System or the Federal Home Loan Banks. No assurance can be given that the U.S. government will provide financial support to its agencies and instrumentalities as described in (ii) and (iii) above, other than as set forth, since it is not obligated to do so by law. As such, the Fund must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment. U.S. government securities also include certain mortgage-backed securities, described below under "Mortgage-Backed Securities." MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed securities, which directly or indirectly provide funds for mortgage loans made to residential home buyers. These include securities which represent interests in pools of mortgage loans made by lenders such as commercial banks, savings and loan institutions, mortgage bankers and others. Pools of mortgage loans are assembled for sale to investors by various governmental, government- related and private organizations. Interests in pools of mortgage-backed securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass- through" of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by prepayments resulting from the sale of the underlying residential property, refinancing or foreclosure (net of fees or costs which may be incurred). In addition, pre-payment of principal on mortgage-backed securities, which often occurs when interest rates decline, can significantly change the realized yield of these securities. Some mortgage-backed securities are described as "modified pass- through." These securities entitle the holders to receive all interest and principal payments owned on the mortgages in the pool, net of certain fees, regardless of whether or not the mortgagors actually make the payments. The principal government guarantor of mortgage-backed securities is Ginnie Mae. Ginnie Mae is authorized to guarantee, with the full faith and credit of the U.S. government, the timely payment of principal and interest on securities issued by approved institutions such as the Federal Housing Association ("FHA") or Veterans Association ("VA") and backed by pools of FHA- insured or VA-guaranteed mortgages. Residential mortgage loans are pooled by various other governmental or private entities, including Freddie Mac. Freddie Mac issues Participation Certificates which represent interests in mortgages from Freddie Mac's national portfolio. Freddie Mac guarantees the timely payment of interest and ultimate collection of principal. Fannie Mae purchases residential mortgages from a list of approved seller/servicers, which include state and federally-chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pay-through pools of mortgage loans and issue fixed-income securities which are collateralized by mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae or by pools of conventional mortgages, and are referred to as "collateralized mortgage obligations" ("CMOs"). Pools created by such nongovernmental issuers and CMOs issued by the pools generally offer a higher 11 rate of interest than government and government-related pools because there are no direct or indirect government guarantees of payments in such pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. In the case of CMOs, timely payment of interest and principal is supported by the government-related securities which collateralize such obligations or by a pool of conventional mortgages. There can be no assurance that the private insurers can meet their obligations under the policies. Each Fund may also invest in parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or fi- nal distribution date of each class, which, as with other CMO structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PAC Bonds generally require payments of a specified amount of principal on each payment date. PAC Bonds are always parallel pay CMOs with the required principal payment on such securities having the highest priority after interest has been paid to all classes. The mortgage-backed securities in which the Funds may invest include stripped mortgage-backed securities. Stripped mortgage-backed securities are often structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. Stripped mortgage-backed securities have greater market volatility than other types of U.S. government securities in which the Funds invest. A common type of stripped mortgage-backed security has one class receiving some of the interest and all or most of the principal (the "principal only" class) from the mort- gage pool, while the other class will receive all or most of the interest (the "interest only" class). The yield to maturity on an interest only class is ex- tremely sensitive not only to changes in prevailing interest rates, but also to the rate of principal payments, including principal prepayments, on the un- derlying pool of mortgage assets, and a rapid rate of principal payment may have a material adverse effect on a Fund's yield. Notwithstanding the Funds' ability to do so, they will not invest in the "principal only" component of stripped mortgage-backed securities until further notice. While interest-only and principal-only securities are generally regarded as being illiquid, such securities may be deemed to be liquid if they can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of the Fund's net asset value per share. Only government in- terest only and principal only securities backed by fixed-rate mortgages and determined to be liquid under guidelines and standards established by the Trustees may be considered liquid securities not subject to a Fund's limita- tion on investments in illiquid securities. The Diversified Income Fund, Federal Securities Fund and Government Securi- ties Fund may also enter into "forward roll" transactions with banks with re- spect to the mortgage-backed securities in which it may invest. A Fund would be required to place cash, U.S. government securities or other high-grade debt securities in a segregated account with its custodian in an amount equal to its obligation under the roll; that amount is subject to the limitation on borrowing described in the Statement of Additional Information. ASSET-BACKED SECURITIES. The Diversified Income Fund may invest in securi- ties which represent undivided fractional interests in pools of loans, similar in structure to the mortgage-backed securities in which the Fund may invest, as described above. Payments of principal and interest are passed through to holders of asset-backed securities and are typically supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or priority to certain of the borrower's other securities. The degree of credit enhancement varies, and generally applies to only a frac- tion of the asset-backed security's par value until exhausted. If the credit enhancement of an asset-backed security held by the Fund has been exhausted, and if any required payments of principal and interest are not made with re- spect to the underlying loans, the Fund may experience losses or delays in re- ceiving payment. ZERO COUPON SECURITIES. The Funds may invest in zero coupon securities as follows: (i) The Diversified Income Fund, High Income Fund, Federal Securities Fund and Government Securities Fund may invest in zero coupon securities issued by 12 the U.S. Treasury; and, in addition, (ii) the Diversified Income Fund and High Income Fund may invest in zero coupon securities issued by domestic corporations, and (iii) the Tax Exempt Insured Fund may invest in zero coupon securities issued by state and local government entities. Zero coupon U.S. government securities are: (i) U.S. Treasury notes and bonds which have been stripped of their unmatured interest coupons and receipts, or (ii) certificates representing interest in such stripped debt obligations or coupons. Because a zero coupon security pays no interest to its holder during its life or for a substantial period of time, it usually trades at a deep discount from its face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities which make current distributions of interest. Because the Funds accrue taxable income from these securities without receiving cash, the Funds may be required to sell portfolio securities in order to pay a dividend depending upon the proportion of shareholders who elect to receive dividends in cash rather than reinvesting dividends in additional shares of the Funds. The Funds might also sell portfolio securities to maintain portfolio liquidity. In either case, cash distributed or held by the Funds and not reinvested will hinder the Funds in seeking a high level of current income. Corporate zero coupon securities are: (i) notes or debentures which do not pay current interest and are issued at substantial discounts from par value, or (ii) notes or debentures that pay no current interest until a stated date one or more years into the future, after which the issuer is obligated to pay interest until maturity, usually at a higher rate than if interest were payable from the date of issuance and may also make interest payments-in-kind (e.g., with identical zero coupon securities). Such corporate zero coupon securities, in addition to the risks identified above, are subject to the risk of the issuer's failure to pay interest and repay principal in accordance with the terms of the obligation. The Funds must accrue the discount or interest on high-yield bonds structured as zero coupon securities as income even though it does not receive a corresponding cash interest payment until the security's maturity or payment date. Municipal zero coupon securities are: (i) notes or bonds which do not pay current interest and are issued at substantial discounts from par value, or (ii) notes or bonds that pay no current interest until a stated date one or more years into the future, after which the securities convert to an interest bearing on a semi-annual basis. The funds must accrue the discount or interest on the bonds structured as zero coupon securities as income even though it does not receive a corresponding cash interest payment until the security's maturity or payment date. PARTICIPATION INTERESTS. The Diversified Income Fund and High Income Fund may acquire participation interests in senior, fully-secured floating rate loans that are made primarily to U.S. companies (the "borrower"). Such participation interests, which may take the form of interests in, or assignments of, loans, are acquired from banks which have made loans or are members of lending syndicates. Each Fund's investments in participation interests are subject to its 10% of net assets limitation on investments in illiquid securities. The Funds may purchase only those participation interests that mature in one year or less, or, if maturing in more than one year, that have a floating rate that is automatically adjusted at least once each year according to a specified rate for such investments, such as the percentage of a bank's prime rate. Participation interests are primarily dependent upon the creditworthiness of the borrower for payment of interest and principal. Such borrowers may have difficulty making payments and may have senior securities rated as low as "C" by Moody's or "D" by S&P. In the event the borrower fails to pay scheduled interest or principal payments, a Fund could experience a reduction in its income and might experience a decline in the net asset value of its shares. FOREIGN SECURITIES. The Diversified Income Fund and High Income Fund may in- vest in U.S. dollar-denominated fixed-income securities issued by domestic corporations in any industry (industrial, financial or utility). The Funds may also invest in debt obligations (which may be denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (in- cluding political subdivisions having taxing authority) or their agencies or instrumentalities, and debt obligations issued by U.S. corporations which are either denominated in non-U.S. currencies or traded in foreign markets (e.g., Eurobonds). The Funds may purchase securities issued by issuers in any coun- try; provided that the Funds may not invest more than 25% of their respective total assets in the securities issued by entities domiciled in any one foreign 13 country. Investment in securities or issuers in non-industrialized countries generally involves more risk and may be considered highly speculative. There is no restriction as to the size of the issuer. These investments may include debt obligations such as bonds, debentures and notes (including variable and floating rate instruments), zero coupon securities and sinking fund and call- able bonds. If a bond held by a Fund is selling at a premium (or discount) and the issuer exercises a call or makes a mandatory sinking fund payment, the Fund would realize a loss (or gain) in market value; the income from the rein- vestment of the proceeds would be determined by current market conditions. The percentage of the Diversified Income Fund's or High Income Fund's total assets that will be allocated to foreign securities will vary depending on the relative yields of foreign and U.S. securities, the economies of foreign coun- tries, the condition of such countries' financial markets, the interest rate climate of such countries and the relationship of such countries' currency to the U.S. dollar. These factors are judged on the basis of fundamental economic criteria (e.g., relative inflation levels and trends, growth rate forecasts, balance of payments status, and economic policies) as well as technical and political data. Subsequent foreign currency losses may result in a Fund having previously distributed more income in a particular period than was available from investment income, which could result in a return of capital to share- holders. The Diversified Income Fund and High Income Fund may each invest in securi- ties of foreign issuers in the form of American Depositary Receipts (ADRs). ADRs are certificates issued by a U.S. depository (usually a bank) and repre- sent a specified quantity of shares of an underlying non-U.S. stock on deposit with a custodian bank as collateral. ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a depository which has an exclusive relationship with the issuer of the underlying security. An unsponsored ADR may be issued by a number of U.S. depositories. A Fund may invest in either type of ADR. Al- though the U.S. investor holds a substitute receipt of ownership rather than direct stock certificates, the use of the depository receipts in the United States can reduce costs and delays as well as potential currency exchange and other difficulties. A Fund may purchase securities in local markets and direct delivery of these ordinary shares to the local depository of an ADR agent bank in the foreign country. Simultaneously, the ADR agents create a certificate which settles at the Fund's custodian in five days. The Fund may also execute trades on the U.S. markets using existing ADRs. A foreign issuer of the secu- rity underlying an ADR is generally not subject to the same reporting require- ments in the United States as a domestic issuer. Accordingly the information available to a U.S. investor will be limited to the information the foreign issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer of the underlying security. Securities of foreign issuers that are represented by ADRs or that are listed on a U.S. securities exchange are not considered "for- eign securities" for purposes of a Fund's 25% limitation on investments in such securities. Foreign securities are subject to risks different than those involved in in- vestment in domestic securities and markets. Foreign investments may be af- fected favorably or unfavorably by changes in currency rates and exchange-con- trol regulations and costs will be incurred in connection with conversions be- tween various currencies. The value of a security may fluctuate as a result of currency exchange rates in a manner unrelated to the underlying value of the security. There may be less publicly available information about a foreign company than about a U.S. company, and foreign companies may not be subject to uniform accounting, auditing and financial reporting standards and require- ments comparable to those applicable to U.S. companies. Securities of some foreign companies may be less liquid or more volatile than securities of U.S. companies, and foreign brokerage commissions and custodian fees are generally higher than in the U.S. In addition, there is generally less governmental reg- ulation of stock exchanges, brokers and listed companies abroad than in the U.S. Investments in foreign securities may also be subject to other risks, different from those affecting U.S. investments, including local political or economic developments, expropriation or nationalization of assets and imposi- tion of withholding taxes on dividend or interest payments. ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets, de- termined as of the date of purchase, in illiquid securities including repur- chase agreements which have a maturity of longer than seven days, securities with legal or contractual restrictions on resale (restricted securities), and securities 14 that are not readily marketable in securities markets either within or without the United States. Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended, that have a readily avail- able market are not considered illiquid for purposes of a Fund's 10% limita- tion on purchases of illiquid securities. Because it is not possible to pre- dict with assurance how the market for restricted securities will develop, the Adviser will monitor the liquidity of such restricted securities under the su- pervision of the Trustees. To the extent that, for a period of time, qualified institutional buyers cease purchasing such restricted securities pursuant to Rule 144A, the Fund's investing in such securities may have the effect of in- creasing the level of illiquidity in the Fund's portfolio during such period. See "Illiquid Securities" in the Statement of Additional Information for a discussion of the risks associated with investments in such securities. SHORT-TERM AND TEMPORARY DEFENSIVE INVESTMENTS. In addition to their primary investments, each Fund may also invest up to 10% of its total assets in money market instruments for liquidity purposes (to meet redemptions and expenses). For temporary defensive purposes, each Fund may invest up to 100% of its total assets in short-term fixed-income securities, including corporate debt obliga- tions and money market instruments rated in one of the two highest categories by a nationally recognized statistical rating organization (or determined by the Adviser to be of equivalent quality). Money market instruments include se- curities issued or guaranteed by the U.S. government, its agencies or instru- mentalities, repurchase agreements, commercial paper, bankers' acceptances and certificates of deposit. See the Appendix to the Statement of Additional In- formation for a description of securities ratings. REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements in order to generate income while providing liquidity. When a Fund acquires a security from a bank or securities dealer, it may simultaneously enter into a repurchase agreement, wherein the seller agrees to repurchase the security at a mutually agreed-upon time (generally within seven days) and price. The repurchase price is in excess of the purchase price by an amount which reflects an agreed-upon market rate of return, which is not tied to the coupon rate or maturity of the underlying security. Repurchase agreements will be fully collateralized. If, however, the seller defaults on its obligation to repurchase the underlying security, the Fund may experience delay or difficulty in exercising its rights to realize upon the security and might incur a loss if the value of the security has declined. The Fund might also incur disposition costs in liquidating the security. There is no limit on the amount of a Fund's net assets that may be subject to repurchase agreements having a maturity of seven days or less for temporary defensive purposes. REVERSE REPURCHASE AGREEMENTS. Each Fund may enter into reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells a security subject to the rights and obligations to repurchase such security. The Fund then invests the proceeds from the transaction in another obligation in which the Fund is authorized to invest. In order to minimize any risk involved, the Fund maintains in a segregated account with the custodian cash, cash equivalents or liquid high grade debt securities equal in value to the repurchase price. INTEREST RATE SWAP TRANSACTIONS. The Diversified Income Fund and High Income Fund may enter into interest rate swaps. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest, for example, an exchange of floating rate payments for fixed-rate payments. Each Fund intends to use these transactions as a hedge and not as a speculative investment. The risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make and will not exceed 5% of the Fund's net assets. Each Fund may pledge up to 5% of its net assets in connection with swap transactions. The use of interest rate swaps may involve investment techniques and risks different from those associated with ordinary portfolio transactions. If the Adviser is incorrect in its forecast of market values, interest rates and other applicable factors, the investment performance of a Fund would diminish compared to what it would have been if this investment technique was never used. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of cash, U.S. government securities or other liquid high grade debt obligations having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by 15 a custodian that satisfies the requirements of the 1940 Act. Each Fund also will establish and maintain such segregated accounts with respect to its total obligations under any interest rate swaps that are not entered into on a net basis and with respect to any interest rate caps, collars and floors that are written by the Fund. WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase or sell securities on a when-issued or delayed-delivery basis. When-issued or delayed-delivery transactions arise when securities are purchased or sold by a Fund with payment and delivery taking place a month or more in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. While the Fund will only purchase securities on a when-issued or delayed-delivery basis with the intention of acquiring the securities, the Fund may sell the securities before the settlement date, if it is deemed advisable. At the time the Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, the Fund will record the transaction and thereafter reflect the value, each day, of such security in determining the net asset value of the Fund. At the time of delivery of the securities, the value may be more or less than the purchase price. The Fund will maintain in a segregated account of the Fund liquid assets having a value equal to or greater than the Fund's purchase commitments. The Fund will likewise segregate liquid assets in respect of securities sold on a delayed delivery basis. Subject to this requirement, each Fund may purchase securities on such basis without limitation. LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities in amounts up to 33% of its respective total assets to brokers, dealers and other financial institutions, provided such loans are callable at any time by the Fund and are at all times secured by cash or equivalent collateral. By lending its portfolio securities, a Fund will receive income while retaining the securities' potential for capital appreciation. As with any extensions of credit, there are risks of delay in recovery and, in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Adviser to be creditworthy. LEVERAGE. In seeking to enhance investment performance, the Federal Securities Fund, Diversified Income Fund and High Income Fund may borrow money for investment purposes and may each pledge its assets to secure such borrowings. This is the speculative factor known as leverage. This practice may help a Fund increase the net asset value of its shares in an amount greater than would otherwise be the case when the market values of the securities purchased through borrowing increase. In the event the return on an investment of borrowed monies does not fully recover the costs of such borrowing, the net asset value of a Fund's shares would be reduced by a greater amount than would otherwise be the case. The effect of leverage will therefore tend to magnify the gains or losses to a Fund as a result of investing the borrowed monies. During periods of substantial borrowings, the net asset value of a Fund's shares would be reduced due to the added expense of interest on borrowed monies. Each Fund is authorized to borrow, and to pledge assets to secure such borrowings, up to the maximum extent permissible under the 1940 Act (i.e., presently 50% of its net assets). The time and extent to which a Fund may employ leverage will be determined by the Adviser in light of changing facts and circumstances, including general economic and market conditions, and will be subject to applicable lending regulations of the Board of Governors of the Federal Reserve Board. A Fund's policy regarding the use of leverage is fundamental, and may not be changed without the approval of the shareholders of the respective Fund. Under the 1940 Act, the value of a Fund's assets less liabilities, other than borrowings, must be at least three times all of the Fund's borrowings, including the proposed borrowing. If for any reason the value of a Fund's assets falls below the 1940 Act requirement, the Fund must within three business days reduce its borrowings to satisfy such requirement. To do this, a Fund may have to sell a portion of its investments at a time when it may be disadvantageous to do so. HEDGING AND INCOME ENHANCEMENT STRATEGIES. Each Fund may write covered calls to enhance income. For hedging purposes as a temporary defensive maneuver, each Fund may use interest rate futures and stock and bond index futures (together, "Futures"); forward contracts on foreign currencies; and call and put options on equity and debt securities, Futures, stock and bond indices and foreign currencies (all of the foregoing are referred to as "Hedging Instruments"). A call or put may be purchased only if, after such purchase, the value of all 16 call and put options held by the Fund would not exceed 5% of the Fund's total assets. A Fund will not use Futures and options on Futures for speculation. All puts and calls on securities, interest rate futures or stock and bond index futures or options on such Futures purchased or sold by the Fund will be listed on a national securities or commodities exchange or on U.S. over-the- counter markets. Special Risks of Hedging and Income Enhancement Strategies. Participation in the options or Futures markets and in currency exchange transactions involves investment risks and transaction costs to which a Fund would not be subject absent the use of these strategies. If the Adviser's predictions of movements in the direction of the securities, foreign currency and interest rate markets are inaccurate, the adverse consequences to the Fund may leave the Fund in a worse position than if such strategies were not used. Risks inherent in the use of options, foreign currency and Futures contracts and options on Futures contracts include (1) dependence on the Adviser's ability to predict correctly movements in the direction of interest rates, securities prices and currency markets; (2) imperfect correlation between the price of options and Futures contracts and options thereon and movements in the prices of the securities or currencies being hedged; (3) the fact that skills needed to use these strategies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences; and (6) the possible inability of the Fund to purchase or sell a portfolio security at a time that otherwise would be favorable for it to do so, or the possible need for the Fund to sell a portfolio security at a disadvantageous time, due to the need for the Fund to maintain "cover" or to segregate securities in connection with hedging transactions. A transaction is "covered" when the Fund owns the security subject to the option on such security, or some other security acceptable for applicable escrow requirements. See the Statement of Additional Information for further information concerning income enhancement and hedging strategies and the regulation requirements relating thereto. FUTURE DEVELOPMENTS. Each Fund may invest in securities and other instruments which do not presently exist but may be developed in the future, provided that each such investment is consistent with the Fund's investment objectives, policies and restrictions and is otherwise legally permissible under federal and state laws. The Prospectus will be amended or supplemented as appropriate to discuss any such new investments. HIGH YIELD/HIGH RISK SECURITIES. The High Income Fund invests primarily in high yielding, lower-rated bonds, commonly called "junk bonds." The Diversified Income Fund may also invest in these securities. Bonds that are rated "Baa" or lower by Moody's or "BBB" or lower by S&P, or unrated bonds of comparable quality, are generally considered to be high yield bonds. These high yield bonds are subject to greater risks than lower yielding, higher rated debt securities. Risk Factors Applicable to High Yield/High Risk Securities. It should be noted that lower-rated securities are subject to risk factors such as: (a) vulnerability to economic downturns and changes in interest rates; (b) sensitivity to adverse economic changes and corporate developments; (c) redemption or call provisions which may be exercised at inopportune times; (d) difficulty in accurately valuing or disposing of such securities; (e) federal legislation which could affect the market for such securities; and (f) special adverse tax consequences associated with investments in certain high-yield, high-risk bonds (e.g., zero coupon bonds or pay-in-kind bonds). See "Dividends, Distributions and Taxes." High yield bonds, like other bonds, may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the High Income Fund or Diversified Income Fund would have to replace the security with a lower yielding security, resulting in lower return for investors. Conversely, a high yield bond's value will decrease in a rising interest rate market. There is a thinly traded market for high yield bonds, and recent market quotations may not be available for some of these bonds. Market quotations are generally available only from a limited number of dealers and may not represent firm bids from such dealers or prices for actual sales. As a result, the Diversified Income Fund and High Income Fund may have difficulty valuing the high yield bonds in their portfolios accurately and disposing of these bonds at the time or price desired. 17 Ratings assigned by Moody's and S&P to high yield bonds, like other bonds, attempt to evaluate the safety of principal and interest payments on those bonds. However, such ratings do not assess the risk of a decline in the market value of those bonds. In addition, ratings may fail to reflect recent events in a timely manner and are subject to change. If a rating with respect to a portfolio security is changed, the Adviser will determine whether the security will be retained based upon the factors the Adviser considers in acquiring or holding other securities in the portfolio. Investment in high yield bonds may make achievement of a Fund's objective more dependent on the Adviser's own credit analysis than is the case for higher-rated bonds. Market prices for high yield bonds tend to be more sensitive than those for higher-rated securities due to many of the factors described above, including the credit-worthiness of the issuer, redemption or call provisions, the liquidity of the secondary trading market and changes in credit ratings, as well as interest rate movements and general economic conditions. In addition, yields on such bonds will fluctuate over time. An economic downturn could severely disrupt the market for high yield bonds. In addition, recent legislation impacting high yield bonds may have a materially adverse effect on the market for such bonds. For example, federally-insured savings and loan associations have been required to divest their investments in high yield bonds. The risk of default in payment of principal and interest on high yield bonds is significantly greater than with higher-rated debt securities because high yield bonds are generally unsecured and are often subordinated to other obligations of the issuer, and because the issuers of high yield bonds usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates. Upon a default, bondholders may incur additional expenses in seeking recovery. As a result of all these factors, the net asset value of the High Income Fund, and the Diversified Income Fund to the extent it invests in high yield bonds, is expected to be more volatile than the net asset value of funds which invest solely in higher-rated debt securities. This volatility may result in an increased number of redemptions from time to time. High levels of redemptions in turn may cause a fund to sell its portfolio securities at inopportune times and decrease the asset base upon which expenses can be spread. INVESTMENT RESTRICTIONS The types of securities in which the Funds may invest are more fully described in the Appendix and the Statement of Additional Information. In addition, each Fund may engage in certain investment techniques, including loaning portfolio securities and the use of leverage, futures, options, options on futures, forward transactions and loan participations, which are described in "Investment Techniques and Risk Factors" and the Statement of Additional Information. Each Fund has no limitation regarding its policy with respect to portfolio turnover. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities, excluding short-term securities, by the average monthly value of the Fund's portfolio securities. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs which will be borne directly by the Fund. In addition, high portfolio turnover may result in short-term capital gains, which, when distributed to shareholders, are treated as ordinary income. Each Fund has adopted certain fundamental policies designed to maintain the diversity of its portfolio and reduce investment risk. With respect to 75% of a Fund's total assets, such Fund may not invest more than 5% of its assets in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities) or purchase more than 10% of an issuer's voting securities or more than 10% of any class of an issuer's outstanding securities. A Fund may not purchase securities (other than obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities) if as a result of such purchase more than 25% of a Fund's total assets would be invested in any one industry. See the Statement of Additional Information for information concerning other fundamental policies. 18 MANAGEMENT OF THE TRUST TRUSTEES. The Trustees of the Trust are responsible for the overall supervision of the operation of the Trust and each Fund and perform various duties imposed on trustees of investment companies by the 1940 Act and by The Commonwealth of Massachusetts. THE ADVISER. The Adviser selects and manages the investments of each Fund, provides various administrative services and supervises the Funds' daily business affairs, subject to general review by the Trustees. The Adviser is an indirect wholly-owned subsidiary of SunAmerica Inc. ("SunAmerica"), an investment-grade financial services company which has total capital of approximately $1.6 billion. SunAmerica's principal executive offices are located at 1 SunAmerica Center, Century City, Los Angeles, CA 90067-6022. In addition to serving as adviser to the Funds, the Adviser serves as adviser, manager and/or administrator for Anchor Pathway Fund, SunAmerica Equity Funds, SunAmerica Money Market Funds, Inc., Anchor Series Trust and SunAmerica Series Trust. As of March 31, 1995, the Adviser managed, advised and/or administered approximately $7 billion of assets for investment companies, individuals, pension accounts, and corporate and trust accounts. Pursuant to the Investment Advisory and Management Agreement entered into between the Adviser and the Trust, on behalf of each Fund, each Fund pays the Adviser a fee, payable monthly, computed daily at the following annual rates:
FUND FEE - ---- --- Government Securities Fund............................. .75% of average daily net assets up to $200 million; .72% of the next $200 million; and .55% of average daily net assets in excess of $400 million. Federal Securities Fund................................ .55% of average daily net assets up to $25 million; .50% of the next $25 million; and .45% of average daily net assets in excess of $50 million. Diversified Income Fund................................ .65% of average daily net assets up to $350 million; and .60% of average daily net assets in excess of $350 million. High Income Fund....................................... .75% of average daily net assets up to $200 million; .72% of the next $200 million; and .55% of average daily net assets in excess of $400 million. Tax Exempt Insured Fund................................ .50% of average daily net assets up to $350 million; and .45% of average daily net assets in excess of $350 million.
The advisory fee with respect to Government Securities Fund and High Income Fund is higher than that paid by most other investment companies. For the fiscal year ended March 31, 1995, each Fund paid the Adviser a fee equal to the following percentage of average daily net assets: Government Securities Fund--.64%; Federal Securities Fund--.50%; Diversified Income Fund--.65%; High Income Fund--.75%; and Tax Exempt Insured Fund--.50%. PORTFOLIO MANAGERS. There are four portfolio managers of the Funds. The following individuals are primarily responsible for the day-to-day management of the particular Funds indicated: Charles J. Dudley has served as portfolio manager of the High Income Fund since June 1990 and as co-portfolio manager to the Diversified Income Fund since October 1993. Mr. Dudley is a Senior Vice President of the Adviser and has been a portfolio manager with the Adviser since 1988. Howard B. Udis serves as assistant portfolio manager of the High Income Fund. Mr. Udis has been an assistant portfolio manager with the firm since January 1993. Previously, Mr. Udis was an investment manager with Value Line Inc. P. Christopher Leary has served as portfolio manager of the Diversified Income Fund, the Federal Securities Fund and the Government Securities Fund since December 1992, October 1993 and January 1994, respectively. Mr. Leary is a Senior Vice President of the Adviser and has been a portfolio manager with the Fund since 1990. Previously, Mr. Leary was an investment manager with Equitable Capital Management. John Mooney has served as portfolio manager to the Tax Exempt Insured Fund since April 1994. Mr. Mooney is an Assistant Vice President of the Adviser. Previously, Mr. Mooney held positions in portfolio management and analysis with several financial services firms. THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an indirect wholly owned subsidiary of SunAmerica, acts as distributor of the shares of each Fund pursuant to the Distribution Agreement between the Distributor and the Trust on behalf of each Fund. The Distributor receives all initial and deferred sales charges in connection with 19 the sale of Fund shares, all or a portion of which it may reallow to other broker-dealers. The Distributor and other broker-dealers pay commissions to salespersons, as well as the cost of printing and mailing prospectuses to potential investors and of any advertising expenses incurred by them in connection with their distribution of Fund shares. The Distributor, at its expense, may from time to time, provide additional compensation to broker-dealers (including in some instances, exclusively to Royal Alliance Associates, Inc. and/or SunAmerica Securities, Inc., affiliates of the Distributor, or such unaffiliated broker-dealers as Advantage Capital Management Corporation) in connection with sales of shares of the Funds. Such compensation may include (i) full reallowance of the front-end sales charge on Class A shares; (ii) additional compensation with respect to the sale of Class B shares; or (iii) financial assistance to broker-dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more of the Funds, and/or other broker-dealer-sponsored special events. In some instances, this compensation will be made available only to certain broker-dealers whose representatives have sold a significant amount of shares of the Funds. Compensation may also include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. In addition, the following types of non-cash compensation may be offered through sales contests: (i) vacation trips, including the provision of travel arrangements and lodging at luxury resorts in exotic locations or travel mileage on major air carriers; (ii) tickets for entertainment events (such as concerts or sporting events); or (iii) merchandise (such as clothing, trophies, clocks, pens or other electronic equipment). Broker-dealers may not use sales of the Funds' shares to qualify for this compensation to the extent receipt of such compensation may be prohibited by the laws of any state or any self-regulatory agency, such as, for example, the National Association of Securities Dealers, Inc. Dealers who receive bonuses or other incentives may be deemed to be underwriters under the Securities Act of 1933. Certain laws and regulations limit the ability of banks and other depository institutions to underwrite and distribute securities. However, in the opinion of the Adviser based upon the advice of counsel, these laws and regulations do not prohibit such depository institutions from providing other services to investment companies of the type contemplated by the Distribution Plans (as described below). The Trustees will consider appropriate modifications to the operations of the Funds, including discontinuance of payments under the Distribution Plans to banks and other depository institutions, in the event such institutions can no longer provide the services called for under their agreements. Banks and other financial services firms may be subject to various state laws regarding services described, and may be required to register as dealers pursuant to state laws. DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment company directly or indirectly to pay expenses associated with the distribution of its shares ("distribution expenses") in accordance with a plan adopted by the investment company's board of directors and approved by its shareholders. Pursuant to such rule, the Trustees and the shareholders of each class of shares of each Fund have adopted Distribution Plans hereinafter referred to as the "Class A Plan" and the "Class B Plan." In adopting the Class A Plan and the Class B Plan, the Trustees determined that there was a reasonable likelihood that each such Plan would benefit the Trust and the shareholders of the respective class. The sales charge and distribution fees of a particular class will not be used to subsidize the sale of shares of any other class. Under the Class A Plan, the Distributor may receive payments from a Fund at an annual rate of up to 0.10% of average daily net assets of such Fund's Class A shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. Under the Class B Plan, the Distributor may receive payments from a Fund at the annual rate of up to 0.75% of the average daily net assets of such Fund's Class B shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. The distribution costs for which the Distributor may be reimbursed out of such distribution fees include fees paid to broker-dealers that have sold Fund shares, commissions, and other expenses such as those incurred for sales literature, 20 prospectus printing and distribution and compensation to wholesalers. It is possible that in any given year, the amount paid to the Distributor under the Class A Plan or Class B Plan may exceed the Distributor's distribution costs as described above. The Distribution Plans provide that each class of shares of each Fund may also pay the Distributor an account maintenance and service fee of up to 0.25% of the aggregate average daily net assets of such class of shares for payments to broker-dealers for providing continuing account maintenance. In this regard, some payments are used to compensate broker- dealers with account maintenance and service fees in an amount up to 0.25% per year of the assets maintained in a Fund by their customers. For the fiscal year ended March 31, 1995, under the Class A Plan, each Fund paid the Distributor a fee equal to the following percentages of average daily net assets: Government Securities Fund--.35%; Federal Securities Fund--.35%; Diversified Income Fund-- .35%; High Income Fund--.35%; and Tax Exempt Insured Fund--.35%. For the same period, under the Class B Plan, each Fund paid the Distributor a fee equal to the following percentages of average daily net assets: Government Securities Fund-- 1.00%; Federal Securities Fund-- 1.00%; Diversified Income Fund-- 1.00%; High Income Fund-- 1.00%; and Tax Exempt Insured Fund-- 1.00%. ADMINISTRATOR. The Trust has entered into a Service Agreement under the terms of which SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica, assists the Transfer Agent in providing shareholder service and may receive reimbursement from the Trust of its costs in providing such services through a fee approved annually by the Trustees. PURCHASE OF SHARES GENERAL. Shares of each of the Funds are sold at the respective net asset value next calculated after receipt of a purchase order, plus a sales charge, which, at the election of the investor, may be imposed either (i) at the time of purchase (Class A shares), or (ii) on a deferred basis (Class B shares and certain Class A shares). The minimum initial investment in each Fund is $500 and the minimum subsequent investment is $100. However, for Individual Retirement Accounts ("IRAs"), Keogh Plan accounts and accounts for other qualified plans, the minimum initial investment is $250 and the minimum subsequent investment is $25. The decision as to which class is most beneficial to an investor depends on the amount and intended length of the investment. Investors making large investments, qualifying for a reduced initial sales charge, might consider Class A shares because there is a lower distribution fee than Class B shares (prior to conversion). Investors making small investments might consider Class B shares because 100% of the purchase price is invested immediately. Shareholders who purchase $1,000,000 or more of shares of the Funds should only purchase Class A shares. Dealers may receive different levels of compensation depending on which class of shares they sell. Upon making an investment in shares of a Fund, an open account will be established under which shares of the applicable Fund and additional shares acquired through reinvestment of dividends and distributions will be held for each shareholder's account by State Street Bank and Trust Company ("State Street") and its affiliate, National Financial Data Services ("NFDS") (collectively, the "Transfer Agent"). Shareholders will not be issued certificates for their shares unless they specifically so request in writing. Shareholders receive regular statements from the Transfer Agent that report each transaction affecting their accounts. Further information may be obtained by calling Shareholder/Dealer Services at (800) 858-8850. CLASS A SHARES. Class A shares are offered at net asset value plus an initial sales charge, which varies with the size of the purchase as follows:
CONCESSION SALES CHARGE TO DEALERS ----------------- ---------- % OF % OF NET % OF OFFERING AMOUNT OFFERING SIZE OF PURCHASE PRICE INVESTED PRICE - ---------------- -------- -------- ---------- Less than $100,000................................. 4.75% 4.99% 4.00% $100,000 but less than $250,000.................... 3.75% 3.90% 3.00% $250,000 but less than $500,000.................... 3.00% 3.09% 2.25% $500,000 but less than $1,000,000.................. 2.10% 2.15% 1.35% $1,000,000 or more................................. NONE NONE see below
21 No sales charge is payable at the time of purchase on investments of $1 million or more. Nevertheless, the Distributor will pay a commission to any dealer who initiates or is responsible for such an investment, in the amount of 1.00% of the amount invested. Redemptions of such shares within the twelve months following their purchase will be subject to a contingent deferred sales charge at the rate of 1.00% of the lesser of the net asset value of the shares being redeemed (exclusive of reinvested dividends and distributions) or the total cost of such shares. This contingent deferred sales charge is paid to the Distributor. Redemptions of such shares held longer than twelve months would not be subject to a contingent deferred sales charge. However, one-half of the commission paid with respect to such a purchase is subject to forfeiture by the dealer in the event the redemption occurs during the second year from the date of purchase. In determining whether a deferred sales charge is payable, it is assumed that shares purchased with reinvested dividends and distributions and then other shares held the longest are redeemed first. To the extent that sales are made for personal investment purposes, the sales charge is waived as to Class A shares purchased by current or retired officers, directors, and other full-time employees of SunAmerica and its affiliates, as well as members of the selling group and family members of the foregoing. In addition, the sales charge is waived with respect to shares purchased by "wrap accounts" for the benefit of clients of broker-dealers, financial institutions or financial planners adhering to certain standards established by the Distributor. Shares purchased under this waiver are subject to certain limitations described in the Statement of Additional Information. Complete details concerning how an investor may purchase shares at reduced sales charges may be obtained by contacting Shareholder/Dealer Services at (800) 858-8850. There are certain special purchase plans for Class A shares which can reduce the amount of the initial sales charge to investors in the Funds. For more information about "Rights of Accumulation," the "Letter of Intent," "Combined Purchase Privilege," "Reduced Sales Charges for Group Purchases" and the "Net Asset Value Transfer Program," see the Statement of Additional Information. CLASS B SHARES. Class B shares are offered at net asset value. Certain redemptions of Class B shares within the first six years of the date of purchase are subject to a CDSC. The charge is assessed on an amount equal to the lesser of the then-current market value or the purchase price of the shares being redeemed. No charge is assessed on shares derived from reinvestment of dividends or capital gains distributions. In determining whether the CDSC is applicable to a redemption, the calculation is determined in the manner that results in the lowest possible rate being charged. Therefore, it is assumed that the redemption is first of any Class A shares, second of any shares in the shareholder's Fund account that are not subject to a CDSC (i.e., shares representing reinvested dividends and distributions), third of shares held for more than six years and fourth of shares held the longest during the six-year period. The CDSC will not be applied to dollar amounts representing an increase in the net asset value of the shares being redeemed since the time of purchase of such redeemed shares. The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of Fund shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month are aggregated and deemed to have been made on the first day of the month. The following table sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF YEAR SINCE PURCHASE DOLLARS INVESTED OR PAYMENT WAS MADE REDEMPTION PROCEEDS - ------------------- ------------------------- First................................................. 4% Second................................................ 4% Third................................................. 3% Fourth................................................ 3% Fifth................................................. 2% Sixth................................................. 1% Seventh and thereafter................................ 0%
The CDSC will be waived in connection with redemptions which are (a) requested within one year of the death or the initial determination of disability of a shareholder; (b) taxable distributions or loans to participants made by qualified retirement plans or retirement accounts (not including rollovers) for which the Adviser serves as fiduciary (e.g., prepares all necessary tax reporting documents); provided that, in the case of a taxable distribution, the plan participant or accountholder has attained the age of 59 1/2 at the time the redemption is made; (c) made pursuant to a 22 Systematic Withdrawal Plan up to a maximum amount of 12% per year from a shareholder account based on the value of the account at the time the Plan is established, provided, however, that all dividends and capital gains distributions are reinvested in Fund shares; and (d) made of shares in accounts consisting of assets which were originally individually managed by the Adviser and had paid an investment advisory fee to the Adviser. See the Statement of Additional Information for further information concerning conditions with respect to (a) above. For Federal income tax purposes, the amount of the CDSC will reduce the amount realized on the redemption of shares, concomitantly reducing gain or increasing loss. For information on the imposition and waiver of the CDSC contact Shareholder/Dealer Services at (800) 858-8850. Shareholders of a Fund that acquired their Class B shares pursuant to a reorganization effected with another SunAmerica mutual fund will remain subject to the terms of the CDSC in effect for the previous fund at the time of such reorganization. For additional information, see "Additional Information Regarding Purchase of Shares" in the Statement of Additional Information. Conversion Feature. Class B shares (including a pro rata portion of the Class B shares purchased through the reinvestment of dividends and distributions) will convert automatically to Class A shares on the first business day of the month following the seventh anniversary of the issuance of such Class B shares. Subsequent to the conversion of a Class B share to a Class A share, such share will no longer be subject to the higher distribution fee of Class B shares. Such conversion will be on the basis of the relative net asset values of Class B shares and Class A shares, without the imposition of any sales load, fee or charge. ADDITIONAL PURCHASE INFORMATION. All purchases are confirmed to each shareholder. The Trust reserves the right to reject any purchase order and may at any time discontinue the sale of any class of shares of any Fund. Share certificates are issued upon written request, but no certificate is issued for fractional shares. Shares of the Funds may be purchased through the Distributor or SAFS, by check or federal funds wire and through a dollar cost averaging program. Shares will be priced at the net asset value next determined after the order is placed with the Distributor or SAFS. See "Additional Information Regarding Purchase of Shares" in the Statement of Additional Information for more information regarding these services and the procedures involved and when orders are deemed to be received. REDEMPTION OF SHARES Shares of any Fund may be redeemed at any time at their net asset value next determined, less any applicable contingent deferred sales charge, after receipt by the Fund of a redemption request in proper form. Any capital gain or loss realized by a shareholder upon any redemption of shares must be recognized for Federal income tax purposes. See "Dividends, Distributions and Taxes." REGULAR REDEMPTION. Shareholders may redeem their shares by sending a written request to SAFS, Mutual Fund Operations, 733 Third Avenue, New York, NY 10017-3204. All written requests for redemption must be endorsed by the shareholder(s) with signature(s) guaranteed by an "eligible guarantor institution" which includes: banks, brokers, dealers, credit unions, securities and exchange associations, clearing agencies and savings associations. Guarantees must be signed by an authorized signatory of the eligible guarantor and the words "Signature Guaranteed" must appear with the signature. Signature guarantees by notaries will not be accepted. SAFS may request further documentation from corporations, executors, administrators, trustees or guardians. REPURCHASE THROUGH DISTRIBUTOR. The Distributor is authorized, as agent for the Funds, to offer to repurchase shares which are presented by telephone to the Distributor by investment dealers. Orders received by dealers must be at least $500. The repurchase price is the net asset value per share of the applicable class of shares of a Fund next determined after the repurchase order is received, less any applicable contingent deferred sales charge. Repurchase orders received by the Distributor after 4:00 P.M., Eastern time, will be priced based on the next business day's close. Dealers may charge for their services in connection with the repurchase, but neither the Funds nor the Distributor imposes any charge. The offer to repurchase may be suspended at any time, as described below. 23 TELEPHONE REDEMPTION. The Trust accepts telephone requests for redemption of shares with a value of less than $100,000. The proceeds of a telephone redemption may be sent by wire to the shareholder's bank account as set forth in the New Account Application Form or in a subsequent written authorization. Shareholders utilizing the redemption through the electronic funds transfer method will incur a $15.00 transaction fee. The Trust will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Failure to do so may result in liability to the Trust for losses incurred due to unauthorized or fraudulent telephone instructions. Such procedures include, but are not limited to, requiring some form of personal identification prior to acting upon instructions received by telephone and/or tape recording of telephone instructions. A shareholder making a telephone redemption should call Shareholder/Dealer Services at (800) 858-8850, and state (i) the name of the shareholder(s) appearing on the Fund's records, (ii) his or her account number with the Fund, (iii) the amount to be redeemed, and (iv) the name of the person(s) requesting the redemption. The Trust reserves the right to terminate or modify the telephone redemption service at any time. SYSTEMATIC WITHDRAWAL PLAN. Shareholders who have invested at least $5,000 in any of the Funds may provide for the periodic payment from their account pursuant to the Systematic Withdrawal Plan. At the shareholder's election, such payment may be made directly to the shareholder or to a third party on a monthly, quarterly, semi-annual or annual basis. The minimum periodic payment is $50. Maintenance of a withdrawal plan concurrently with purchases of additional shares may be disadvantageous to a shareholder because of the sales charge applicable to such purchases. Shareholders who have been issued share certificates will not be eligible to participate in the Systematic Withdrawal Plan and will have to comply with certain additional procedures in order to redeem shares. Further information may be obtained by calling Shareholder/Dealer Services at (800) 858-8850. GENERAL. Normally payment is made on the next business day for shares redeemed, but in any event, payment is made by check within seven days after receipt by the Transfer Agent of share certificates or of a redemption request, or both, in proper form. Under unusual circumstances, the Funds may suspend repurchases or postpone payment for up to seven days or longer, as permitted by the federal securities laws. At various times, a Fund may be requested to redeem shares for which it has not yet received good payment. A Fund may delay or cause to be delayed the mailing of a redemption check until such time as good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares, which will not exceed 15 days. Because of the high cost of maintaining smaller shareholder accounts, the Funds may redeem on at least 60 days' written notice and without shareholder consent, any account that, due to a shareholder redemption and not to market fluctuation of the account's value, has a net asset value of less than $500 ($250 for retirement plan accounts), as of the close of business on the day preceding such notice, unless such shareholder increases the account balance to at least $500 during such 60-day period. In the alternative, the applicable Fund may impose a $2.00 monthly charge on accounts below the minimum account size. If a shareholder redeems shares of any class of a Fund and then within one year from the date of redemption decides the shares should not have been redeemed, the shareholder may use all or any part of the redemption proceeds to reinstate, free of sales charges (Class A shares) and with the crediting of any CDSC paid with respect to such reinstated shares at the time of redemption (Class B shares), all or any part of the redemption proceeds in shares of the Fund at the then-current net asset value. Reinstatement may affect the tax status of the prior redemption. EXCHANGE PRIVILEGE Shareholders in any of the Funds may exchange their shares for the same class of shares of any other Fund or other funds in the SunAmerica Family of Mutual Funds that offer such class at the respective net asset value per share. Before making an exchange, a shareholder should obtain and review the prospectus of the fund whose shares are being acquired. All exchanges are subject to applicable minimum initial investment requirements and can only be effected if the shares to be acquired are 24 qualified for sale in the state in which the shareholder resides. Exchanges of shares generally will constitute a taxable transaction except for IRAs, Keogh Plans and other qualified or tax-exempt accounts. The exchange privilege may be terminated or modified upon 60 days' written notice. Further information about the exchange privilege may be obtained by calling Shareholder/Dealer Services at (800) 858-8850. If a shareholder acquires Class A shares through an exchange from another fund in the SunAmerica Family of Mutual Funds where the original purchase of such fund's Class A shares was not subject to an initial sales charge because the purchase was in excess of $1 million, such shareholder will remain subject to the 1% CDSC, if any, applicable to such redemptions. In such event, the period for which the original shares were held prior to the exchange will be "tacked" with the holding period of the shares acquired in the exchange for purposes of determining whether the 1% CDSC is applicable upon a redemption of any of such shares. A shareholder who acquires Class B shares through an exchange from another fund in the SunAmerica Family of Mutual Funds will retain liability for any deferred sales charge which is outstanding on the date of the exchange. In such event, the period for which the original shares were held prior to the exchange will be "tacked" with the holding period of the shares acquired in the exchange for purposes of determining what, if any, CDSC is applicable upon a redemption of any of such shares. PORTFOLIO TRANSACTIONS AND BROKERAGE The Adviser is responsible for decisions to buy and sell securities for the Funds, selection of broker-dealers and negotiations of commission rates. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission (although the price of the security usually includes a profit to the dealer). In underwritten offerings, securities are purchased at a fixed price which includes an underwriter's concession or discount. On occasion, certain money market securities may be purchased directly from an issuer, in which case no commissions or discounts are paid. As a general matter, the Adviser selects broker-dealers which, in its best judgment, provide prompt and reliable execution at favorable security prices and reasonable commission rates. The Adviser may select broker-dealers which provide it with research services and may cause a Fund to pay such broker- dealers commissions which exceed those which other broker-dealers may have charged, if in the Adviser's view the commissions are reasonable in relation to the value of the brokerage and/or research services provided by the broker- dealer. Brokerage arrangements may take into account the distribution of Fund shares by broker-dealers, subject to best price and execution. The Adviser may effect portfolio transactions through an affiliated broker-dealer, acting as agent and not as principal, in accordance with Rule 17e-1 under the 1940 Act and other applicable securities laws. DETERMINATION OF NET ASSET VALUE Each Fund calculates the net asset value of each class of its shares separately by dividing the total value of each class's net assets by the shares of each class outstanding. Shares are valued each day as of the close of regular trading on the New York Stock Exchange ("NYSE") (currently, 4:00 p.m. Eastern time). Investments for which market quotations are readily available are valued at market as described in the Statement of Additional Information. Securities and assets for which market quotations are not readily available are valued at fair value following procedures approved by the Trustees. Short-term investments that mature in less than 60 days are valued at amortized cost if their original maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if their original term exceeds 60 days (unless the Trustees determine that amortized cost value does not represent fair value, in which case, fair value will be determined as described above). PERFORMANCE DATA Each Fund may advertise performance data that reflects its yield or total investment return. A brief summary of the computations is provided below and a detailed discussion is in the Statement of Additional Information. Both yield and total return figures are based on historical earnings and are not intended to indicate future performance. Yield will be calculated based on a 30-day (or one month) period ended on the date of the 25 applicable Fund's most recent balance sheet and for other such periods, as deemed appropriate. The net investment income per share earned during the period will be divided by the maximum offering price per share on the last day of the period and annualized to obtain the yield. For purposes of calculating yields, net income is determined by a standard formula prescribed by the Securities and Exchange Commission to facilitate comparison with yields quoted by other mutual funds. Total return performance data may be advertised by each Fund. The average annual total return may be calculated for one- five-, and ten-year periods or for the lesser period since inception. These performance data represent the average annual percentage changes of a hypothetical $1,000 investment and assumes the reinvestment of all dividends and distributions and includes sales charges and recurring fees that are charged to shareholder accounts. A Fund's advertisements may also reflect total return performance data calculated by means of cumulative, aggregate, average, year-to-date, or other total return figures. Further, the Fund may advertise total return performance for periods of time in addition to those noted above. Although expenses for Class B shares may be higher than those for Class A shares, the performance of Class B shares may be higher than the performance of Class A shares after giving effect to the impact of the sales charges and 12b-1 fees applicable to each class of shares. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS. Dividends from net investment income are declared daily and paid monthly. Dividends are paid on or about the fifteenth day of the month. Dividends and distributions generally are taxable in the year in which they are paid, except any dividends paid in January which were declared in the previous calendar quarter will be treated as paid in December of the previous year. Dividends and distributions are paid in additional shares based on the next determined net asset value, unless the shareholder elects in writing, not less than five business days prior to the payment date, to receive amounts in excess of $10 in cash. In addition to having the dividends and distributions of a Fund reinvested in shares of such Fund, a shareholder may, if he or she so elects on the New Account Application Form, have dividends and distributions invested in the same class of shares of any other SunAmerica Mutual Fund at the then-current net asset value of such Fund(s). The excess of net realized long-term capital gains over net capital losses, if any, will be distributed to the shareholders annually. Each Fund's policy is to offset any prior year's capital loss carry forward against any realized capital gains, and accordingly, no distribution of capital gains will be made until gains have been realized in excess of any such loss carry forward. TAXES. Each Fund is qualified and intends to continue to qualify and elect to be taxed as a regulated investment company under the Internal Revenue Code of 1986, as amended. While so qualified, the Trust and each of the Funds will not be subject to U.S. Federal income tax on the portion of its investment company taxable income and net capital gains distributed to its shareholders. For Federal income tax purposes, dividends of net investment income and distributions of any net realized short-term capital gain, whether paid in cash or reinvested in shares of the Fund, are taxable to shareholders as ordinary income (except as described below). To the extent a Fund's income is derived from certain dividends received from domestic corporations, a portion of the dividends paid to corporate shareholders of such Fund will be eligible for the 70% dividends received deduction. Dividends paid by the Funds generally will not qualify for the 70% dividends received deduction. The Federal Securities Fund, Diversified Income Fund, High Income Fund and Government Securities Fund must report the discount or interest on debt securities (such as zero coupon or pay-in-kind securities) that contain original issue discount as income even though they do not receive a corresponding cash interest payment until the security's maturity or payment date. Therefore, the Fund may have to sell some of its assets in order to distribute cash to shareholders so as to comply with the distribution requirements applicable to regulated investment companies. With respect to the Tax Exempt Insured Fund, distributions out of net investment income attributable to interest received on tax-exempt securities ("exempt-interest dividends") will be 26 exempt from Federal income tax when paid to shareholders. It also should be noted that interest on certain "private activity bonds" issued after August 7, 1986 is an item of tax preference for purposes of the alternative minimum tax (investment in such securities will be limited to 30% of the Fund's net assets). The Fund anticipates that a portion of its investment may be made in such "private activity bonds" with the result that a portion of the exempt- interest dividends paid by the Fund will be an item of tax preference to shareholders subject to the alternative minimum tax. Additionally, tax-exempt interest, whether or not a tax preference must be considered by corporations in determining the amount of the adjustment to alternative minimum taxable income for purposes of the adjustment based on adjusted current earnings. Moreover, shareholders should be aware that, while exempt from Federal income tax, exempt-interest dividends may be taxable for state and local tax purposes. Statements as to the tax status of distributions to shareholders of the Funds will be mailed annually. Shareholders are urged to consult their own tax advisors regarding specific questions as to Federal, state or local taxes. Foreign Shareholders are also urged to consult their own tax advisors regarding the foreign tax consequences of ownership of interests in a Fund. See "Dividends, Distributions and Taxes" in the Statement of Additional Information. GENERAL INFORMATION REPORTS TO SHAREHOLDERS. The Trust sends to its shareholders audited annual and unaudited semi-annual reports for the Funds. The financial statements appearing in annual reports are audited by independent accountants. In addition, the Transfer Agent sends to each shareholder having an account directly with the Trust a statement confirming transactions in the account. ORGANIZATION. The Trust, a business trust organized under the laws of the Commonwealth ofMassachusetts on April 24, 1986, is an open-end diversified management investment company, commonly referred to as a mutual fund. The Trust consists of five investment series or funds: Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund. The Trustees have the authority to issue an unlimited number of shares of beneficial interest of separate series, par value $.01 per share, of the Trust, and to divide each such series into one or more classes of shares. The Trust does not hold annual shareholder meetings. The Trustees are required to call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee when so requested in writing by the shareholders of record holding at least 10% of the Trust's outstanding shares. Each share of each Fund has equal voting rights on each matter pertaining to that Fund or matters to be voted upon by the Trust, except as noted above. Each share of each Fund is entitled to participate equally with the other shares of that Fund in dividends and other distributions and the proceeds of any liquidation, except that, due to the differing expenses borne by the two classes, such dividends and proceeds are likely to be lower for Class B shares than for Class A shares. See the Statement of Additional Information for more information with respect to the distinctions among classes. Under Massachusetts law, shareholders of a trust, such as the Trust, in certain circumstances may be held personally liable as partners for the obligations of the trust. However the Declaration of Trust, pursuant to which the Trust was organized, contains an express disclaimer of shareholder liability for acts or obligations of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's property for any shareholder held personally liable for any Trust obligation. Thus the risk of a shareholder being personally liable, as a partner for obligations of the Trust, is limited to the unlikely circumstance in which the Trust itself would be unable to meet its obligations. INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036, has been selected as independent accountants for the Funds. The firm of Shereff, Friedman, Hoffman and Goodman, LLP, 919 Third Avenue, New York, NY 10022, has been selected as legal counsel for the Funds. SHAREHOLDER INQUIRIES. All inquiries regarding the Trust should be directed to the Trust at the telephone number or address on the cover page of this Prospectus. For questions concerning share ownership, dividends, transfer of ownership or share redemption, contact SAFS, Mutual Fund Operations, 733 Third Avenue, New York, NY 10017-3204, or call Shareholder/Dealer Services at (800) 858-8850. 27 NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA- TIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDI- TIONAL INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESEN- TATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE AD- VISER, SUB-ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OF- FERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE. ----------------- TABLE OF CONTENTS
PAGE ----- Prospectus................................................................ Cover Summary of Fund Expenses.................................................. 2 Financial Highlights...................................................... 4 Investment Objectives and Policies........................................ 7 Government Securities Fund................................................ 7 Federal Securities Fund................................................... 7 Diversified Income Fund................................................... 8 High Income Fund.......................................................... 8 Tax Exempt Insured Fund................................................... 9 Investment Techniques and Risk Factors.................................... 10 Investment Restrictions................................................... 18 Management of the Trust................................................... 19 Purchase of Shares........................................................ 21 Redemption of Shares...................................................... 23 Exchange Privilege........................................................ 24 Portfolio Transactions and Brokerage................................................................ 25 Determination of Net Asset Value.................................................................... 25 Performance Data.......................................................... 25 Dividends, Distributions and Taxes........................................ 26 General Information....................................................... 27
Investment Adviser: SUNAMERICA ASSET MANAGEMENT CORP. 733 Third Avenue New York, NY 10017 Distributor: SUNAMERICA CAPITAL SERVICES, INC. 733 Third Avenue New York, NY 10017 Custodian and Transfer Agent: STATE STREET BANK AND TRUST COMPANY 1776 Heritage Drive North Quincy, MA 02171 Servicing Agent: SUNAMERICA FUND SERVICES, INC. 733 Third Avenue New York, NY 10017 IFPRO SUNAMERICA INCOME FUNDS SUNAMERICA U.S. GOVERNMENT SECURITIES FUND SUNAMERICA FEDERAL SECURITIES FUND SUNAMERICA DIVERSIFIED INCOME FUND SUNAMERICA HIGH INCOME FUND SUNAMERICA TAX EXEMPT INSURED FUND PROSPECTUS JULY 28, 1995 [LOGO OF SUNAMERICA CAPITAL SERVICES APPEARS HERE] SUNAMERICA INCOME FUNDS Statement of Additional Information dated July 28, 1995 733 Third Avenue General Marketing and New York, NY 10017-3204 Shareholder Information (800) 858-8850 SunAmerica Income Funds is a mutual fund consisting of five different investment funds: SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund. Each Fund has distinct investment objectives and strategies. This Statement of Additional Information is not a Prospectus, but should be read in conjunction with the Funds' Prospectus dated July 28, 1995. To obtain a Prospectus, please call the Trust (800) 858-8850. Capitalized terms used herein but not defined have the meanings assigned to them in the Prospectus. TABLE OF CONTENTS
Page -------- History of the Funds..................................... B- 2 Investment Objectives and Policies....................... B- 3 Portfolio Turnover....................................... B-36 Investment Restrictions.................................. B-37 Trustees and Officers.................................... B-39 Adviser, Personal Securities Trading, Distributor and Administrator........................................ B-44 Portfolio Transactions and Brokerage..................... B-54 Additional Information Regarding Purchase of Shares...... B-56 Additional Information Regarding Redemption of Shares.... B-64 Determination of Net Asset Value......................... B-64 Performance Data......................................... B-65 Dividends, Distributions and Taxes....................... B-72 Retirement Plans......................................... B-76 Description of Shares.................................... B-77 Additional Information................................... B-79 Appendix................................................. B-82 Financial Statements.....................................B-89
No dealer, salesman or other person has been authorized to give any information or to make any representations, other than those contained in this Statement of Additional Information or in the Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Trust, the Adviser or the Distributor. This Statement of Additional Information and the Prospectus do not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction in which such an offer to sell or solicitation of an offer to buy may not lawfully be made. This Statement of Additional Information relates to the five different investment funds (each, a "Fund," and collectively, the "Funds") of SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), which is registered as an open-end investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The five Funds are: SunAmerica U.S. Government Securities Fund ("Government Securities Fund"), SunAmerica Federal Securities Fund ("Federal Securities Fund"), SunAmerica Diversified Income Fund ("Diversified Income Fund"), SunAmerica High Income Fund ("High Income Fund") and SunAmerica Tax Exempt Insured Fund ("Tax Exempt Insured Fund"). HISTORY OF THE FUNDS The Trust was organized under the name Integrated Income Portfolios in 1986, and subsequently renamed "SunAmerica Income Portfolios" in 1990. On October 1, 1993, the Trust reorganized with certain mutual funds in the SunAmerica Family of Mutual Funds (the "Reorganization") and was renamed the "SunAmerica Income Funds." In the Reorganization, all outstanding shares of the two existing series of the Trust, the Government Income Portfolio (the "Government Income Portfolio") and the High Yield Portfolio (the "High Yield Portfolio"), were redesignated Class A shares and renamed the Government Securities Fund and the High Income Fund respectively. In addition, the SunAmerica U.S. Government Securities Fund series of SunAmerica Fund Group ("Old Government Securities") and the SunAmerica High Income Fund series of SunAmerica Fund Group ("Old High Income") reorganized with, and its shareholders received Class B shares of, the Government Securities Fund and the High Income Fund, respectively. With regard to the three additional series of the Trust, the Federal Securities Fund, the Diversified Income Fund and the Tax Exempt Insured Fund, the SunAmerica Federal Securities Fund ("Old Federal Securities") was reorganized with, and its shareholders received Class B shares of, the Federal Securities Fund. In addition, the SunAmerica Diversified Income Fund series of SunAmerica Multi-Asset Portfolios, Inc. ("Old Diversified Income") was reorganized with, and its shareholders received Class B shares of, the Diversified Income Fund. Until December 16, 1992, Old Diversified Income had a different investment objective and was SunAmerica Global Short-Term Income Fund. Finally, the SunAmerica Tax Exempt Insured Fund series of SunAmerica Tax Free Portfolios ("Old Tax Exempt Insured") was reorganized with and its shareholders received Class A shares of, the Tax Exempt Insured Fund. The Reorganization was approved by the shareholders of the Funds or their predecessors who were entitled to vote with respect thereto on September 23, 1993. B-2 INVESTMENT OBJECTIVES AND POLICIES The investment objectives and policies of each of the Funds are described in the Funds' Prospectus. Certain types of securities in which the Funds may invest and certain investment practices which the Funds may employ, which are described under "Other Investment Practices and Restrictions" in the Prospectus and in the Appendix to the Prospectus, are discussed more fully below. U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Treasury securities, including bills, notes, bonds and other debt securities issued by the U.S. Treasury. These instruments are direct obligations of the U.S. government and, as such, are backed by the "full faith and credit" of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances. Each Fund may also invest in securities issued by agencies of the U.S. government or instrumentalities of the U.S. government. These obligations, including those which are guaranteed by federal agencies or instrumentalities, may or may not be backed by the "full faith and credit" of the United States. All of the foregoing are referred to collectively as "U.S. government securities." Obligations of the Government National Mortgage Association ("GNMA"), the Farmers Home Administration and the Export-Import Bank are backed by the full faith and credit of the United States. In the case of securities not backed by the full faith and credit of the United States, a Fund must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States if the agency or instrumentality does not meet its commitments. U.S. government securities include certain mortgage-backed securities, as described below under "Mortgage-Backed Securities." MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed securities. These securities represent participation interests in pools of residential mortgage loans made by lenders such as commercial banks, savings and loan institutions, mortgage bankers and others, which may or may not be guaranteed by agencies or instrumentalities of the U.S. government. Mortgage-backed securities differ from conventional debt securities which provide for periodic payment of interest in fixed amounts (usually semiannually) with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by prepayments resulting from the sale of the underlying residential property, refinancing or foreclosure (net of fees or costs which B-3 may be incurred). In addition, prepayment of principal on mortgage-backed securities, which often occurs when interest rates decline, can significantly change the realized yield of these securities. Some mortgage-backed securities are described as "modified pass-through." These securities entitle the holders to receive all interest and principal payments owed on the mortgages in the pool, net of certain fees, regardless of whether or not the mortgagors actually make the payments. The yield on mortgage-backed securities is based on the average expected life of the underlying pool of mortgage loans. The actual life of any particular pool will be shortened by any unscheduled or early payments of principal and interest. Principal prepayments generally result from the sale of the underlying property or the refinancing or foreclosure of underlying mortgages. The occurrence of prepayments is affected by a wide range of economic, demographic and social factors and, accordingly, it is not possible to predict accurately the average life of a particular pool. Yield on such pools is usually computed by using the historical record of prepayments for that pool, or, in the case of newly-issued mortgages, the prepayment history of similar pools. The actual prepayment experience of a pool of mortgage loans may cause the yield realized by a Fund to differ from the yield calculated on the basis of the expected average life of the pool. Prepayments tend to increase during periods of falling interest rates, while during periods of rising interest rates prepayments will most likely decline. When prevailing interest rates rise, the value of a pass-through security may decrease as do the value of other debt securities, but, when prevailing interest rates decline, the value of a pass-through security is not likely to rise on a comparable basis with other debt securities because of the prepayment feature of pass-through securities. The reinvestment of scheduled principal payments and unscheduled prepayments that a Fund receives may occur at higher or lower rates than the original investment, thus affecting the yield of the Fund. Monthly interest payments received by a Fund have a compounding effect which may increase the yield to shareholders more than debt obligations that pay interest semiannually. Because of those factors, mortgage-backed securities may be less effective than U.S. Treasury bonds of similar maturity at maintaining yields during periods of declining interest rates. Accelerated prepayments adversely affect yields for pass-through securities purchased at a premium (i.e., at a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass- through securities purchased at a discount. Each Fund may purchase mortgage- backed securities at a premium or at a discount. B-4 The following is a description of GNMA, FNMA and FHLMC certificates, the most widely available mortgage-backed securities: GNMA Certificates. GNMA certificates ("GNMA Certificates") are mortgage- ----------------- backed securities which evidence an undivided interest in a pool or pools of mortgages. GNMA Certificates that each Fund may purchase are the modified pass- through type, which entitle the holder to receive timely payment of all interest and principal payments due on the mortgage pool, net of fees paid to the issuer and GNMA, regardless of whether or not the mortgagor actually makes the payment. GNMA guarantees the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration ("FHA") or the Farmers' Home Administration ("FMHA"), or guaranteed by the Veterans Administration ("VA"). The GNMA guarantee is authorized by the National Housing Act and is backed by the full faith and credit of the United States. The GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee. The average life of a GNMA Certificate is likely to be substantially shorter than the original maturity of the mortgages underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosure will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal investment because of the GNMA guarantee, except to the extent that a Fund has purchased the certificates at a premium in the secondary market. As prepayment rates of the individual mortgage pools vary widely, it is not possible to predict accurately the average life of a particular issue of GNMA Certificates. The coupon rate of interest of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the GNMA Certificates by the amount of the fees paid to GNMA and the issuer. The coupon rate by itself, however, does not indicate the yield which will be earned on GNMA Certificates. First, GNMA Certificates may trade in the secondary market at a premium or discount. Second, interest is earned monthly, rather than semiannually as with traditional bonds; monthly compounding raises the effective yield earned. Finally, the actual yield of a GNMA Certificate is influenced by the prepayment experience of the mortgage pool underlying it. For example, if the higher-yielding mortgages from the pool are prepaid, the yield on the remaining pool will be reduced. FHLMC Certificates. The Federal Home Loan Mortgage Corporation ("FHLMC") ------------------ issues two types of mortgage pass-through B-5 securities: mortgage participation certificates ("PCS") and guaranteed mortgage certificates ("GMCs") (collectively, "FHLMC Certificates"). PCS resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. Like GNMA Certificates, PCS are assumed to be prepaid fully in their twelfth year. The FHLMC guarantees timely monthly payment of interest (and, under certain circumstances, principal) of PCS and the ultimate payment of principal. GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semiannually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years. The FHLMC guarantee is not backed by the full faith and credit of the U.S. Government. FNMA Certificates. The Federal National Mortgage Association ("FNMA") ----------------- issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates represent a pro rata share of all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest and principal on FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit of the U.S. Government. However, FNMA guarantees timely payment of interest on FNMA Certificates and the full return of principal. Collateralized Mortgage Obligations. Another type of mortgage-backed security in which each Fund may invest is a collateralized mortgage obligation ("CMO"). CMOs are fully-collateralized bonds which are the general obligations of the issuer thereof (e.g., the U.S. government, a U.S. government instrumentality, or a private issuer). The Government Securities Fund will not invest in privately issued CMO's except to the extent that they are collateralized by securities of entities that are instrumentalities of the U.S. government. CMOs generally are secured by an assignment to a trustee (under the indenture pursuant to which the bonds are issued) of collateral consisting of a pool of mortgages. Payments with respect to the underlying mortgages generally are made to the trustee under the indenture. Payments of principal and interest on the underlying mortgages are not passed through to the holders of the CMOs as such (i.e., the character of payments of principal and interest is not passed through, and therefore payments to holders of CMOs attributable to interest paid and principal repaid on the underlying mortgages do not necessarily constitute income and return of capital, respectively, to such holders), but such payments are dedicated to payment of interest on and repayment of principal of the CMOs. CMOs often are issued in two or more classes with varying maturities and stated rates of interest. Because interest and principal payments on the underlying mortgages are not passed through to holders of CMOs, B-6 CMOs of varying maturities may be secured by the same pool of mortgages, the payments on which are used to pay interest on each class and to retire successive maturities in sequence. Unlike other mortgage-backed securities, CMOs are designed to be retired as the underlying mortgages are repaid. In the event of prepayment on such mortgages, the class of CMO first to mature generally will be paid down. Therefore, although in most cases the issuer of CMOs will not supply additional collateral in the event of such prepayment, there will be sufficient collateral to secure CMOs that remain outstanding. Certain CMOs may be deemed to be investment companies under the 1940 Act. Each Fund intends to conduct operations in a manner consistent with this view, and therefore generally may not invest more than 10% of its total assets in such issuers without obtaining appropriate regulatory relief. In reliance on recent Securities and Exchange Commission ("SEC") staff interpretations, each Fund may invest in those CMOs and other mortgage-backed securities that are not by definition excluded from the provisions of the 1940 Act, but have obtained exemptive orders from the SEC from such provisions. Stripped Mortgage-Backed Securities. The mortgage-backed securities in which each Fund may invest include stripped mortgage-backed securities. Unlike U.S. Treasury securities, which are stripped into separate securities for each interest and principal payment, mortgage securities are generally stripped into only two parts: a PO (principal only) strip representing all principal payments and an IO (interest-only) strip representing all interest payments. The feature that makes mortgage strips most useful in portfolio management is their interest rate sensitivity. In principle, mortgage strips can be very useful hedging devices for a variety of investors and portfolio managers. However, determining the degree of interest sensitivity of mortgage strips in different interest rate environments is extremely complicated. The precise sensitivity of mortgage-backed securities and their associated stripped securities to interest rate changes depends on many factors. First, the prepayment effect makes the interest rate sensitivity of mortgage-backed securities different from the interest sensitivity of Treasury securities. Second, the prepayment effect makes the PO and IO mortgage-backed strips much more sensitive, on average, to interest rates than the underlying mortgage- backed security. Third, the prepayment effect is sometimes so strong that an IO mortgage-backed strip will rise in value when interest rates rise and fall in value when rates fall --precisely the opposite relationship from other fixed- income securities. This last feature of stripped mortgage-backed securities, the positive relationship between the value of some IO B-7 strips and interest rates, is particularly useful to investors who need to hedge a portfolio of other fixed-income securities. Mortgage-Backed Security Rolls. The Diversified Income Fund, the Federal Securities Fund and the Government Securities Fund may enter into "forward roll" transactions with respect to mortgage-backed securities issued by GNMA, FNMA or FHLMC. In a forward roll transaction, the Fund will sell a mortgage-backed security to a bank and simultaneously agree to repurchase a similar security from the institution at a later date at an agreed upon price. The mortgage- backed securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. Risks inherent in mortgage- backed security rolls include: (i) the risk of prepayment prior to maturity, (ii) the possibility that a Fund may not be entitled to receive interest and principal payments on the securities sold and that the proceeds of the sale may have to be invested in money market instruments (typically repurchase agreements) maturing not later than the expiration of the roll, and (iii) the risk that the market value of the securities sold by a Fund may decline below the price at which a Fund is obligated to purchase the securities. Upon entering into a mortgage-backed security roll a Fund will be required to place cash, U.S. government securities or other high-grade debt securities in a segregated account with its custodian in an amount equal to its obligation under the roll; that amount is subject to the limitation on borrowing described below under "Investment Restrictions." ASSET-BACKED SECURITIES. The Diversified Fund may invest in asset-backed securities. The value of asset-backed securities is affected by changes in the market's perception of the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing any credit enhancement, and is also affected if any credit enhancement is exhausted. The risks of investing in asset-backed securities are ultimately dependent upon payment of consumer loans by the individuals, and the Fund would generally have no recourse to the entity that originated the loans in the event of default by a borrower. The underlying loans are subject to prepayments which shorten the weighted average life of asset-backed securities and may lower their return, in the same manner as described above for prepayments of a pool of mortgage loans underlying mortgage-backed securities. ZERO COUPON SECURITIES. The Diversified Income Fund, the High Income Fund, the Federal Securities Fund and the Government Securities Fund may invest in zero coupon securities issued by the U.S. Treasury and, in addition, the Diversified Income Fund and High Income Fund may invest in zero coupon securities issued by domestic corporations. Investors earn a return on a zero coupon B-8 bond by purchasing the bond at a discount, that is, by paying less than the face value of the bond. Since there are no periodic interest payments to reinvest, there is no reinvestment risk. The yield of a zero coupon held to maturity is the yield quoted when the bond is sold. Because a zero coupon security pays no interest to its holder during its life or for a substantial period of time, it usually trades at a deep discount from its face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities which make current distributions of interest. Because the Funds accrue taxable income from these securities without receiving cash, the Funds may be required to sell portfolio securities in order to pay a dividend depending upon the proportion of shareholders who elect to receive dividends in cash rather than reinvesting dividends in additional shares of the Funds. The Funds might also sell portfolio securities to maintain portfolio liquidity. In either case, cash distributed or held by the Funds and not reinvested will hinder the Funds in seeking a high level of current income. Zero Coupon U.S. Government Securities. Zero coupon U.S. government securities are: (i) U.S. Treasury notes and bonds which have been stripped of their unmatured interest coupons and receipts, or (ii) certificates representing interest in such stripped debt obligations or coupons. Corporate Zero Coupon Securities. Corporate zero coupon securities are: (i) notes or debentures which do not pay current interest and are issued at substantial discounts from par value, or (ii) notes or debentures that pay no current interest until a stated dated one or more years into the future, after which the issuer is obligated to pay interest until maturity, usually at a higher rate than if interest were payable from the date of issuance and may also make interest payments in kind (e.g., with identical zero coupon securities). Such corporate zero coupon securities, in addition to the risks identified above, are subject to the risk of the issuer's failure to pay interest and repay principal in accordance with the terms of the obligation. A Fund must accrue the discount or interest on high-yield bonds structured as zero coupon securities as income even though it does not receive a corresponding cash interest payment until the security's maturity or payment date. PARTICIPATION INTERESTS. The Diversified Income Fund and High Income Fund may invest in loan participation interests, subject to the 10% of net assets limitation on illiquid investments. These participation interests provide each Fund an undivided interest in a loan made by the issuing financial institution in the proportion that the Fund's participation interest bears to the total principal amount of the loan. The loan participations in which the Funds may invest will typically be participating interests in loans made by B-9 a syndicate of banks, represented by an agent bank which has negotiated and structured the loan, to corporate borrowers to finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Such loans may also have been made to governmental borrowers, especially governments of developing countries (LOC debt). The loans underlying such participations may be secured or unsecured, and each Fund may invest in loans collateralized by mortgages on real property or which have no collateral. The loan participations themselves may extend for the entire term of the loan or may extend only for short "strips" that correspond to a quarterly or monthly floating rate interest period on the underlying loan. Thus, a term or revolving credit that extends for several years may be subdivided into shorter periods. The loan participations in which each Fund will invest will also vary in legal structure. Occasionally, lenders assign to another institution both the lender's rights and obligations under a credit agreement. Since this type of assignment relieves the original lender of its obligations, it is called a novation. More typically, a lender assigns only its right to receive payments of principal and interest under a promissory note, credit agreement or similar document. A true assignment shifts to the assignee the direct debtor-creditor relationship with the underlying borrower. Alternatively, a lender may assign only part of its rights to receive payments pursuant to the underlying instrument or loan agreement. Such partial assignments, which are more accurately characterized as "participating interests," do not shift the debtor- creditor relationship to the assignee, who must rely on the original lending institution to collect sums due and to otherwise enforce its rights against the agent bank which administers the loan or against the underlying borrower. No more than 5% of each Fund's net assets can be invested in participation interests of the same issuing bank. Each Fund must look to the creditworthiness of the borrowing entity, which is obligated to make payments of principal and interest on the loan. In the event the borrower fails to pay scheduled interest or principal payments, the Fund could experience a reduction in its income and might experience a decline in the net asset value of its shares. In the event of a failure by the financial institution to perform its obligation in connection with the participation agreement, the Fund might incur certain costs and delays in realizing payment or may suffer a loss or principal and/or interest. FOREIGN SECURITIES. The Diversified Income Fund and High Income Fund may invest in U.S. dollar denominated fixed-income securities issued by domestic corporations in any industry. The Funds may also invest in debt obligations (which may be denominated in U.S. dollars or in non-U.S. currencies) issued or guaranteed by foreign B-10 corporations, certain supranational entities and foreign governments (including political subdivisions having taxing authority) or their agencies and instrumentalities, and debt obligations issued by U.S. corporations which are either denominated in non-U.S. currencies or traded in the foreign markets (e.g., Eurobonds). The Adviser may direct the investment of assets of the Diversified Income Fund and the High Income Fund in securities of foreign issuers in the form of American Depository Receipts (ADRs), European Depository Receipts (EDRs) or other similar securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. The obligations of foreign governmental entities may or may not be supported by the full faith and credit of a foreign government. Obligations of supranational entities include those of international organizations designated or supported by governmental entities to promote economic reconstruction or development and of international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Each supranational entity's lending activities are limited to a percentage of its total capital (including "callable capital" contributed by members at the entity's call), reserves and net income. There is no assurance that foreign governments will be able or willing to honor their commitments. Investments in foreign securities, including securities of developing countries, present special additional investment risks and considerations not typically associated with investments in domestic securities, including reduction of income by foreign taxes; fluctuation in value of foreign portfolio investments due to changes in currency rates and control regulations (e.g., currency blockage); transaction charges for currency exchange; lack of public information about foreign issuers; lack of uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers; less volume on foreign exchanges than on U.S. exchanges; greater volatility and less B-11 liquidity on foreign markets than in the U.S.; less regulation of foreign issuers, stock exchanges and brokers than in the U.S.; greater difficulties in commencing lawsuits; higher brokerage commission rates than in the U.S.; increased possibilities in some countries of expropriation, confiscatory taxation, political, financial or social instability or adverse diplomatic developments; and differences (which may be favorable or unfavorable) between the U.S. economy and foreign economies. Because the Diversified Income Fund and the High Income Fund may purchase securities denominated in foreign currencies, a change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of each Fund's assets and income available for distribution. In addition, although a portion of each Fund's investment income may be received or realized in foreign currencies, the Fund will be required to compute and distribute its income in U.S. dollars, and absorb the cost of currency fluctuations. Each Fund may engage in foreign currency exchange transactions for hedging purposes to protect against changes in future exchange rates. See "Hedging Strategies." Costs will be incurred in connection with conversions between various currencies. The values of foreign investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations. Although the Funds will invest only in securities denominated in foreign currencies that at the time of investment do not have significant government-imposed restrictions on conversion into U.S. dollars, there can be no assurance against subsequent imposition of currency controls. In addition, the values of foreign securities will fluctuate in response to changes in U.S. and foreign interest rates. Investments in foreign securities offer potential benefits not available from investments solely in securities of domestic issuers by offering the opportunity to invest in foreign issuers that appear to offer growth potential, or in foreign countries with economic policies or business cycles different from those of the U.S., or to reduce fluctuations in portfolio value by taking advantage of foreign stock and bond markets that do not move in a manner parallel to U.S. markets. From time to time, U.S. government policies have discouraged certain investments abroad by U.S. investors, through taxation or other restrictions, and it is possible that such restrictions could be reimposed. ILLIQUID SECURITIES. Each Fund may invest up to 10% of its net assets, determined as of the date of purchase, in illiquid securities including repurchase agreements which have a maturity of longer than seven days 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 B-12 securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. There will generally be a lapse of time between a mutual fund's decision to sell an unregistered security and the registration of such security promoting sale. Adverse market conditions could impede a public offering of such securities. When purchasing unregistered securities, each of the Funds will seek to obtain the right of registration at the expense of the issuer. 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. The Funds' investment adviser, SunAmerica Asset Management Corp. (the "Adviser"), will monitor the liquidity of such restricted securities subject to the supervision of the Board of Trustees of the Trust (the "Trustees"). In reaching liquidity decisions the 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 B-13 dispose of the security, the method of soliciting offers and the mechanics of the transfer). Commercial paper issues in which the Funds may invest include securities issued by major corporations without registration under the Securities Act in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and commercial paper issued in reliance on the so-called private placement exemption from registration which is afforded by Section 4(2) of the Securities Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the Federal securities laws in that any resale must similarly be made in an exempt transaction. Section 4(2) paper is normally resold to other institutional investors through or with the assistance of investment dealers who make a market in Section 4(2) paper, thus providing liquidity. Section 4(2) paper that is issued by a company that files reports under the Securities Exchange Act of 1934 is generally eligible to be sold in reliance on the safe harbor of Rule 144A described above. A Fund's 10% limitation on investments in illiquid securities includes Section 4(2) paper other than Section 4(2) paper that the Adviser has determined to be liquid pursuant to guidelines established by the Trustees. The Trustees delegated to the Adviser the function of making day-to-day determinations of liquidity with respect to Section 4(2) paper, pursuant to guidelines approved by the Trustees that require the Adviser to take into account the same factors described above for other restricted securities and require the Adviser to perform the same monitoring and reporting functions. The staff of the SEC has taken the position that purchased over-the-counter ("OTC") options and the assets used as "cover" for written OTC options are illiquid. The assets used as cover for OTC options written by a Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered illiquid only to the extent that the maximum repurchase price under the option formula exceeds the intrinsic value of the option. SHORT-TERM AND TEMPORARY DEFENSIVE INSTRUMENTS. For temporary defensive purposes, each Fund may invest up to 100% of its total assets in short-term fixed-income securities, including corporate debt obligations and money market instruments rated in one of the two highest categories by a nationally recognized statistical rating organization (or determined by the Adviser to be of equivalent quality). A description of securities ratings is contained in the Appendix to this Statement of Additional Information. B-14 Subject to the limitations described above, the following is a description of the types of money market and short-term fixed-income securities in which the Funds may invest: U.S. Government Securities: See section entitled "U.S. Government Securities" below. Commercial Paper: Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by entities in order to finance their current operations. Each Fund's commercial paper investments may include variable amount master demand notes and floating rate or variable rate notes. Variable amount master demand notes and variable amount floating rate notes are obligations that permit the investment of fluctuating amounts by a Fund at varying rates of interest pursuant to direct arrangements between a Fund, as lender, and the borrower. Master demand notes permit daily fluctuations in the interest rates while the interest rate under variable amount floating rate notes fluctuates on a weekly basis. These notes permit daily changes in the amounts borrowed. A Fund has the right to increase the amount under these notes at any time up to the full amount provided by the note agreement, or to decrease the amount, and the borrower may repay up to the full amount of the note without penalty. Because these types of notes are direct lending arrangements between the lender and the borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for these notes. Master demand notes are redeemable (and, thus, immediately repayable by the borrower) at face value, plus accrued interest, at any time. Variable amount floating rate notes are subject to next-day redemption 14 days after the initial investment therein. With both types of notes, therefore, a Fund's right to redeem depends on the ability of the borrower to pay principal and interest on demand. In connection with both types of note arrangements, a Fund considers earning power, cash flow and other liquidity ratios of the issuer. These notes, as such, are not typically rated by credit rating agencies. Unless they are so rated, a Fund may invest in them only if at the time of an investment the issuer has an outstanding issue of unsecured debt rated in one of the two highest categories by a nationally recognized statistical rating organization. Certificates of Deposit and Bankers' Acceptances: Certificates of deposit are receipts issued by a bank in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers' acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a B-15 time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by another bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most maturities are six months or less. The Funds will generally open interest-bearing accounts only with, or purchase certificates of deposit or bankers' acceptances only from, banks or savings and loan associations whose deposits are federally-insured and whose capital is at least $50 million. Corporate Obligations: Corporate debt obligations (including master demand notes). For a further description of variable amount master demand notes, see the section entitled "Commercial Paper" above. Repurchase Agreements and Reverse Repurchase Agreements: See the sections entitled "Repurchase Agreements" and "Reverse Repurchase Agreements" below. REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements with banks, brokers or securities dealers. In such agreements, the seller agrees to repurchase a security from a Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, either overnight or a few days although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time a Fund's money is invested in the security. Whenever a Fund enters into a repurchase agreement, it obtains collateral having a value at least equal to the amount of the purchase price. The instruments held as collateral are valued daily and if the value of the instruments declines, a Fund will require additional collateral. If the seller defaults and the value of the collateral securing the repurchase agreements declines, a Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. The Trustees have established guidelines to be used by the Adviser in connection with transactions in repurchase agreements and will regularly monitor each Fund's use of repurchase agreements. A Fund will not invest in repurchase agreements maturing in more than seven days if the aggregate of such investments along with other illiquid securities exceeds 10% of the value of its total assets. However, there is no limit on the amount of a Fund's net assets that may be subject to repurchase agreements having a maturity of seven days or less for temporary defensive purposes. B-16 REVERSE REPURCHASE AGREEMENTS. Each Fund may engage in reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells a security subject to the right and obligation to repurchase such security. The Fund then invests the proceeds from the transaction in another obligation in which the Fund is authorized to invest. In order to minimize any risk involved, the Fund maintains in a segregated account cash, cash equivalents or liquid high grade debt securities equal in value to the repurchase price. Reverse repurchase agreements are considered to be borrowings and are subject to the percentage limitations on borrowings. See "Investment Restrictions." INTEREST RATE SWAP TRANSACTIONS. The Diversified Income and the High Income Fund may enter into either asset-based interest rate swaps or liability-based interest rate swaps, depending on whether it is hedging its assets or its liabilities. A Fund will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Since these hedging transactions are entered into for good faith hedging purposes and a segregated account has been established, the Adviser believes such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to the borrowing restrictions applicable to each Fund. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or liquid high-grade debt securities having an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by a custodian that satisfies the requirements of the 1940 Act. To the extent that a Fund enters into interest rate swaps on other than a net basis, the amount maintained in a segregated account will be the full amount of the Fund's obligations, if any, with respect to such interest rate swaps, accrued on a daily basis. A Fund may pledge up to 5% of its net assets in connection with interest rate swap transactions. A Fund will not enter into any interest rate swaps unless the unsecured senior debt or the claims-paying ability of the other party thereto is rated in the highest rating category of at least one nationally recognized rating organization at the time of entering into such transaction. If there is a default by the other party to such transaction, a Fund will have contractual remedies pursuant to the agreement related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. The use of interest rate swaps is a highly speculative activity which involves investment techniques and risks different from those associated with ordinary portfolio securities B-17 transactions. If incorrect in its forecast of market values, interest rates and other applicable factors, the investment performance of a Fund would diminish compared to what it would have been if this investment technique was never used. A Fund may only enter into interest rate swaps to hedge its portfolio. Interest rate swaps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rates swaps is limited to the net amount of interest payments that a Fund is contractually obligated to make. If the other party to an interest rate swap defaults, a Fund's risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to receive. Since interest rate swaps are individually negotiated, a Fund expects to achieve an acceptable degree of correlation between its rights to receive interest on its portfolio securities and its rights and obligations to receive and pay interest pursuant to interest rate swaps. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase or sell such securities on a "when-issued" or "delayed delivery" basis. Although a Fund will enter into such transactions for the purpose of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the Fund may dispose of a commitment prior to settlement. "When-issued" or "delayed delivery" refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery. When such transactions are negotiated, the price (which is generally expressed in yield terms) is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. During the period between commitment by a Fund and settlement (generally within two months but not to exceed 120 days), no payment is made for the securities purchased by the purchaser, and no interest accrues to the purchaser from the transaction. Such securities are subject to market fluctuation, and the value at delivery may be less than the purchase price. A Fund will maintain a segregated account with its custodian, consisting of cash, U.S. government securities or other high grade debt obligations at least equal to the value of purchase commitments until payment is made. A Fund will likewise segregate liquid assets in respect of securities sold on a delayed delivery basis. A Fund will engage in when-issued transactions in order to secure what is considered to be an advantageous price and yield at the time of entering into the obligation. When a Fund engages in when-issued or delayed delivery transactions, it relies on the buyer or seller, as the case may be, to consummate the transaction. Failure to do so may result in a Fund losing the opportunity to obtain a price and yield considered to be advantageous. If a Fund chooses to (i) dispose of the right to acquire a when-issued B-18 security prior to its acquisition or (ii) dispose of its right to deliver or receive against a forward commitment, it may incur a gain or loss. (At the time a Fund makes a commitment to purchase or sell a security on a when-issued or forward commitment basis, it records the transaction and reflects the value of the security purchased, or if a sale, the proceeds to be received in determining its net asset value.) To the extent a Fund engages in when-issued and delayed delivery transactions, it will do so for the purpose of acquiring or selling securities consistent with its investment objectives and policies and not for the purposes of investment leverage. A Fund enters into such transactions only with the intention of actually receiving or delivering the securities, although (as noted above) when-issued securities and forward commitments may be sold prior to the settlement date. In addition, changes in interest rates in a direction other than that expected by the Adviser before settlement will affect the value of such securities and may cause a loss to a Fund. When-issued transactions and forward commitments may be used to offset anticipated changes in interest rates and prices. For instance, in periods of rising interest rates and falling prices, a Fund might sell securities in its portfolio on a forward commitment basis to attempt to limit its exposure to anticipated falling prices. In periods of falling interest rates and rising prices, a Fund might sell portfolio securities and purchase the same or similar securities on a when-issued or forward commitment basis, thereby obtaining the benefit of currently higher cash yields. WHEN, AS AND IF ISSUED SECURITIES. Each Fund may purchase securities on a "when, as and if issued" basis under which the issuance of the security depends upon the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or debt restructuring. The commitment for the purchase of any such security will not be recognized until the Adviser determines that issuance of the security is probable. At such time, each Fund will record the transaction, and, in determining its net asset value, will reflect the value of the security daily. At such time, each Fund will also establish a segregated account with its custodian in which it will maintain cash or liquid debt securities equal in value to recognized commitments for such securities. The value of a Fund's commitments to purchase the securities of any one issuer, together with the value of all securities of such issuer owned by a Fund, may not exceed 5% of the value of the Fund's total assets at the time the initial commitment to purchase such securities is made. Subject to the foregoing restrictions, each Fund may purchase securities on such basis without limit. An increase in the percentage of a Fund's assets committed to the purchase of securities on a B-19 when,as and if issued basis may increase the volatility of its net asset value. The Adviser does not believe that the net asset value of the Funds will be adversely affected by its purchase of securities on such basis. LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory requirements, each Fund may lend portfolio securities in amounts up to 33% of total assets to brokers, dealers and other financial institutions, provided, that such loans are callable at any time by the Fund and are at all times secured by cash or equivalent collateral that is equal to at least the market value, determined daily, of the loaned securities. In lending its portfolio securities, a Fund receives income while retaining the securities' potential for capital appreciation. The advantage of such loans is that a Fund continues to receive the interest and dividends on the loaned securities while at the same time earning interest on the collateral, which will be invested in short-term obligations. A loan may be terminated by the borrower on one business day's notice or by a Fund at any time. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates, and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Adviser to be creditworthy. On termination of the loan, the borrower is required to return the securities to a Fund; and any gain or loss in the market price of the loaned security during the loan would inure to the Fund. Each Fund will pay reasonable finders', administrative and custodial fees in connection with a loan of its securities or may share the interest earned on collateral with the borrower. Since voting or consent rights which accompany loaned securities pass to the borrower, each Fund will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in the securities which are the subject of the loan. PREFERRED STOCKS. The Diversified Income Fund's investment in fixed income securities issued by domestic corporations may include preferred stocks. In addition, up to 5% of the High Income Fund's total assets may be invested in preferred and common stock and other equity securities that are acquired as part of a unit consisting of a combination of fixed-income and equity securities. Dividends on some preferred stock may be "cumulative" if stated dividends from prior periods have not been paid. Preferred stock also generally has a preference over common stock on the B-20 distribution of a corporation's assets in the event of liquidation of the corporation, and may be "participating," which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stock are generally subordinate to rights associated with a corporation's debt securities. WARRANTS AND RIGHTS. The Diversified Income Fund may invest up to 5% of its total assets (at the time of purchase) in warrants and rights. The Fund will invest only in those warrants or rights: (i) acquired as part of a unit or attached to other securities purchased by the Fund, or (ii) acquired as part of a distribution from the issuer. Warrants basically are options to purchase equity securities at specific prices valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities. Rights are similar to warrants but normally have a short duration and are distributed by the issuer to its shareholders. Warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer. PAY-IN-KIND BONDS. Investments of the Diversified Income Fund, the High Income Fund and the Federal Securities Fund in fixed-income securities may include pay- in-kind bonds. These are securities which pay interest in either cash or additional securities, at the issuer's option, for a specified period. Pay-in- kind bonds, like zero coupon bonds, are designed to give an issuer flexibility in managing cash flow. Pay-in-kind bonds can be either senior or subordinated debt and trade flat (i.e., without accrued interest). The price of pay-in-kind bonds is expected to reflect the market value of the underlying debt plus an amount representing accrued interest since the last payment. Pay-in-kind bonds are usually less volatile than zero coupon bonds, but more volatile than cash pay securities. INCOME ENHANCEMENT STRATEGIES. Each Fund may write (i.e., sell) call options ---- ("calls") on securities that are traded on U.S. and foreign securities exchanges and over-the-counter markets to enhance income through the receipt of premiums from expired calls and any net profits from closing purchase transactions. After any such sale up to 100% of a Fund's total assets may be subject to calls. All such calls written by a Fund must be "covered" while the call is outstanding (i.e., the Fund must own the securities subject to the call or other securities ---- acceptable for applicable escrow requirements). Calls on Futures (defined below) used to enhance income must be covered by deliverable securities or by liquid assets segregated to satisfy the Futures contract. If a call written by the Fund is exercised, the Fund forgoes any profit from any increase in the market price above the call price of the underlying investment on which the call was written. In addition, the Fund could experience capital losses which might cause B-21 previously distributed short-term capital gains to be re-characterized as a non- taxable return of capital to shareholders. HEDGING STRATEGIES. For hedging purposes as a temporary defensive maneuver, the Diversified Income Fund and the High Income Fund may use forward contracts on forward currencies ("Forward Contracts") and each Fund may use interest rate futures contracts, foreign currency futures contracts, and stock and bond index futures contracts (together, "Futures"), as well as call and put options on equity and debt securities, Futures, stock and bond indices and foreign currencies (all the foregoing referred to as "Hedging Instruments"); except that the Government Securities Fund, the Federal Securities Fund and the Tax Exempt Insured Fund may not engage in foreign currency Futures and options thereon. Hedging Instruments may be used to attempt to: (i) protect against possible declines in the market value of a Fund's portfolio resulting from downward trends in the equity and debt securities markets (generally due to a rise in interest rates); (ii) protect a Fund's unrealized gains in the value of its equity and debt securities which have appreciated; (iii) facilitate selling securities for investment reasons; (iv) establish a position in the equity and debt securities markets as a temporary substitute for purchasing particular equity and debt securities; or (v) reduce the risk of adverse currency fluctuations. A Fund's strategy of hedging with Futures and options on Futures will be incidental to its activities in the underlying cash market. When hedging to attempt to protect against declines in the market value of a Fund's portfolio, to permit a Fund to retain unrealized gains in the value of portfolio securities which have appreciated, or to facilitate selling securities for investment reasons, a Fund could: (i) sell Futures; (ii) purchase puts on such Futures or securities; or (iii) write calls on securities held by it or on Futures. When hedging to attempt to protect against the possibility that portfolio securities are not fully included in a rise in value of the debt securities market, a Fund could: (i) purchase Futures, or (ii) purchase calls on such Futures or on securities. When hedging to protect against declines in the dollar value of a foreign currency-denominated security, the Diversified Income Fund and the High Income Fund could: (i) purchase puts on that foreign currency and on foreign currency Futures; (ii) write calls on that currency or on such Futures; or (iii) enter into Forward Contracts at a lower rate than the spot ("cash") rate. Additional information about the Hedging Instruments the Funds may use is provided below. B-22 OPTIONS - ------- Options on Securities. As noted above, each Fund may write and purchase call and put options on equity and debt securities. When a Fund writes a call on a security, it receives a premium and agrees to sell the underlying security to a purchaser of a corresponding call on the same security during the call period (usually not more than 9 months) at a fixed price (which may differ from the market price of the underlying security), regardless of market price changes during the call period. A Fund has retained the risk of loss should the price of the underlying security decline during the call period, which may be offset to some extent by the premium. To terminate its obligation on a call it has written, a Fund may purchase a corresponding call in a "closing purchase transaction." A profit or loss will be realized, depending upon whether the net of the amount of the option transaction costs and the premium received on the call written was more or less than the price of the call subsequently purchased. A profit may also be realized if the call expires unexercised, because a Fund retains the underlying security and the premium received. Any such profits are considered short-term capital gains for Federal income tax purposes, and when distributed by the Fund are taxable as ordinary income. If a Fund could not effect a closing purchase transaction due to lack of a market, it would hold the callable securities until the call expired or was exercised. When a Fund purchases a call (other than in a closing purchase transaction), it pays a premium and has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period at a fixed exercise price. A Fund benefits only if the call is sold at a profit or if, during the call period, the market price of the underlying investment is above the sum of the call price plus the transaction costs and the premium paid and the call is exercised. If the call is not exercised or sold (whether or not at a profit), it will become worthless at its expiration date and a Fund will lose its premium payment and the right to purchase the underlying investment. A put option on securities gives the purchaser the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period. Writing a put covered by segregated liquid assets equal to the exercise price of the put has the same economic effect to a Fund as writing a covered call. The premium a Fund receives from writing a put option represents a profit as long as the price of the underlying investment remains above the exercise price. However, a Fund has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise B-23 price, even though the value of the investment may fall below the exercise price. If the put expires unexercised, a Fund (as the writer of the put) realizes a gain in the amount of the premium. If the put is exercised, a Fund must fulfill its obligation to purchase the underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, a Fund may incur a loss, equal to the sum of the sale price of the underlying investment and the premium received minus the sum of the exercise price and any transaction costs incurred. A Fund may effect a closing purchase transaction to realize a profit on an outstanding put option it has written or to prevent an underlying security from being put. Furthermore, effecting such a closing purchase transaction will permit a Fund to write another put option to the extent that the exercise price thereof is secured by the deposited assets, or to utilize the proceeds from the sale of such assets for other investments by the Fund. A Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from writing the option. As described above for writing covered calls, any and all such profits described herein from writing puts are considered short-term gains for Federal tax purposes, and when distributed by a Fund, are taxable as ordinary income. When a Fund purchases a put, it pays a premium and has the right to sell the underlying investment to a seller of a corresponding put on the same investment during the put period at a fixed exercise price. Buying a put on an investment a Fund owns enables the Fund to protect itself during the put period against a decline in the value of the underlying investment below the exercise price by selling such underlying investment at the exercise price to a seller of a corresponding put. If the market price of the underlying investment is equal to or above the exercise price and as a result the put is not exercised or resold, the put will become worthless at its expiration date, and the Fund will lose its premium payment and the right to sell the underlying investment pursuant to the put. The put may, however, be sold prior to expiration (whether or not at a profit.) Buying a put on an investment a Fund does not own permits the Fund either to resell the put or buy the underlying investment and sell it at the exercise price. The resale price of the put will vary inversely with the price of the underlying investment. If the market price of the underlying investment is above the exercise price and as a result the put is not exercised, the put will become worthless on its expiration date. In the event of a decline in the stock market, a Fund could exercise or sell the put at a profit to attempt to offset some or all of its loss on its portfolio securities. B-24 When writing put options on securities, to secure its obligation to pay for the underlying security, a Fund will deposit in escrow liquid assets with a value equal to or greater than the exercise price of the underlying securities. A Fund therefore forgoes the opportunity of investing the segregated assets or writing calls against those assets. As long as the obligation of a Fund as the put writer continues, it may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring a Fund to take delivery of the underlying security against payment of the exercise price. A Fund has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This obligation terminates upon expiration of the put, or such earlier time at which a Fund effects a closing purchase transaction by purchasing a put of the same series as that previously sold. Once a Fund has been assigned an exercise notice, it is thereafter not allowed to effect a closing purchase transaction. Options on Foreign Currencies. The Diversified Income Fund and the High Income Fund may write and purchase calls on foreign currencies. A call written on a foreign currency by a Fund is "covered" if the Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call written by a Fund on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Fund owns or has the right to acquire and which is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, a Fund collateralizes the option by maintaining in a segregated account with the Fund's custodian, cash or U.S. government securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily. Options on Securities Indices. As noted above, each Fund may write and purchase call and put options on securities indices. Puts and calls on broadly- based securities indices are similar to puts and calls on securities except that all settlements are in cash and gain or loss depends on changes in the index in question (and thus on price movements in the securities market generally) rather than on price movements in individual securities or Futures. When a Fund buys a call on a securities index, it pays a premium. During the call period, upon exercise of a call by a Fund, a seller of a corresponding call on the same investment will pay the Fund an amount of cash to settle the call if the closing level of the securities index upon which the call is based is greater than the exercise price of the call. That cash payment is equal to the B-25 difference between the closing price of the index and the exercise price of the call times a specified multiple (the "multiplier") which determines the total dollar value for each point of difference. When a Fund buys a put on a securities index, it pays a premium and has the right during the put period to require a seller of a corresponding put, upon the Fund's exercise of its put, to deliver to the Fund an amount of cash to settle the put if the closing level of the securities index upon which the put is based is less than the exercise price of the put. That cash payment is determined by the multiplier, in the same manner as described above as to calls. FUTURES AND OPTIONS ON FUTURES - ------------------------------ Futures. Upon entering into a Futures transaction, a Fund will be required to deposit an initial margin payment with the futures commission merchant (the "futures broker"). The initial margin will be deposited with the Fund's custodian in an account registered in the futures broker's name; however the futures broker can gain access to that account only under specified conditions. As the Future is marked to market to reflect changes in its market value, subsequent margin payments, called variation margin, will be paid to or by the futures broker on a daily basis. Prior to expiration of the Future, if a Fund elects to close out its position by taking an opposite position, a final determination of variation margin is made, additional cash is required to be paid by or released to the Fund, and any loss or gain is realized for tax purposes. All Futures transactions are effected through a clearinghouse associated with the exchange on which the Futures are traded. Interest rate futures contracts are purchased or sold for hedging purposes to attempt to protect against the effects of interest rate changes on a Fund's current or intended investments in fixed-income securities. For example, if a Fund owned long-term bonds and interest rates were expected to increase, that Fund might sell interest rate futures contracts. Such a sale would have much the same effect as selling some of the long-term bonds in that Fund's portfolio. However, since the Futures market is more liquid than the cash market, the use of interest rate futures contracts as a hedging technique allows a Fund to hedge its interest rate risk without having to sell its portfolio securities. If interest rates did increase, the value of the debt securities in the portfolio would decline, but the value of that Fund's interest rate futures contracts would be expected to increase at approximately the same rate, thereby keeping the net asset value of that Fund from declining as much as it otherwise would have. On the other hand, if interest rates were expected to decline, interest rate futures contracts may be purchased to hedge in anticipation of subsequent purchases of long-term bonds at higher prices. Since the fluctuations in the value of the interest rate futures contracts B-26 should be similar to that of long-term bonds, a Fund could protect itself against the effects of the anticipated rise in the value of long-term bonds without actually buying them until the necessary cash became available or the market had stabilized. At that time, the interest rate futures contracts could be liquidated and that Fund's cash reserves could then be used to buy long-term bonds on the cash market. Purchases or sales of stock or bond index futures contracts are used for hedging purposes to attempt to protect a Fund's current or intended investments from broad fluctuations in stock or bond prices. For example, a Fund may sell stock or bond index futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of the Fund's securities portfolio that might otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the Futures position. When a Fund is not fully invested in the securities market and anticipates a significant market advance, it may purchase stock or bond index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of securities that the Fund intends to purchase. As such purchases are made, the corresponding positions in stock or bond index futures contracts will be closed out. As noted above, the Diversified Income Fund and the High Income Fund may purchase and sell foreign currency futures contracts for hedging purposes to attempt to protect current or intended investments from fluctuations in currency exchange rates. Such fluctuations could reduce the dollar value of portfolio securities denominated in foreign currencies, or increase the cost of foreign- denominated securities to be acquired, even if the value of such securities in the currencies in which they are denominated remains constant. A Fund may sell futures contracts on a foreign currency, for example, when it holds securities denominated in such currency and it anticipates a decline in the value of such currency relative to the dollar. In the event such decline occurs, the resulting adverse effect on the value of foreign-denominated securities may be offset, in whole or in part, by gains on the Futures contracts. However, if the value of the foreign currency increases relative to the dollar, a Fund's loss on the foreign currency futures contract may or may not be offset by an increase in the value of the securities since a decline in the price of the security stated in terms of the foreign currency may be greater than the increase in value as a result of the change in exchange rates. Conversely, a Fund could protect against a rise in the dollar cost of foreign-denominated securities to be acquired by purchasing Futures contracts on the relevant currency, which could offset, in whole or in part, the increased cost of such securities resulting B-27 from a rise in the dollar value of the underlying currencies. When a Fund purchases futures contracts under such circumstances, however, and the price of securities to be acquired instead declines as a result of appreciation of the dollar, the Fund will sustain losses on its futures position which could reduce or eliminate the benefits of the reduced cost of portfolio securities to be acquired. Options on Futures. As noted above, each Fund may purchase and write options on interest rate futures contracts and stock and bond index futures contracts, and the Diversified Income Fund and the High Income Fund may purchase and write options on foreign currency futures contracts. (Unless otherwise specified, options on interest rate futures contracts, options on stock and bond index futures contracts and options on foreign currency futures contracts are collectively referred to as "Options on Futures.") The writing of a call option on a Futures contract constitutes a partial hedge against declining prices of the securities in a Fund's portfolio. If the Futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put option on a Futures contract constitutes a partial hedge against increasing prices of the securities or other instruments required to be delivered under the terms of the Futures contract. If the Futures price at expiration of the put option is higher than the exercise price, a Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option a Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its Options on Futures positions, a Fund's losses from exercised Options on Futures may to some extent be reduced or increased by changes in the value of portfolio securities. A Fund may purchase Options on Futures for hedging purposes, instead of purchasing or selling the underlying Futures contract. For example, where a decrease in the value of portfolio securities is anticipated as a result of a projected market-wide decline or changes in interest or exchange rates, a Fund could, in lieu of selling a Futures contract, purchase put options thereon. In the event that such decrease occurs, it may be offset, in whole or part, by a profit on the option. If the market decline does not occur, the Fund will suffer a loss equal to the price of the put. Where it is projected that the value of securities to be acquired by a Fund will increase prior to acquisition, due to a market advance or changes in interest or exchange rates, a Fund could B-28 purchase call Options on Futures, rather than purchasing the underlying Futures contract. If the market advances, the increased cost of securities to be purchased may be offset by a profit on the call. However, if the market declines, the Fund will suffer a loss equal to the price of the call but the securities which the Fund intends to purchase may be less expensive. FORWARD CONTRACTS - ----------------- The Diversified Income Fund and the High Income Fund may use Forward Contracts. A Forward Contract involves bilateral obligations of one party to purchase, and another party to sell, a specific currency at a future date (which may be any fixed number of days from the date of the contract agreed upon by the parties), at a price set at the time the contract is entered into. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. No price is paid or received upon the purchase or sale of a Forward Contract. A Fund may use Forward Contracts to protect against uncertainty in the level of future exchange rates. The use of Forward Contracts does not eliminate fluctuations in the prices of the underlying securities a Fund owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although Forward Contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase. A Fund will not speculate with Forward Contracts or foreign currency exchange rates. A Fund may enter into Forward Contracts with respect to specific transactions. For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when a Fund anticipates receipt of dividend payments in a foreign currency, the Fund may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of such payment by entering into a Forward Contract, for a fixed amount of U.S. dollars per unit of foreign currency, for the purchase or sale of the amount of foreign currency involved in the underlying transaction. A Fund will thereby be able to protect itself against a possible loss resulting from an adverse change in the relationship between the currency exchange rates during the period between the date on which the security is purchased or sold, or on which the payment is declared, and the date on which such payments are made or received. A Fund may also use Forward Contracts to lock in the U.S. dollar value of portfolio positions ("position hedge"). In a position hedge, for example, when a Fund believes that foreign currency may suffer a substantial decline against the U.S. dollar, B-29 it may enter into a Forward Contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency, or when a Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a Forward Contract to buy that foreign currency for a fixed dollar amount. In this situation a Fund may, in the alternative, enter into a Forward Contract to sell a different foreign currency for a fixed U.S. dollar amount where the Fund believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which portfolio securities of the Fund are denominated ("cross-hedged"). The Fund's custodian will place cash not available for investment or U.S. government securities or other liquid high-quality debt securities in a separate account of the Fund having a value equal to the aggregate amount of the Fund's commitments under Forward Contracts entered into with respect to position hedges and cross-hedges. If the value of the securities placed in a separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Fund's commitments with respect to such contracts. As an alternative to maintaining all or part of the separate account, a Fund may purchase a call option permitting the Fund to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the Forward Contract price or the Fund may purchase a put option permitting the Fund to sell the amount of foreign currency subject to a forward purchase contract at a price as high or higher than the Forward Contract price. Unanticipated changes in currency prices may result in poorer overall performance for a Fund than if it had not entered into such contracts. The precise matching of the Forward Contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of these securities between the date the Forward Contract is entered into and the date it is sold. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase), if the market value of the security is less than the amount of foreign currency a Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency a Fund is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly B-30 uncertain. Forward Contracts involve the risk that anticipated currency movements will not be accurately predicted, causing a Fund to sustain losses on these contracts and transactions costs. At or before the maturity of a Forward Contract requiring a Fund to sell a currency, the Fund may either sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, a Fund may close out a Forward Contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. A Fund would realize a gain or loss as a result of entering into such an offsetting Forward Contract under either circumstance to the extent the exchange rate or rates between the currencies involved moved between the execution dates of the first contract and offsetting contract. The cost to a Fund of engaging in Forward Contracts varies with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because Forward Contracts are usually entered into on a principal basis, no fees or commissions are involved. Because such contracts are not traded on an exchange, a Fund must evaluate the credit and performance risk of each particular counterparty under a Forward Contract. Although a Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Fund may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. ADDITIONAL INFORMATION ABOUT HEDGING INSTRUMENTS AND THEIR USE - -------------------------------------------------------------- The Fund's custodian, or a securities depository acting for the custodian, will act as the Fund's escrow agent, through the facilities of the Options Clearing Corporation ("OCC"), as to the securities on which the Fund has written options or as to other acceptable escrow securities, so that no margin will be required for such transaction. OCC will release the securities on the expiration of the option or upon a Fund's entering into a closing transaction. B-31 An option position may be closed out only on a market which provides secondary trading for options of the same series and there is no assurance that a liquid secondary market will exist for any particular option. A Fund's option activities may affect its turnover rate and brokerage commissions. The exercise by a Fund of puts on securities will cause the sale of related investments, increasing portfolio turnover. Although such exercise is within a Fund's control, holding a put might cause the Fund to sell the related investments for reasons which would not exist in the absence of the put. A Fund will pay a brokerage commission each time it buys a put or call, sells a call, or buys or sells an underlying investment in connection with the exercise of a put or call. Such commissions may be higher than those which would apply to direct purchases or sales of such underlying investments. Premiums paid for options are small in relation to the market value of the related investments, and consequently, put and call options offer large amounts of leverage. The leverage offered by trading in options could result in a Fund's net asset value being more sensitive to changes in the value of the underlying investments. In the future, each Fund may employ Hedging Instruments and strategies that are not presently contemplated but which may be developed, to the extent such investment methods are consistent with a Fund's investment objectives, legally permissible and adequately disclosed. REGULATORY ASPECTS OF HEDGING INSTRUMENTS - ----------------------------------------- Each Fund must operate within certain restrictions as to its long and short positions in Futures and options thereon under a rule (the "CFTC Rule") adopted by the Commodity Futures Trading Commission (the "CFTC") under the Commodity Exchange Act (the "CEA"), which excludes the Fund from registration with the CFTC as a "commodity pool operator" (as defined in the CEA) if it complies with the CFTC Rule. In particular, the Fund may (i) purchase and sell Futures and options thereon for bona fide hedging purposes, as defined under CFTC regulations, without regard to the percentage of the Fund's assets committed to margin and option premiums, and (ii) enter into non-hedging transactions, provided that the Fund may not enter into such non-hedging transactions if, immediately thereafter, the sum of the amount of initial margin deposits on the Fund's existing Futures positions and option premiums would exceed 5% of the fair value of its portfolio, after taking into account unrealized profits and unrealized losses on any such transactions. However, the Fund intends to engage in Futures transactions and options thereon only for hedging purposes. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market. Transactions in options by a Fund are subject to limitations established by each of the exchanges governing the maximum number B-32 of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or different exchanges or are held in one or more accounts or through one or more exchanges or brokers. Thus, the number of options which a Fund may write or hold may be affected by options written or held by other entities, including other investment companies having the same or an affiliated investment adviser. Position limits also apply to Futures. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions. Due to requirements under the 1940 Act, when a Fund purchases a Future, the Fund will maintain, in a segregated account or accounts with its custodian bank, cash or readily marketable, short-term (maturing in one year or less) debt instruments in an amount equal to the market value of the securities underlying such Future, less the margin deposit applicable to it. TAX ASPECTS OF HEDGING INSTRUMENTS - ---------------------------------- Each Fund intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"). One of the tests for such qualification is that less than 30% of its gross income must be derived from gains realized on the sale of stock or securities held for less than three months. This limitation may limit the ability of each Fund to engage in options transactions and, in general, to hedge investment risk. POSSIBLE RISK FACTORS IN HEDGING - -------------------------------- In addition to the risks discussed in the Prospectus and above, there is a risk in using short hedging by selling Futures to attempt to protect against decline in value of a Fund's portfolio securities (due to an increase in interest rates) that the prices of such Futures will correlate imperfectly with the behavior of the cash (i.e., market value) prices of the Fund's securities. The ordinary spreads between prices in the cash and Futures markets are subject to distortions due to differences in the natures of those markets. First, all participants in the Futures markets are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close Futures contracts through offsetting transactions which could distort the normal relationship between the cash and Futures markets. Second, the liquidity of the Futures markets depend on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the Futures markets could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the Futures markets are less onerous than margin requirements in the securities markets. B-33 Therefore, increased participation by speculators in the Futures markets may cause temporary price distortions. If a Fund uses Hedging Instruments to establish a position in the debt securities markets as a temporary substitute for the purchase of individual debt securities (long hedging) by buying Futures and/or calls on such Futures or on debt securities, it is possible that the market may decline; if the Adviser then determines not to invest in such securities at that time because of concerns as to possible further market decline or for other reasons, the Fund will realize a loss on the Hedging Instruments that is not offset by a reduction in the price of the debt securities purchased. LEVERAGE. In seeking to enhance investment performance, the Federal Securities Fund, Diversified Income Fund and High Income Fund may each increase its ownership of securities by borrowing from banks at fixed rates of interest and investing the borrowed funds, subject to the restrictions stated in the Prospectus. Any such borrowing will be made only from banks and pursuant to the requirements of the 1940 Act and will be made only to the extent that the value of the Fund's assets less its liabilities, other than borrowings, is equal to at least 300% of all borrowings including the proposed borrowing. If the value of a Fund's assets, so computed, should fail to meet the 300% asset coverage requirement, the Fund is required, within three business days, to reduce its bank debt to the extent necessary to meet such requirement and may have to sell a portion of its investments at a time when independent investment judgment would not dictate such sale. Interest on money borrowed is an expense the Fund would not otherwise incur, so that it may have little or no net investment income during periods of substantial borrowings. Since substantially all of the Fund's assets fluctuate in value, but borrowing obligations are fixed when the Fund has outstanding borrowings, the net asset value per share of the Fund correspondingly will tend to increase and decrease more when the Fund's assets increase or decrease in value than would otherwise be the case. The Fund's policy regarding use of leverage is a fundamental policy which may not be changed without approval of the shareholders of the Fund. HIGH YIELD/HIGH RISK SECURITIES. The Diversified Income Fund may, and the High Income Fund will, invest in lower-rated bonds commonly referred to as "junk bonds." These securities are rated "Baa" or lower by Moody's Investors Service, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's Corporation ("S&P"). Each Fund may invest in securities rated as low as "C" by Moody's or "D" by S&P. These ratings indicated that the obligations are speculative and may be in default. In addition, each such Fund may invest in unrated securities subject to the restrictions stated in the Prospectus. B-34 Certain Risk Factors Relating to High-Yield, High-Risk Securities. The descriptions below are intended to supplement the discussion in the Prospectus under "Risk Factors -- High Yield/High Risk Securities." GROWTH OF HIGH-YIELD, HIGH-RISK BOND MARKET. - The widespread expansion of ------------------------------------------- government, consumer and corporate debt within the U.S. economy has made the corporate sector more vulnerable to economic downturns or increased interest rates. Further, an economic downturn could severely disrupt the market for high-yield, high-risk bonds and adversely affect the value of outstanding bonds and the ability of the issuers to repay principal and interest. 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 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, a Fund may incur losses or expenses in seeking recovery of amounts owed to it. In addition, periods of economic uncertainty and change can be expected to result in increased volatility of market prices of high-yield, high-risk bonds and a Fund's 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, a Fund would have to replace the security with a lower yielding security, resulting in a decreased return for investors. Conversely, a high-yield, high-risk bond's value will decrease in a rising interest rate market, as will the value of the Fund's assets. If the Fund experiences significant unexpected net redemptions, this may force it to sell high-yield, high-risk bonds without regard to their investment merits, thereby decreasing the asset base upon which expenses can be spread and possibly reducing the Fund's rate of return. LIQUIDITY AND VALUATION. There may be little trading in the secondary ----------------------- market for particular bonds, which may affect adversely a Fund's ability to value accurately or dispose of such bonds. Adverse publicity and investor perception, whether or not based on fundamental analysis, may decrease the values and liquidity of high-yield, high-risk bonds, especially in a thin market. LEGISLATION - Federal laws require the divestiture by federally insured ----------- savings and loan associations of their investments in high yield bonds and limit the deductibility of B-35 interest by certain corporate issuers of high yield bonds. These laws could adversely affect a Fund's net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value of outstanding high yield securities. TAXES - A Fund may purchase debt securities (such as zero-coupon or pay-in- ----- kind securities) that contain original issue discount. Original issue discount that accrues in a taxable year is treated as earned by a Fund and therefore is subject to the distribution requirements of the Code. Because the original issue discount earned by the Fund in a taxable year may not be represented by cash income, the Fund may have to dispose of other securities and use the proceeds to make distributions to shareholders. MUNICIPAL SECURITIES AND SHORT-TERM TAXABLE SECURITIES. Subject to the restrictions set forth in the Prospectus, the Tax Exempt Insured Fund seeks to achieve its investment objective by investing in Municipal Securities and Short- Term Taxable Securities (defined below). Municipal Securities. "Municipal Securities" includes long-term (i.e., maturing in over ten years) and medium-term (i.e., maturing from three to ten years) municipal bonds ("Municipal Bonds") and short-term (i.e., maturing in one day to three years) municipal notes and tax-exempt commercial paper ("Municipal Notes"), and in each case refers to debt obligations issued by or on behalf of states, territories and possessions of the United States and of the District of Columbia and their political subdivisions, agencies and instrumentalities, the interest from which is, in the opinion of bond counsel at the time of issuance, exempt from Federal income tax. The two principal classifications of Municipal Bonds are general obligation bonds and revenue or special obligation bonds. General obligation bonds are secured by the issuer's pledge of its faith, credit and taxing power for the payment of principal and interest. The term "issuer" means the agency, authority, instrumentality or other political subdivision whose assets and revenues are available for the payment of principal and interest on the bonds. Revenue or special obligation bonds are payable only from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special tax or other specific revenue source and generally are not payable from the unrestricted revenues of the issuer. There are, of course, variations in the quality of Municipal Bonds, both within a particular classification and between classifications. Municipal Housing Bonds are Municipal Bonds issued by state and municipal authorities established to purchase single family and B-36 other residential mortgages from commercial banks and other lending institutions within the applicable state or municipality. Such Bonds are typically revenue or special obligation bonds in that they are secured only by the authority issuing such bonds. Such authorities are located in or have been established by at least 45 states and generally are intended to facilitate the construction and sales of housing for low income families. Generally, the authorities are not entitled to state or municipal appropriations from general tax revenues. As a result, and because investors in Municipal Housing Bonds receive repayments of principal as the underlying mortgages are paid prior to maturity, the yields obtainable on such Bonds exceed those of other similarly rated Municipal Bonds. Municipal Housing Bonds are used to purchase single family or other residential mortgages which may or may not be insured by the FHA or guaranteed by the VA. Some Municipal Housing Bonds, however, are used only to purchase residential mortgages that are either insured by the FHA or guaranteed by the VA. Under FHA insurance programs, upon the conveyance of the insured premises and compliance with certain administrative procedures, the FHA pays to the mortgagee insurance benefits equal to the unpaid principal amount of the defaulted mortgage loan. Under a VA guaranty, the VA guarantees the payment of a mortgage loan up to a maximum. The liability of the VA on any such guaranty is reduced or increased pro rata with any reduction or increase in the amount of indebtedness, but in no event will the amount payable on the guaranty exceed the amount of the original guaranty. Notwithstanding the dollar and percentage limitations of the guaranty, a mortgagee will ordinarily suffer a monetary loss only when the difference between the unsatisfied indebtedness and the proceeds of a foreclosure sale of the mortgaged premises is greater than the original guaranty as adjusted. The VA may, at its option and without regard to the guaranty, make full payment to a mortgagee of the unsatisfied indebtedness on a mortgage loan upon its assignment to the VA of the property. As most Municipal Housing Bonds are secured only by the mortgages purchased, bonds that are used to purchase mortgages that are either insured by the FHA or guaranteed by the VA will have less risk of loss of principal than bonds that are used to purchase comparable mortgages that are not insured by the FHA or guaranteed by the VA. The Fund may invest in Municipal Bonds which, on the date of investment, are within the four highest ratings of Moody's ("Aaa," "Aa," "A," "Baa") or S&P ("AAA," "AA," "A," "BBB") or in Municipal Bonds which are not rated, provided that in the opinion of the Adviser, such Municipal Bonds are comparable in quality to those within the four highest ratings. Though bonds rated Baa or BBB normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for such bonds than for bonds in higher rated categories. Occasional speculative factors apply to some bonds in this category. B-37 The ratings of Moody's and S&P represent their respective opinions of the qualities of the securities they undertake to rate and such ratings are general and are not absolute standards of quality. In determining suitability of investment in a particular unrated security, the Adviser will take into consideration asset and debt coverage, the purpose of the financing, history of the issuer, existence of other rated securities of the issuer and other general conditions as may be relevant, including comparability to other issuers. The Fund has no restrictions on the maturity of Municipal Securities in which it may invest. The Fund seeks to invest in Municipal Securities of such maturities that, in the judgment of the Adviser will provide a high level of current income consistent with liquidity requirements and market conditions after taking into account the cost of any insurance obtainable on such Municipal Securities. While short-term trading increases the Fund's turnover, the execution costs for Municipal Securities are substantially less than for equivalent dollar values of equity securities. Generally, the value of Municipal Securities will change as the general level of interest rates fluctuate. During periods of rising interest rates, the value of outstanding long-term, fixed-income securities generally decline. Conversely, during periods of falling interest rates, the value of such securities generally increase. The value of the Fund's shares fluctuates with the value of its investments. In addition, the individual credit ratings of issuers' obligations, the ability of such issuers to make payments of interest and principal on their obligations, and the value of any insurance applicable thereto also affects the value of the Fund's investments. Yields on Municipal Bonds vary depending on a variety of factors, including the general condition of the financial markets and of the municipal bond market, the size of a particular offering, the maturity of the obligation and the credit rating of the issuer. Generally, Municipal Bonds of longer maturities produce higher current yields but are subject to greater price fluctuation due to changes in interest rates, tax laws and other general market factors than are Municipal Bonds with shorter maturities. Similarly, lower-rated Municipal Bonds generally produce a higher yield than higher-rated Municipal Bonds due to the perception of a greater degree of risk as to the ability of the issuer to pay principal and interest obligations. Short-Term Taxable Securities. "Short-Term Taxable Securities" mature in one year or less from the date of purchase and consist of the following obligations the income from which is subject to Federal income tax: obligations of the U.S. Government, its agencies or instrumentalities, some of which may be secured by B-38 the full faith and credit of the U.S. Government and some of which may be secured only by the credit of the agency or instrumentality of the U.S. Government issuing such obligations; corporate bonds or debentures rated within the four highest grades by either Moody's or S&P; commercial paper rated by either of such rating services (Prime-1 through Prime 2- or A-1 through A-2, respectively) or, if not rated, issued by companies having an outstanding debt issue rated at least "A" by either of such rating services; certificates of deposit and banker's acceptances of banks having assets in excess of $2 billion. Insurance Feature. As discussed in the Prospectus, the Fund under normal market conditions invests at least 65% of its total assets in Municipal Bonds that, at the time of purchase, either (1) are insured under a Mutual Fund Insurance Policy issued to the Trust for the benefit of the Fund by Financial Guaranty Insurance Company ("Financial Guaranty") or another insurer (subject to the limitations set forth below) or (2) are insured under an insurance policy obtained by the issuer or underwriter of such Municipal Bonds at the time of original issuance thereof (a "New Issue Insurance Policy"). If a Municipal Bond is already covered by a New Issue Insurance Policy when acquired by the Fund, then coverage will not be duplicated by a Mutual Fund Insurance Policy; if a Municipal Bond is not covered by a New Issue Insurance Policy then it may be covered by a Mutual Fund Insurance Policy purchased by the Trust for the benefit of the Fund. The Fund may also purchase Municipal Notes that are insured. However, in general, Municipal Notes are not presently issued with New Issue Insurance Policies and the Fund does not generally expect to cover Municipal Notes under its Mutual Fund Insurance Policy. Accordingly, the Fund does not presently expect that any significant portion of the Municipal Notes it purchases will be covered by insurance. Securities other than Municipal Bonds and Notes purchased by the Fund are not covered by insurance. Although the insurance feature reduces certain financial risks, the premiums for a Mutual Fund Insurance Policy, which are paid from the Fund's assets, and the restrictions on investments imposed by the guidelines in a Mutual Fund Insurance Policy, reduce the Fund's current yield. For the fiscal year ended March 31, 1995, the premiums paid by Tax Exempt Insured Fund for a Mutual Fund Insurance Policy were .02% of the average net assets of the Fund. In order to be considered as eligible insurance by the Fund, such insurance policies must guarantee the scheduled payment of all principal and interest on the Municipal Bonds as they become due for as long as such Bonds remain held by the Fund in the case of a Mutual Fund Insurance Policy, and for as long as such Bonds are outstanding in the case of a New Issue Insurance Policy. However, such insurance may provide that in the event of non-payment of interest or principal, when due, with respect to an insured Municipal Bond, the insurer is not obligated to make such payment B-39 until a specified time period after it has been notified by the Fund that such non-payment has occurred. (The Financial Guaranty Fund Policy described below provides that payments will be made on the later of the date the principal or interest becomes due for payment or the business day following the day on which Financial Guaranty shall have received notice of non-payment from the Fund.) For these purposes, a payment of principal may be due only at final maturity of the Municipal Bond and not at the time any earlier sinking fund payment is due. The insurance does not guarantee the market value of the Municipal Bonds or the value of the shares of the Fund and, except as described below, has no effect on the price or redemption value of the Fund's shares. It is anticipated that the insured Municipal Bonds held by the Fund will be insured by Financial Guaranty (see "Financial Guaranty" below). However, the Fund may obtain insurance on its Municipal Bonds or purchase insured Municipal Bonds covered by policies issued by other insurers; provided, any such company has a claims-paying ability rated "AAA" by S&P or "Aaa" by Moody's. S&P and Moody's have rated the claims-paying ability of Financial Guaranty and the Municipal Bonds insured by Financial Guaranty at "AAA" and "Aaa", respectively. NEW ISSUE INSURANCE POLICIES. The New Issue Insurance Policies, if any, ---------------------------- will have been obtained by the issuer of the Municipal Bonds and all premiums with respect to such Bonds for the lives thereof will have been paid in advance by such issuer. Such policies are generally non-cancelable and will continue in force so long as the Municipal Bonds are outstanding and the insurer remains in business. Since New Issue Insurance Policies remain in effect as long as the Bonds are outstanding, the insurance may have an effect on the resale value of the Municipal Bonds. Therefore, New Issue Insurance Policies may be considered to represent an element of market value in regard to Municipal Bonds thus insured, but the exact effect, if any, of this insurance on such market value cannot be estimated. MUTUAL FUND INSURANCE POLICY. The Trust has obtained a Mutual Fund ---------------------------- Insurance Policy (the "Fund Policy") on behalf of the Fund from Financial Guaranty. Under the Fund Policy, if the principal of or interest on a bond covered by the Fund Policy is due for payment, but is unpaid by reason of non- payment by the issuer, Financial Guaranty, upon proper notice by the Fund, will make a payment of such amount to a fiscal agent for the benefit of the Fund, upon the fiscal agent receiving from the Fund (i) evidence of the Fund's right to receive payment of the principal or interest due for payment and (ii) evidence that all of the Fund's right to such payment of the principal or interest due for payment shall thereupon vest with Financial Guaranty. The principal of a bond is considered due for payment under the Fund Policy at the stated maturity date of such bond or the date on which the same shall have B-40 been duly called for mandatory sinking fund redemption. The principal of a bond will not be considered due for payment under the Fund Policy by reason of a call for redemption (other than a mandatory sinking fund redemption), acceleration or other advancement of maturity. The interest on a bond is considered due under the Fund Policy on the stated date for payment. "Non-payment," by an issuer of bonds, is when that issuer has not provided, on a timely basis, sufficient funds to the paying agent of the issuer for payment in full of all principal and interest due for payment. Financial Guaranty's obligation to insure any particular bond which it has agreed to insure is subject only to the Fund's becoming the owner of such bond (i) on or before the 100th day following the date on which the Fund purchases such bond or (ii) on or before the 150th day following the purchase date in the case of "when, as and if issued" bonds which the issuer thereof has failed on a timely basis to deliver in definitive form to the purchasers thereof. So long as the Fund becomes the owner on or before the 100th or 150th day following the purchase date, as the case may be, such bond will be insured as of the purchase date. Once the insurance under the Fund Policy is effective with respect to the Municipal Bonds, it covers the Municipal Bonds only so long as the Fund is in existence, Financial Guaranty is still in business, the covered Municipal Bonds continue to be held by the Fund, and the Fund pays the insurance premium monthly with respect to the covered Municipal Bonds. In the event of a sale of any Municipal Bond held by the Fund or payment thereof prior to maturity, the Fund Policy terminates as to such Municipal Bond and Financial Guaranty is liable only for those payments of principal and interest which are then due and owing. However, if in the judgment of the Adviser it would be to the Fund's advantage, the Trust, on behalf of the Fund, may purchase additional insurance (if available at an acceptable premium) that will extend the insurance coverage on such Municipal Bond until maturity. The Fund Policy provides that it is non-cancelable by Financial Guaranty except for non-payment of premiums. Once the Fund purchases a bond and begins paying a premium for that bond based upon a stated annual premium, that annual premium rate cannot be changed by Financial Guaranty so long as the bond is owned by the Fund and insured under the Fund Policy. Similar Municipal Bonds purchased at different times, however, may have different premiums. The Trust, at the request of the Fund, may cancel the Fund Policy at any time upon written notice to Financial Guaranty and may do so if the Fund determines that the benefits of the Fund Policy are not justified by the expense involved. In the event the Fund were to cancel the Fund Policy and not obtain a substitute, the Fund would satisfy its investment policy concerning the portion of its portfolio required to be invested in insured Municipal Bonds by limiting such investments to Municipal Bonds covered by New B-41 Issue Insurance Policies. If adequate quantities of such Municipal Bonds were not available, the Fund would promptly seek approval of its shareholders to change its name and its fundamental investment policy. If the Fund discontinues insuring newly acquired Municipal Bonds with Financial Guaranty, it has the right to continue paying premiums to Financial Guaranty for all Municipal Bonds previously insured and still held by the Fund and keep the insurance in force as to those Municipal Bonds. The insurance premiums will be payable monthly in advance by the Fund based on a statement of premiums duly supplied by Financial Guaranty. The amount of premiums due will be computed on a daily basis for purchases and sales of covered Municipal Bonds during the month. If the Fund sells a Municipal Bond or that Bond is redeemed, Financial Guaranty will refund any unused portion of the premium. Municipal Bonds are eligible for insurance under the Fund Policy if they are, at the time of purchase by the Fund, identified separately or by category in qualitative guidelines (based primarily on ratings) furnished by Financial Guaranty and are in compliance with the aggregate limitations on amounts set forth in such guidelines. Premium variations are based, in part, on the rating of the Municipal Bond being insured at the time the Fund purchases such Bond. Financial Guaranty may be willing to insure only a portion of the outstanding bonds, or issue of bonds, by any particular issuer. In such event, Financial Guaranty will advise the Fund, on a quarterly basis, of any limitation on the insurance available for such Municipal Bonds. Once Financial Guaranty has established such a limitation, it cannot reduce that limitation for any issue during that quarter, but Financial Guaranty may, at its sole discretion, remove at any time, any Municipal Bond from its list of bonds eligible to be insured, if the credit quality of such Municipal Bond has materially deteriorated after the quarterly limitation is made. Once such Municipal Bond is removed from the list of bonds eligible to be insured the Fund cannot acquire insurance upon such Municipal Bond from Financial Guaranty. Financial Guaranty, however, must continue to insure the full amount of such bonds previously acquired so long as they remain held by the Fund and were, at the time of purchase by the Fund, considered eligible by Financial Guaranty. The qualitative guidelines and aggregate amount limitations established by Financial Guaranty, from time to time, will not necessarily be the same as those the Adviser would use to govern selection of Municipal Bonds for the Fund's investments. Therefore, from time to time, such guidelines and limitations may affect investment decisions. When the Fund's investment policies are more restrictive than the qualitative guidelines and aggregate amount limitations established by Financial Guaranty or any other insurer, the Fund's policies will govern. B-42 Because coverage under the Fund Policy terminates upon sale of a Municipal Bond held by the Fund, the insurance does not have any effect on the resale value of Municipal Bonds. Therefore, the Adviser may decide to retain any insured Municipal Bonds which are in default or, in the view of the Adviser, in significant risk of default and to recommend to the Trustees that the Fund place a value on the insurance which will be equal to the difference between the market value of the defaulted Municipal Bond and the market value of similar Municipal Bonds of minimum investment grade (i.e., rated "BBB") which are not in default. As a result, the Adviser may be unable to fully manage the Fund's investments to the extent that it holds defaulted Municipal Bonds, which will limit the ability of the Adviser in certain circumstances to purchase other Municipal Bonds. While a defaulted Municipal Bond is held by the Fund, the Fund continues to pay the insurance premium thereon, but also collects interest payments from the insurer and retains the rights to collect the full amount of principal from the insurer when the Municipal Bond comes due. The Fund expects that the market value of a defaulted Municipal Bond covered by a New Issue Insurance Policy will generally be greater than the market value of an otherwise comparable defaulted Municipal Bond covered by the Fund Policy. SECONDARY MARKET INSURANCE POLICIES. On behalf of the Fund, the Trust ----------------------------------- may, at any time, purchase from Financial Guaranty a secondary market insurance policy (a "Secondary Market Policy") on any Municipal Bond currently covered by the Fund Policy at the time such Bond was purchased by the Fund. The coverage and obligation to pay monthly premiums under the Fund Policy would cease with the purchase by the Trust of a Secondary Market Policy. By purchasing a Secondary Market Policy, the Trust would, upon payment of a single premium, obtain similar insurance for the Fund against non-payment of scheduled principal and interest for the remaining term Municipal Bond, regardless of whether the Fund then owned the Bond. Such insurance coverage will be non-cancelable and will continue in force so long as the Municipal Bonds so insured are outstanding. The purpose of acquiring such a policy would be to enable the Fund to sell the Municipal Bond to a third party as an "AAA"/"Aaa" rated insured Municipal Bond at a market price higher than what otherwise might be obtainable if the security were sold without the insurance coverage. (Such rating is not automatic, however, and must specifically be requested for each Municipal Bond.) Any difference between the excess of a Municipal Bond's market value as an "AAA"/"Aaa" rated Municipal Bond over its market value without such rating and the single premium payment would inure to the Fund in determining the net capital gain or loss realized by the Fund upon the sale of the Bond. B-43 Since Secondary Market Policies remain in effect as long as the Municipal Bonds insured thereby are outstanding, such insurance may have an effect on the resale value of such Bonds. Therefore, Secondary Market Policies may be considered to represent an element of market value with regard to Municipal Bonds thus insured, but the exact effect, if any, of this insurance on such market value cannot be estimated. Since the Fund has the right under the Mutual Fund Insurance Policy to purchase such Secondary Market Policy even if an eligible Municipal Bond is currently in default as to any payments by the issuer, the Fund would have the opportunity to sell such Bond, rather than as described above, be obligated to hold it in its portfolio in order to continue the Fund Policy in force. FINANCIAL GUARANTY. Financial Guaranty, in addition to providing insurance ------------------ for the payment of interest and principal of municipal bonds and notes held in mutual fund portfolios, provides insurance for all, or a portion of, new and secondary market issues of municipal bonds and notes and for municipal bonds and notes held in unit investment trust portfolios. It is also authorized to write fire, property damage liability, worker's compensation and employers' liability and fidelity and surety insurance. Financial Guaranty is currently licensed to provide insurance in 49 states and the District of Columbia, files reports with state insurance regulatory agencies and is subject to audit and review by such authorities. Financial Guaranty is also subject to regulation by the State of New York Insurance Department. Such regulation, however, is no guarantee that Financial Guaranty will be able to perform its contracts of insurance in the event a claim should be made thereunder at some time in the future. PORTFOLIO TURNOVER The portfolio turnover rate is calculated for each Fund by dividing (a) the lesser of purchases or sales of portfolio securities for the fiscal year by (b) the monthly average of the value of portfolio securities owned during the fiscal year. For purposes of this calculation, securities which at the time of purchase had a remaining maturity of one year or less are excluded from the numerator and the denominator. Transactions in Futures or the exercise of calls written by a Fund may cause the Fund to sell portfolio securities, thus increasing its turnover rate. The exercise of puts also may cause a sale of securities and increase turnover; although such exercise is within a Fund's control, holding a protective put might cause the Fund to sell the underlying securities for reasons which would not exist in the absence of the put. A Fund will pay a brokerage commission each time it buys or sells a security in connection with the exercise of a put or call. Some commissions may be higher than those which would apply to direct purchases or sales of portfolio securities. B-44 For the fiscal year ended March 31, 1995, the portfolio turnover rates for the Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund were 105%, 267%, 160%, 196% and 162%, respectively. For the fiscal period ended March 31, 1994, the portfolio turnover rates for the Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund were 35%, 68%, 48%, 290% and 52%, respectively. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs which will be borne directly by a Fund. High portfolio turnover may also involve a possible increase in short-term capital gains or losses. INVESTMENT RESTRICTIONS Each Fund is subject to a number of investment restrictions that are fundamental policies and may not be changed without the approval of the holders of a majority of that Fund's outstanding voting securities. A "majority of the outstanding voting securities" of a Fund for this purpose means the lesser of (i) 67% of the shares of the Fund represented at a meeting at which more than 50% of the outstanding shares are present in person or represented by proxy or (ii) more than 50% of the outstanding shares. Unless otherwise indicated, all percentage limitations apply to each Fund on an individual basis, and apply only at the time the investment is made; any subsequent change in any applicable percentage resulting from fluctuations in value will not be deemed an investment contrary to these restrictions. Under these restrictions: (1) Each Fund may not purchase securities on margin, but each Fund may obtain such short-term credits as may be necessary for the clearance of transactions; (2) Each Fund may not make short sales of securities to maintain a short position, except that each Fund may effect short sales against the box; (3) Each Fund may not issue senior securities or borrow money or pledge its assets (except that (i) each Fund may borrow from a bank for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) and pledge its assets to secure such borrowings; (ii) the Federal Securities Fund, Diversified Income Fund and High Income Fund may each borrow money to purchase securities in amounts not exceeding 50% of B-45 its net assets and pledge its assets to secure such borrowings; and (iii) the High Income Fund and Diversified Income Fund may pledge up to 5% of its assets in connection with interest rate swaps. (4) Each Fund may not purchase any security (other than obligations of the U.S. Government, its agencies, or instrumentalities) if as a result: (i) as to 75% of the Fund's total assets (taken at current value), more than 5% of such assets would then be invested in securities of a single issuer, or (ii) more than 25% of the Fund's total assets (taken at current value) would be invested in a single industry, or (iii) the Fund would then hold more than 10% of the outstanding voting securities of an issuer; (5) Each Fund may not buy or sell commodities or commodity contracts (except financial futures as described under "Investment Objectives and Policies" above) or real estate or interests in real estate, although it may purchase and sell securities which are secured by real estate and securities of companies which invest or deal in real estate; (6) Each Fund may not act as underwriter except to the extent that, in connection with the disposition of Fund securities, it may be deemed to be an underwriter under certain Federal securities laws; (7) Each Fund may not make loans, except through (i) repurchase agreements (repurchase agreements with a maturity of longer than 7 days together with other illiquid assets being limited to 10% of the Fund's total assets), (ii) loans of portfolio securities (limited to 33% of a Fund's assets), and (iii) participation in loans to foreign governments or companies; The following additional restrictions are not fundamental policies and may be changed by the Trustees without a shareholder vote: (8) Each Fund may not purchase any security if as a result the Fund would then have more than 5% of its total assets (taken at current value) invested in securities of companies (including predecessors) less than three years old; (9) Each Fund may not invest in any securities of any issuer if, to the knowledge of the Fund, any officer, Trustee or director of the Trust or of the Adviser owns more than 1/2 of 1% of the outstanding securities of such issue, and B-46 such officers, directors or Trustees who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer; (10) Each Fund may not make investments for the purpose of exercising control or management; (11) The Fund may not invest more than 10% of its net assets in illiquid securities, including repurchase agreements which have a maturity of longer than seven days, time deposits with a maturity of longer than seven days, securities with legal or contractual restrictions on resale and securities that are not readily marketable in securities markets either within or without the United States. Restricted securities eligible for resale pursuant to Rule 144A under the 1933 Act that have a readily available market, and commercial paper exempted from registration under the 1933 Act pursuant to Section 4(2) of the 1933 Act that may be offered and sold to "qualified institutional buyers" as defined in Rule 144A, which the Adviser has determined to be liquid pursuant to guidelines established by the Trustees, will not be considered illiquid for purposes of this 10% limitation on illiquid securities. (12) Each Fund may not invest in securities of other registered investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which the Fund will not hold more than 3% of the outstanding voting securities of any one investment company, will not have invested more than 5% of its total assets in any one investment company and will not have invested more than 10% of its total assets in such securities of one or more investment companies (each of the above percentages to be determined at the time of investment), or except as part of a merger, consolidation or other acquisition. (13) Each Fund may not invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of companies which invest in or sponsor such programs; (14) The High Income Fund may not purchase any security if as a result the Fund would then hold more than 10% of any class of securities of an issuer (taking all common stock issues of an issuer as a single class, all preferred stock issues as a single class, and all debt issues as a single class; and B-47 (15) The High Income Fund may not purchase warrants if as a result the Fund would then have more than 5% of its total assets (taken at current value) invested in warrants, or purchase warrants not listed on the New York or American Stock Exchanges if as a result more than 2% of its total assets (taken at current value) would be invested in such warrants. Notwithstanding paragraph (4) of the fundamental policies on the previous page, the High Income Fund will also undertake to certain state securities commissions not to invest more than 5% of its total assets in securities of a single issuer. The Fund(s) have also undertaken that investments in illiquid or restricted securities, together with investments in Rule 144A securities and/or Section 4(2) commercial paper will not exceed 15% of a Fund's total net assets. TRUSTEES AND OFFICERS The following table lists the Trustees and executive officers of the Trust, their age, business addresses and principal occupations during the past five years. The SunAmerica Mutual Funds consist of SunAmerica Equity Funds, SunAmerica Income Funds and SunAmerica Money Market Funds, Inc. B-48
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- Eli Broad*, 62 Trustee Chairman, President and Chief Executive Officer, SunAmerica Inc., Co-founded the 1 SunAmerica Center company in 1957; Founder and Chairman, Kaufman and Broad Home Corporation, Century City ("KBHC") since 1986 (prior to 1986, KBHC was owned by SunAmerica Inc.); Los Angeles, CA 90067 Director/Trustee of the SunAmerica Mutual Funds; Director of Federal National Mortgage Association since 1984; Chairman of Stanford Ranch since 1966; Co-owner and Co-Chairman of Sacramento Kings and ARCO Arena since 1992; and Trustee of Committee for Economic Development since 1993. S. James Coppersmith, 61 Trustee Formerly, President and General Manager, WCVB-TV, a division of the Hearst 7 Elmwood Road Corporation from 1982 to 1994 (retired); Marblehead, MA 01945 Director/Trustee of the SunAmerica Mutual Funds and Anchor Series Trust. Samuel M. Eisenstat, 55 Chairman of Attorney in private practice; Trustee of RPS Realty Trust since December, 1988; 430 East 86th Street the Board Director of Volt Information Sciences Funding, Inc., a subsidiary of Volt New York, NY 10028 Information Sciences, Inc., since October 1993; Chairman of the Boards of the Directors/Trustees of the SunAmerica Mutual Funds and Anchor Series Trust. Stephen J. Gutman, 52 Trustee Chairman of the Board, Chief Operating and Executive Officer of Beau Brummel 515 East 79th Street Casuals Limited, Inc., a menswear specialty retailer since May 1989; New York, NY 10021 Director/Trustee of the SunAmerica Mutual Funds and Anchor Series Trust.
B-49
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- Sebastiano Sterpa, 66 Trustee Founder of Sterpa Realty, Inc., a full service real estate firm since 1962; Suite 200 Chairman of the Sterpa Group, real estate investments and management company; 200 West Glenoaks Blvd. Director/Trustee of the SunAmerica Mutual Funds. Glendale, CA 91202 Jay S. Wintrob*, 38 Trustee Vice Chairman, SunAmerica Inc., since May 1995; formerly, Executive Vice 1 SunAmerica Center President, SunAmerica Inc., from November 1991 to May 1995 and Senior Vice Century City President, SunAmerica Inc., from April 1989 to November 1991; Director/Trustee Los Angeles, CA 90067 of the SunAmerica Mutual Funds and Anchor Series Trust. Peter A. Harbeck, 41 President Executive Vice President and Director, SunAmerica Asset Management Corp. 733 Third Avenue ("SAAMCo") and President, SunAmerica Fund Services, Inc. ("SAFS"), since May New York, NY 10017 1988; Chief Operating Officer, SAAMCo, since September 1994; President of the SunAmerica Mutual Funds and Anchor Series Trust; Executive Vice President, SunAmerica Capital Services, Inc. ("SACS"), since November 1991; Director, Resources Trust Company. Stanton J. Feeley, 58 Executive Executive Vice President and Chief Investment officer, SAAMCo, since February 733 Third Avenue Vice President 1992. Formerly, Senior Portfolio Manager, Delaware Management Company, Inc., New York, NY 10017 from December 1987 to February 1992. Charles J. Dudley, 36 Vice President Senior Vice President and Senior Portfolio Manager, SAAMCo, since March 1993; 733 Third Avenue Fixed Income Portfolio Manager, SAAMCo, since November 1988. New York, NY 10017
B-50
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- P. Christopher Leary, 35 Vice President Senior Vice President, SAAMCo, since January 1994; Vice President and Senior 733 Third Avenue Portfolio Manager, SAAMCo, since June 1991; Fixed Income Portfolio Manager, New York, NY 10017 SAAMCo, since October 1990. Formerly, an investment manager with Equitable Capital Management from September 1987 to October 1990. Nancy Kelly, 44 Vice President Vice President and Head Trader, SAAMCo, since April 1994; Formerly Vice 733 Third Avenue President, Whitehorne & Co. Ltd. (1991-1994); Sales Trader, Lynch, Jones and New York, NY 10017 Ryan (1992-1994). Robert M. Zakem, 37 Secretary Senior Vice President and General Counsel, SAAMCo since April 1993; Executive 733 Third Avenue Vice President and Director, SACS, since February 1993; Vice President, SAFS, New York, NY 10017 since January 1994. Formerly Vice President and Associate General Counsel, SAAMCo, since March 1992; Associate, Piper & Marbury from 1989 to 1992. Peter C. Sutton, 30 Controller Vice President, SAAMCo, since September 1994; Controller, SunAmerica Mutual 733 Third Avenue Funds (since March 1993); Assistant Controller, SunAmerica Mutual Funds (1990- New York, NY 10017 1993); Formerly, Senior Accountant/Supervisor, The Dreyfus Corporation (1986- 1990).
________________________ * A Trustee who may be deemed to be an "interested person" of the Trust or the Adviser as that term is defined in the 1940 Act. The following table sets forth information summarizing the compensation of each disinterested Trustee as defined herein of the Trust for his services as Trustee for the fiscal year ended March 31, 1995. Neither the Trustees who are interested persons of the Trust nor any of the officers of the Trust receive any compensation from the Trust. B-51 COMPENSATION TABLE
Pension or Retirement Benefits Total Compensation Aggregate Accrued as from Registrant Compensation Part of Fund and Fund Complex from Registrant Expenses* Paid to Trustees* ========================================================================= S. James Coppersmith $27,884 $30,629 $65,000 Samuel M. Eisenstat 29,478 3,191 69,000 Stephen J. Gutman 27,884 12,440 65,000 Sebastiano Sterpa 28,040 4,932 43,333
* Information is as of March 31, 1995 for the four investment companies in the complex which pay fees to these directors/trustees. Trustees and officers of the Trust are also trustees and officers of some or all of the other investment companies managed, administered or advised by the Adviser, and distributed by SACS (the "Distributor") and other affiliates of SunAmerica Inc. The Trust pays each Trustee, who is not an affiliated person of the Adviser, annual compensation in addition to reimbursement of out-of-pocket expenses in connection with attendance at meetings of the Trustees. Specifically, each unaffiliated Trustee receives a pro rata portion (based upon the Trust's net assets) of $40,000 in annual compensation for acting as director or trustee to all the retail funds in the SunAmerica Mutual Funds (namely, the Trust, SunAmerica Equity Funds and SunAmerica Money Market Funds, Inc.). In addition, Mr. Eisenstat receives an aggregate of $2,000 in annual compensation for serving as the Chairman of the Boards of the retail funds in the SunAmerica Mutual Funds. Officers of the Trust receive no direct remuneration in such capacity from the Trust or any of the Funds. In addition, each unaffiliated Trustee also serves on the Audit Committee of the Board of Trustees. Each member of the Audit Committee receives an aggregate of $5,000 in annual compensation for serving on the Audit Committees of all the SunAmerica Mutual Funds. With respect to the Trust, each member of the committee receives a pro rata portion of the $5,000 annual compensation, based on the relative net assets of the Trust. The Trust also has a Nominating Committee, comprised solely of unaffiliated Trustees, which recommends to the Trustees those persons to be nominated for election as Trustees by shareholders and selects and proposes nominees for election by Trustees between shareholders' meetings. Members of the Nominating Committee serve without compensation. B-52 The Trustees (and Directors) of the SunAmerica Mutual Funds have adopted the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the "Retirement Plan") effective January 1, 1993 for the Trustees who are not "interested persons" (within the meaning of the 1940 Act) of the SunAmerica mutual funds (the "disinterested Trustees"). The Retirement Plan provides generally that if a disinterested Trustee who has at least 10 years of consecutive service as a disinterested Trustee of any of the SunAmerica Mutual Funds (an "Eligible Trustee") retires after reaching age 60 but before age 70 or dies while a Trustee, such person will be eligible to receive a retirement or death benefit from each SunAmerica Mutual Fund with respect to which he or she is an Eligible Trustee. As of each birthday, prior to the 70th birthday, each Eligible Trustee will be credited with an amount equal to (i) 50% of his or her regular fees (excluding committee fees) for services as a disinterested Trustee of each SunAmerica mutual fund for the calendar year in which such birthday occurs, plus (ii) 8.5% of any amounts credited under clause (i) during prior years. An Eligible Trustee may receive any benefits payable under the Retirement Plan, at his or her election, either in one lump sum or in up to fifteen annual installments. As of July 14, 1995, the Trustees and officers of the Trust owned in the aggregate, less than 1% of the Trust's total outstanding shares. ADVISER, PERSONAL SECURITIES TRADING, DISTRIBUTOR AND ADMINISTRATOR THE ADVISER. The Adviser, organized as a Delaware corporation in 1982, is located at 733 Third Avenue, New York, NY 10017-3204, and acts as adviser to each of the Funds pursuant to the Investment Advisory and Management Agreement dated September 23, 1993 (the "Advisory Agreement") with the Trust, on behalf of each Fund. The Adviser is an indirect wholly owned subsidiary of SunAmerica Inc. SunAmerica Inc., is incorporated in the State of Maryland and maintains its principal executive offices at 1 SunAmerica Center, Century City, Los Angeles, CA 90067-6022, telephone (310) 772-6000. Under the Advisory Agreement, the Adviser selects and manages the investments of each Fund, provides various administrative services and supervises the Funds' daily business affairs, subject to general review by the Trustees. Except to the extent otherwise specified in the Advisory Agreement, each Fund pays, or causes to be paid, all other expenses of the Trust and each of the Funds, including, without limitation, charges and expenses of any registrar, custodian, transfer and dividend disbursing agent; brokerage commissions; taxes; engraving and printing of share certificates; registration costs of the Funds B-53 and their shares under Federal and state securities laws; the cost and expense of printing, including typesetting, and distributing Prospectuses and Statements of Additional Information respecting the Funds, and supplements thereto, to the shareholders of the Funds; all expenses of shareholders' and Trustees' meetings and of preparing, printing and mailing proxy statements and reports to shareholders; all expenses incident to any dividend, withdrawal or redemption options; fees and expenses of legal counsel and independent accountants; membership dues of industry associations; interest on borrowings of the Funds; postage; insurance premiums on property or personnel (including Officers and Trustees) of the Trust which inure to its benefit; extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification relating thereto); and all other costs of the Trust's operation. As compensation for its services to the Funds, the Adviser receives a fee from each Fund, payable monthly, computed daily at the following annual rates:
Fund Fee - ---------------------------- --------------------------------------------------- Government Securities Fund .75% of average daily net assets up to $200 million; .72% of next 200 million; and .55% of average daily net assets in excess of $400 million. Federal Securities Fund .55% of average daily net assets up to $25 million; .50% of the next $25 million; and .45% of average daily net assets in excess of $50 million. Diversified Income Fund .65% of average daily net assets up to $350 million; and .60% of average daily net assets in excess of $350 million. High Income Fund .75% of average daily net assets up to $200 million; .72% of the next $200 million; and .55% of average daily net assets in excess of $400 million. Tax Exempt Insured Fund .50% of average daily net assets up to $350 million; and .45% of average daily net assets in excess of $350 million.
The Advisory Agreement was approved by the Trustees, including a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any such party, on March 31, 1993 and, with respect to the Class A shares of Government Securities Fund and High Income Fund, by the shareholders of each Fund on September 23, 1993, and with respect to the Class B shares of Government Securities Fund, the Class A shares and Class B shares of Federal Securities Fund and Diversified Income Fund, B-54 the Class B shares of High Income Fund, and the Class A and B shares of Tax Exempt Insured Fund, by the Adviser, the sole initial shareholder, on September 24, 1993. The Advisory Agreement became effective on September 24, 1993. For the fiscal year ended March 31, 1995, the Adviser earned fees of $8,619,802 as follows: $5,033,634, Government Securities Fund (reduced by the voluntary waiver of $226,804); $365,395, Federal Securities Fund; $1,153,494, Diversified Income Fund; $1,192,998, High Income Fund; and $874,281, Tax Exempt Insured Fund. For the fiscal period ended March 31, 1994, the Adviser received fees of $7,551,996 as follows: $5,419,370, Government Securities Fund; $506,648, Federal Securities Fund; $393,249, Diversified Income Fund; $824,761, High Income Fund and; $407,968, Tax Exempt Insured Fund. The Adviser (or a predecessor adviser) received fees from the mutual funds that were reorganized into the Funds, and from former series of the Trust that were redesignated as classes of shares of the Government Securities Fund and the High Income Fund, as described below. The following advisory fees were paid during the fiscal year prior to the Reorganization. With regard to the Government Securities Fund, all outstanding shares of the Government Income Portfolio were redesignated Class A shares in the Reorganization and the portfolio was renamed the Government Securities Fund. In addition, Old Government Securities was reorganized with, and its shareholders received Class B shares of, the Government Securities Fund. Government Income Portfolio paid an advisory fee at an annual rate of .60% of average daily net assets up to $350 million and .55% of average daily net assets over $350 million. For the fiscal year ended March 31, 1993, the Adviser earned advisory fees from Government Income Portfolio in the amount of $403,143. Old Government Securities paid an advisory fee at the same annual rate as is payable by the Government Securities Fund under the Advisory Agreement. The Adviser earned an advisory fee from Old Government Securities of $ 7,528,432 (reduced by the waiver of $269,790) for the fiscal year ended June 30, 1993. With regard to the Federal Securities Fund, Old Federal Securities was reorganized with, and its shareholders received Class B shares of, the Federal Securities Fund. Old Federal Securities paid the Adviser an advisory fee at the same annual rate as is payable by the Federal Securities Fund under the Advisory Agreement. For the fiscal year ended March 31, 1993, the Adviser earned advisory fees of $609,904. With regard to the Diversified Income Fund, Old Diversified Income was reorganized with and its shareholders received Class B shares of the Diversified Income Fund. Old Diversified Income paid an advisory fee at the same annual rate as is payable by the B-55 Diversified Income Fund under the Advisory Agreement. For the fiscal year ended October 31, 1993, the Adviser earned advisory fees from Old Diversified Income of $285,667 (reduced by the waiver of $53,511). With regard to the High Income Fund, in the reorganization, all outstanding shares of the High Yield Portfolio were redesignated as Class A shares and the portfolio was named the High Income Fund. In addition, Old High Income reorganized with and its shareholders received Class B shares of the High Income Fund. High Yield Portfolio paid an advisory fee at an annual rate of .70% of average daily net assets up to $250 million and .60% of average daily net assets over $250 million. For the fiscal year ended March 31, 1993, the Adviser earned advisory fees from the High Yield Portfolio of $181,340. Old High Income paid an advisory fee at the same annual rate as is payable by the High Income Fund under the Advisory Agreement. The Adviser earned an advisory fee from Old High Income of $699,799 for the fiscal year ended June 30, 1993. With regard to the Tax Exempt Insured Fund, Old Tax Exempt Insured was reorganized with, and its shareholders received Class A shares of, the Tax Exempt Insured Fund. Old Tax Exempt Insured paid an advisory fee at the same annual rate as is payable by the Tax Exempt Insured Fund under the Advisory Agreement. For the fiscal year ended October 31, 1993, the Adviser earned advisory fees from Old Tax Exempt Insured in the amount of $759,005. Certain states in which the shares of the Funds are qualified for sale impose limitations on the expenses of the Funds. The current annual expense limitations require that the Adviser reimburse each Fund in any amount necessary to prevent such Fund's aggregate ordinary operating expenses (excluding interest, taxes, distribution and brokerage fees and commissions, and extraordinary charges such as litigation costs) from exceeding, in any fiscal year, 2 1/2% of the first $30 million of the average daily net assets of each Fund, 2% of the next $70 million of such assets, plus 1-1/2% of such assets in excess of $100 million. In accordance with the terms of the Advisory Agreement, if the expenses of a Fund exceed the amount of the fees paid by the Fund to the Adviser, then the Adviser will reimburse the Fund the amount of such excess. For the fiscal year ended March 31, 1995, no such reimbursement was required. With respect to the Class A shares of Federal Securities Fund, for the fiscal year ended March 31, 1995, voluntary expense reimbursements were given to the Fund by the Adviser in the amount of $20,954. The foregoing fee waiver is voluntary and may be terminated by the Adviser at any time. B-56 Pursuant to prior advisory arrangements with Old Diversified Income and Old Tax Exempt Insured (which reorganized with and whose shareholders received Class B shares of the Diversified Income Fund and Class A shares of the Tax Exempt Insured Fund, respectively) and pursuant to prior advisory arrangements with the Government Income Portfolio and the High Yield Portfolio (all of whose outstanding shares were redesignated Class A shares of the Government Securities Fund and Class A shares of the High Income Fund, respectively), the Adviser was required to reimburse each of these funds in the manner required under the Advisory Agreement described above. For their respective fiscal year prior to Reorganization, no reimbursements were made by the Adviser with respect to Government Income Portfolio and High Yield Portfolio. For the fiscal year ended October 31, 1993, Old Tax Exempt Insured received $86,799 in expense reimbursements and Old Diversified Income received $53,511 in expense reimbursements from the Adviser. Pursuant to prior advisory arrangements with Old Government Securities and Old High Income which reorganized with and whose shareholders received Class B shares of Government Securities Fund and High Income Fund, respectively, the Adviser was required to reimburse these predecessor funds to the extent that each such fund's annual operating and management expenses (excluding interest, taxes, brokerage commissions, extraordinary expenses and distribution fees) exceeded 1.5% of average daily net assets up to $30 million and 1% of such assets over $30 million. No reimbursements were made by the Adviser with respect to Old Government Securities and Old High Income for the fiscal year ended June 30, 1993. Pursuant to prior advisory arrangements with Old Federal Securities, the Adviser was not required to reimburse the Fund in any amount to prevent the fund's annual ordinary operating expenses from exceeding state expense limitations. The annual operating expenses of Old Federal Securities did not exceed the most restrictive state expense limitations for the fiscal year prior to the Reorganization. The Advisory Agreement will continue in effect with respect to each Fund until September 23, 1995, and thereafter from year to year, if approved at least annually by vote of a majority of the Trustees or by the holders of a majority of the respective Fund's outstanding voting securities. Any such continuation also requires approval by a majority of the Trustees who are not parties to the Advisory Agreement or "interested persons" of any such party as defined in the 1940 Act (the "Independent Trustees") by vote cast in person at a meeting called for such purpose. The Advisory Agreement may be terminated with respect to a Fund at any time, without penalty, on 60 days' written notice by the Trustees, B-57 by the holders of a majority of the respective Fund's outstanding voting securities or by the Adviser. The Advisory Agreement automatically terminates with respect to each Fund in the event of its assignment (as defined in the 1940 Act and the rules thereunder). With respect to each Fund, the Advisory Agreement was continued for an additional year by the Trustees of the Trust, including a majority of the Independent Trustees at a meeting held on May 16, 1995. Under the terms of the Advisory Agreement, the Adviser is not liable to the Funds, or their shareholders, for any act or omission by it or for any losses sustained by the Funds or their shareholders, except in the case of willful misfeasance, bad faith, gross negligence or reckless disregard of duty. The Sub-Adviser. With respect to periods prior to August 1, 1994, the Adviser had entered into a sub-advisory agreement (the "Sub-Advisory Agreement") with Wellington Management Company ("WMC" or the "Sub-Adviser") pursuant to which the Sub-Adviser provided the Tax Exempt Insured Fund with investment advisory services, including the continuous review and administration of such Fund's investment program. The Sub-Adviser discharged its responsibilities subject to the direction and control of the Trustees and the oversight and review of the Adviser. The Adviser paid the Sub-Adviser a monthly fee with respect to the Tax Exempt Insured Fund, computed daily, at the following annual rate: .15% of average daily net assets up to $200 million; .125% of the next $300 million; and .10% of average daily net assets in excess of $500 million. This fee was paid from the management fee paid to the Adviser and did not increase Fund expenses. Prior to January 3, 1994, the Sub-Adviser also served as sub-adviser to the Government Securities Fund. The Sub-Adviser received a monthly fee, computed daily, at the following annual rate: .11% of average daily net assets up to $200 million; .10% of the next $200 million; and .075% of average daily net assets in excess of $400 million. This fee was paid by the Adviser. The Sub-Adviser is a professional investment counseling firm which provides investment services to investment companies, employee benefit plans, endowments, foundations and other institutions and individuals. The Sub-Adviser is located at 75 State Street, Boston, MA 02109. The Sub-Advisory Agreement was approved by the Trustees, including a majority of the Trustees who are not parties to the Sub-Advisory Agreement or "interested persons" of any such party, on March 31, 1993 and, with respect to the Class A shares of Government Securities Fund, by the shareholders of such Fund on September 23, 1993 and, with respect to the Class B shares of B-58 Government Securities Fund and Class A and B shares of Tax Exempt Insured Fund, by the Adviser, the sole initial shareholder, on September 24, 1993. The Sub- Advisory Agreement became effective on September 24, 1993. For the fiscal period April 1, 1994 through July 31, 1994 the Sub-Adviser earned fees of $92,926 with respect to Tax Exempt Insured Fund. For the fiscal period ended March 31, 1994, the Sub-Adviser earned fees from the Adviser of $254,348 as follows: $131,957, Government Securities Fund (until January 2, 1994) and; $122,391, Tax Exempt Insured Fund. In addition, the Sub- Adviser received fees from the Adviser with respect to Old Government Securities and Old Tax Exempt Insured, which were reorganized into the Government Securities Fund and the Tax Exempt Insured Fund, respectively. In addition, although the Adviser does not currently employ the Sub-Adviser in any capacity with respect to the Federal Securities Fund, the Sub-Adviser received fees from the Adviser with respect to Old Federal Securities which was reorganized into the Federal Securities Fund. The following sub-advisory fees were paid during the fiscal year preceding the fiscal year ended March 31, 1994. With respect to the Government Securities Fund, Old Government Securities was reorganized with, and its shareholders received Class B shares of, the Government Securities Fund. The Adviser paid the Sub-Adviser a sub-advisory fee with respect to Old Government Securities at the same annual rate as was payable by the Adviser (until January 3, 1994) with respect to the Government Securities Fund under the Sub-Advisory Agreement. For the fiscal year ended June 30, 1993, the Sub-Adviser earned sub-advisory fees with respect to Old Government Securities of $1,045,695 (net of waiver of $269,790). With respect to the Federal Securities Fund, Old Federal Securities reorganized with, and its shareholders received Class B shares of, the Federal Securities Fund. The Adviser paid the Sub-Adviser a fee with respect to Old Federal Securities at the annual rate of .225% of average daily net assets up to $50 million; .125% of the next $50 million; and .100% of average daily net assets in excess of $100 million. For the fiscal year ended March 31, 1993, the Sub-Adviser earned sub-advisory fees with respect to Old Federal Securities of $202,201. With respect to the Tax Exempt Insured Fund, Old Tax Exempt Insured reorganized with, and its shareholders received Class A shares of, the Tax Exempt Insured Fund. The Adviser paid the Sub-Adviser a fee with respect to Old Tax Exempt Insured at the same annual rate as is payable by the Adviser with respect to the Tax Exempt Insured Fund under the Sub-Advisory Agreement. For the fiscal year ended October 31, 1993, the Sub-Adviser earned sub- B-59 advisory fees with respect to Old Tax Exempt Insured of $176,469. PERSONAL SECURITIES TRADING. The Trust and the Adviser have adopted a written Code of Ethics (the "Code of Ethics") which prescribes general rules of conduct and sets forth guidelines with respect to personal securities trading by "Access Persons" thereof. An Access Person as defined in the Code of Ethics is an individual who is a trustee, director, officer, general partner or advisory person of the Trust or the Adviser. Among the guidelines on personal securities trading include; (i) securities being considered for purchase or sale, or purchased or sold, by any Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii) private placements, (iv) blackout periods, (v) short-term trading profits, (vi) gifts, and (vii) services as a director. These guidelines are substantially similar to those contained in the Report of the Advisory Group on Personal Investing issued by the Investment Company Institute's Advisory Panel. The Adviser reports to the Board of Trustees, on a quarterly basis, as to whether there were any violations of the Code of Ethics by Access Persons of the Trust or the Adviser during the quarter. THE DISTRIBUTOR. The Trust, on behalf of each Fund, has entered into a distribution agreement (the "Distribution Agreement") with the Distributor, a registered broker-dealer and an indirect wholly owned subsidiary of SunAmerica Inc., to act as the principal underwriter of the shares of each Fund. The address of the Distributor is 733 Third Avenue, New York, NY 10017-3204. The Distribution Agreement provides that the Distributor has the exclusive right to distribute shares of the Funds through its registered representatives and authorized broker-dealers. The Distribution Agreement also provides that the Distributor will pay the promotional expenses, including the incremental cost of printing prospectuses, annual reports and other periodic reports respecting each Fund, for distribution to persons who are not shareholders of such Fund and the costs of preparing and distributing any other supplemental sales literature. However, certain promotional expenses may be borne by the Funds (see "Distribution Plans" below). The Distribution Agreement was approved by the Trustees, including a majority of those Trustees who are not "interested persons" of the Trust, on March 31, 1993. The Distribution Agreement became effective on September 24, 1993. The Distribution Agreement will remain in effect until September 23, 1995 and thereafter from year-to-year with respect to each Fund if such continuance is approved at least annually by the Trustees, including a majority of the Trustees who are not "interested persons" of the Trust. The Trust or the Distributor each has the right to terminate the Distribution Agreement with respect to a B-60 Fund on 60 days' written notice, without penalty. The Distribution Agreement will terminate automatically in the event of its assignment as defined in the 1940 Act and the rules thereunder. With respect to each Fund, the Distribution Agreement was continued for an additional year by the Trustees of the Trust, including a majority of the Independent Trustees at a meeting held on May 16, 1995. The Distributor may, from time-to-time, pay additional commissions or promotional incentives to brokers, dealers or other financial services firms that sell shares of the Funds. In some instances, such additional commissions, fees or other incentives may be offered only to certain firms, including Royal Alliance Associates, Inc. and SunAmerica Securities, Inc. affiliates of the Distributor, that sell or are expected to sell during specified time periods certain minimum amounts of shares of the Funds, or of other funds underwritten by the Distributor. In addition, the terms and conditions of any given promotional incentive may differ from firm to firm. Such differences will, nevertheless, be fair and equitable, and based on such factors as size, geographic location, or other reasonable determinants, and will in no way affect the amount paid to any investor. DISTRIBUTION PLANS. As indicated in the Prospectus, the Trustees of the Trust and the shareholders of each class of shares of each Fund have adopted Distribution Plans (the "Class A Plan" and the "Class B Plan," and collectively, the "Distribution Plans"). Reference is made to "Management of the Trust - Distribution Plans" in the Prospectus for certain information with respect to the Distribution Plans. Under the Class A Plan, the Distributor may receive payments from a Fund at an annual rate of up to 0.10% of average daily net assets of such Fund's Class A shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. Under the Class B Plan, the Distributor may receive payments from a Fund at the annual rate of up to 0.75% of the average daily net assets of such Fund's Class B shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. The distribution costs for which the Distributor may be reimbursed out of such distribution fees include fees paid to broker-dealers that have sold Fund shares, commissions and other expenses such as sales literature, prospectus printing and distribution and compensation to wholesalers. It is possible that in any given year the amount paid to the Distributor under the Class A Plan or Class B Plan will exceed the Distributor's distribution costs as described above. The Distribution Plans provide that each class of shares of each Fund may also pay the Distributor an account maintenance and B-61 service fee of up to 0.25% of the aggregate average daily net assets of such class of shares for payments to broker-dealers for providing continuing account maintenance. In this regard, some payments are used to compensate broker- dealers with account maintenance and service fees in an amount up to 0.25% per year of the assets maintained in a Fund by their customers. The Distribution Plans were approved on March 31, 1993 by the Trustees, including a majority of the Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Distribution Plans (the "Independent Trustees"), and, with respect to the Class A shares of Government Securities Fund and High Income Fund, by the shareholders of each Fund on September 23, 1993 and, with respect to the Class B shares of Government Securities Fund, Class A and B shares of Federal Securities Fund and Diversified Income Fund, Class B shares of High Income Fund, and Class A and B shares of Tax Exempt Insured Fund, by the Adviser, the sole initial shareholder, on September 24, 1993. The Distribution Plans became effective on September 24, 1993. For the fiscal year ended March 31, 1995, the Distributor received distribution fees of $947,330, pursuant to the Class A Distribution Plans, as follows: $251,367, Government Securities Fund; $5,831, Federal Securities Fund; $52,416, Diversified Income Fund; $109,589, High Income Fund; and $528,127, Tax Exempt Insured Fund. For the same period, the Distributor received distribution fees of $10,942,459, pursuant to the Class B Distribution Plans, as follows: $7,088,417, Government Securities Fund; $711,995, Federal Securities Fund; $1,624,850, Diversified Income Fund; $1,277,571, High Income Fund; and $239,626, Tax Exempt Insured Fund. For the fiscal period ended March 31, 1995, Government Securities Fund -Class A, Tax Exempt Insured Fund - Class A and High Income Fund - -Class B received $28,728, $61,214 and $102,206, respectively, in expense reimbursements from the Adviser. For the fiscal period ended March 31, 1994, the Distributor received distribution fees of $533,356, pursuant to the Class A Distribution Plans, as follows: $137,217, Government Securities Fund; $598, Federal Securities Fund; $6,475, Diversified Income Fund; $124,115, High Income Fund; and $264,951, Tax Exempt Insured Fund. For the same period, the Distributor received distribution fees of $10,532,770, pursuant to the Class B Distribution Plans, as follows: $8,132,385, Government Securities Fund; $997,988, Federal Securities Fund; $586,500, Diversified Income Fund; $756,964, High Income Fund; and $58,933, Tax Exempt Insured Fund. For the fiscal period ended March 31, 1994, Government Securities Fund - Class A, Tax Exempt Insured Fund - Class A and High Income Fund - Class B received $15,597, $83,270 and $60,557, respectively, in expense reimbursements from the Adviser. In addition, fees were received by the Distributor from the Funds' predecessors pursuant to B-62 distribution plans which were in effect prior to the Reorganization (each, a "Predecessor Distribution Plan"). With regard to the U.S. Government Securities Fund, in the Reorganization, all outstanding shares of the Government Income Portfolio were redesignated Class A shares and the portfolio was renamed the Government Securities Fund. The Predecessor Distribution Plan for the Government Income Portfolio provided for distribution expenditures of up to 0.35% of average daily net assets. For the fiscal year ended March 31, 1993, the Distributor received $235,167 pursuant to the Predecessor Distribution Plan. In addition, Old Government Securities reorganized with, and its shareholders received Class B shares of, the Government Securities Fund. The Predecessor Distribution Plan for Old Government Securities provided for distribution expenditures at the annualized rate of 1.00% of the lesser of (i) the net asset value of all Assessable Shares sold less the net asset value of all Assessable Shares redeemed, or (ii) the then current net asset value of all Assessable Shares. Assessable Shares include all shares purchased since inception, except through reinvestment of dividends and distributions. For the fiscal year ended June 30, 1993, the Distributor received $11,744,667 in distribution fees from Old Government Securities, pursuant to a Predecessor Distribution Plan. With regard to the Federal Securities Fund, Old Federal Securities was reorganized with, and its shareholders received Class B shares of, the Federal Securities Fund. Old Federal Securities' Predecessor Distribution Plan provided for distribution expenditures .95% of average daily net assets. For the fiscal year ended March 31, 1993, the Distributor received $1,208,408 pursuant to the Predecessor Distribution Plan. With regard to the Diversified Income Fund, Old Diversified Income was reorganized with, and its shareholders received Class B shares of, the Diversified Income Fund, a newly created series of the Trust. The Predecessor Distribution Plan of Old Diversified Income provided for distribution expenditures of up to .75% of average daily net assets. For the fiscal year ended October 31, 1993, the Distributor received $348,006 (reduced by the waiver of $112,733). With regard to the High Income Fund, in the Reorganization, all outstanding shares of the High Yield Portfolio were redesignated Class A shares and the portfolio was renamed the High Income Fund. The Predecessor Distribution Plan for the High Yield Portfolio provided for distribution expenditures of up to .35% of average daily net assets. For the fiscal year ended March 31, 1993, the Distributor received fees from the High Yield Portfolio of $90,670. In addition, in the Reorganization, Old High Income reorganized, with and its shareholders received Class B shares B-63 of, the High Income Fund. Old High Income's Predecessor Distribution Plan provided for a distribution fee at the same annual rate and calculated in the same manner as in Old Government Securities' Predecessor Distribution Plan. For the fiscal year ended June 30, 1993, the Distributor received $889,318 in distribution fees from Old High Income, pursuant to a Predecessor Distribution Plan. With regard to the Tax Exempt Insured Fund, Old Tax Exempt Insured was reorganized with, and its shareholders received Class A shares of, the Tax Exempt Insured Fund, a newly created series of the Trust. The Predecessor Distribution Plan of Old Tax Exempt Insured provided for distribution expenditures of up to .35% of average daily net assets or such lesser amounts as the trustees of Old Tax Exempt Insured determined. For the fiscal year ended October 31, 1993, the Distributor received distribution fees from Old Tax Exempt Insured of $530,537. Continuance of the Distribution Plans with respect to each Fund is subject to annual approval by vote of the Trustees, including a majority of the Independent Trustees. A Distribution Plan may not be amended to increase materially the amount authorized to be spent thereunder with respect to a class of shares of a Fund, without approval of the shareholders of the affected class of shares of the Fund. In addition, all material amendments to the Distribution Plans must be approved by the Trustees in the manner described above. A Distribution Plan may be terminated at any time with respect to a Fund without payment of any penalty by vote of a majority of the Independent Trustees or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the affected class of shares of the Fund. So long as the Distribution Plans are in effect, the election and nomination of the Independent Trustees of the Trust shall be committed to the discretion of the Independent Trustees. In the Trustees' quarterly review of the Distribution Plans, they will consider the continued appropriateness of, and the level of, compensation provided in the Distribution Plans. In their consideration of the Distribution Plans with respect to a Fund, the Trustees must consider all factors they deem relevant, including information as to the benefits of the Fund and the shareholders of the relevant class of the Fund. With respect to each class of each Fund, the Distribution Plans were continued for an additional year by the Trustees of the Trust, including a majority of the Independent Trustees at a meeting held on May 16, 1995. THE ADMINISTRATOR. The Trust has entered into a Service Agreement, under the terms of which SunAmerica Fund Services Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica Inc., acts as a servicing agent assisting State Street Bank and Trust Company ("State Street") in connection with certain services offered to the B-64 shareholders of each of the Funds. Under the terms of the Service Agreement, SAFS may receive reimbursement of its costs in providing such shareholder services. SAFS is located at 733 Third Avenue, New York, NY 10017-3204. The Trustees, including a majority of the Trustees who are not parties to the Service Agreement or "interested persons," as that term is defined in the 1940 Act, approved the Service Agreement on March 31, 1993. The Service Agreement will remain in effect until September 23, 1995 and from year-to-year thereafter provided its continuance is approved annually by vote of the Trustees including a majority of the disinterested Trustees. With respect to each Fund, the Service Agreement was continued for an additional year by the Trustees of the Trust, including a majority of the Independent Trustees at a meeting held on May 16, 1995. Pursuant to the Service Agreement, as compensation for services rendered, SAFS receives an annual fee from each Fund, computed daily and payable monthly of 0.22% of average daily net assets. Out of such fee, SAFS pays the fees of State Street, and its affiliate, National Financial Data Services ("NFDS" and with State Street, the "Transfer Agent"). For further information regarding the Transfer Agent see the section entitled "Additional Information" below. PORTFOLIO TRANSACTIONS AND BROKERAGE As discussed in the Prospectus, the Adviser is responsible for decisions to buy and sell securities for each Fund, selection of broker-dealers and negotiation of commission rates. Purchases and sales of securities on a securities exchange are effected through brokers-dealers who charge a negotiated commission for their services. Orders may be directed to any broker-dealer including, to the extent and in the manner permitted by applicable law, an affiliated brokerage subsidiary of the Adviser. In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission (although the price of the security usually includes a profit to the dealer). In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. The primary consideration of the Adviser in effecting a security transaction is to obtain the best net price and the most favorable execution of the order. However, the Adviser may select broker-dealers which provide them with research services and may cause a Fund to pay such broker-dealers commissions which B-65 exceed those that other broker-dealers may have charged, if in their view the commissions are reasonable in relation to the value of the brokerage and/or research services provided by the broker-dealer. Certain research services furnished by brokers may be useful to the Adviser with clients other than the Trust. No specific value can be determined for research services furnished without cost to the Adviser by a broker. The Adviser is of the opinion that because the material must be analyzed and reviewed by its staff, its receipt does not tend to reduce expenses, but may be beneficial in supplementing the Adviser's research and analysis. Therefore, it may tend to benefit the Funds by improving the quality of the Adviser's investment advice. The investment advisory fees paid by the Funds are not reduced because the Adviser receives such services. When making purchases of underwritten issues with fixed underwriting fees, the Adviser may designate the use of broker-dealers who have agreed to provide the Adviser with certain statistical, research and other information. Subject to applicable law and regulations, consideration may also be given to the willingness of particular brokers to sell shares of a Fund as a factor in the selection of brokers for transactions effected on behalf of a Fund, subject to the requirement of best price and execution. Although the objectives of other accounts or investment companies which the Adviser manages may differ from those of the Funds, it is possible that, at times, identical securities will be acceptable for purchase by one or both of the Funds and one or more other accounts or investment companies which the Adviser manages. However, the position of each account or company in the securities of the same issue may vary with the length of the time that each account or company may choose to hold its investment in those securities. The timing and amount of purchase by each account and company will also be determined by its cash position. If the purchase or sale of a security is consistent with the investment policies of one or more of the Funds and one or more of these other accounts or companies is considered at or about the same time, transactions in such securities will be allocated in a manner deemed equitable by the Adviser. The Adviser may combine such transactions, in accordance with applicable laws and regulations, where the size of the transaction would enable it to negotiate a better price or reduced commission. However, simultaneous transactions could adversely affect the ability of a Fund to obtain or dispose of the full amount of a security, which it seeks to purchase or sell, or the price at which such security can be purchased or sold. For the fiscal year ended March 31, 1995, High Income Fund paid brokerage commissions of $34,028, of which $0 was paid to B-66 affiliated brokers. None of the other Portfolios of the Trust paid any commissions during this period. For the fiscal period ended March 31, 1994, High Income Fund paid brokerage commissions of $4,250, of which $0 was paid to affiliated brokers. None of the other Portfolios of the Trust paid any commissions during this period. For their respective fiscal year prior to the Reorganization, no brokerage commissions were paid by Government Income Portfolio (which was renamed Government Securities Fund and whose outstanding shares were redesignated Class A shares of the Fund), Old Government Securities (which reorganized with, and whose shareholders received Class B shares of, the Government Securities Fund), Old Federal Securities (which reorganized with, and whose shareholders received Class B shares of the Federal Securities Fund), Old Diversified Income (which reorganized with, and whose shareholders received Class B shares of the Diversified Income Fund), High Yield Portfolio (which was renamed the High Income Fund and whose outstanding shares were redesignated Class A shares of that Fund), Old High Income (which reorganized with, and whose shareholders received Class B shares of the High Income Fund) and Old Tax Exempt Insured (which reorganized with and whose shareholders received Class A shares of the Tax Exempt Insured Fund). ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES Shares of each of the Funds are sold at the respective net asset value next determined after receipt of a purchase order, plus a sales charge, which, at the election of the investor, may be imposed either (i) at the time of purchase (Class A shares), or (ii) on a deferred basis (Class B shares and certain Class A shares). Reference is made to "Purchase of Shares" in the Prospectus for certain information as to the purchase of Fund shares. Initial sales charges from the sale of Class A shares or deferred sales charges from the sale of Class B shares of the Funds have been received as of the date of this Statement of Additional Information as herein after stated. For the fiscal year ended March 31, 1995, the Distributor received sales concessions of $84,710, $19,976, $201,057, $148,782 and $149,429, respectively, from the Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund, of which $56,872, $11,597, $144,342, $107,889 and $85,321, respectively, was reallowed to affiliated Broker Dealers and $10,813, $3,947, $26,811, $16,642 and $40,047, respectively, was reallowed to non-affiliated broker-dealers. In addition, for the same period, the Distributor informed the Government Securities B-67 Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund that it received $4,729,948, $68,586, $776,679, $420,741 and $85,661, respectively, of contingent deferred sales charges. For the fiscal period ended March 31, 1994, the Distributor received sales concessions of $80,688, $14,286, $167,367, $281,934 and $244,958, respectively, from the Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund, of which $53,360, $11,503, $118,893, $191,584 and $102,031, respectively, was reallowed to affiliated Broker Dealers and $13,521, $0, $24,373, $45,772 and $107,207, respectively, was reallowed to non-affiliated broker-dealers. In addition, for the same period, the Distributor informed the Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund that it received $3,733,888, $192,962, $131,716, $268,221 and $19,084, respectively, of contingent deferred sales charges. Initial and deferred sales charges were also received by the Funds' predecessors prior to the date of the Reorganization. With regard to the Government Securities Fund, in the Reorganization, all outstanding shares of the Government Income Portfolio were redesignated as Class A shares and the portfolio was renamed the Government Securities Fund. For the fiscal year ended March 31, 1993, the Distributor received gross sales charges of $438,891 with respect to the Government Income Portfolio, of which $178,988 was reallowed to affiliated broker-dealers and $157,320 was reallowed to non- affiliated broker-dealers. In addition, Old Government Securities reorganized with and its shareholders received Class B shares of the Government Securities Fund. For the fiscal year ended June 30, 1993, the Distributor received contingent deferred sales charges of $2,488,521 with respect to Old Government Securities. As described above, Old Federal Securities reorganized with, and its shareholders received Class B shares of, the Federal Securities Fund, a newly created series of the Trust. For the fiscal year ended March 31, 1993, the Distributor received $131,618 in contingent deferred sales charges, with respect to Old Federal Securities. With regard to the Diversified Income Fund, Old Diversified Income was reorganized with, and its shareholders received Class B shares of, the Diversified Income Fund, a newly created series of the Trust. For the fiscal year ended October 31, 1993, the Distributor received contingent deferred sales charges of $168,707 with respect to Old Diversified Income. B-68 With regard to the High Income Fund, in the Reorganization, all outstanding shares of the High Yield Portfolio were redesignated Class A shares and the portfolio was renamed the High Income Fund. For the fiscal year ended March 31, 1993, the Distributor received gross sales charges of $397,070 with respect to the High Yield Portfolio, of which $247,288 was reallowed to affiliated broker- dealers and $73,989 was reallowed to non-affiliated broker-dealers. In addition, in the Reorganization, Old High Income reorganized with and its shareholders received Class B shares of the High Income Fund. For the fiscal year ended June 30, 1993, the Distributor received contingent deferred sales charges of $205,619 with respect to Old High Income. With regard to the Tax Exempt Insured Fund, Old Tax Exempt Insured reorganized with, and its shareholders received Class A shares of, the Tax Exempt Insured Fund. For the fiscal year ended October 31, 1993, the Distributor received gross sales charges of $2,776,121 with respect to Old Tax Exempt Insured, of which $994,945 was reallowed to affiliated broker-dealers and $1,105,406 was reallowed to non-affiliated broker-dealers. PURCHASES THROUGH THE DISTRIBUTOR. An investor may purchase shares of a Fund through dealers which have entered into selected dealer agreements with the Distributor. An investor's dealer who has entered into a distribution arrangement with the Distributor is expected to forward purchase orders and payment promptly to the Fund. Orders received by the Distributor before the close of business will be executed at the offering price determined at the close of regular trading on the New York Stock Exchange ("NYSE") that day. Orders received by the Distributor after the close of business will be executed at the offering price determined after the close of the NYSE on the next trading day. The Distributor reserves the right to cancel any purchase order for which payment has not been received by the fifth business day following the investment. A Fund will not be responsible for delays caused by dealers. PURCHASE BY CHECK. In the case of a new account, purchase orders by check must be submitted directly by mail to SunAmerica Fund Services, Inc., Mutual Fund Operations, 733 Third Avenue, New York, New York 10017-3204, together with payment for the purchase price of such shares and a completed New Account Application and Authorization Form. Shares of each Fund may be purchased directly through the Transfer Agent. Upon receipt of the New Account Application and Authorization Form and payment check, the Transfer Agent will purchase full and fractional shares of the applicable Fund at the net asset value next computed after the check is received, plus the applicable sales charge. Certified checks are not necessary, but checks are accepted subject to collection at full face value in United States funds and must be drawn on a bank located in the United States. There are restrictions on the B-69 redemption of shares purchased by check for which funds are being collected. (See "Redemption of Shares.") PURCHASE THROUGH SAFS. SAFS will effect a purchase order on behalf of a customer who has an investment account upon confirmation of a verified credit balance at least equal to the amount of the purchase order (subject to the minimum $500 investment requirement for wire orders). If such order is received at or prior to 4:00 P.M., Eastern time, on a day the NYSE is open for business, the purchase of shares of a Fund will be effected on that day. If the order is received after 4:00 P.M., Eastern time, the order will be effected on the next business day. PURCHASE BY FEDERAL FUNDS WIRE. An investor may make purchases by having his or her bank wire Federal funds to the Trust's Transfer Agent. Federal funds purchase orders will be accepted only on a day on which the Trust and the Transfer Agent are open for business. In order to insure prompt receipt of a Federal funds wire, it is important that these steps be followed: 1. You must have an existing SunAmerica Fund Account before wiring funds. To establish an account, complete the New Account Application and send it via facsimile to SunAmerica Fund Services, Inc. at: (212) 551-5343. 2. Call SunAmerica Fund Services' Shareholder/Dealer Services, toll free at (800) 858-8850, extension 5125 to obtain your new account number. 3. Instruct the bank to wire the specified amount to the Transfer Agent: State Street Bank and Trust Company, Boston, MA, ABA# 0110-00028; DDA# 99029712, SunAmerica [name of Fund, Class __] (include shareholder name and account number). WAIVER OF SALES CHARGES WITH RESPECT TO CERTAIN PURCHASES OF CLASS A SHARES. To the extent that sales are made for personal investment purposes, the sales charge is waived as to Class A shares purchased by current or retired officers, directors, and other full-time employees of SunAmerica and its affiliates, as well as members of the selling group and family members of the foregoing. In addition, the sales charge is waived with respect to shares purchased by certain qualified retirement plans or employee benefit plans (other than IRAs), which are sponsored or administered by SunAmerica or an affiliate thereof. Shares purchased under this waiver may not be resold except to the Fund. Shares are offered at net asset value to the foregoing persons because of anticipated economies in sales effort and sales related expenses. Reductions in sales charges apply to purchases or shares by a "single person" including an individual; members of a family unit comprising husband, wife and minor children; or a trustee B-70 or other fiduciary purchasing for a single fiduciary account. Complete details concerning how an investor may purchase shares at reduced sales charges may be obtained by contacting the Distributor. Further, the sales charge is waived with respect to shares purchased by "wrap accounts" for the benefit of clients of broker-dealers, financial institutions or financial planners adhering to the following standards established by the Distributor: (i) the broker-dealer, financial institution or financial planner charges its client(s) an advisory fee based on the assets under management on an annual basis, and (ii) such broker- dealer, financial institution or financial planner does not advertise that shares of the Funds may be purchased by clients at net asset value. REDUCED SALES CHARGES (CLASS A SHARES ONLY). As discussed under "Purchase of Shares" in the Prospectus, investors in Class A shares of a Fund may be entitled to reduced sales charges pursuant to the following special purchase plans made available by the Trust. COMBINED PURCHASE PRIVILEGE. The following persons may qualify for the sales - --------------------------- charge reductions or eliminations by combining purchases of Fund shares into a single transaction: (i) an individual, or a "company" as defined in Section 2(a)(8) of the 1940 Act (which includes corporations which are corporate affiliates of each other); (ii) an individual, his or her spouse and their children under twenty-one, purchasing for his, her or their own account; (iii) a trustee or other fiduciary purchasing for a single trust estate or single fiduciary account (including a pension, profit-sharing, or other employee benefit trust created pursuant to a plan qualified under Section 401 of the Code); (iv) tax-exempt organizations qualifying under Section 501(c)(3) of the Code (not including 403(b) plans); (v) employee benefit plans of a single employer or of affiliated employers, other than 403(b) plans; and (vi) group purchases as described below. A combined purchase currently may also include shares of other funds in the SunAmerica Family of Mutual Funds (other than money market funds) purchased at the same time through a single investment dealer, if the dealer places the order for such shares directly with the Distributor. B-71 RIGHTS OF ACCUMULATION. A purchaser of Fund shares may qualify for a reduced - ----------------------- sales charge by combining a current purchase (or combined purchases as described above) with shares previously purchased and still owned; provided the cumulative value of such shares (valued at cost or current net asset value, whichever is higher), amounts to $50,000 or more. In determining the shares previously purchased, the calculation will include, in addition to other Class A shares of the particular Fund that were previously purchased, shares of the other classes of the same Fund, as well as shares of any class of any other Fund or of any of the other Funds advised by the Adviser, as long as such shares were sold with a sales charge or acquired in exchange for shares purchased with such a sales charge. The shareholder's dealer, if any, or the shareholder, must notify the Distributor at the time an order is placed of the applicability of the reduced charge under the Right of Accumulation. Such notification must be in writing by the dealer or shareholder when such an order is placed by mail. The reduced sales charge will not be granted if: (a) such information is not furnished at the time of the order; or (b) a review of the Distributor's or the Transfer Agent's records fails to confirm the investor's represented holdings. LETTER OF INTENT. A reduction of sales charges is also available to an investor - ---------------- who, pursuant to a written Letter of Intent which is set forth in the New Account Application and Authorization Form in the Prospectus, establishes a total investment goal in Class A shares of one or more Funds to be achieved through any number of investments over a thirteen-month period, of $50,000 or more. Each investment in such Funds made during the period will be subject to a reduced sales charge applicable to the goal amount. The initial purchase must be at least 5% of the stated investment goal and shares totaling 5% of the dollar amount of the Letter of Intent will be held in escrow by the Transfer Agent, in the name of the investor. Shares of any class of shares of any Fund, or of other funds advised by the Adviser which impose a sales charge at the time of purchase, which the investor intends to purchase or has previously purchased during a 30-day period prior to the date of execution of the Letter of Intent and still owns, may also be included in determining the applicable reduction; provided, the dealer or shareholder notifies the Distributor of such prior purchase(s). The Letter of Intent does not obligate the investor to purchase, nor the Trust to sell, the indicated amounts of the investment goal. In the event the investment goal is not achieved within the thirteen-month period, the investor is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if not B-72 paid, the Distributor is authorized by the Letter of Intent to liquidate a sufficient number of escrowed shares to obtain such difference. If the goal is exceeded and purchases pass the next sales charge break-point, the sales charge on the entire amount of the purchase that results in passing that break-point, and on subsequent purchases, will be subject to a further reduced sales charge in the same manner as set forth above under "Rights of Accumulation," but there will be no retroactive reduction of sales charges on previous purchases. At any time while a Letter of Intent is in effect, a shareholder may, by written notice to the Distributor, increase the amount of the stated goal. In that event, shares of the applicable Funds purchased during the previous 90-day period and still owned by the shareholder will be included in determining the applicable sales charge. The 5% escrow and the minimum purchase requirement will be applicable to the new stated goal. Investors electing to purchase shares of one or more of the Funds pursuant to this purchase plan should carefully read such Letter of Intent. Investors electing to purchase shares of one or more of the Funds pursuant to this purchase plan should carefully read such Letter of Intent. REDUCED SALES CHARGE FOR GROUP PURCHASES. Members of qualified groups may - ---------------------------------------- purchase Class A shares of the Funds under the combined purchase privilege as described above. To receive a rate based on combined purchases, group members must purchase Class A shares of a Fund through a single investment dealer designated by the group. The designated dealer must transmit each member's initial purchase to the Distributor, together with payment and completed New Account Application and Authorization Form. After the initial purchase, a member may send funds for the purchase of Class A shares directly to the Transfer Agent. Purchases of a Fund's shares are made at the public offering price based on the net asset value next determined after the Distributor or the Transfer Agent receives payment for the Class A shares. The minimum investment requirements described above apply to purchases by any group member. Class B shares are not included in calculating the purchased amount of a Fund's shares. Qualified groups include the employees of a corporation or a sole proprietorship, members and employees of a partnership or association, or other organized groups of persons (the members of which may include other qualified groups) provided that: (i) the group has at least 25 members of which at least ten members participate in the initial purchase; (ii) the group has been in existence for at least six months; (iii) the group has some purpose in addition to the purchase of investment company shares at a reduced sales charge; (iv) the group's sole organizational nexus or B-73 connection is not that the members are credit card customers of a bank or broker-dealer, clients of an investment adviser or security holders of a company; (v) the group agrees to provide its designated investment dealer access to the group's membership by means of written communication or direct presentation to the membership at a meeting on not less frequently than an annual basis; (vi) the group or its investment dealer will provide annual certification, in form satisfactory to the Transfer Agent, that the group then has at least 25 members and that at least ten members participated in group purchases during the immediately preceding 12 calendar months; and (vii) the group or its investment dealer will provide periodic certification, in form satisfactory to the Transfer Agent, as to the eligibility of the purchasing members of the group. Members of a qualified group include: (i) any group which meets the requirements stated above and which is a constituent member of a qualified group; (ii) any individual purchasing for his or her own account who is carried on the records of the group or on the records of any constituent member of the group as being a good standing employee, partner, member or person of like status of the group or constituent member; or (iii) any fiduciary purchasing shares for the account of a member of a qualified group or a member's beneficiary. For example, a qualified group could consist of a trade association which would have as its members individuals, sole proprietors, partnerships and corporations. The members of the group would then consist of the individuals, the sole proprietors and their employees, the members of the partnership and their employees, and the corporations and their employees, as well as the trustees of employee benefit trusts acquiring a Fund's shares for the benefit of any of the foregoing. Interested groups should contact their investment dealer or the Distributor. The Trust reserves the right to revise the terms of or to suspend or discontinue group sales with respect to shares of the Funds at any time. NET ASSET VALUE TRANSFER PROGRAM. Investors may purchase Class A shares of a -------------------------------- Fund at net asset value to the extent that the investment represents the proceeds from a redemption of a non-SunAmerica mutual fund in which the investor either (a) paid a front-end sales load or (b) was subject to or paid a CDSC on the redemption proceeds. Nevertheless, the Distributor will pay a commission to any dealer who initiates or is responsible for such an investment, in the amount of .50% of the amount invested, subject, however, to forfeiture in the event of a redemption during the first year from the date of purchase. In addition, it is essential that an NAV Transfer Program Form accompany the New Account Application to indicate that the investment is intended to participate in the Net Asset Value Transfer Program (formerly, Exchange Program for Investment Company Shares). This program B-74 may be revised or terminated without notice by the Distributor. For current information, contact Shareholder/Dealer Services at (800) 858-8850. CONTINGENT DEFERRED SALES CHARGES ("CDSCS") APPLICABLE TO CERTAIN CLASS B SHARES. Class B shares of the Government Securities Fund, the Federal Securities Fund, the Diversified Income Fund and the High Income Fund issued to shareholders in exchange for shares of Old Government Securities, Old Federal Securities, Old Diversified Income and Old High Income, respectively, in the Reorganization, are subject to the CDSC schedule that applied to redemptions of shares of these funds at the time of reorganization. Upon a redemption of these shares, the shareholder will receive credit for the periods both prior to and after the Reorganization during which the shares were held. The following table sets forth the rates of the CDSC applicable to shares of the Government Securities Fund, the Federal Securities Fund and the High Income Fund:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLARS YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS - ------------------------------------ ------------------------------- First 5% Second 4% Third 3% Fourth 2% Fifth 1% Sixth and thereafter 0%
The following table sets forth the rates of CDSC applicable to shares of the Diversified Income Fund:
CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLARS YEAR SINCE PURCHASE PAYMENT WAS MADE INVESTED OR REDEMPTION PROCEEDS - ------------------------------------ ------------------------------- First 3% Second 2% Third 1% Fourth and thereafter 0%
Any Class B shares purchased after the date of the Reorganization (other than through the reinvestment of dividends and distributions, which are not subject to the CDSC) will be subject to the CDSC schedule reflected in the Prospectus. CONVERSION FEATURE APPLICABLE TO CERTAIN CLASS B SHARES. Shareholders of Class B shares of the Government Securities Fund, the Federal Securities Fund, the Diversified Income Fund and the High Income Fund issued in exchange for shares of Old Government Securities, Old Federal Securities, Old Diversified Income and Old High Income, respectively, in the Reorganization, will receive credit for the periods both prior to and after the Reorganization B-75 during which the shares were held, for purposes of computing the seven year holding period applicable to the conversion feature. WAIVER OF CONTINGENT DEFERRED SALES CHARGES. As discussed under "Purchase of Shares" in the Prospectus, CDSCs may be waived on redemptions of Class B shares under certain circumstances. The conditions set forth below are applicable with respect to the following situations with the proper documentation: Death. CDSCs may be waived on redemptions within one year following the ------ death (i) of the sole shareholder on an individual account, (ii) of a joint tenant where the surviving joint tenant is the deceased's spouse, or (iii) of the beneficiary of a Uniform Gifts to Minors Act, Uniform Transfers to Minors Act or other custodial account. The CDSC waiver is also applicable in the case where the shareholder account is registered as community property. If, upon the occurrence of one of the foregoing, the account is transferred to an account registered in the name of the deceased's estate, the date of CDSC will be waived on any redemption from the estate account occurring within one year of the death. If the Class B shares are not redeemed within one year of the date of death, they will remain Class B shares and be subject to the applicable CDSC, if any, when redeemed. Disability. CDSCs may be waived on redemptions occurring within one year ----------- after the sole shareholder on an individual account or a joint tenant on a spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of the Code). To be eligible for such waiver, (i) the disability must arise AFTER the purchase of shares AND (ii) the disabled shareholder must have been under age 65 at the time of the initial determination of disability. If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged. ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption of Fund shares. If the Trustees determine that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Trust, having filed with the SEC a notification of election pursuant to Rule 18f-1 on behalf of each of the Funds, may pay the redemption price in whole, or in part, by a distribution in kind of securities from a Fund in lieu of cash. In conformity with applicable rules of the SEC, the Funds are committed to pay in cash all requests for redemption, by any shareholder of record, limited in amount with respect to each shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1% of the net asset value of the applicable Fund at the B-76 beginning of such period. If shares are redeemed in kind, the redeeming shareholder would incur brokerage costs in converting the assets into cash. The method of valuing portfolio securities is described below in the section entitled "Determination of Net Asset Value," and such valuation will be made as of the same time the redemption price is determined. At various times a Fund may be requested to redeem shares for which it has not yet received good payment. A Fund may delay or cause to be delayed the mailing of redemption check until such time as good payment (e.g., cash or certified check drawn on a United States bank) has been collected for the purchase of such shares. Normally, this delay will not exceed 15 days. DETERMINATION OF NET ASSET VALUE Each Fund calculates the net asset value of its shares separately by dividing the total value of each class's net assets by the shares of such class outstanding. Shares are valued each day the NYSE is open as of approximately 4:00 P.M., Eastern time. The net asset value of a Fund's shares will also be computed on each other day in which there is a sufficient degree of trading in such Fund's securities that the net asset value of its shares might be materially affected by changes in the values of the portfolio securities; provided, however, that on such day the Trust receives a request to purchase or redeem such Fund's shares. The days and times of such computation may, in the future, be changed by the Trustees in the event that the portfolio securities are traded in significant amounts in markets other than the NYSE, or on days or at times other than those during which the NYSE is open for trading. Securities that are actively traded over-the-counter, including listed securities for which the primary market is believed by the Adviser to be over- the-counter, are valued on the basis of the bid prices provided by principal market makers. Securities listed on the NYSE or other national securities exchanges, other than those principally traded over-the-counter, are valued on the basis of the last sale price on the exchange on which they are primarily traded. However, if the last sale price on the NYSE is different than the last sale price on any other exchange, the NYSE price will be used. If there are no sales on that day, then the securities are valued at the bid price on the NYSE or other primary exchange for that day. Options traded on national securities exchanges are valued at the last sale price on such exchanges preceding the valuation, and Futures and options thereon, which are traded on commodities exchanges, are valued at their last sale price as of the close of such commodities exchanges. B-77 Securities that are traded on foreign exchanges are ordinarily valued at the last quoted sales price available before the time when assets are valued. If a securities price is available from more than one foreign exchange, a Fund uses the exchange that is the primary market for the security. Values of portfolio securities primarily traded on foreign exchanges are already translated into U.S. dollars when received from a quotation service. The above procedures need not be used to determine the value of debt securities owned by a Fund if, in the opinion of the Trustees, some other method would more accurately reflect the fair market value of such debt securities in the quantities owned by such Fund. Securities for which quotations are not readily available and other assets are appraised at fair value, as determined pursuant to procedures adopted in good faith by the Trustees. Short-term investments that mature in less than 60 days are valued at amortized cost if their original maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if their original term exceeds 60 days (unless the Trustees determine that amortized cost value does not represent fair value, in which case, fair value will be determined as described above). A pricing service may be utilized to value the Funds' assets under the procedures set forth above. Any use of a pricing service will be approved and monitored by the Trustees. The value of all assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars at the mean between the bid and offered prices of such currencies against U.S. dollars last quoted by any large New York bank which is a dealer in foreign currency. The values of securities held by the Funds, and other assets used in computing net asset value, are determined as of the time trading in such securities is completed each day, which in the case of foreign securities may be at a time prior to 4:00 P.M., Eastern time. On occasion, the values of foreign securities and exchange rates may be affected by events occurring between the time as of which determinations of such values or exchange rates are made and 4:00 P.M., Eastern time. When such events materially affect the values of securities held by the Funds or their liabilities, such securities and liabilities will be valued at fair value as determined in good faith by the Trustees. PERFORMANCE DATA Each Fund may advertise performance data that reflects various measures of total return and yield. An explanation of the data presented and the methods of computation that will be used are as follows. B-78 A Fund's performance may be compared to the historical returns of various investments, performance indices of those investments or economic indicators, including, but not limited to, stocks, bonds, certificates of deposit, money market funds and U.S. Treasury Bills. Certain of these alternative investments may offer fixed rates of return and guaranteed principal and may be insured. Average annual total return is determined separately for Class A and Class B shares in accordance with a formula specified by the SEC. Average annual total return is computed by finding the average annual compounded rates of return for the 1-, 5-, and 10-year periods or for the lesser included periods of effectiveness. The formula used is as follows: P(1 + T) to the power of n = ERV P = a hypothetical initial purchase payment of $1,000 T = average annual total return N = number of years ERV = $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional = ending redeemable value of a hypothetical portion thereof). The above formula assumes that: 1. The maximum sales load (i.e., either the front-end sales load in the case of the Class A shares or the deferred sales load that would be applicable to a complete redemption of the investment at the end of the specified period in the case of the Class B shares) is deducted from the initial $1,000 purchase payment; 2. All dividends and distributions are reinvested at net asset value; and 3. Complete redemption occurs at the end of the 1-, 5-, or 10- year periods or fractional portion thereof with all nonrecurring charges deducted accordingly. The Funds' average annual total return for the 1-, 5- and 10-year periods (or from date of inception, if sooner) ended March 31, 1995, are as follows:
Class A Shares Inception 1 year 5 years 10 years - ------------------------------- ---------- ------- -------- --------- Government Securities Fund (1.15)%(1) (1.05)% N/A N/A --------- ------ ------- -------- Federal Securities Fund (1.27)%(1) (0.77)% N/A N/A --------- ------ ------- -------- Diversified Income Fund (7.43)%(1) (9.61)% N/A N/A --------- ------ ------- -------- High Income Fund 7.41% (2) (7.52)% 11.46% N/A --------- ------ ------- --------
B-79
Tax Exempt Insured Fund 6.23% (2) 1.89% 4.89% N/A --------- ------ ------- --------
- -------------- (1) From date of October 1, 1993. (2) From dates of inception of September 16, 1986 and November 21, 1985, respectively.
Since Class B Shares Inception 1 year 5 years 10 years - ----------------------------------------- ------ ------- -------- Government Securities Fund 6.00% (2) (0.88)% 5.30% N/A --------- ------ ------- -------- Federal Securities Fund 8.14% (2) (0.34)% 6.32% 7.73% --------- ------ ------- -------- Diversified Income Fund 1.37% (2) (9.24)% N/A N/A --------- ------ ------- -------- High Income Fund (3.36)%(1) (7.28)% N/A N/A --------- ------ ------- -------- Tax Exempt Insured Fund (2.10)%(1) 2.04% N/A N/A --------- ------ ------- -------- - --------------
(1) From date of October 1, 1993. (2) From dates of inception of March 3, 1986, April 25, 1983 and April 6, 1991, respectively. Each Fund may advertise cumulative, rather than total average return, for each class of its shares for periods of time other than the 1-, 5-, and 10-year periods or fractions thereof, as discussed above. Such return data will be computed in the same manner as that of average annual total return, except that the actual cumulative return will be computed. Each Fund may also advertise performance data that reflects yield. Yield is determined separately for Class A and Class B shares in accordance with a standardized formula prescribed by the SEC and is not indicative of the amounts which were or will be paid to shareholders. The current yield quoted in a Fund's advertisements is computed by dividing the net investment income per share earned during the 30 day period by the maximum offering price per share on the last day of the period. The following formula illustrates the computation: Yield = 2 [{A - B + 1} to the power of 6 - 1 ] ----- CD A = dividends and interest earned during the period B = expenses accrued for the period (net of reimbursements) C = the average daily number of shares outstanding during the period that were entitled to receive dividends D = the maximum offering price per share on the last day of the period B-80 For the one month period ended March 31, 1995, the yields are as follows: 6.04%, Government Securities Fund, Class A; 5.64%, Government Securities Fund, Class B; 6.48%, Federal Securities Fund, Class A; 6.07%, Federal Securities Fund, Class B; 10.39%, Diversified Income Fund, Class A; 10.65%, Diversified Income Fund, Class B; 9.99% High Income Fund, Class A; 9.93%, High Income Fund, Class B; 5.10%, Tax Exempt Insured Fund, Class A; and 4.73% Tax Exempt Insured Fund, Class B. For the one month period ended March 31, 1994, the yields are as follows: 4.16%, Government Securities Fund, Class A; 3.52%, Government Securities Fund, Class B; 5.31%, Federal Securities Fund, Class A; 4.67%, Federal Securities Fund, Class B; 8.84%, Diversified Income Fund, Class A; 8.43%, Diversified Income Fund, Class B; 11.42% High Income Fund, Class A; 11.45%, High Income Fund, Class B; 4.99%, Tax Exempt Insured Fund, Class A; and 4.55% Tax Exempt Insured Fund, Class B. In addition, as with total return, information concerning yield prior to the Reorganization is available for the predecessors of the Funds. For the one month periods ended March 31, 1993 and June 30, 1993, the yields for the Government Income Portfolio (redesignated the Class A shares of the Government Securities Fund) and Old Government Securities (reorganized with the Class B shares of the Government Securities Fund) were 4.26% and 5.00%, respectively. For the one month period ended March 31, 1993, the yield for the Federal Securities Fund (reorganized with the Class B shares of Federal Securities Fund) was 5.08%. For the one month period ended October 31, 1993, the yield for the Old Diversified Income (reorganized with the Class B shares of Diversified Income Fund) was 7.01%. For the one month periods ended March 31, 1993 and June 30, 1993, the yields for the High Yield Portfolio (redesignated the Class A shares of the High Income Fund) and Old High Income (reorganized with the Class B shares of the High Income Fund) were 10.66% and 9.50%, respectively. For the one month period ended October 31, 1993, the yield for Old Tax Exempt Insured (reorganized with the Class A shares of the Tax Exempt Insured Fund) was 4.93%. Current yield is not indicative of the amount which was or will be paid to the shareholders. The amount paid to shareholders is reflected in the quoted current distribution rate. The current distribution rate is computed by annualizing the total amount of dividends per share paid by each Fund during the past month and dividing by the current maximum offering price. Under some B-81 circumstances it may be appropriate to use the dividends paid over the past year. The current distribution rate differs from current yield in that it includes amounts distributed to shareholders from sources other than dividends and interest, such as short-term capital gains or option writing premiums and is calculated over a different period of time. Such rates will be accompanied in advertisements by standardized yield calculations as promulgated by the SEC. COMPARISONS - ----------- Each Fund may compare its total return or yield to similar measures as calculated by various publications, services, indices, or averages. Such comparisons are made to assist in evaluating an investment in a Fund. The following references may be used: a) Dow Jones Composite Average or its component averages --an unmanaged index composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20 transportation company stocks (Dow Jones Transportation Average). Comparisons of performance assume reinvestment of dividends. b) Standard & Poor's 500 Stock Index or its component indices -- an unmanaged index composed of 400 industrial stocks, 40 financial stocks, 40 utilities stocks, and 20 transportation stocks. Comparisons of performance assume reinvestment of dividends. c) Standard & Poor's 100 Stock Index -- an unmanaged index based on the prices of 100 blue chip stocks, including 92 industrials, one utility, two transportation companies, and five financial institutions. The Standard & Poor's 100 Stock Index is a smaller, more flexible index for options trading. d) The New York Stock Exchange composite or component indices -- unmanaged indices of all industrial, utilities, transportation, and finance stocks listed on the New York Stock Exchange. e) Wilshire 5000 Equity Index or its component indices --represents the return on the market value of all common equity securities for which daily pricing is available. Comparisons of performance assume reinvestment of dividends. f) Russell 3000 and 2000 Indices -- represents the top 3,000 and the next 2,000 stocks traded on the New York Stock Exchange, American Stock Exchange and National Association of Securities Dealers Automated Quotations, by market capitalization. B-82 g) Lipper: Mutual Fund Performance Analysis, Fixed Income Analysis, and Mutual Fund Indices -- measures total return and average current yield for the mutual fund industry. Ranks individual mutual fund performance over specified time periods assuming reinvestment of all distributions, exclusive of sales charges. h) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc., analyzes price, current yield, risk, total return, and average rate of return (average annual compounded growth rate) over specified time periods for the mutual fund industry. i) Mutual Fund Source Book, published by Morningstar, Inc. -- analyzes price, risk and total return for the mutual fund industry. j) Financial publications: Wall Street Journal, Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Pension and Investment Age, United Mutual Fund Selector, and Wiesenberger Investment Companies Service, and other publications containing financial analyses which rate mutual fund performance over specified time periods. k) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau of Labor Statistics -- a statistical measure of periodic change in the price of goods and services in major expenditure groups. l) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -- historical measure of yield, price, and total return for common and small company stock, long-term government bonds, treasury bills, and inflation. m) Savings and Loan Historical Interest Rates as published in the U.S. Savings & Loan League Fact Book. n) Shearson-Lehman Municipal Bond Index and Government/Corporate Bond Index - -- unmanaged indices that track a basket of intermediate and long-term bonds. Reflect total return and yield and assume dividend reinvestment. o) Salomon GNMA Index published by Salomon Brothers Inc. --Market value of all outstanding 30-year GNMA Mortgage Pass-Through Securities that includes single family and graduated payment mortgages. Salomon Mortgage Pass-Through Index published by Salomon Brothers Inc. -- Market value of all outstanding agency mortgage pass-through securities that includes 15- and 30-year FNMA, FHLMC and GNMA Securities. B-83 p) Value Line Geometric Index -- broad based index made up of approximately 1700 stocks each of which have an equal weighting. q) Morgan Stanley Capital International EAFE Index -- an arithmetic, market value-weighted average of the performance of over 900 securities on the stock exchanges of countries in Europe, Australia and the Far East. r) Goldman Sachs 100 Convertible Bond Index -- currently includes 67 bonds and 33 preferred stocks. The original list of names was generated by screening for convertible issues of $100 million or more in market capitalization. The index is priced monthly. s) Salomon Brothers High Grade Corporate Bond Index --consists of publicly issued, non-convertible corporate bonds rated "AA" or "AAA." It is a value- weighted, total return index, including approximately 800 issues. t) Salomon Brothers Broad Investment Grade Bond Index -- is a market- weighted index that contains approximately 4700 individually priced investment grade corporate bonds rated "BBB" or better, U.S. Treasury/agency issues and mortgage pass-through securities. u) Salomon Brothers World Bond Index -- measures the total return performance of high-quality securities in major sectors of the international bond market. The index covers approximately 600 bonds from 10 currencies: Australian Dollars Netherlands Guilders Canadian Dollars Swiss Francs European Currency Units UK Pound Sterling French Francs U.S. Dollars Japanese Yen German Deutsche Marks v) J.P. Morgan Global Government Bond Index -- a total return, market capitalization-weighted index, rebalanced monthly, consisting of the following countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, The Netherlands, Spain, Sweden, the United Kingdom, and the United States. w) Shearson Lehman LONG-TERM Treasury Bond Index -- is comprised of all bonds covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or greater. B-84 x) NASDAQ Industrial Index -- is comprised of more than 3,000 industrial issues. It is a value-weighted index calculated on pure change only and does not include income. y) The MSCI Combined Far East Free ex Japan Index -- a market capitalization weighted index comprised of stocks in Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand. Korea is included in this index at 20% of its market capitalization. z) First Boston High Yield Index -- generally includes over 180 issues with an average maturity range of seven to ten years with a minimum capitalization of $100 million. All issues are individually trader-priced monthly. aa) Merrill Lynch High Yield Bond Master Index -- generally includes over 500 issues rated "BB+" to "CCC-" with an aggregate par value of approximately $100 billion. bb) Morgan Stanley Capital International World Index -- An arithmetic, market value-weighted average of the performance of over 1,470 securities list on the stock exchanges of countries in Europe, Australia, the Far East, Canada and the United States. In assessing such comparisons of performance, an investor should keep in mind that the composition of the investments in the reported indices and averages is not identical to a Fund's portfolio, that the averages are generally unmanaged and that the items included in the calculations of such averages may not be identical to the formula used by a Fund to calculate its figures. In addition, there can be no assurance that a Fund will continue its performance as compared to such other standards. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS. Each Fund intends to distribute to the registered holders of its shares substantially all of its net investment income, which includes dividends, interest and net short-term capital gains, if any, in excess of any net long-term capital losses. Each Fund intends to distribute any net long-term capital gains in excess of any net short-term capital losses. Dividends from net investment income are declared daily and paid monthly. Dividends are paid on or about the fifteenth day of the month. Net capital gains, if any, will be paid annually. In determining amounts of capital gains to be distributed, any capital loss carry-forwards from prior years will be offset against capital gains. Distributions will be paid in additional Fund shares based on the net asset value at the close of business on the record B-85 date, unless the dividends total in excess of $10 per distribution period and the shareholder notifies the Fund at least five business days prior to the payment date to receive such distributions in cash. TAXES. Each Fund is qualified and intends to remain qualified and elect to be treated as a regulated investment company under Subchapter M of the Code for each taxable year. In order to remain qualified as a regulated investment company, each Fund generally must, among other things, (a) derive at least 90% of its gross income from dividends, interest, proceeds from loans of stock or securities and certain other related income; (b) derive less than 30% of its gross income from the sale or other disposition of stock or securities held less than 3 months; and (c) diversify its holdings so that, at the end of each fiscal quarter, (i) 50% of the market value of each Fund's assets is represented by cash, government securities, securities of other regulated investment companies and other securities limited, in respect of any one issuer, to an amount no greater than 5% of each Fund's assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than government securities or the securities of other regulated investment companies). As a regulated investment company, each Fund will not be subject to U.S. Federal income tax on its income and gains which it distributes as dividends or capital gains distributions to shareholders provided that it distributes to shareholders at least equal to the sum of 90% of its investment company taxable income and 90% of its net tax-exempt interest income for the taxable year. Each Fund intends to distribute sufficient income to meet this qualification requirement. Under the Code, amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To avoid the tax, each Fund must distribute during each calendar year (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its net capital gains, i.e., capital gains in excess of its capital losses for the 12-month period ending on October 31 of the calendar year, and (3) all ordinary income and net capital gains for the previous years that were not distributed during such years. To avoid application of the excise tax, each Fund intends to make distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid during the calendar year if it actually is paid during calendar year or if declared by each Fund in October, November or December of such year, payable to shareholders of record on a date in such month and paid by B-86 each Fund during January of the following year. Any such distributions paid during January of the following year will be taxable to shareholders as of December 31, rather than the date on which the distributions are received. Distributions of net investment income and short-term capital gains are taxable to the shareholder as ordinary dividend income regardless of whether the shareholder receives such distributions in additional shares or in cash. The portion of such dividends received from each Fund that will be eligible for the dividends received deduction for corporations will be determined on the basis of the amount of each Fund's gross income, exclusive of long-term capital gains from sales of stock or securities, which is derived as dividends from domestic corporations, other than certain tax-exempt corporations and certain real estate investment trusts, and will be designated as such in a written notice to shareholders mailed not later than 60 days after the end of each fiscal year. Because each of the Funds will invest principally in debt securities, it is not anticipated that a significant portion of dividends paid by any Fund will qualify for the dividends received deduction. Distributions of net long-term capital gains, if any, are taxable as long-term capital gains regardless of whether the shareholder receives such distributions in additional shares or in cash or how long the investor has held his or her shares and are not eligible for the dividends received deduction for corporations. At March 31, 1995, Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund, and Tax Exempt Insured Fund had capital loss carryforwards of $30,763,078, $2,911,854, $13,636,808, $31,090,077 and $10,224,019, respectively, which are available to the extent not utilized to offset future gains from 1996 through 2003. The utilization of such losses will be subject to annual limitations under the Code and the regulations thereunder. Upon a sale or exchange of its shares, a shareholder will realize a taxable gain or loss depending upon its basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands and will be long-term capital gain or loss if the shares have been held for more than one year. Generally, any loss realized on a sale or exchange will be disallowed to the extent the shares disposed of are replaced within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of. Any loss realized by a shareholder on the sale of shares of a Fund held by the shareholder for six months or less will be treated for tax purposes as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares. B-87 Under certain circumstances (such as the exercise of an exchange privilege in certain cases), the tax effect of sales load charges imposed on the purchase of shares in a regulated investment company is deferred if the shareholder does not hold the shares for at least 90 days. Income received by a Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Income tax treaties between certain countries and the United States may reduce or eliminate such taxes. It is impossible to determine in advance the effective rate of foreign tax to which a Fund will be subject, since the amount of that Fund's assets to be invested in various countries is not known. It is not anticipated that any Fund will qualify to pass through to its shareholders the ability to claim as a foreign tax credit their respective shares of foreign taxes paid by such Fund. Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time such Fund actually collects such receivables or pays such liabilities are treated as ordinary income or ordinary loss. Similarly, gains or losses on forward foreign currency exchange contracts, sale of currencies or dispositions of debt securities denominated in a foreign currency attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security and the date of disposition generally also are treated as ordinary gain or loss. These gains, referred to under the Code as "Section 988" gains or losses, increase or decrease the amount of each Fund's investment company taxable income available to be distributed to its shareholders as ordinary income. The Code includes special rules applicable to the listed non-equity options, regulated futures contracts, and options on futures contracts which a Fund may write, purchase or sell. Such options and contracts are classified as Section 1256 contracts under the Code. The character of gain or loss resulting from the sale, disposition, closing out, expiration or other termination of Section 1256 contracts, except forward foreign currency exchange contracts, is generally treated as long-term capital gain or loss to the extent of 60% thereof and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when held by a Fund at the end of a fiscal year, generally are required to be treated as sold at market value on the last day of such fiscal year for Federal income tax purposes ("marked-to-market"). Over- the-counter options are not classified as Section 1256 contracts and are not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any gains or losses recognized by a Fund from transactions in over-the-counter options generally B-88 constitute short-term capital gains or losses. When call options written, or put options purchased, by a Fund are exercised, the gain or loss realized on the sale of the underlying securities may be either short-term or long-term, depending on the holding period of the securities. In determining the amount of gain or loss, the sales proceeds are reduced by the premium paid for the over- the-counter puts or increased by the premium received for over-the-counter calls. A substantial portion of each Fund's transactions in options, futures contracts and options on futures contracts, particularly its hedging transactions, may constitute "straddles" which are defined in the Code as offsetting positions with respect to personal property. A straddle consisting of a listed option, futures contract, or option on a futures contract and of U.S. Government securities would constitute a "mixed straddle" under the Code. The Code generally provides with respect to straddles (i) "loss deferral" rules which may postpone recognition for tax purposes of losses from certain closing purchase transactions or other dispositions of a position in the straddle to the extent of unrealized gains in the offsetting position, (ii) "wash sale" rules which may postpone recognition for tax purposes of losses where a position is sold and a new offsetting position is acquired within a prescribed period, (iii) "short sale" rules which may terminate the holding period of securities owned by a Fund when offsetting positions are established and which may convert certain losses from short-term to long-term and (iv) "conversion transaction" rules which may treat all or a portion of the gain on a transaction as ordinary income rather than as capital gains. The Code provides that certain elections may be made for mixed straddles that can alter the character of the capital gain or loss recognized upon disposition of positions which form part of a straddle. Certain other elections also are provided in the Code; no determination has been reached to make any of these elections. The Federal Securities Fund, the Diversified Income Fund and the High Income Fund may purchase debt securities (such as zero-coupon or pay-in-kind securities) that contain original issue discount. Original issue discount that accrues in a taxable year is treated as earned by a Fund and therefore is subject to the distribution requirements of the Code. Because the original issue discount earned by the Fund in a taxable year may not be represented by cash income, the Fund may have to dispose of other securities and use the proceeds to make distributions to shareholders. With respect to the Tax Exempt Insured Fund, distributions out of net investment income attributable to interest received on tax-exempt securities ("exempt-interest dividends") will be exempt from Federal income tax when paid to shareholders. It should be noted, B-89 however, that interest on certain "private activity bonds" issued after August 7, 1986 is an item of tax preference for purposes of the alternative minimum tax, and in any event, must be taken into account by corporate shareholders for purposes of determining the amount of the adjustment to corporate alternative minimum taxable income based on adjusted current earnings. The Fund anticipates that a portion of its investment may be made in such "private activity bonds" with the result that a portion of the exempt-interest dividends paid by the Fund will be an item of tax preference to shareholders subject to the alternative minimum tax. Moreover, shareholders should be aware that, while exempt from Federal income tax, exempt-interest dividends may be taxable for state and local tax purposes. Any loss realized by a shareholder on the sale of shares of the Tax Exempt Insured Fund held by the shareholder for six months or less will be disallowed to the extent of any exempt-interest dividend received thereon. Recent legislation has expanded the market discount rules to apply to tax exempt bonds purchased after April 30, 1993. Therefore, any gain on the disposition of such a bond (including the receipt of a partial principal payment) that was acquired for a price less than the principal amount of the bond is treated as ordinary income to the extent of the required market discount. A Fund may be required to backup withhold U.S. Federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide their correct taxpayer identification number or fail to make required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against a shareholder's U.S. Federal income tax liability. The foregoing is a general abbreviated summary of the applicable provisions of the Code and Treasury regulations currently in effect. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, state and local taxes. In addition, foreign investors should consult with their own tax advisers regarding the particular tax consequences to them of an investment in each Fund. Qualification as a regulated investment company under the Code for tax purposes does not entail government supervision of management or investment policies. RETIREMENT PLANS Shares of each Fund (other than the Tax Exempt Insured Fund) are eligible to be purchased in conjunction with various types of retirement plans. The summary below is only a brief description of Federal income tax laws and does not purport to be complete. It is recommended that a shareholder considering the plan described below, consult a tax adviser before participating in such a plan. B-90 INDIVIDUAL RETIREMENT ACCOUNT (IRA). Shareholders who are not (and whose spouses are not) "active participants" in a retirement plan can invest annually in an IRA up to the lesser of 100% of compensation or $2,000 (or $2,250 in the case of a spousal IRA) and take a tax deduction for the entire amount invested. If, however, the shareholder, or his or her spouse, is an "active participant" in a retirement plan and their combined adjusted gross income is above certain specified levels, the amount of the deductible contribution he or she may make to an IRA is phased out and eventually eliminated. A person is an "active participant" for a year if he or she is covered by a retirement plan, i.e., if his or her employer or union maintains a retirement plan under which money is added to his or her account or he or she is eligible to earn retirement benefits. A person is an "active participant" for a year even if he or she has not yet vested in the retirement benefit. Also, if a person makes required contributions or voluntary employee contributions to a retirement plan, he or she may be an "active participant". Even if a person is above the threshold level and thus may not make a deductible contribution, he or she may still make a nondeductible contribution of up to the lesser of 100% of compensation or $2,000 to an IRA ($2,250 for a spousal IRA). A shareholder also may choose to make a nondeductible contribution even if he or she could have deducted part or all of the contribution. Income derived from IRA contributions, whether from deductible or nondeductible contributions, is not subject to tax until withdrawn from the IRA. A shareholder may also establish an IRA under the "rollover" provision of the Code if the shareholder is retiring or changing jobs and receives a "qualifying rollover" from a qualified corporate retirement plan (or receives such a distribution by virtue of the termination of the employer's qualified corporate retirement plan). The establishment of such account generally will enable the shareholder to postpone all current Federal income taxes on the distribution and enable the distribution to continue earning income, which will not be subject to Federal income taxes, as long as it remains in the account. However, the distribution from the qualified retirement plan may be subject to withholding if the rollover is not accomplished directly between the trustee of the qualified retirement plan and the trustee of the IRA. Penalty taxes, however, may be imposed in the event of contributions in excess of the above annual limitations or distribution prior to age 59 1/2, except upon death or disability. Distributions from an IRA must begin no later than April 1, the year after the year in which age 70 1/2 is attained. A penalty tax is also imposed if the minimum amount required to be distributed from an IRA is not actually distributed. An application to B-91 establish an Individual Retirement Account to invest in shares of a Fund may be obtained by calling Shareholder Dealer/Services at (800) 858-8850. SELF-EMPLOYED RETIREMENT PLAN (KEOGH PLAN). Each Fund (other than the Tax Exempt Insured Fund) provides a prototype retirement plan for self-employed individuals ("Keogh Plan"). Resources Trust Company, an indirect wholly owned subsidiary of SunAmerica Inc., will be available to furnish all custodian services for the Keogh Plan for service fees chargeable to the self-employed individuals. Under the Code, a self-employed person may contribute to his or her Keogh Plan up to the lesser of 25% of annual earned income or $30,000, and deduct that amount for Federal income tax purposes. The amount deducted and the earnings from investments under this account generally will not be subject to Federal income taxes until distributed. Certain distribution requirements applicable to all qualified retirement plans should be considered when deciding whether or not to start a Keogh Plan. As is the case with other forms of retirement plans, the Code and the rules applicable to Keogh Plans may change. The potential effect of such changes should be also taken into account in determining whether a Keogh Plan should be created. DESCRIPTION OF SHARES Ownership of the Trust is represented by transferable shares of beneficial interest. The Declaration of Trust of the Trust (the "Declaration of Trust") permits the Trustees to issue an unlimited number of full and fractional shares, $.01 par value, and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests of the Trust. Currently, five series of shares of the Trust have been authorized pursuant to the Declaration of Trust: the Government Securities Fund, the Federal Securities Fund, the Diversified Income Fund, the High Income Fund and the Tax Exempt Insured Fund. Each series has been divided into two classes of shares, designated as Class A and Class B shares. The Trustees may authorize the creation of additional series of shares so as to be able to offer to investors additional investment portfolios within the Trust that would operate independently from the Trust's present portfolios, or to distinguish among shareholders, as may be necessary, to comply with future regulations or other unforeseen circumstances. Each series of the Trust's shares represents the interests of the shareholders of that series in a particular portfolio of Trust assets. In addition, the Trustees may authorize the creation of additional classes of shares in the future, which may have fee structures different from those of existing classes and/or may be offered only to certain qualified investors. B-92 Shareholders are entitled to a full vote for each full share held. The Trustees have terms of unlimited duration (subject to certain removal procedures) and have the power to alter the number of Trustees, and appoint their own successors, provided that at all times at least a majority of the Trustees have been elected by shareholders. The voting rights of shareholders are not cumulative, so that holders of more than 50% of the shares voting can, if they choose, elect all Trustees being elected, while the holders of the remaining shares would be unable to elect any Trustees. Although the Trust need not hold annual meetings of shareholders, the Trustees may call special meetings of shareholders for action by shareholder vote as may be required by the 1940 Act or the Declaration of Trust. Also, a shareholders meeting must be called, if so requested in writing by the holders of record of 10% or more of the outstanding shares of the Trust. In addition, the Trustees may be removed by the action of the holders of record of two-thirds or more of the outstanding shares. All series of shares will vote with respect to certain matters, such as election of Trustees. When all series of shares are not affected by a matter to be voted upon, such as approval of investment advisory agreements or changes in a Fund's policies, only shareholders of the series affected by the matter may be entitled to vote. Both classes of shares of a given series are identical in all respects, except that (i) each class may bear differing amounts of certain class-specific expenses, (ii) Class A shares are subject to an initial sales charge, a distribution fee and an ongoing account maintenance and service fee, (iii) Class B shares are subject to a contingent deferred sales charge, a distribution fee and an ongoing account maintenance and service fee, (iv) Class B shares convert automatically to Class A shares on the first business day of the month seven years after the purchase of such Class B Shares, (v) each class has voting rights on matters that pertain to the Rule 12b-1 plan adopted with respect to such class, except that under certain circumstances, the holders of the Class B shares may be entitled to vote on material changes to the Class A Rule 12b-1 plan, and (vi) each class of shares will be exchangeable only into the same class of shares of any other Fund or other funds in the SunAmerica Family of Mutual Funds that offers that class. All shares of the Trust issued and outstanding and all shares offered by the Prospectus when issued, are and will be fully paid and non-assessable. Shares have no preemptive or other subscription rights and are freely transferable on the books of the Trust. In addition, shares have no conversion rights, except as described above. The Declaration of Trust provides that no Trustee, officer, employee or agent of the Trust is liable to the Trust or to a shareholder, nor is any Trustee, officer, employee or agent liable to any third persons in connection with the affairs of the Trust, B-93 except as such liability may arise from his or its own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. It also provides that all third persons shall look solely to the Trust's property for satisfaction of claims arising in connection with the affairs of the Trust. With the exceptions stated, the Declaration of Trust provides that a Trustee, officer, employee or agent is entitled to be indemnified against all liability in connection with the affairs of the Trust. The Trust shall continue, without limitation of time, subject to the provisions in the Declaration of Trust concerning termination by action of the shareholders. ADDITIONAL INFORMATION COMPUTATION OF OFFERING PRICE PER SHARE - --------------------------------------- The offering price for Class A and Class B shares of the Funds, based on the value of each Fund's net assets as of March 31, 1995, is calculated as follows: [This area intentionally left blank.] B-94
Government Federal Securities Diversified Securities Fund Fund Income Fund ------------------------- ------------------------- ------------------------- Class Class Class Class Class Class A B A B A B ----------- ------------ ------------ ----------- ----------- ------------ Net Assets............ $73,399,166 $594,779,196 $ 6,258,798 $65,631,470 $14,213,004 $132,378,414 Number of Shares Outstanding.......... 8,916,920 72,221,541 626,947 6,559,217 3,429,918 31,867,128 Net Asset Value Per Share (net assets divided by number of shares)........... $ 8.23 $ 8.24 $ 9.98 $ 10.01 $ 4.14 $ 4.15 Sales Charge (for Class A Shares: 4.75% of offering price (6.10% of net asset value per share))*............. $ .41 $ ** $ .50 $ ** $ .21 $ ** Offering Price........ $ 8.64 $ 8.24 $ 10.48 $ 10.01 $ 4.35 $ 4.15
High Income Tax Exempt Insured Fund Fund -------------------------- -------------------------- Class Class Class Class A B A B ------------ ------------ ------------ ------------ Net Assets............ $ 40,584,603 $153,034,165 $137,955,296 $ 25,984,538 Number of Shares Outstanding.......... 5,839,531 21,981,850 11,370,750 2,141,283 Net Asset Value Per Share (net assets divided by number of shares)........... $ 6.95 $ 6.96 $ 12.13 $ 12.14 Sales Charge (for Class A Shares: 4.75% of offering price (6.10% of net asset value per share))*............. $ .35 $ ** $ .60 $ ** Offering Price........ $ 7.30 $ 6.96 $ 12.73 $ 12.14
* Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable ** Class B shares are not subject to an initial sales charge but may be subject to a contingent deferred sales charge on redemption of shares within six years of purchase. B-95 REPORTS TO SHAREHOLDERS. The Trust sends audited annual and unaudited semi- annual reports to shareholders of each of the Funds. In addition, the Transfer Agent sends a statement to each shareholder having an account directly with the Trust to confirm transactions in the account. CUSTODIAN AND TRANSFER AGENCY. State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent for the Funds and in those capacities maintains certain financial and accounting books and records pursuant to agreements with the Trust. Transfer agent functions are performed for State Street, by National Financial Data Services, P.O. Box 419572, Kansas City, MO 64141-6572, an affiliate of State Street. SunAmerica Fund Services Inc., 733 Third Avenue, New York, NY 10017-3204, acts as a servicing agent assisting State Street Bank and Trust Company in connection with certain services offered to the shareholders of each of the Funds. INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036, has been selected to serve as the Trust's independent accountants and in that capacity examines the annual financial statements of the Trust. The firm of Shereff, Friedman, Hoffman and Goodman, LLP, 919 Third Avenue, New York, NY 10022, has been selected as legal counsel to the Trust. B-96 APPENDIX BOND, NOTE AND COMMERCIAL PAPER RATINGS DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE AND TAX- EXEMPT BOND RATINGS Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of desirable investments. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. B-97 Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of the generic rating category. The foregoing ratings for tax-exempt bonds are sometimes presented in parentheses preceded with a "con" indicating the bonds are rated conditionally. Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed or (d) payments to which some other limiting condition attaches. Such parenthetical rating denotes the probable credit stature upon completion of construction or elimination of the basis of the condition. DESCRIPTION OF MOODY'S TAX-EXEMPT NOTE RATINGS The ratings of Moody's for tax-exempt notes are MIG 1, MIG 2, MIG 3 and MIG 4. MIG 1 Notes bearing the designation MIG 1 are judged to be of the best quality, enjoying strong protection from established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing, or both. MIG 2 Notes bearing the designation MIG 2 are judged to be of high quality, with margins of protection ample although not so large as in the preceding group. MIG 3 Notes bearing the designation MIG 3 are judged to be of favorable quality, with all security elements accounted for but lacking the undeniable strength of the preceding grades. Market access for refinancing, in particular, is likely to be less well established. MIG 4 Notes bearing the designation MIG 4 are judged to be of adequate quality, carrying specific risk but having protection commonly regarded as required of B-98 an investment security and not distinctly or predominantly speculative. DESCRIPTION OF MOODY'S CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER Ratings The term "commercial paper" as used by Moody's means promissory obligations not having an original maturity in excess of nine months. Moody's makes no representations as to whether such commercial paper is by any other definition "commercial paper" or is exempt from registration under the Securities Act. Moody's rating grades for commercial paper are applied to municipal commercial paper as well as taxable commercial paper. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's makes no representation that such obligations are exempt from registration under the Securities Act, nor does it represent that any specific note is a valid obligation of a rated issuer or issued in conformity with any applicable law. Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. PRIME-1 repayment capacity will normally be evidenced by the following characteristics: -- Leading market positions in well established industries -- High rates of return on funds employed -- Conservative capitalization structures with moderate reliance on debt and ample asset protection -- Broad margins in earnings coverage of fixed financial charges and high internal cash generation -- Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated PRIME-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. B-99 Issuers rated NOT PRIME do not fall within any of the Prime rating categories. If an issuer represents to Moody's that its commercial paper obligations are supported by the credit of another entity or entities, then the name or names of such supporting entity or entities are listed within parentheses beneath the name of the issuer, or there is a footnote referring the reader to another page for the name or names of the supporting entity or entities. In assigning ratings to such issuers, Moody's evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies, foreign governments or other entities, but only as one factor in the total rating assessment. Moody's makes no representation and gives no opinion on the legal validity or enforceability of any support arrangement. You are cautioned to review with your counsel any questions regarding particular support arrangements. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. DESCRIPTION OF STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S") CORPORATE AND TAX-EXEMPT BOND RATINGS A Standards & Poor's corporate or municipal rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligers such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. The ratings are based, in varying degrees, on the following considerations: (1) likelihood of default capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation: (2) nature of and provisions of the obligation; and (3) protection afforded by, and relative position of, the obligation in the event B-100 of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher- rated categories. BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. Debt rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB - rating. B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-rating. CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, ancial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay B-101 principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. C The rating C is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC-debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed but debt service payments are continued. CI The rating CI is reserved for income bonds on which no interest is being paid. D Debt rated D is in default. The D rating is assigned on the day an interest or principal payment is missed. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. Plus (+) or minus (-): The ratings of "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within these ratings categories. Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood or risk of default upon failure of such completion. The investor should exercise judgment with respect to such likelihood and risk. L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is insured by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance Corp. and interest is adequately collateralized. * Continuance of the rating is contingent upon Standard & Poor's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. NR Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy. Debt Obligations of Issuers outside the United States and its territories are rated on the same basis as domestic corporate and B-102 municipal issues. The ratings measure the credit worthiness of the obligor but do not take into account currency exchange and related uncertainties. BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade" ratings) are generally regarded as eligible for bank investment. In addition, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies and fiduciaries generally. DESCRIPTION OF STANDARD & POOR'S TAX-EXEMPT NOTE RATINGS The ratings of Standard & Poor's for municipal notes issued on or after July 29, 1984 are "SP-1", "SP-2" and "SP-3". Prior to July 29, 1984, municipal notes carried the same symbols as municipal bonds. SP-1 The designation "SP-1" indicates a very strong capacity to pay principal and interest. A "+" is added for those issues determined to possess overwhelming safety characteristics. SP-2 An "SP-2" designation indicates a satisfactory capacity to pay principal and interest. SP-3 "SP-3" designation indicates speculative capacity to pay principal and interest. DESCRIPTION OF STANDARD & POOR'S CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS. Standard & Poor's rating grades for commercial paper are applied to municipal commercial paper as well as taxable commercial paper. A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of not more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. A Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. B-103 A-2 Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-1". A-3 Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effect of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only adequate capacity for timely payment. However, such capacity may be damaged by changing conditions or short-term adversities. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D This rating indicates that the issue is either in default or is expected to be in default upon maturity. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. FINANCIAL STATEMENTS Set forth following this Statement of Additional Information are the financial statements of: SunAmerica Income Funds with respect to Registrant's fiscal year ended March 31, 1995. B-104 SUNAMERICA INCOME FUNDS STATEMENT OF ASSETS AND LIABILITIES -- March 31, 1995
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND ------------------------------------------------------------------------ ASSETS: Investment securities, at value (identified cost $684,450,797; $69,800,933; $151,255,975; $190,061,209 and $154,140,202, respective- ly)...................... $678,326,383 $69,464,381 $139,167,872 $186,018,721 $160,319,338 Short-term securities (identified cost $392,434; $99,924; $196,055; $0 and $1,300,000, respectively) 392,871 99,924 196,225 -- 1,300,000 Joint repurchase agree- ment..................... 101,505,000 11,266,000 3,422,000 3,489,000 -- Cash...................... 333 7,287 226 230 6,550 Interest and dividends re- ceivable................. 8,665,442 745,096 3,684,907 5,324,370 2,831,127 Receivable for investments sold..................... 1,570,138 881,252 1,041,173 4,478,904 4,141,878 Receivable for shares of beneficial interest sold. 233,738 36,693 101,745 276,423 649,878 Prepaid expenses.......... 41,174 28,889 6,080 12,034 21,939 Receivable from distribu- tor...................... 2,511 -- -- 10,233 -- Receivable from custodian. -- -- -- 102,123 -- ------------ ----------- ------------ ------------ ------------ Total assets............. 790,737,590 82,529,522 147,620,228 199,712,038 169,270,710 ------------ ----------- ------------ ------------ ------------ LIABILITIES: Payable for securities loaned................... 118,343,750 10,262,500 -- -- -- Payable for shares of ben- eficial interest re- deemed................... 1,522,680 49,616 233,965 101,248 473,269 Dividends payable......... 1,445,863 177,961 497,015 772,273 344,381 Distribution and service maintenance fees payable. 532,909 58,000 117,257 139,777 62,917 Investment advisory and management fees payable.. 378,391 30,830 81,325 121,361 69,840 Accrued expenses.......... 335,635 60,347 99,248 88,156 86,797 Payable for investments purchased................ -- -- -- 4,870,455 4,293,672 ------------ ----------- ------------ ------------ ------------ Total liabilities........ 122,559,228 10,639,254 1,028,810 6,093,270 5,330,876 ------------ ----------- ------------ ------------ ------------ Net assets............ $668,178,362 $71,890,268 $146,591,418 $193,618,768 $163,939,834 ============ =========== ============ ============ ============ NET ASSETS WERE COMPOSED OF: Shares of beneficial in- terest, $.01 par value... $ 811,385 $ 71,862 $ 352,970 $ 278,214 $ 135,120 Paid-in capital........... 721,584,585 76,338,501 183,296,577 235,667,329 170,149,403 ------------ ----------- ------------ ------------ ------------ 722,395,970 76,410,363 183,649,547 235,945,543 170,284,523 Accumulated undistributed (distribution in excess of) net investment in- come..................... (1,295,646) (99,141) 311,631 146,988 (216,286) Accumulated net realized loss on investments and futures contracts........ (46,797,985) (4,084,402) (24,941,003) (38,285,060) (12,307,539) Accumulated net realized loss on foreign currency, other assets and liabili- ties..................... -- -- (340,911) (146,215) -- Net unrealized appreciation/depreciation of investments........... (6,123,977) (336,552) (12,087,933) (4,042,488) 6,179,136 Net unrealized apprecia- tion of foreign currency, other assets and liabilities... -- -- 87 -- -- ------------ ----------- ------------ ------------ ------------ Net assets............ $668,178,362 $71,890,268 $146,591,418 $193,618,768 $163,939,834 ============ =========== ============ ============ ============ CLASS A (UNLIMITED SHARES AUTHORIZED): Net asset value and re- demption price per share ($73,399,166/8,916,920; $6,258,798/626,947; $14,213,004/3,429,918; $40,584,603/5,839,531 and $137,955,296/11,370,750 net assets and shares of beneficial interest is- sued and outstanding, respectively)........... $ 8.23 $ 9.98 $ 4.14 $ 6.95 $ 12.13 Maximum sales charge (4.75% of offering price).................. 0.41 0.50 0.21 0.35 0.60 ------------ ----------- ------------ ------------ ------------ Maximum offering price to public.................. $ 8.64 $ 10.48 $ 4.35 $ 7.30 $ 12.73 ============ =========== ============ ============ ============ CLASS B (UNLIMITED SHARES AUTHORIZED): Net asset value, offering and redemption price per share ($594,779,196/72,221,541; $65,631,470/6,559,217; $132,378,414/31,867,128; $153,034,165/21,981,850 and $25,984,538/2,141,283 net assets and shares of beneficial interest is- sued and outstanding, respectively)........... $ 8.24 $ 10.01 $ 4.15 $ 6.96 $ 12.14 ============ =========== ============ ============ ============
See Notes to Financial Statements 4 SUNAMERICA INCOME FUNDS STATEMENT OF OPERATIONS -- For the year ended March 31, 1995
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND ---------------------------------------------------------------- INVESTMENT INCOME: Income: Interest (net of with- holding taxes of $8,285 on High Income Fund)....... $69,875,267 $6,094,155 $ 19,709,044 $19,395,424 $11,391,581 Dividends................ -- -- -- 367,063 -- ----------- ---------- ------------ ----------- ----------- Total investment income.. 69,875,267 6,094,155 19,709,044 19,762,487 11,391,581 ----------- ---------- ------------ ----------- ----------- Expenses: Investment advisory and management fees......... 5,033,634 365,395 1,153,494 1,192,998 874,281 Distribution and service maintenance fees--Class A....................... 251,367 5,831 52,416 109,589 528,127 Distribution and service maintenance fees--Class B....................... 7,088,417 711,995 1,624,850 1,277,571 239,626 Transfer agent fees and expenses--Class A....... 173,233 19,375 48,353 75,195 386,424 Transfer agent fees and expenses--Class B....... 1,771,111 206,755 435,516 314,182 59,466 Custodian fees and ex- penses.................. 1,099,225 109,990 132,395 156,015 108,960 Legal fees and expenses.. 117,925 1,386 6,285 15,105 -- Trustees' fees and ex- penses.................. 81,098 6,408 17,483 15,640 17,655 Audit and tax consulting fees.................... 73,610 17,385 32,070 24,500 30,840 Registration fees--Class A....................... 10,520 7,650 11,097 12,392 16,604 Registration fees--Class B....................... 68,208 12,709 16,548 20,165 12,522 Insurance expense........ 47,458 1,035 2,979 4,996 31,840 Printing expense......... 18,820 -- 5,360 3,565 2,450 Interest expense......... 678,771 21,542 143,682 143,908 10,217 Miscellaneous expenses... 34,348 4,274 2,212 4,958 5,835 ----------- ---------- ------------ ----------- ----------- Total expenses........... 16,547,745 1,491,730 3,684,740 3,370,779 2,324,847 Less: Expenses waived/reimbursed by investment adviser and distributor....... (255,532) (20,954) -- (102,206) (61,214) ----------- ---------- ------------ ----------- ----------- Net expenses............. 16,292,213 1,470,776 3,684,740 3,268,573 2,263,633 ----------- ---------- ------------ ----------- ----------- Net investment income..... 53,583,054 4,623,379 16,024,304 16,493,914 9,127,948 ----------- ---------- ------------ ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVEST- MENTS: Net realized loss on in- vestments and futures contracts................ (45,098,323) (3,546,056) (23,976,569) (22,330,854) (9,524,226) Net realized loss on for- eign currency, other as- sets and liabilities.............. -- -- (335,830) (105,175) -- Net change in unrealized appreciation/depreciation of investments.............. 12,685,155 1,261,503 (1,943,292) 1,183,178 11,417,085 Net change in unrealized appreciation/depreciation of foreign currency, other assets and liabili- ties..................... -- -- 4,974 2,926 -- ----------- ---------- ------------ ----------- ----------- Net realized and unrealized gain (loss) on investments and foreign currency................. (32,413,168) (2,284,553) (26,250,717) (21,249,925) 1,892,859 ----------- ---------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $21,169,886 $2,338,826 $(10,226,413) $(4,756,011) $11,020,807 =========== ========== ============ =========== ===========
See Notes to Financial Statements 5 SUNAMERICA INCOME FUNDS STATEMENT OF CHANGES IN NET ASSETS
U.S. GOVERNMENT SECURITIES FUND FEDERAL SECURITIES FUND DIVERSIFIED INCOME FUND --------------------------------- -------------------------- ---------------------------- FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD ENDED ENDED ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1995 1994 (A) 1995 1994 1995 1994(A) --------------- ---------------- ------------ ------------ ------------ -------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income.... $ 53,583,054 $ 58,428,019 $ 4,623,379 $ 6,035,408 $ 16,024,304 $ 4,556,587 Net realized gain (loss) on investments and futures contracts....... (45,098,323) (20,974,300) (3,546,056) (1,301,198) (23,976,569) 170,629 Net realized loss on foreign currency, other assets and liabilities.. -- -- -- -- (335,830) (5,081) Net change in unrealized appreciation/depreciation of investments.......... 12,685,155 (32,131,136) 1,261,503 (5,391,717) (1,943,292) (10,708,669) Net change in unrealized appreciation/depreciation of foreign currency, other assets and liabilities............. -- -- -- -- 4,974 (2,422) --------------- ---------------- ----------- ----------- ------------ ------------ Increase (decrease) in net assets resulting from operations.......... 21,169,886 5,322,583 2,338,826 (657,507) (10,226,413) (5,988,956) --------------- ---------------- ----------- ----------- ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (Class A)........ (4,146,499) (2,119,372) (106,644) (8,142) (1,404,506) (150,231) From net investment income (Class B)........ (35,858,561) (29,655,321) (4,158,525) (4,786,019) (14,176,998) (4,400,324) In excess of net investment income (Class A) .............. -- (1,147,456) -- (198) -- -- In excess of net investment income (Class B)............... -- (16,055,780) -- (116,160) -- -- Return of capital (Class A)...................... -- (157,768) -- -- -- -- Return of capital (Class B)...................... -- (2,207,573) -- -- -- -- From net realized gain (Class A)............... -- -- -- (576) -- -- From net realized gain (Class B)............... -- -- -- (338,071) -- -- --------------- ---------------- ----------- ----------- ------------ ------------ Total dividends and distributions to shareholders............ (40,005,060) (51,343,270) (4,265,169) (5,249,166) (15,581,504) (4,550,555) --------------- ---------------- ----------- ----------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (NOTE 9).... (275,662,086) (251,148,315) (7,785,923) (33,758,032) (14,272,578) 93,930,677 --------------- ---------------- ----------- ----------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS............ (294,497,260) (297,169,002) (9,712,266) (39,664,705) (40,080,495) 83,391,166 NET ASSETS: Beginning of period....... 962,675,622 1,259,844,624 81,602,534 121,267,239 186,671,913 103,280,747 --------------- ---------------- ----------- ----------- ------------ ------------ End of period [including undistributed (distributions in excess of) net investment income for March 31, 1995 and March 31, 1994 of $(1,295,646), $(1,886,428), $(99,141), $(154,916), $311,631 and $(131,169), respectively]............ $ 668,178,362 $ 962,675,622 $71,890,268 $81,602,534 $146,591,418 $186,671,913 =============== ================ =========== =========== ============ ============
- ------------ (a) For the periods beginning July 1, 1993 and November 1, 1993 for U.S. Government Securities Fund and Diversified Income Fund, respectively. See Notes to Financial Statements 6 SUNAMERICA INCOME FUNDS STATEMENT OF CHANGES IN NET ASSETS
HIGH INCOME FUND TAX EXEMPT INSURED FUND -------------------------- ---------------------------- FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1994 1995 1994 1995 (A) ------------ ------------ ------------ -------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income.... $ 16,493,914 $ 10,531,121 $ 9,127,948 $ 4,026,095 Net realized gain (loss) on investments and futures contracts....... (22,330,854) 3,729,025 (9,524,226) (1,045,254) Net realized loss on foreign currency, other assets and liabilities.. (105,175) (39,593) -- -- Net change in unrealized appreciation/depreciation of investments.......... 1,183,178 (6,471,318) 11,417,085 (12,089,113) Net change in unrealized appreciation/depreciation of foreign currency, other assets and liabilities............. 2,926 (2,926) -- -- ------------ ------------ ------------ ------------ Increase (decrease) in net assets resulting from operations......... (4,756,011) 7,746,309 11,020,807 (9,108,272) ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (Class A)........ (3,535,939) (3,488,366) (7,962,945) (3,784,886) From net investment income (Class B)........ (13,736,255) (6,963,506) (1,089,883) (249,641) ------------ ------------ ------------ ------------ Total dividends and distributions to shareholders............ (17,272,194) (10,451,872) (9,052,828) (4,034,527) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (NOTE 9).... 50,209,365 137,428,490 (24,008,980) 2,851,723 ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS............ 28,181,160 134,722,927 (22,041,001) (10,291,076) NET ASSETS: Beginning of period....... 165,437,608 30,714,681 185,980,835 196,271,911 ------------ ------------ ------------ ------------ End of period [including undistributed (distributions in excess of) net investment income for March 31, 1995 and March 31, 1994 of $146,988, $661,552, $(216,286) and $(304,804), respectively]............ $193,618,768 $165,437,608 $163,939,834 $185,980,835 ============ ============ ============ ============
- ------------ (a) For the period beginning November 1, 1993 for Tax Exempt Insured Fund. See Notes to Financial Statements 7 SUNAMERICA INCOME FUNDS FINANCIAL HIGHLIGHTS U.S. GOVERNMENT SECURITIES FUND
NET GAIN (LOSS) ON DISTRI- INVEST- BUTIONS MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET NET ASSET (BOTH FROM FROM NET BUTIONS OF NET ASSET VALUE, NET REALIZED INVEST- INVEST- FROM RETURN INVEST- TOTAL VALUE, PERIOD BEGINNING INVESTMENT AND MENT MENT OTHER OF MENT DISTRI- END OF TOTAL ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME SOURCES CAPITAL INCOME BUTIONS PERIOD RETURN(2) - ---------------- --------- ---------- ----------- ---------- --------- ------- ------- --------- ------- ------ --------- Class A ------- 10/01/93- 3/31/94(11).... $8.68 $0.28 $(0.34) $(0.06) $(0.14) $ -- $(0.01) $(0.08) $(0.23) $8.39 (0.68)% 3/31/95......... 8.39 0.61 (0.30) 0.31 (0.47) -- -- -- (0.47) 8.23 3.89 Class B ------- 6/30/91(6)...... $8.90 $0.82 $ -- $ 0.82 $(0.73) $(0.09) $ -- $ -- $(0.82) $8.90 9.55% 6/30/92(6)...... 8.90 0.73 (0.02) 0.71 (0.57) (0.16) -- -- (0.73) 8.88 8.33 6/30/93(6)...... 8.88 0.64 (0.17) 0.47 (0.44) (0.17) -- -- (0.61) 8.74 5.49 7/01/93- 3/31/94........ 8.74 0.43 (0.40) 0.03 (0.24) -- (0.01) (0.13) (0.38) 8.39 0.25 3/31/95......... 8.39 0.56 (0.30) 0.26 (0.41) -- -- -- (0.41) 8.24 3.25 RATIO OF RATIO OF NET EXPENSES NET ASSETS TO INVESTMENT END OF AVERAGE INCOME TO PERIOD PERIOD NET AVERAGE PORTFOLIO ENDED (000'S) ASSETS NET ASSETS TURNOVER - ---------------- ---------- ------------- -------------- --------- Class A ------- 10/01/93- 3/31/94(11).... $ 76,586 1.35%(3)(4) 6.83%(3)(4) 35% 3/31/95......... 73,399 1.46(5) 7.50(5) 105 Class B ------- 6/30/91(6)...... $ 513,062 1.98%(7) 9.31%(7) 38% 6/30/92(6)...... 1,075,668 1.92 8.21 54 6/30/93(6)...... 1,259,845 1.82(8) 7.27(8) 73 7/01/93- 3/31/94........ 886,089 1.95(3)(9) 6.61(3)(9) 35 3/31/95......... 594,779 2.15(10) 6.80(10) 105
- -------------------------------------------------------------------------------- FEDERAL SECURITIES FUND
NET GAIN (LOSS) ON DISTRI- INVEST- BUTIONS MENTS TOTAL DIVIDENDS DISTRI- IN EXCESS NET NET NET ASSET NET (BOTH FROM FROM NET BUTIONS OF NET ASSET ASSETS VALUE, INVEST- REALIZED INVEST- INVEST- FROM INVEST- TOTAL VALUE, END OF PERIOD BEGINNING MENT AND MENT MENT CAPITAL MENT DISTRI- END OF TOTAL PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(2) (000'S) - ---------------- --------- ------- ----------- ---------- --------- ------- --------- ------- ------ --------- -------- Class A ------- 10/11/93- 3/31/94(11) $10.58 $0.22(1) $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% $ 592 3/31/95......... 10.22 0.60(1) (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 6,259 Class B ------- 3/31/91(14)..... $ 9.91 $0.77 $ 0.44 $ 1.21 $(0.77) $ -- $ -- $(0.77) $10.35 12.78 % $129,108 3/31/92(14)..... 10.35 0.77 0.29 1.06 (0.77) -- -- (0.77) 10.64 10.57 120,454 3/31/93(14)..... 10.64 0.70 0.14 0.84 (0.64) -- -- (0.64) 10.84 8.06 121,267 3/31/94......... 10.84 0.62(1) (0.71) (0.09) (0.49) (0.03) (0.01) (0.53) 10.22 (0.89) 81,011 3/31/95......... 10.22 0.63(1) (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 65,631 RATIO OF RATIO OF EXPENSES NET TO INVESTMENT AVERAGE INCOME TO PERIOD NET AVERAGE PORTFOLIO ENDED ASSETS NET ASSETS TURNOVER - ---------------- -------------- --------------- --------- Class A ------- 10/11/93- 3/31/94(11) 1.39%(3)(12) 4.68%(3)(12) 68% 3/31/95......... 1.40(13) 6.90(13) 267 Class B ------- 3/31/91(14)..... 1.93% 7.67% 23% 3/31/92(14)..... 1.90 7.32 57 3/31/93(14)..... 1.85 6.36 97 3/31/94......... 1.98 5.79 68 3/31/95......... 2.03 6.33 267
- ------------ (1) Calculated based upon average shares outstanding. (2) Total return is not annualized and does not reflect sales load. (3) Annualized (4) Net of expense reimbursement equivalent to .10% of average net assets in fiscal 1994. (5) Net of expense reimbursement equivalent to .07% of average net assets in fiscal 1995. (6) Shares of SAUSGF have been redesignated as Class B shares of U.S. Government Securities Fund. (7) Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1991. (8) Net of expense reimbursement equivalent to .02% of average net assets in fiscal 1993. (9) Net of expense reimbursement equivalent to .06% of average net assets in fiscal 1994. (10) Net of expense reimbursement equivalent to .03% of average net assets in fiscal 1995. (11) Commencement of sale of respective class of shares. (12) Net of expense reimbursement equivalent to 6.74% of average net assets in fiscal 1994. (13) Net of expense reimbursement equivalent to 1.26% of average net assets in fiscal 1995. (14) Shares of SAFSF have been redesignated as Class B shares of Federal Securities Fund. See Notes to Financial Statements 8 SUNAMERICA INCOME FUNDS FINANCIAL HIGHLIGHTS DIVERSIFIED INCOME FUND
NET GAIN (LOSS) ON RATIO OF RATIO OF INVESTMENTS NET NET EXPENSES NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS NET ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ---------- Class A ------- 10/05/93 - 10/31/93(3).... $5.05 $0.02(2) $0.01 $0.03 $(0.01) $5.07 0.65% $ 762 1.40%(4) 8.92%(4) 11/01/93 - 3/31/94........ 5.07 0.13(2) (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42 (4)(5) 8.25 (4)(5) 3/31/95......... 4.79 0.43(2) (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 9.58 Class B ------- 4/06/91 - 10/31/91(6)(7). $5.29 $0.28 $(0.08) $0.20 $(0.28) $5.21 3.40% $ 39,790 0.00%(4)(8) 8.87%(4)(8) 10/31/92(6)(7).. 5.21 0.42 (0.41) 0.01 (0.40) 4.82 0.16 35,409 0.74 (9) 7.81 (9) 10/31/93(6)(7).. 4.82 0.38(2) 0.24 0.62 (0.37) 5.07 13.35 102,519 1.78 (10) 7.53 (10) 11/01/93 - 3/31/94........ 5.07 0.15(2) (0.27) (0.12) (0.16) 4.79 (2.52) 174,072 2.11 (4) 7.48 (4) 3/31/95......... 4.79 0.40(2) (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 8.98 PORTFOLIO PERIOD ENDED TURNOVER - ----------------- --------- Class A ------- 10/05/93 - 10/31/93(3).... 249% 11/01/93 - 3/31/94........ 48 3/31/95......... 160 Class B ------- 4/06/91 - 10/31/91(6)(7). 8% 10/31/92(6)(7).. 191 10/31/93(6)(7).. 249 11/01/93 - 3/31/94........ 48 3/31/95......... 160
- -------------------------------------------------------------------------------- HIGH INCOME FUND
NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- Class A ------- 03/31/91(11)(12). $7.11 $0.88 $(0.27) $ 0.61 $(0.88) $6.84 9.51% $ 19,347 1.90% 03/31/92(11)(12). 6.84 0.95 1.28 2.23 (1.00) 8.07 35.27 22,607 1.57 03/31/93(11)(12). 8.07 0.95 0.18 1.13 (1.08) 8.12 15.05 30,715 1.77 03/31/94(11)(12). 8.12 0.87(2) (0.14) 0.73 (0.82) 8.03 9.14 33,724 1.72 3/31/95......... 8.03 0.78(2) (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 Class B ------- 10/01/93 - 03/31/94(3).... $8.18 $0.38(2) $(0.17) $ 0.21 $(0.35) $8.04 2.46% $131,713 2.15%(4)(13) 3/31/95......... 8.04 0.73(2) (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16 (14) RATIO OF NET INVESTMENT INCOME TO AVERAGE PORTFOLIO PERIOD ENDED NET ASSETS TURNOVER - ------------------ ---------------- --------- Class A ------- 03/31/91(11)(12). 12.77% 95% 03/31/92(11)(12). 13.19 208 03/31/93(11)(12). 11.08 232 03/31/94(11)(12). 10.34 290 3/31/95......... 10.82 196 Class B ------- 10/01/93 - 03/31/94(3).... 9.07%(4)(13) 290% 3/31/95......... 10.26 (14) 196
- ------------ (1) Total return is not annualized and does not reflect sales load. (2) Calculated based upon average shares outstanding. (3) Commencement of sale of respective class of shares. (4) Annualized (5) Net of expense reimbursement equivalent to .62% of average net assets in fiscal 1994. (6) Shares of SADIF have been redesignated as Class B shares of Diversified Income Fund. (7) Restated to reflect 1.889180183-for-1 stock split effective December 16, 1992. (8) Net of expense reimbursement equivalent to 2.31% of average net assets in fiscal 1991. (9) Net of expense reimbursement equivalent to 1.25% of average net assets in fiscal 1992. (10) Net of expense reimbursement equivalent to .38% of average net assets in fiscal 1993. (11) Shares of SAHYP have been redesignated as Class A shares of High Income Fund. (12) Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993. (13) Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1994. (14) Net of expense reimbursement equivalent to .08% of average net assets in fiscal 1995. See Notes to Financial Statements 9 SUNAMERICA INCOME FUNDS FINANCIAL HIGHLIGHTS TAX EXEMPT INSURED FUND
NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- Class A ------- 10/31/91 (2).... $12.20 $0.81 $ 0.21 $ 1.02 $(0.81) $12.41 8.62% $ 95,246 1.32% 10/31/92 (2).... 12.41 0.79 (0.07) 0.72 (0.80)(3) 12.33 5.93 110,364 1.25 10/31/93 (2).... 12.33 0.70(4) 0.50 1.20 (0.74) 12.79 9.95 191,350 1.10 (5) 11/01/93- 3/31/94........ 12.79 0.26(4) (0.84) (0.58) (0.26) 11.95 (4.61) 165,216 1.28 (6)(7) 3/31/95......... 11.95 0.63(4) 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20 (9) Class B ------- 10/04/93- 10/31/93(8).... $12.84 $0.02(4) $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(6) 11/01/93- 3/31/94........ 12.79 0.22(4) (0.83) (0.61) (0.23) 11.95 (4.84) 20,765 2.12 (6) 3/31/95......... 11.95 0.54(4) 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 RATIO OF NET INVESTMENT INCOME TO AVERAGE PORTFOLIO PERIOD ENDED NET ASSETS TURNOVER - ---------------- --------------- --------- Class A ------- 10/31/91 (2).... 6.57% 16% 10/31/92 (2).... 6.26 21 10/31/93 (2).... 5.56 (5) 26 11/01/93- 3/31/94........ 4.99 (6)(7) 52 3/31/95......... 5.32 (9) 162 Class A ------- 10/04/93- 10/31/93(8).... 4.09%(6) 26% 11/01/93- 3/31/94........ 4.17 (6) 52 3/31/95......... 4.60 162
- ------------ (1) Total return is not annualized and does not reflect sales load. (2) Shares of SATEF have been redesignated as Class A shares of Tax Exempt Insured Fund. (3) Prior year amounts reclassified to net investment income. (4) Calculated based upon average shares outstanding. (5) Net of expense reimbursement equivalent to .10% of average net assets in fiscal 1993. (6) Annualized (7) Net of expense reimbursement equivalent to .11% of average net assets in fiscal 1994. (8) Commencement of sale of respective class of shares. (9) Net of expense reimbursement equivalent to .04% of average net assets in fiscal 1995. See Notes to Financial Statements 10 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 4) - --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--22.9% 6.94% due 5/15/06 (3)................................. $ 5,000 $ 4,060,938 7.50% due 6/25/23..................................... 10,000 9,721,800 8.00% due 3/15/17 (1)................................. 34,896 4,179,334 8.50% due 6/01/01-1/01/02............................. 67 68,446 9.00% due 1/01/02 - 10/01/16.......................... 753 769,018 9.25% due 9/01/08 - 3/01/17........................... 742 759,287 9.50% due 9/01/16 - 9/01/21........................... 9,343 9,733,466 10.00% due 10/01/02 - 8/01/21......................... 19,577 20,775,806 10.00% due 5/01/05 (2)................................ 228 230,957 10.50% due 6/01/00 - 1/01/21.......................... 1,221 1,305,911 10.75% due 9/01/00 - 1/01/15.......................... 294 314,574 11.00% due 9/01/00 - 6/01/17.......................... 3,069 3,296,679 11.25% due 11/01/13................................... 89 95,775 11.50% due 11/01/01 - 7/01/19......................... 1,479 1,594,144 11.75% due 8/01/11 - 10/01/14......................... 203 218,270 12.00% due 7/01/99 - 7/01/20.......................... 20,187 21,946,699 12.13% due 9/01/11.................................... 981 1,066,983 12.25% due 10/01/99 - 7/01/15......................... 1,453 1,577,222 12.50% due 8/01/99 - 7/01/19.......................... 32,530 36,017,999 12.52% due 2/15/21 (2)(3)............................. 221 200,344 12.75% due 2/01/00 - 6/01/15.......................... 1,616 1,785,988 13.00% due 5/01/00 - 12/01/15......................... 17,191 19,197,528 13.25% due 11/01/10 - 5/01/15......................... 1,620 1,806,754 13.50% due 11/01/01 - 2/01/19......................... 9,704 10,922,728 13.75% due 7/01/11 - 8/01/14.......................... 101 113,409 14.00% due 10/01/09 - 4/01/16......................... 908 1,022,136 14.50% due 1/01/10 - 5/01/13.......................... 175 196,616 14.75% due 3/01/10.................................... 2 2,438 ------------- TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (cost $153,341,740)................................... 152,981,249 ------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION--16.7% 5.20% due 11/25/21 (1)................................ 879 12,625,144 6.00% due 11/01/03.................................... 8,002 7,590,722 6.50% due 8/01/99 - 1/01/01........................... 8,423 8,144,279 8.00% due 12/01/22 - 1/01/23.......................... 19,344 19,150,735 8.50% due 9/25/20 (2)................................. 600 600,000 9.00% due 12/01/97 - 5/01/07.......................... 4,288 4,441,144 9.25% due 12/01/10 - 1/01/17.......................... 483 497,162 10.25% due 6/01/14 - 7/01/16.......................... 147 156,240 10.50% due 3/01/15.................................... 440 473,599 11.00% due 3/01/09 - 8/01/20.......................... 2,117 2,298,676 11.50% due 5/01/00 - 3/01/14.......................... 964 1,029,264 11.75% due 3/01/15 - 11/01/15......................... 62 67,392 12.00% due 9/01/07 - 4/01/19.......................... 17,780 19,558,975 12.25% due 9/01/99 - 10/01/15......................... 2,385 2,617,786 12.50% due 12/01/97 - 9/01/15......................... 10,366 11,474,158 12.75% due 9/01/12 - 9/01/15.......................... 947 1,048,928 13.00% due 10/01/09 - 9/01/16......................... 13,280 14,873,185 13.25% due 10/01/12 - 2/01/15......................... 337 376,831
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (CONTINUED) 13.50% due 1/01/10 - 2/01/17......................... $ 2,470 $ 2,779,075 13.75% due 11/01/11 - 10/01/14....................... 220 246,981 14.00% due 10/01/14.................................. 531 602,603 14.50% due 7/01/11................................... 303 343,826 14.75% due 7/01/12................................... 148 174,800 15.00% due 10/01/12 - 2/01/13........................ 199 225,386 15.50% due 10/01/12.................................. 101 115,329 ----------- TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (cost $108,977,811).................................. 111,512,220 ----------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--26.1% 6.50% due 12/15/98 - 10/15/04........................ 7,638 7,100,844 7.00% due 11/15/22 - 10/15/23........................ 23,267 21,761,449 7.50% due 1/15/17 - 10/15/23......................... 30,579 29,517,999 8.50% due 6/15/01 - 7/15/17.......................... 18,789 19,282,312 9.00% due 6/15/01 - 12/15/20......................... 13,586 14,056,511 9.50% due 2/15/98 - 7/15/20.......................... 4,703 4,936,614 10.00% due 3/15/98 - 5/15/19......................... 3,458 3,653,314 10.25% due 7/15/15................................... 102 112,414 10.50% due 11/15/97 - 6/15/21........................ 12,977 13,989,358 11.00% due 2/15/98 - 4/15/21......................... 8,970 9,802,233 11.50% due 3/15/98 - 1/15/21......................... 11,652 12,910,385 11.75% due 7/15/13 - 11/15/15........................ 1,436 1,560,532 12.00% due 9/15/98 - 10/15/19........................ 5,624 6,270,821 12.25% due 8/15/13 - 7/15/15......................... 1,473 1,629,489 12.50% due 4/15/10 - 3/15/16......................... 11,170 12,615,005 12.75% due 10/15/13.................................. 6 6,284 13.00% due 11/15/10 - 6/15/15........................ 5,753 6,467,777 13.25% due 7/15/14 - 11/15/14........................ 133 147,307 13.50% due 5/15/10 - 5/15/15......................... 4,087 4,621,855 14.00% due 5/15/11 - 12/15/14........................ 1,979 2,252,776 15.00% due 6/15/11 - 9/15/12......................... 1,152 1,333,941 16.00% due 12/15/11 - 7/15/12........................ 375 435,723 ----------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (cost $181,887,750).................................. 174,464,943 ----------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--2.0% 10.00% due 9/20/16 - 4/20/19......................... 31 33,057 11.00% due 7/20/00................................... 45 47,403 11.50% due 8/20/13 - 7/20/20......................... 1,928 2,092,043 11.75% due 11/20/14 - 2/20/16........................ 748 814,935 12.00% due 10/20/13 - 5/20/15........................ 1,191 1,302,895 12.25% due 2/20/14 - 10/20/15........................ 156 170,736 12.50% due 9/20/13 - 1/20/15......................... 5,525 6,104,319 12.75% due 11/20/13 - 7/20/15........................ 255 279,551 13.00% due 9/20/13 - 10/20/14........................ 2,355 2,599,467
11 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (CONTINUED) 13.25% due 8/20/14 - 5/20/15.......................... $ 90 $ 98,281 13.50% due 10/20/14................................... 81 89,687 ------------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (cost $13,898,177).................................... 13,632,374 ------------- U.S. FEDERAL AGENCY--5.8% United States Department Veteran Affairs 6.00% due 5/15/07.................................... 16,504 15,854,732 6.50% due 10/15/05................................... 22,577 22,497,982 7.75% due 9/15/04.................................... 697 697,381 ------------- TOTAL U.S. FEDERAL AGENCY (cost $40,665,319).................................... 39,050,095 ------------- U.S. TREASURY NOTES--13.4% 5.00% due 1/31/99..................................... 15,000 13,996,800 5.63% due 8/31/97..................................... 25,000 24,316,500 7.25% due 8/15/04..................................... 30,000 30,004,800 7.88% due 11/15/04.................................... 20,000 20,862,400 ------------- TOTAL U.S. TREASURY NOTES (cost $90,007,031).................................... 89,180,500 ------------- U.S. TREASURY BONDS--14.6% 7.50% due 11/15/24.................................... 65,000 65,121,550 7.63% due 2/15/25..................................... 31,700 32,383,452 ------------- TOTAL U.S. TREASURY BONDS (cost $95,672,969).................................... 97,505,002 ------------- TOTAL INVESTMENT SECURITIES--101.5% (cost $684,450,797)................................... 678,326,383 -------------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- SHORT-TERM SECURITIES--0.1% United States Treasury Bills 6.19% due 7/20/95 (cost $392,434)............................ $ 400 $ 392,871 ------------- REPURCHASE AGREEMENT--15.2% Joint Repurchase Agreement Account (Note 5) (cost $101,505,000)........................ 101,505 101,505,000 ------------- TOTAL INVESTMENTS-- (cost $786,348,231*)........................ 116.8% 780,224,254 Liabilities in excess of other assets........ (16.8) (112,045,892) ------- ------------- NET ASSETS-- 100.0% $ 668,178,362 ======= =============
- -------- * See Note 8 (1) PAC IO ("Planned Amortization Class Interest Only") Bond (2) Fair valued security, see Note 4 (3) Inverse floaters See Notes to Financial Statements 12 SUNAMERICA FEDERAL SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - ------------------------------------------------------------------------------- FEDERAL HOME LOAN MORTGAGE CORP.--0.1% 12.50% due 9/30/13..................................... $ 28 $ 28,358 13.50% due 2/01/14..................................... 8 8,877 14.75% due 3/01/10..................................... 13 14,890 ------------ TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (cost $49,198)......................................... 52,125 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION--0.0% 15.50% due 10/01/12 (cost $10,795)......................................... 13 14,320 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--65.7% 7.00% due 3/15/23...................................... 14,170 13,253,615 8.50% due 3/15/17 - 9/15/24............................ 15,307 15,527,764 9.00% due 9/15/08 - 5/15/17............................ 14,604 15,147,476 11.00% due 11/15/15.................................... 824 906,350 11.25% due 8/15/15..................................... 126 136,796 12.00% due 5/15/15..................................... 144 160,804 12.25% due 9/15/13..................................... 1,101 1,217,497 12.50% due 11/15/10.................................... 225 254,063 13.00% due 12/15/10 - 1/15/11.......................... 419 472,040 13.25% due 10/15/13.................................... 21 22,910 13.50% due 5/15/11 - 10/15/12.......................... 100 113,123 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (cost $48,004,709)..................................... 47,212,438 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--2.7% 10.00% due 10/20/13.................................... 668 703,068 11.00% due 12/20/13.................................... 97 104,087 12.00% due 3/20/15..................................... 474 518,885 12.25% due 12/20/14.................................... 536 588,387 13.00% due 6/20/14..................................... 18 20,091 13.75% due 9/20/14..................................... 15 16,680 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (cost $1,894,825)...................................... 1,951,198 ------------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- U.S. TREASURY BONDS--28.1% 7.50% due 11/15/24..................................... $10,000 $ 10,018,700 7.63% due 2/15/25...................................... 10,000 10,215,600 ------------ TOTAL U.S. TREASURY BONDS (cost $19,841,406)..................................... 20,234,300 ------------ TOTAL INVESTMENT SECURITIES--96.6% (cost $69,800,933)..................................... 69,464,381 ------------ SHORT-TERM SECURITIES--0.1% United States Treasury Bills 5.47% due 4/6/95 (cost $99,924)........................ 100 99,924 ------------ REPURCHASE AGREEMENT--15.7% Joint Repurchase Agreement Account (Note 5) (cost $11,266,000)..................................... 11,266 11,266,000 ------------ TOTAL INVESTMENTS-- (cost $81,166,857*).................................... 112.4% 80,830,305 Liabilities in excess of other assets................... (12.4) (8,940,037) ------- ------------ NET ASSETS-- 100.0% $71,890,268 ======= ============
- -------- * See Note 8 See Notes to Financial Statements 13 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES--56.9% BROADCASTING--2.0% NWCG Holding Corp. Sr. Disc. Notes, Series B zero coupon due 6/15/99............................... $ 5,000 $ 2,887,500 ------------ CABLE--2.6% Adelphia Communications Corp. Sr. Notes, Series B/PIK 9.50% due 2/15/04(1).................................. 2,192 1,624,524 American Telecasting, Inc. Sr. Disc. Notes zero coupon due 6/15/04(3)............................ 2,000 1,015,000 United International Holdings, Inc. Sr. Disc. Notes zero coupon due 11/15/99(6)........................... 2,000 1,115,000 ------------ 3,754,524 ------------ CHEMICALS--3.9% Arcadian Partners L.P. Sr. Notes, Series B 10.75% due 5/01/05.................................... 1,000 982,500 LaRoche Industries, Inc. Sr. Subordinated Notes 13.00% due 8/15/04.................................... 3,500 3,500,000 OSI Specialties Holdings Co. Sr. Secured Disc. Debentures, Series B zero coupon due 4/15/04(3)............................ 2,000 1,310,000 ------------ 5,792,500 ------------ COMPUTERS--4.1% Computervision Corp. Sr. Subordinated Notes 11.38% due 8/15/99.................................... 3,000 2,745,000 Unisys Corp. Credit Sensitive Notes 13.50% due 7/01/97.................................... 3,000 3,277,500 ------------ 6,022,500 ------------ FOOD & BEVERAGES--0.6% All American Bottling Corp. Sr. Secured Notes 13.00% due 8/15/01.................................... 1,000 825,000 ------------ FOREST PRODUCTS--4.9% Fort Howard Corp. Subordinated Debentures 12.63% due 11/01/00................................... 3,000 3,097,500 Ivex Holdings Corp. Sr. Debentures, Series B zero coupon due 3/15/05(3)............................ 2,000 960,000 Stone Container Corp. Sr. Notes 11.50% due 10/01/04................................... 3,000 3,150,000 ------------ 7,207,500 ------------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- GAMING--0.7% Harrah's Jazz Co. First Mortgage Notes 14.25% due 11/15/01................................... $ 1,000 $ 1,070,000 ------------ GROCERY--4.4% Farm Fresh, Inc. Sr. Notes 12.25% due 10/01/00................................... 1,750 1,627,500 Kash 'N Karry Food Stores, Inc. Sr. Notes/PIK 11.50% due 2/01/03(1)................................. 4,930 4,760,561 ------------ 6,388,061 ------------ HEALTH SERVICES--3.6% Amerisource Distribution Corp. Sr. Debentures/PIK 11.25% due 7/15/05(1)................................. 1,056 1,140,750 Dade International, Inc. Sr. Subordinated Notes 13.00% due 2/01/05(2)................................. 1,500 1,522,500 National Medical Enterprises, Inc. Sr. Subordinated Notes 10.13% due 3/01/05.................................... 2,500 2,565,625 ------------ 5,228,875 ------------ HOTELS & RESTAURANTS--2.7% American Restaurant Group, Inc. Sr. Secured Notes 12.00% due 9/15/98.................................... 2,000 1,820,000 Carrols Corp. Sr. Notes 11.50% due 8/15/03.................................... 1,000 920,000 Flagstar Corp. Sr. Subordinated Debentures 11.25% due 11/01/04................................... 1,500 1,260,000 ------------ 4,000,000 ------------ HOUSING--0.6% Peters (J.M.) Co., Inc. Sr. Notes 12.75% due 5/01/02.................................... 1,000 825,000 ------------ INDUSTRIAL--4.1% Calmar, Inc. Sr. Secured Notes 12.00% due 12/15/97................................... 2,000 2,020,000 Georgia Marble Co. Subordinated Notes 17.00% due 1/01/96(5)................................. 2,000 1,230,000 International Semi-Tech Microelectronic, Inc. Sr. Secured Disc. Notes zero coupon due 8/15/03(3)............................ 4,000 1,760,000
14 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES (CONTINUED) INDUSTRIAL (CONTINUED) MVE, Inc. Sr. Secured Notes 12.50% due 2/15/02(6).................................... $ 1,000 $1,025,000 ---------- 6,035,000 ---------- MEDIA--3.8% Katz Corp. Sr. Subordinated Notes 12.75% due 11/15/02...................................... 3,000 3,135,000 Sullivan Graphics, Inc. Sr. Subordinated Debentures 15.00% due 2/01/00....................................... 2,300 2,432,250 ---------- 5,567,250 ---------- OIL & GAS--0.6% DeepTech International, Inc. Sr. Secured Notes 12.00% due 12/15/00...................................... 1,000 880,000 ---------- RETAIL--8.2% County Seat Stores, Inc. Sr. Subordinated Notes 12.00% due 10/01/01...................................... 2,000 1,990,000 Hills Stores Co. Sr. Notes 10.25% due 9/30/03....................................... 2,000 1,940,000 Parisian, Inc. Sr. Subordinated Notes 9.88% due 7/15/03........................................ 3,000 2,062,500 Rickel Home Centers, Inc. Sr. Notes 13.50% due 12/15/01(6)................................... 2,000 1,900,000 Thrifty Payless Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04(6).................................... 2,000 2,150,000 Thrifty Payless Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04....................................... 2,000 2,020,000 ---------- 12,062,500 ---------- STEEL--1.4% A.K. Steel Corp. Sr. Notes 10.75% due 4/01/04....................................... 2,000 2,017,500 ---------- TELECOMMUNICATIONS--7.5% Comcast Cellular Corp. Notes zero coupon due 3/05/00.................................. 3,000 2,160,000 Dial Page, Inc. Sr. Notes 12.25% due 2/15/00....................................... 3,000 3,030,000 Echostar Communications Corp. Sr. Disc. Notes zero coupon due 6/01/04(3)(6)............................ 3,000 1,440,000
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- TELECOMMUNICATIONS (CONTINUED) Mobile Telecommunication Technologies Corp. Sr. Subordinated Disc. Notes 13.50% due 12/15/02............................... $ 1,000 $ 1,038,750 PanAmSat, L.P. Sr. Subordinated Notes zero coupon due 8/01/03(3)........................ 5,000 3,300,000 ------------ 10,968,750 ------------ TRANSPORTATION--1.2% Burlington Motor Holdings, Inc. Sr. Subordinated Notes 11.50% due 11/01/03............................... 2,000 1,780,000 ------------ TOTAL CORPORATE BONDS & NOTES (cost $85,695,914)................................ 83,312,460 ------------ FOREIGN BONDS & NOTES--18.1% BANKS--1.1% Banco Rio de La Plata SA Notes 8.75% due 12/15/03................................ 1,000 592,500 Unibanco - Uniao de Bancos Brasileiros SA Notes 11.13% due 11/28/97(2)............................ 1,000 955,000 ------------ 1,547,500 ------------ CEMENT--0.5% Cemex SA and Tolmex Debentures 10.00% due 11/05/99............................... 1,000 715,000 ------------ CONGLOMERATES--0.9% Grupo IRSA SA de CV Notes 8.38% due 7/15/98................................. 2,000 1,271,250 ------------ FINANCE--0.9% European Investment Bank Debentures 6.63% due 3/15/00(4).............................. JPY 100,000 1,331,491 ------------ FOOD & BEVERAGES--0.5% Grupo Embatellador de Mexico Bearer Notes 10.75% due 11/19/97............................... 1,000 725,000 ------------ FOREST PRODUCTS--1.4% Grupo Industrial Durango SA de CV Sr. Notes 12.00% due 7/15/01................................ 3,000 2,085,000 ------------ GOVERNMENT/AGENCY--8.5% Federative Republic of Brazil Capitalization Bonds 4.00% due 4/15/14................................. 7,140 2,623,950
15 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN THOUSANDS)/ VALUE SECURITY DESCRIPTION WARRANTS (NOTE 4) - -------------------------------------------------------------------------------- FOREIGN BONDS & NOTES (CONTINUED) GOVERNMENT/AGENCY (CONTINUED) Federative Republic of Brazil Disc. Notes 4.00% due 4/15/24(7).................................. $ 4,000 $ 1,447,500 Republic of Argentina Disc. Notes 4.25% due 3/31/23(7).................................. 4,500 1,842,187 Republic of Argentina Disc. Notes 7.13% due 3/31/23(7).................................. 4,000 2,102,500 Republic of Argentina Sr. Unsubordinated 8.38% due 12/20/03.................................... 4,000 2,630,000 Republic of Argentina Bonds 10.95% due 11/01/99................................... 2,000 1,778,750 ------------ 12,424,887 ------------ OIL & GAS--1.7% Bridas Corp. Sr. Notes 12.50% due 11/15/99................................... 2,000 1,610,000 Petroleos Mexicanos Debentures 8.63% due 12/01/23.................................... 2,000 950,000 ------------ 2,560,000 ------------ TELECOMMUNICATIONS--1.6% Telecom Argentina Debentures 8.38% due 10/18/00.................................... 3,000 2,317,500 ------------ TOBACCO--1.0% Empresas La Moderna Bearer Notes 10.25% due 11/12/97(2)................................ 2,000 1,510,000 ------------ TOTAL FOREIGN BONDS & NOTES (cost $34,443,292).................................... 26,487,628 ------------ WARRANTS--0.0%+ CABLE--0.0% American Telecasting, Inc.(8)......................... 10,000 100 ------------ CHEMICALS--0.0% OSI Specialties Holdings Co........................... 2,000 40,000 ------------ FOOD & BEVERAGES--0.0% Browne Bottling Co.(8)................................ 475 5 ------------ HOUSING--0.0% Peters (J.M.) Co., Inc.(8)............................ 7,900 79 ------------ TOTAL WARRANTS (cost $105)........................................... 40,184 ------------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- U.S. GOVERNMENT AND AGENCIES--20.0% FEDERAL HOME LOAN BANK--3.2% 4.35% due 12/02/97.................................... $ 5,000 $ 4,687,000 ------------ U.S. TREASURY BONDS--6.6% 6.25% due 8/15/23..................................... 7,000 5,963,090 11.13% due 8/15/03.................................... 3,000 3,720,930 ------------ 9,684,020 ------------ U.S. TREASURY NOTES--10.2% 5.13% due 11/30/98.................................... 5,000 4,700,800 5.50% due 7/31/97..................................... 2,000 1,942,180 7.75% due 2/15/01..................................... 3,000 3,089,070 8.00% due 8/15/99..................................... 3,000 3,106,410 8.88% due 11/15/98.................................... 2,000 2,118,120 ------------ 14,956,580 ------------ TOTAL U.S. GOVERNMENT AND AGENCIES (cost $31,116,664).................................... 29,327,600 ------------ TOTAL INVESTMENT SECURITIES--95.0% (cost $151,255,975)................................... 139,167,872 ------------ SHORT-TERM SECURITIES--0.1% United States Treasury Bills 6.07% due 7/27/95 (cost $196,055)...................................... 200 196,225 ------------ REPURCHASE AGREEMENT--2.3% Joint Repurchase Agreement Account (Note 5) (cost $3,422,000).................................... 3,422 3,422,000 ------------ TOTAL INVESTMENTS-- (cost $154,874,030*).................................. 97.4% 142,786,097 Other assets less liabilities.......................... 2.6 3,805,321 -------- ------------ NET ASSETS-- 100.0% $146,591,418 ======== ============
- ------- * See Note 8 + Non-income producing security (1) PIK ("Payment-in-Kind") payment made with additional securities in lieu of cash (2) Resale restricted to qualified institutional buyers (3) Represents a zero-coupon bond which will convert to an interest-bearing security at a later date (4) JPY-Security denominated in Japanese Yen (5) Bond in default (6) Bond issued as part of a unit which includes an equity component (7) Variable rate security, rate as of March 31, 1995 (8) Fair valued security, see Note 4 (9) Allocation of net assets by country as of March 31, 1995: United States 75.9% Argentina 8.1 Mexico 5.2 Brazil 3.6 Canada 1.3 Japan 0.9
See Notes to Financial Statements 16 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES--93.3% AEROSPACE--0.1% Fairchild Corp. Subordinated Debentures 12.00% due 10/15/01...................................... $ 307 $ 264,020 ---------- BROADCASTING--2.5% NWCG Holding Corp. Sr. Disc. Notes, Series B zero coupon due 6/15/99.................................. 6,250 3,609,375 Univision Network Holding Subordinated Notes zero coupon due 12/17/02(4)............................. 2,000 1,190,000 ---------- 4,799,375 ---------- CABLE--5.1% Adelphia Communications Corp. Sr. Notes, Series B/PIK 9.50% due 2/15/04(1)..................................... 2,287 1,695,536 Adelphia Communications Corp. Sr. Notes 12.50% due 5/15/02....................................... 1,000 955,000 American Telecasting, Inc. Sr. Disc. Notes zero coupon due 6/15/04(4)............................... 3,000 1,522,500 Falcon Holding Group, L.P. Sr. Subordinated Notes/PIK 11.00% due 9/15/03(1)......... 29 25,540 Simmons Cable Co. Sr. Subordinated Notes zero coupon due 4/30/96(3)+.............................. 3,000 1,575,000 United International Holdings, Inc. Sr. Disc. Notes zero coupon due 11/15/99(4)(7)........................... 3,000 1,672,500 Videotron Holdings PLC Sr. Subordinated Notes zero coupon due 7/01/04(4).............................. 4,000 2,380,000 ---------- 9,826,076 ---------- CHEMICALS--5.5% Arcadian Partners L.P. Sr. Notes, Series B 10.75% due 5/01/05....................................... 3,500 3,438,750 GI Holdings, Inc. Sr. Notes, Series B zero coupon due 10/01/98(4).............................. 2,000 1,290,000 Georgia Gulf Corp. Sr. Subordinated Notes 15.00% due 4/15/00....................................... 500 500,625 LaRoche Industries, Inc. Sr. Subordinated Notes 13.00% due 8/15/04...................................... 4,000 4,000,000
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CHEMICALS (CONTINUED) OSI Specialties Holdings Co. Sr. Secured Disc. Debentures, Series B zero coupon due 4/15/04(4)........................... $ 2,000 $ 1,310,000 ------------ 10,539,375 ------------ COMPUTERS--1.8% Computervision Corp. Sr. Subordinated Notes 11.38% due 8/15/99.................................... 3,800 3,477,000 ------------ FOOD & BEVERAGES--0.4% All American Bottling Corp. Sr. Secured Notes 13.00% due 8/15/01.................................... 1,000 825,000 ------------ FOREST PRODUCTS--8.8% Fort Howard Corp. Jr. Subordinated Disc. Debentures 14.13% due 4/15/95................................... 6,550 6,582,750 Ivex Holdings Corp. Sr. Debentures, Series B zero coupon due 3/15/05(4)........................... 2,000 960,000 Pacific Lumber Co. Sr. Notes 10.50% due 3/01/03.................................... 3,000 2,820,000 Southwest Forest Industries, Inc. Subordinated Debentures 12.13% due 9/15/01................................... 2,500 2,512,500 Stone Container Corp. Sr. Notes 11.50% due 10/01/04.................................. 4,000 4,200,000 ------------ 17,075,250 ------------ GAMING--7.0% Capital Gaming International, Inc. Promissory Notes zero coupon due 8/01/95(2)............................ 20 20,000 Capital Gaming International, Inc. Sr. Secured Notes, Series B 11.50% due 2/01/01........ 2,000 1,500,000 Empress River Casino Finance Corp. Sr. Notes 10.75% due 4/01/02................................... 3,000 2,910,000 Fitzgerald Gaming Corp. Sr. Secured Notes 13.00% due 3/15/96(2)(3)(7)........................... 1,000 530,000 Harrah's Jazz Co. First Mortgage Notes 14.25% due 11/15/01................................... 2,000 2,140,000
17 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES (CONTINUED) GAMING (CONTINUED) Showboat, Inc. First Mortgage Bonds 9.25% due 5/01/08....................................... $ 2,000 $1,745,000 Showboat, Inc. Sr. Subordinated Notes 13.00% due 8/01/09...................................... 3,000 3,105,000 Stratosphere Corp. Guaranteed First Mortgage Notes 14.25% due 5/15/02....... 1,500 1,533,750 ---------- 13,483,750 ---------- GROCERY--6.0% Farm Fresh, Inc. Sr. Notes 12.25% due 10/01/00...................................... 1,000 930,000 Kash 'N Karry Food Stores, Inc. Sr. Notes/PIK 11.50% due 2/01/03(1).................................... 6,998 6,757,064 Ralph's Grocery Co. Sr. Subordinated Notes 10.25% due 7/15/02....................................... 3,500 3,465,000 Smittys Super Value, Inc. Sr. Subordinated Notes, Series B 12.75% due 6/15/04...................................... 500 470,000 ---------- 11,622,064 ---------- HEALTH SERVICES--9.2% Amerisource Distribution Corp. Sr. Debentures/PIK 11.25% due 7/15/05(1).................................... 1,848 1,996,312 Dade International, Inc. Sr. Subordinated Notes 13.00% due 2/01/05(2)................................... 2,000 2,030,000 Integrated Health Services, Inc. Sr. Subordinated Notes 10.75% due 7/15/04...................................... 1,500 1,552,500 Multicare, Inc. Sr. Subordinated Notes 12.50% due 7/01/02...................................... 2,000 2,255,000 National Medical Enterprises, Inc. Sr. Subordinated Notes 10.13% due 3/01/05...................................... 4,500 4,618,125 OrNda Health Corp. Sr. Subordinated Notes 12.25% due 5/15/02...................................... 2,000 2,180,000 Surgical Health Corp. Sr. Notes 11.50% due 7/15/04...................................... 3,000 3,240,000 ---------- 17,871,937 ---------- HOTELS & RESTAURANTS--6.3% American Restaurant Group, Inc. Sr. Secured Notes 12.00% due 9/15/98...................................... 2,000 1,820,000
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- HOTELS & RESTAURANTS (CONTINUED) Carrols Corp. Sr. Notes 11.50% due 8/15/03...................................... $ 3,000 $2,760,000 Flagstar Corp. Sr. Subordinated Debentures 11.25% due 11/01/04..................................... 4,250 3,570,000 Host Marriott Corp. Sr. Notes, Series K 11.25% due 7/18/05...................................... 2,000 2,010,000 Motels of America, Inc. Sr. Subordinated Notes 12.00% due 4/15/04...................................... 2,000 2,035,000 ---------- 12,195,000 ---------- HOUSEHOLD PRODUCTS--0.7% Chattem, Inc. Sr. Secured Notes, Series B 12.75% due 6/15/04....................................... 1,500 1,368,750 ---------- HOUSING--0.4% Peters (J.M.) Co., Inc. Sr. Notes 12.75% due 5/01/02....................................... 1,000 825,000 ---------- INDUSTRIAL--6.2% Calmar, Inc. Sr. Secured Notes 12.00% due 12/15/97...................................... 2,000 2,020,000 Georgia Marble Co. Subordinated Notes 17.00% due 1/01/96(6).................................... 3,750 2,306,250 International Semi-Tech Microelectronic, Inc. Sr. Secured Disc. Notes zero coupon due 8/15/03(4)............................... 4,000 1,760,000 J.B. Poindexter & Co. Sr. Notes 12.50% due 5/15/04....................................... 3,000 2,842,500 MVE, Inc. Sr. Secured Notes 12.50% due 2/15/02(7).................................... 2,000 2,050,000 Thermadyne Holdings Corp. Sr. Subordinated Notes 10.75% due 11/01/03..................................... 1,000 975,000 ---------- 11,953,750 ---------- MEDIA--4.3% Katz Corp. Sr. Subordinated Notes 12.75% due 11/15/02...................................... 5,000 5,225,000
18 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES (CONTINUED) MEDIA (CONTINUED) Sullivan Graphics, Inc. Sr. Subordinated Debentures 15.00% due 2/01/00....................................... $ 3,000 $3,172,500 ---------- 8,397,500 ---------- METALS--2.1% Kaiser Aluminum & Chemical Corp. Sr. Subordinated Notes 12.75% due 2/01/03...................................... 1,000 1,035,000 Renco Metals, Inc. Sr. Notes 12.00% due 7/15/00....................................... 3,000 2,970,000 ---------- 4,005,000 ---------- OIL & GAS--2.0% DeepTech International, Inc. Sr. Secured Notes 12.00% due 12/15/00...................................... 2,000 1,760,000 Petroleum Heat & Power, Inc. Subordinated Debentures 12.25% due 2/01/05...................................... 2,000 2,080,000 ---------- 3,840,000 ---------- RETAIL--11.8% County Seat Stores, Inc. Sr. Subordinated Notes 12.00% due 10/01/01...................................... 3,000 2,985,000 Eckerd Jack Corp. Subordinated Debentures 11.13% due 5/01/01...................................... 3,000 3,015,000 Finlay Fine Jewelry Corp. Sr. Notes 10.63% due 5/01/03...................................... 2,000 1,860,000 Hills Store Co. Sr. Notes 10.25% due 9/30/03...................................... 2,000 1,940,000 Parisian, Inc. Sr. Subordinated Notes 9.88% due 7/15/03........................................ 3,000 2,062,500 Rickel Home Centers, Inc. Sr. Notes 13.50% due 12/15/01(7).................................. 2,000 1,900,000 Thrifty PayLess Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04(7).................................... 4,000 4,300,000 Thrifty PayLess Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04...................................... 2,000 2,020,000 Wickes Lumber Co. Sr. Subordinated Notes 11.63% due 12/15/03...................................... 2,910 2,764,500 ---------- 22,847,000 ----------
PRINCIPAL AMOUNT (IN THOUSANDS)/ VALUE SECURITY DESCRIPTION SHARES (NOTE 4) - -------------------------------------------------------------------------------- STEEL--2.8% A.K. Steel Corp. Sr. Notes 10.75% due 4/01/04...................................... $ 4,000 $ 4,035,000 WCI Steel, Inc. Sr. Notes, Series B 10.50% due 3/01/02..................................... 1,500 1,447,500 ----------- 5,482,500 ----------- TELECOMMUNICATIONS--9.4% Comcast Cellular Corp. Notes zero coupon due 3/05/00(4)............................. 4,000 2,880,000 Dial Page, Inc. Sr. Notes 12.25% due 2/15/00..................................... 4,000 4,040,000 Echostar Communications Corp. Sr. Disc. Notes zero coupon due 6/01/04(4)(7)........................... 5,000 2,400,000 Mobile Telecommunication Technologies Corp. Sr. Subordinated Disc. Notes 13.50% due 12/15/02.................................... 4,000 4,155,000 PanAmSat, L.P. Sr. Subordinated Notes zero coupon due 8/01/03(4)............................. 7,000 4,620,000 ----------- 18,095,000 ----------- TRANSPORTATION--0.9% Burlington Motor Holdings, Inc. Sr. Subordinated Notes 11.50% due 11/01/03..................................... 2,000 1,780,000 ----------- TOTAL CORPORATE BONDS & NOTES (cost $184,606,569)..................................... 180,573,347 ----------- COMMON STOCK--1.6% CABLE--0.0% M.L. Opportunity L.P.(3)+............................... 70,106 70,106 MCGP Holdings, Inc.(3)+................................. 1 0 ----------- 70,106 ----------- FOREST PRODUCTS--0.6% Fort Howard Corp.+...................................... 95,000 1,199,375 ----------- GAMING--0.1% Capital Gaming International, Inc.+..................... 50,000 262,500 -----------
19 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
SHARES/ VALUE SECURITY DESCRIPTION WARRANTS (NOTE 4) - -------------------------------------------------------------------------------- COMMON STOCK (CONTINUED) MEDIA--0.9% TMM, Inc.(3)(8)+........................................ 2,000,000 $ 1,660,000 ----------- TOTAL COMMON STOCK (cost $3,066,356)....................................... 3,191,981 ----------- PREFERRED STOCK--1.1% BANKING--1.1% Chevy Chase Savings Bank, F.S.B. 13.00% Series A ....................................... 57,000 1,567,500 Chevy Chase Savings Bank, F.S.B. 13.00% Series A(8)..................................... 18,000 495,000 ----------- 2,062,500 ----------- CABLE--0.0% Maryland Cable Partners L.P.(3)+........................ 16,009 16,009 ----------- TOTAL PREFERRED STOCK (cost $2,317,259)....................................... 2,078,509 ----------- WARRANTS--0.1%+ CABLE--0.0% American Telecasting, Inc.(3)........................... 15,000 150 ----------- CHEMICALS--0.0% OSI Specialties Holdings Co............................. 2,000 40,000 ----------- FOOD & BEVERAGES--0.0% Browne Bottling Co.(3).................................. 475 5 ----------- GAMING--0.1% Capital Gaming International, Inc....................... 45,500 113,750 Casino Magic Finance Corp............................... 24,000 11,400 ----------- 125,150 ----------- GROCERY--0.0% Smittys Supermarkets, Inc............................... 500 5,000 ----------- HOUSEHOLD PRODUCTS--0.0% Chattem, Inc............................................ 1,500 4,500 ----------- HOUSING--0.0% Peters (J.M.) Co., Inc.(3).............................. 7,900 79 ----------- TOTAL WARRANTS (cost $71,025).......................................... 174,884 ----------- TOTAL INVESTMENT SECURITIES--96.1% (cost $190,061,209)..................................... 186,018,721 -----------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT--1.8% Joint Repurchase Agreement Account (Note 5) (cost $3,489,000)..................................... $3,489 $ 3,489,000 ------------ TOTAL INVESTMENTS-- (cost $193,550,209*).................................. 97.9% 189,507,721 Other assets less liabilities.......................... 2.1 4,111,047 ----- ------------ NET ASSETS-- 100.0% $193,618,768 ===== ============
- ------- * See Note 8 + Non-income producing security (1) PIK ("Payment-in-kind") payment made with additional securities in lieu of cash (2) Resale restricted to qualified institutional buyers (3) Fair valued security, see Note 4 (4) Represents a zero-coupon bond which will convert to an interest-bearing security at a later date (5) Variable rate security, rate as of March 31, 1995 (6) Bond in default (7) Bond issued as part of a unit which includes an equity component (8) At March 31, 1995 the Fund held two restricted securities amounting to 1.1% of net assets. The Fund will not bear any costs, including those involved in registration under the Securities Act of 1933, in connection with the disposition of the following securities.
VALUATION DATE OF UNIT AS OF DESCRIPTION ACQUISITION COST MARCH 31, 1995 -------------------------------------------- ----------- ------ -------------- Chevy Chase Savings Bank F.S.B. ............ 9/8/93 $30.75 $27.50 TMM, Inc. .................................. 2/1/95 .83 .83
See Notes to Financial Statements 20 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MUNICIPAL BONDS--97.8% ALASKA--1.3% Alaska State Housing Finance Corp., 7.50% due 12/01/15.................................... $ 1,975 $ 2,068,062 ------------ ARIZONA--0.8% Maricopa County, Arizona General Obligation, School District Number 213, 7.00% due 7/01/08+.................................... 1,000 1,138,690 Maricopa County, Arizona School District 80, zero coupon due 7/11/11+.............................. 600 224,562 ------------ 1,363,252 ------------ ARKANSAS--0.4% Arkansas State Development Finance Authority, Single Family Mortgage Revenue, Conventional Mortgage Loans, 9.00% due 6/01/14+.................................... 150 157,494 Arkansas State Development Finance Authority, Single Family Mortgage Revenue, Conventional & FHA Insured, Series A, 9.38% due 8/01/14..................................... 410 428,840 ------------ 586,334 ------------ CALIFORNIA--9.2% California Housing Finance Agency, Home Mortgage Reve- nue, Series A, 8.13% due 8/01/19+.................................... 940 998,712 California Housing Finance Agency, Home Mortgage Reve- nue, Series A, 8.20% due 8/01/17+.................................... 1,000 1,056,900 Los Angeles, California Convention And Exhibition Center Authority, Lease Revenue, 6.00% due 8/15/10+.................................... 1,155 1,178,181 San Francisco, California City & County Redevelopment Agency, Lease Revenue, 6.75% due 7/01/15+.................................... 1,000 1,064,810 San Jose, California Airport Revenue, 5.88% due 3/01/07+.................................... 2,905 2,958,423 San Jose, California Redevelopment Agency Tax Allocation, Merged Area Redevelopment Project, 6.00% due 8/01/06+.................................... 1,000 1,044,230
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- CALIFORNIA (CONTINUED) San Jose, California Redevelopment Agency Tax Allocation, Merged Area Redevelopment Project, 6.00% due 8/01/07+..................................... $ 3,000 $ 3,113,670 San Jose, California Redevelopment Agency Tax Allocation, Merged Area Redevelopment Project, 6.00% due 8/01/11+..................................... 3,700 3,753,613 ----------- 15,168,539 ----------- COLORADO--0.1% Colorado Housing Finance Authority, Single Family Revenue, Series C, 9.38% due 3/01/12+..................................... 140 146,020 ----------- DISTRICT OF COLUMBIA--0.9% District of Columbia Housing Finance Agency, Mortgage Revenue Collateral, Single Family, Series A, 7.75% due 12/01/18..................................... 1,370 1,447,748 ----------- FLORIDA--2.9% Florida Housing Finance Agency, Residential Mortgage, 1985 Series 1, 8.50% due 6/15/06+..................................... 2,500 2,601,750 Florida Housing Finance Agency, Single Family Mortgage, Series A, 9.25% due 7/01/07+..................................... 85 88,948 Indian Trace Community Development District, Florida, Special Benefit, Series A, 5.75% due 5/01/11+..................................... 2,000 1,989,500 ----------- 4,680,198 ----------- GEORGIA--6.2% Georgia State, General Obligation, Series C, 6.50% due 4/01/07...................................... 1,700 1,879,435 Georgia State, General Obligation, 7.20% due 3/01/05...................................... 3,000 3,457,590 Georgia State, General Obligation, 7.20% due 3/01/07...................................... 3,000 3,478,440 Municipal Electric Authority, Georgia Special Obligation, Fifth Crossover Project 1, 6.40% due 1/01/09+..................................... 1,250 1,320,238 ----------- 10,135,703 -----------
21 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) ILLINOIS--3.2% Cook County, Illinois, Community College, District Number 508, 7.70% due 12/01/07+................................... $ 2,000 $ 2,367,120 Illinois Health Facilities Authority, Lutheran General Health System, 7.00% due 4/01/08+.................................... 2,500 2,773,675 Illinois Housing Development Authority, Multi-Family Housing, Series B, 9.25% due 7/01/28..................................... 45 46,465 ------------ 5,187,260 ------------ INDIANA--1.0% Indiana State Housing Finance Authority, Multi-Unit Mortgage Program, Series A, 9.00% due 1/01/14..................................... 1,470 1,509,954 Indiana State Housing Finance Authority, Single Family Mortgage Revenue, Series B, 9.38% due 1/01/06..................................... 160 164,725 ------------ 1,674,679 ------------ KENTUCKY--0.2% Kentucky Housing Corp., Multi- Family Revenue Mortgage, Series A, 8.88% due 7/01/19+.................................... 250 259,933 ------------ LOUISIANA--1.2% Louisiana Housing Finance Agency, Single Family Mort- gage Revenue, 1985 Series A, 9.38% due 2/01/15+.................................... 135 141,170 Louisiana State, General Obligation, Series A, 5.80% due 8/01/10+.................................... 1,750 1,751,592 ------------ 1,892,762 ------------ MARYLAND--3.3% Baltimore, Maryland, General Obligation, Series A, 7.25% due 10/15/05+................................... 2,000 2,289,120 Maryland State Community Development Administration, Multi-Family Housing Revenue, 1985 Series B, 8.75% due 5/15/12..................................... 3,000 3,093,390 ------------ 5,382,510 ------------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MASSACHUSETTS--7.1% Massachusetts State Housing Finance Agency, Insured Rental, Series A, 6.60% due 7/01/14+.................................... $ 5,375 $ 5,511,579 Massachusetts State Housing Finance Agency, Multi-Fam- ily Housing, Series A, 8.88% due 7/01/18+.................................... 990 1,029,303 Massachusetts State Housing Finance Agency, Multi-Fam- ily Mortgage, GNMA, Series A, 9.00% due 12/01/09.................................... 500 520,035 Massachusetts State Housing Finance Agency, Multi-Fam- ily Mortgage, GNMA, Series A, 9.13% due 12/1/20.................................... 485 508,037 Massachusetts State Water Resources Authority, 6.25% due 11/01/10+................................... 4,000 4,145,520 ------------ 11,714,474 ------------ MICHIGAN--1.5% Goodrich, Michigan, School District General Obliga- tion, 5.70% due 5/01/15+.................................... 1,000 962,920 Michigan Municipal Bond Authority, Revenue Capital Ap- preciation, Local Government Loan, zero coupon due 5/01/16+.............................. 2,735 744,111 Michigan Municipal Bond Authority, Revenue Capital Ap- preciation, Local Government Loan, zero coupon due 5/01/17+.............................. 2,875 733,815 ------------ 2,440,846 ------------ MISSISSIPPI--0.1% Mississippi Housing Finance Corp., Single Family Mortgage Purchase Revenue, Series A, 8.80% due 4/15/10+.................................... 185 194,363 ------------ MISSOURI--3.9% Missouri State Housing Development Commission, Insured, Single Family Mortgage Revenue, 9.38% due 4/01/16+.................................... 110 117,328 Sikeston, Missouri Electric, Revenue, 6.20% due 6/01/10+.................................... 6,000 6,313,740 ------------ 6,431,068 ------------
22 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) NEVADA--2.7% Nevada Housing Division, Single Family Mortgage, Series A, zero coupon due 4/01/16+.............................. $ 5,945 $ 4,381,108 ------------ NEW HAMPSHIRE--0.2% New Hampshire State Housing Finance Authority, Single Family Residential Mortgage, Series A, 9.25% due 7/01/11+.................................... 285 298,010 ------------ NEW JERSEY--1.4% New Jersey Economic Development Authority, Market Transition Facility Revenue, 7.00% due 7/01/04+.................................... 2,000 2,252,080 New Jersey State Housing & Mortgage Finance Agency, Revenue, Series B, 9.13% due 4/01/15+.................................... 15 15,522 ------------ 2,267,602 ------------ NEW MEXICO--0.3% New Mexico Mortgage Finance Authority, Single Family Mortgage Revenue, Series C, 8.63% due 7/01/17..................................... 230 244,863 New Mexico Mortgage Finance Authority, Single Family Mortgage Program, Series A, 9.25% due 7/01/12+.................................... 200 208,588 ------------ 453,451 ------------ NEW YORK--8.8% New York City Industrial Development Agency, Civic Facility, Revenue, 6.25% due 11/15/06+................................... 2,000 2,125,620 New York State Dormitory Authority Revenue, State University Educational Facilities, Series A, 5.50% due 5/15/10+.................................... 1,000 979,830 New York State Medical Care Facilities, Finance Agency, Revenue, New York Hospital, FHA Insured Mortgage A, 6.75% due 8/15/14..................................... 2,850 3,039,382 New York, New York, Series E, 6.20% due 8/01/07+.................................... 2,250 2,372,963 Niagara Falls, New York, General Obligation, 7.50% due 3/01/13+.................................... 445 534,156
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- NEW YORK (CONTINUED) Niagara Falls, New York, General Obligation, 7.50% due 3/01/14+....................................... $ 555 $ 663,180 Niagara Falls, New York, General Obligation, 7.50% due 3/01/18+....................................... 500 607,705 Suffolk County, New York, Industrial Development Agency, Southwest Sewer Systems Revenue, 6.00% due 2/01/07+....................................... 4,000 4,161,320 ---------- 14,484,156 ---------- NORTH CAROLINA--4.8% Cumberland County, North Carolina, Certificates of Participation, Civic Center Project, Series A, 6.40% due 12/01/19+...................................... 2,050 2,121,361 Harnett County, North Carolina, Certificates of Participation, 6.20% due 12/01/09+...................................... 2,400 2,505,168 North Carolina Municipal Power Agency, Catawba Electric Revenue, 6.00% due 1/01/10+....................................... 1,250 1,280,637 North Carolina Municipal Power Agency, Catawba Electric Revenue, 6.00% due 1/01/11+....................................... 2,000 2,042,780 ---------- 7,949,946 ---------- NORTH DAKOTA--0.5% North Dakota State Housing Finance Agency, Single Family Mortgage Revenue, Series A, 7.38% due 7/01/17+....................................... 695 720,555 North Dakota State Housing Finance Agency, Single Family Mortgage Revenue, Series A, 9.13% due 7/01/16+....................................... 160 164,400 ---------- 884,955 ---------- OHIO--4.2% Lucas County, Ohio, Hospital Revenue, St. Vincent Medical Center, 6.50% due 8/15/07+....................................... 3,500 3,766,595 Ohio State Water Development Authority Revenue, 5.50% due 12/01/11+...................................... 2,000 1,940,400
23 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) OHIO (CONTINUED) Woodridge, Ohio, Local School District, General Obligation, 6.80% due 12/01/14+................................... $ 1,000 $ 1,123,880 ------------ 6,830,875 ------------ OKLAHOMA--1.1% Grand River Dam Authority, Oklahoma, Electric Revenue, 5.75% due 6/01/08+.................................... 1,850 1,865,115 ------------ PENNSYLVANIA--6.5% Northeastern Pennsylvania Hospital & Education Authority, Health Care Revenue, 6.20% due 1/01/04+.................................... 2,000 2,104,500 Northeastern Pennsylvania Hospital & Education Authority, Health Care Revenue, 6.50% due 1/01/07+.................................... 1,000 1,066,840 Pennsbury, Pennsylvania, School District, General Obligation, 6.80% due 8/15/14+.................................... 3,800 4,071,434 Pennsylvania Housing Finance Agency, Multi-Family, FHA Insured, Issue B, 8.88% due 8/01/28+.................................... 985 1,032,369 Pennsylvania Housing Finance Agency, Multi-Family Mortgage, 9.38% due 8/01/28+.................................... 170 177,789 Pennsylvania State Industrial Development Authority, Economic Development, 7.00% due 1/01/07+.................................... 2,000 2,249,460 ------------ 10,702,392 ------------ PUERTO RICO--1.0% Puerto Rico Electric Power Authority, Revenue, 7.00% due 7/01/06..................................... 1,435 1,585,675 ------------ RHODE ISLAND--0.6% Rhode Island Housing & Mortgage Finance Corp., Supplementary Insurance, Series B, 8.38% due 10/01/16+................................... 1,000 1,058,730 ------------ TEXAS--12.6% Bexar County, Texas, Health Facilities Development Corp., Hospital Revenue, 6.75% due 8/15/19+.................................... 4,000 4,200,560
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- TEXAS (CONTINUED) Garland, Texas, Independent School District, General Obligation, 5.50% due 2/15/16..................................... $ 1,335 $ 1,247,010 Grand Prairie, Texas, Health Facilities Development Corp., Hospital Revenue, 6.88% due 11/01/10+................................... 1,600 1,732,256 Harris County, Texas Flood Control District, Series A, General Obligation, 5.13% due 10/01/12.................................... 1,000 905,980 Harris County, Texas Hospital District Mortgage, Revenue, 7.40% due 2/15/10+.................................... 2,500 2,867,625 Houston, Texas Water and Sewer Systems, Revenue, Series C, zero coupon due 12/01/09+............................. 1,420 589,896 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation, 6.13% due 12/15/08+................................... 1,250 1,305,988 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation, 6.13% due 12/15/09+................................... 1,000 1,037,770 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation, 6.38% due 12/15/07+................................... 3,500 3,757,075 Sherman, Texas Independent School District, General Obligation, 6.50% due 2/15/20..................................... 3,000 3,098,940 ------------ 20,743,100 ------------ UTAH--1.3% Utah State Housing Finance Agency, Single Family Mortgage, Series B, 7.38% due 7/01/16+.................................... 310 319,189 Utah State Housing Finance Agency, Single Family Mortgage, Series D, 7.50% due 7/01/16+.................................... 1,685 1,766,638 ------------ 2,085,827 ------------ VIRGINIA--3.9% Metropolitan, Washington District of Columbia, Airport Authority, General Airport Revenue, 5.50% due 10/01/24+................................... 4,000 3,622,880 Metropolitan, Washington District of Columbia, Airport Authority, General Airport Revenue, 5.75% due 10/01/20+................................... 3,000 2,824,470 ------------ 6,447,350 ------------
24 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1995 -- (continued)
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) WASHINGTON--2.4% Washington State Housing Finance Commission, Multi-Family Mortgage Revenue, Series A, 9.13% due 7/01/10+................................... $ 380 $ 398,601 Washington State, Series B, General Obligation, 6.00% due 6/01/11.................................... 3,400 3,470,380 ----------- 3,868,981 ----------- WEST VIRGINIA--1.9% West Virginia State Housing Development Fund, Series A, 7.25% due 5/01/17+.................................... 3,000 3,123,630 ----------- WISCONSIN--0.3% Wisconsin Housing & Economic Development Authority, Homeownership Revenue, 1985 Issue I, 9.13% due 6/01/05+................................... 160 166,304 Wisconsin Housing & Economic Development Authority, Homeownership Revenue, 1985 Issue I, 9.13% due 12/01/11+.................................. 335 348,380 ----------- 514,684 ----------- TOTAL MUNICIPAL BONDS (cost $154,140,202). 160,319,338 -----------
PRINCIPAL AMOUNT (IN VALUE SECURITY DESCRIPTION THOUSANDS) (NOTE 4) - -------------------------------------------------------------------------------- VARIABLE RATE MUNICIPAL BONDS --0.8% LOUISIANA--0.8% Louisiana State Recovery District Sales Tax Revenue, 4.60% due 7/01/97(1) (cost $1,300,000).................................... $ 1,300 $ 1,300,000 ------------ TOTAL INVESTMENT SECURITIES--98.6% (cost $155,440,202)................................... 161,619,338 ------------ TOTAL INVESTMENTS-- (cost $155,440,202*).................................. 98.6% 161,619,338 Other assets less liabilities.......................... 1.4 2,320,496 ----- ------------ NET ASSETS-- 100.0% $163,939,834 ===== ============
- ------- * See Note 8 + All or part of this security position is insured by Municipal Bond Insurance Association ("MBIA"), Bond Insurance Guarantee ("BIG") or Financial Guarantee Insurance Corporation ("FGIC") ($125,714,483 or 76.7% of total assets) (1) Rate as of March 31, 1995 See Notes to Financial Statements 25 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 Note 1. Organization The SunAmerica Income Funds is an open-end diversified management investment company organized as a Massachusetts business trust (the "Trust") with five different investment series (each, a "Fund" and collectively, the "Funds"). Each Fund is a separate series of the Trust with distinct investment objectives and/or strategies. Each Fund is managed by SunAmerica Asset Management Corp. (the "Adviser" or "SAAMCo"). An investor may invest in one or more of the following Funds: SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund. The Funds are considered to be separate entities for financial and tax reporting purposes. Each Fund currently offers two classes of shares. Class A shares are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent sales charge may be imposed on redemptions made within six years of purchase and any purchases of Class A shares in excess of $1,000,000 will be subject to a contingent deferred sales charge on redemptions made within one year of purchase. Class B shares of each Fund will convert automatically to Class A shares on the first business day of the month following the seventh anniversary of the issuance of such Class B shares and at such time will be subject to the lower distribution fee applicable to Class A shares. Each class of shares bears the same voting, dividend, liquidation and other rights and conditions and each makes distribution and account maintenance and service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940 Act") except that Class B shares are subject to higher distribution fee rates. Note 2. Reorganization On March 31, 1993 and September 23, 1993, the Board of Directors/Trustees and Shareholders, respectively, of the various funds comprising the SunAmerica Mutual Funds approved the Agreements and Plans of Reorganization dated March 13, 1993, whereby all of the assets and liabilities of the determined Funds were transferred in a tax-free reorganization for shares of the series of the Trust. The details of the reorganization transactions, which were consummated on October 1, 1993, are set forth below. Prior to the Reorganization, the Trust was known as SunAmerica Income Portfolios and consisted of two series, SunAmerica High Yield Portfolio and SunAmerica Government Income Portfolio. Upon consummation of the reorganization, SunAmerica High Yield Portfolio ("SAHYP") and SunAmerica Government Income Portfolio ("SAGIP") were renamed SunAmerica High Income Fund ("High Income Fund") and SunAmerica U.S. Government Securities Fund ("U.S. Government Securities Fund"), respectively, and the then-outstanding shares were redesignated as Class A shares of such Funds and the name of the Trust was changed from SunAmerica Income Portfolios to SunAmerica Income Funds. On October 1, 1993, Class A shareholders of the High Income Fund were issued 1.174107276 shares of High Income Fund stock for each share of stock owned as of that date. The financial highlights included in these financial statements have been adjusted to reflect this stock split as if it had taken place as of the commencement of operations. 26 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) SunAmerica High Income Fund portfolio of SunAmerica Fund Group ("SAHIF") was reorganized into High Income Fund. In exchange for all of the assets and liabilities of SAHIF, the High Income Fund issued 16,026,407 Class B shares to SAHIF shareholders at a net asset value of $8.18 per share or $131,166,516, which was the equivalent of the net assets of SAHIF (including $431,265 of unrealized appreciation) as of the close of business on October 1, 1993. In the reorganization, the High Income Fund acquired $11,787,012 of net capital loss carryforwards of SAHIF. The net assets of SAHYP were $31,895,603 as of October 1, 1993. SunAmerica U.S. Government Securities Fund portfolio of SunAmerica Fund Group ("SAUSGF") was reorganized into U.S. Government Securities Fund. However, based on generally accepted accounting principles, from a financial reporting standpoint, SAUSGF is the surviving entity in this reorganization transaction. Accordingly, in exchange for all of the assets and liabilities of SAGIP, SAUSGF was deemed to have issued 7,553,768 Class A shares of U.S. Government Securities Fund at a net asset value of $8.68 per share or $65,566,703, which was the equivalent of the net assets of SAGIP (including $1,468,106 of unrealized appreciation) as of the close of business on October 1, 1993. In the reorganization, the U.S. Government Securities Fund acquired $12,720,078 of net capital loss carryforwards of SAUSGF and the net assets of SAUSGF were $1,216,098,153 as of October 1, 1993. Notwithstanding the foregoing, SAGIP is the surviving entity in the transaction for legal and tax reporting purposes. SunAmerica Diversified Income Fund ("SADIF"), SunAmerica Federal Securities Fund ("SAFSF"), and SunAmerica Tax Exempt Insured Fund ("SATEF") were reorganized into three new series, SunAmerica Diversified Income Fund ("Diversified Income Fund"), SunAmerica Federal Securities Fund ("Federal Securities Fund") and SunAmerica Tax Exempt Insured Fund ("Tax Exempt Insured Fund"), respectively, whereby substantially all of the assets and liabilities of each acquired fund were transferred to the respective acquiring fund and the then-respective shareholders received Class B shares in the case of Diversified Income Fund and Federal Securities Fund, and Class A shares in the case of Tax Exempt Insured Fund. In the reorganization, the Diversified Income Fund, Federal Securities Fund and Tax Exempt Insured Fund acquired $2,109,587, $489,787 and $2,067,457, of net capital loss carryforwards of SADIF, SAFSF and SATEF, respectively, and the net assets of SADIF, SAFSF and SATEF were $91,231,340, $104,568,882 and $190,954,771, respectively, on October 1, 1993. Diversified Income Fund and Tax Exempt Insured Fund also changed their respective year ends from October 31 to March 31. Note 3. Acquisition On June 18, 1991, SAAMCo and SunAmerica Capital Services, Inc. ("SACS"), indirect wholly-owned subsidiaries of SunAmerica Inc., completed the acquisition of certain assets related to the mutual fund business of Siebel Capital Management, Incorporated ("SCMI"), Equitec Securities Corporation ("ESC"), and their parent corporation, Equitec Financial Group, Inc. (the "transaction"). At the time of the transaction, the Fund Group changed its name from Equitec Siebel Fund Group to SunAmerica Fund Group and each of the individual series of the Fund group changed its name including SAUSGF and SAHIF, which were previously known as Equitec Siebel U.S. Government Securities Fund and Equitec Siebel High Yield Bond Fund, respectively. 27 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) On June 11, 1992, SAHIF acquired all of the assets and liabilities of the SunAmerica Income Plus Fund, Inc. ("Income Plus Fund"), a regulated investment company registered under the Investment Company Act of 1940. The acquisition was executed pursuant to an agreement and plan of reorganization approved by the shareholders of Income Plus Fund on June 11, 1992. The agreement was adopted as a tax-free reorganization of Income Plus Fund. In exchange for all of the assets and liabilities of Income Plus Fund, SAHIF issued 1,034,599 shares to Income Plus Fund shareholders at a net asset value of $8.01 per share, totalling $8,287,137, which was the equivalent of the net assets of Income Plus Fund (including $688,981 of net unrealized appreciation) as of the close of business on June 11, 1992. In the reorganization, SAHIF assumed $9,692,412 of net capital loss carryforwards of Income Plus Fund. The net assets of SAHIF were $37,600,732 at June 11, 1992. Note 4. Significant Accounting Policies The following is a summary of the significant accounting policies followed by the Funds in the preparation of their financial statements: SECURITY VALUATIONS: Securities that are actively traded in the over-the- counter market, including listed securities for which the primary market is believed by the Adviser to be over-the-counter, are valued at the quoted bid price provided by principal market makers. Securities for which the primary market is on an exchange are valued at the last sale price on such exchange on the day of valuation or, if there was no sale on such day, the last bid price quoted on such day. Securities listed on the New York Stock Exchange ("NYSE") or other national securities exchanges, are valued on the basis of the last sale price on the exchange on which they are primarily traded. If there is no sale on that day, then securities are valued at the bid price on the NYSE or other primary exchange for that day. However, if the last sale price on the NYSE is different than the last sale price on any other exchange, the NYSE price is used. Options traded on national securities exchanges are valued as of the close of the exchange on which they are traded. Futures and options traded on commodities exchanges are valued at their last sale price as of the close of such exchange. The Funds may make use of a pricing service in the determination of their net asset values. The preceding procedures need not be used to determine the value of debt securities owned by a Fund if, in the opinion of the Trustees, some other method would more accurately reflect the fair market value of such debt securities in quantities owned by such Fund. Securities for which market quotations are not readily available and other assets are valued at fair value as determined pursuant to procedures adopted in good faith by the Trustees. Short-term investments which mature in less than 60 days are valued at amortized cost, if their original maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if their original term to maturity exceeded 60 days. REPURCHASE AGREEMENTS: The Funds, along with other affiliated registered investment companies, transfer uninvested cash balances into a single joint account, the daily aggregate balance of which is invested in one or more repurchase agreements collateralized by U.S. Treasury or federal agency obligations. The Funds' custodian takes possession of the collateral pledged for investments in repurchase agreements. The underlying collateral is valued daily on a mark to market basis to ensure 28 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) that the value, including accrued interest, is at least equal to the repurchase price. In the event of default of the obligation to repurchase, a Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Securities transactions are recorded on the trade date. Realized gains and losses on sales of investments are calculated on the identified cost basis. Interest income is recorded on the accrual basis; dividend income is recorded on the ex-dividend date. The Funds do not amortize market premiums (except for Tax Exempt Insured Fund) or accrue market discounts (except for Diversified Income Fund) except original issue discounts and interest only securities for which amortization is required for federal income tax purposes. Net investment income other than class specific expenses, and realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative net asset value of outstanding shares (or the value of dividend-eligible shares, as appropriate) of each class of shares at the beginning of the day (after adjusting for the current capital share activity of the respective class). The Fund records dividends and distributions to its shareholders on the ex- dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains. To the extent distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as distributions of paid-in-capital. The Funds Account and report distributions to shareholders in accordance with AICPA Statement of Position 93-2: Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. For the year ended March 31, 1995, the reclassification arising from book/tax differences resulted in increases (decreases) to the components of net assets. The following table discloses the current year effect of such differences reclassified from undistributed accumulated net investment income/loss and accumulated undistributed net realized gain/loss on investments to paid-in capital. These reclassifications were primarily the result of market discount, paydown loss and expiration of capital loss carryover for the year ended March 31, 1995. 29 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued)
ACCUMULATED ACCUMULATED UNDISTRIBUTED NET UNDISTRIBUTED NET INVESTMENT REALIZED PAID-IN INCOME/(LOSS) GAIN/(LOSS) CAPITAL ----------------- ----------------- -------- U.S. Government Securities Fund.......................... (12,987,212) 12,987,212 -- Federal Securities Fund........ (302,435) 302,435 -- Diversified Income Fund........ -- -- -- High Income Fund............... 263,716 (263,716) -- Tax Exempt Insured Fund........ 13,398 266,034 (279,432)
Dividends from net investment income are paid monthly. Capital gain distributions, if any, are paid annually. INVESTMENT SECURITIES LOANED: During the year ended March 31, 1995, U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund and High Income Fund participated in securities lending with qualified brokers. In lending portfolio securities to brokers the Funds receive cash as collateral against the loaned securities, which must be maintained at not less than 100% of the market value of the loaned securities during the period of the loan. To the extent income is earned on the cash collateral invested, it is recorded as interest income. As with other extensions of credit, should the borrower of the securities fail financially, the Funds may bear the risk of delay in recovery or may be subject to replacing the loaned securities by purchasing them with the cash collateral held, which may be less than 100% of the market value of such securities at the time of replacement. At March 31, 1995, U.S. Government Securities Fund and Federal Securities Fund loaned securities having a value of $115,988,750 and $10,018,700 and received cash collateral of $118,343,750 and $10,262,500 for these loans. FOREIGN CURRENCY TRANSLATION: The books and records of the Funds are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at published rates on the following basis: (i) market value of investment securities, other assets and liabilities--at the prevailing rate of exchange at the valuation date. (ii) purchases and sales of investment securities, income and expenses-- at the rate of exchange prevailing on the respective dates of such transactions. Assets and liabilities denominated in foreign currencies and commitments under forward foreign currency contracts are translated into U.S. dollars at the mean of the quoted bid and asked prices of such currencies against the U.S. dollar at the year end date. Purchases and sales of portfolio securities are translated at the rate of exchange prevailing when such securities were acquired or sold. Income and expenses are translated at rates of exchange prevailing when earned or incurred. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of securities held at fiscal year-end. The Fund does not isolate the effect of changes in foreign exchange rates from the changes in the market prices of portfolio securities sold during the year. 30 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) Realized foreign exchange gains and losses on other assets and liabilities and change in unrealized foreign exchange gains and losses on other assets and liabilities include realized foreign exchange gains and losses from currency gains or losses realized between the trade and settlement dates of securities transactions, the difference between the amounts of interest, dividends, discount and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid and changes in the unrealized foreign exchange gains and losses relating to other assets and liabilities arising as a result of changes in the exchange rates. FUTURES CONTRACTS: A futures contract is an agreement between two parties to buy and sell a security at a set price on a future date. Each Fund may purchase and sell financial futures contracts which are traded on a commodities exchange or board of trade for certain hedging and risk management purposes. Upon entering into such a contract the Funds are required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. A Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Funds activities in futures contracts are conducted through regulated exchanges which do not result in counterparty credit risks. Pursuant to a contract the Funds agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Funds as unrealized appreciation or depreciation. When a contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. FEDERAL INCOME TAXES: It is the Funds' policy to meet the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute all of their net income (taxable and tax-exempt) to their shareholders. Therefore, no federal income tax or excise tax provisions are required. EXPENSES: Expenses common to all Funds are allocated among the Income Funds based upon their relative net asset values. Note 5. Joint Repurchase Agreement Account Pursuant to exemptive relief granted by the Securities and Exchange Commission, the Funds are permitted to participate in joint Repurchase Agreement transactions. As of March 31, 1995, the U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund and High Income Fund had a 64.1%, 7.1%, 2.2% and 2.2% undivided interest which represented $101,505,000, $11,266,000, $3,422,000 and $3,489,000, respectively, in principal amount in a repurchase agreement in the joint account. As of such date, the repurchase agreement in the joint account and the collateral therefore were as follows: Yamaichi International (America), Inc. Repurchase Agreement, 6.25% dated 3/31/95, in the principal amount of $158,263,000 repurchase price $158,345,429 due 4/3/95 collateralized by $10,475,000 U.S. Treasury Notes 6.75% due 5/31/99, $29,045,000 U.S. Treasury Notes 8.50% due 5/15/97, 31 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) $50,000,000 U.S. Treasury Notes 7.50% due 12/31/96, $50,000,000 U.S. Treasury Notes 4.25% due 5/15/96, $16,530,000 U.S. Treasury Notes 8.50% due 5/15/97 and $925,000 U.S. Treasury Notes 8.50% due 4/15/97, approximate aggregate value $161,235,774. Note 6. Investment Advisory and Management Agreement, Distribution Agreement and Service Agreement The Trust, on behalf of each Fund, has an Investment Advisory and Management Agreement (the "Agreement") with SAAMCo. Under the Agreement, SAAMCo provides continuous supervision of a Fund's portfolio and administers its corporate affairs, subject to general review by the Trustees. In connection therewith, SAAMCo furnishes the Funds with office facilities, maintains certain of the Funds' books and records, and pays the salaries and expenses of all personnel, including officers of the Funds who are employees of SAAMCo and its affiliates. The investment advisory and management fee payable to SAAMCo with respect to U.S. Government Securities Fund and High Income Fund is computed daily, and payable monthly, at an annual rate of .75% of average daily net assets up to $200 million; .72% of the next $200 million; and .55% of average daily net assets in excess of $400 million. The investment advisory and management fee payable to SAAMCo with respect to Federal Securities Fund is computed daily, and payable monthly, at an annual rate of .55% of average daily net assets up to $25 million; .50% of the next $25 million; and .45% of average daily net assets in excess of $50 million. The investment advisory and management fee payable to SAAMCo with respect to Diversified Income Fund is computed daily, and payable monthly, at an annual rate of .65% of average daily net assets of up to $350 million; and .60% of average daily net assets in excess of $350 million. The investment advisory and management fee payable to SAAMCo with respect to Tax Exempt Insured Fund is computed daily, and payable monthly, at an annual rate of .50% of average daily net assets up to $350 million; and .45% of average daily net assets in excess of $350 million. For the year ended March 31, 1995, SAAMCo earned fees of $5,033,634, $365,395, $1,153,494, $1,192,998 and $874,281 for U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund, respectively (of which SAAMCo agreed to waive $226,804 for U.S. Government Securities Fund). Through July 31, 1994, SAAMCo had a Sub-Advisory Agreement with Wellington Management Company ("WMC") under which WMC acted as sub-adviser to the Tax Exempt Insured Fund. Under the Sub-Advisory Agreement SAAMCo paid WMC a monthly fee calculated at an annual rate of .15% of average daily net assets up to $200 million, .125% of the next $300 million and .10% of such average net assets in excess of $500 million. For the period April 1, 1994 through July 31, 1994 WMC earned fees of $92,926. Effective August 1, 1994, the Sub-Advisory Agreement with WMC was terminated. As of that date, SAAMCo assumed all portfolio management responsibilities for the Fund. SAAMCo has agreed that, in any fiscal year, it will refund or rebate its management fee to each of the Funds to the extent that the Fund's expenses (including the fees of SAAMCo and amortization of organizational expenses, but excluding interest, taxes, brokerage commissions, distribution fees and other extraordinary expenses) exceed the most restrictive expense limitation imposed by states where the Fund's shares are sold. The most restrictive expense limitation is presently believed to be 2 1/2% of the first $30 million of the Fund's average daily net assets, 2% of the next $70 million of average net assets and 1 1/2% of such net assets in excess of $100 million. For the year ended March 31, 1995, no such reimbursement was required. 32 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) For the year ended March 31, 1995, SAAMCo agreed to voluntarily waive fees and reimburse expenses of $20,954 for Federal Securities Fund (Class A) related to registration and transfer agent fees. The Trust, on behalf of each Fund has a Distribution Agreement with SunAmerica Capital Services, Inc. ("SACS"). Each Fund, with respect to each class of Shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Rule 12b-1 under the 1940 Act permits an investment company directly or indirectly to pay expenses associated with the distribution of its shares ("distribution expenses") in accordance with a plan adopted by the investment company's board of directors and approved by its shareholders. Pursuant to such rule, the Trustees and the shareholders of each class of shares of each Fund have adopted Distribution Plans, hereinafter referred to as the "Class A Plan" and the "Class B Plan." In adopting the Class A Plan and the Class B Plan, the Trustees determined that there was a reasonable likelihood that each such Plan would benefit the Trust and the shareholders of the respective class. The sales charge and distribution fees of a particular class will not be used to subsidize the sale of shares of any other class. Under the Class A Plan, the Distributor receives payments from a Fund at an annual rate of up to 0.10% of average daily net assets of such Fund's Class A shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. Under the Class B Plan, the Distributor receives payments from a Fund at the annual rate up to 0.75% of the average daily net assets of such Fund's Class B shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. The distribution costs for which the Distributor may be reimbursed out of such distribution fees include fees paid to broker- dealers that have sold Fund shares, commissions, and other expenses such as those incurred for sales literature, prospectus printing and distribution and compensation to wholesalers. It is possible that in any given year the amount paid to the Distributor under the Class A Plan or Class B Plan may exceed the Distributor's distribution costs as described above. The Distribution Plans provide that each class of shares of each Fund may also pay the Distributor an account maintenance and service fee at the annual rate up to 0.25% of the aggregate average daily net assets of such class of shares for payments to broker-dealers for providing continuing account maintenance. In this regard, some payments are used to compensate broker- dealers with account maintenance and service fees in an amount up to 0.25% per year of the assets maintained in a Fund by their customers. For the year ended March 31, 1995, SACS earned fees of $7,339,784, $717,826, $1,677,266, $1,387,160 and $767,753 for U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund, respectively, (of which $28,728, $102,206 and $61,214 was waived by U.S. Government Securities Fund Class A, High Income Fund Class B and Tax Exempt Insured Fund Class A, respectively). For the year ended March 31, 1995, SACS has advised the following Funds that it has received sales concessions on each Fund's Class A shares, portions of which are reallowed to affiliated broker-dealers and non- affiliated broker-dealers as follows: 33 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued)
SALES AFFILIATED NON-AFFILIATED CONCESSIONS BROKER-DEALERS BROKER-DEALERS ----------- -------------- -------------- U.S. Government Securities Fund... $ 84,710 $ 56,872 $10,813 Federal Securities Fund........... 19,976 11,597 3,947 Diversified Income Fund........... 201,057 144,342 26,811 High Income Fund.................. 148,782 107,889 16,642 Tax Exempt Insured Fund........... 149,429 85,321 40,047
SACS also receives the proceeds of contingent deferred sales charges paid by investors in connection with certain redemptions of Class B fund shares. For the year ended March 31, 1995, SACS informed U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund that it received approximately $4,729,948, $68,586, $776,679, $420,741, and $85,661, respectively, in contingent deferred sales charges. The Trust has entered into a Service Agreement with SunAmerica Fund Services, Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica Inc. Under the Service Agreement, SAFS performs certain shareholder account functions by assisting the Funds' transfer agent in connection with the services that it offers to the shareholders of the Funds. The Service Agreement permits the Funds to reimburse SAFS for costs incurred in providing such services which is approved annually by the Trustees. For the year ended March 31, 1995, U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund incurred expenses of $1,432,118, $103,960, $306,639, $261,605 and $327,191, respectively, to reimburse SAFS pursuant to the terms of the Service Agreement. Of these amounts $126,217, $13,516, $27,525, $35,599 and $30,730, respectively, were payable to SAFS at March 31, 1995. Note 7. Purchases and Sales of Investment Securities The aggregate cost of purchases and proceeds from sales and maturities of investments (excluding U.S. Government securities and short-term investments in the Diversified Income, High Income and Tax Exempt Insured Funds, respectively) during the year ended March 31, 1995 were as follows:
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES SECURITIES INCOME INCOME INSURED FUND FUND FUND FUND FUND ------------ ------------ ------------ ------------ ------------ Aggregate purchases..... $838,709,561 $191,048,807 $277,796,086 $339,639,174 $274,639,486 ============ ============ ============ ============ ============ Aggregate sales......... $940,780,360 $191,986,373 $281,659,858 $307,240,643 $285,209,218 ============ ============ ============ ============ ============
Note 8. Portfolio Securities (Tax Basis) The costs of securities and the aggregate appreciation and depreciation of securities for federal income tax purposes at March 31, 1995 were as follows: 34 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued)
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES SECURITIES INCOME INCOME INSURED FUND FUND FUND FUND FUND ------------ ----------- ------------ ------------ ------------ Cost (tax basis)........ $788,087,294 $81,420,763 $156,690,936 $193,829,055 $155,483,682 ============ =========== ============ ============ ============ Appreciation............ $ 7,523,855 $ 629,339 $ 1,881,981 $ 3,112,126 $ 6,236,435 Depreciation............ (15,386,895) (1,219,797) (15,786,820) (7,433,460) (100,779) ------------ ----------- ------------ ------------ ------------ Unrealized appreciation/ depreciation--net...... $ (7,863,040) $ (590,458) $(13,904,839) $ (4,321,334) $ 6,135,656 ============ =========== ============ ============ ============
Capital losses and currency losses incurred after October 31 within the taxable year are deemed to arise on the first business day of the Funds' next taxable year. Accordingly, the U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund incurred and elected to defer capital losses of $14,295,844, $918,642, $9,487,289, $6,684,269 and $2,040,040, respectively, to the taxable year ended March 31, 1996. Diversified Income Fund and High Income Fund incurred and elected to defer currency losses of $218,508 and $55,430, respectively, to the taxable year ended March 31, 1996. To the extent these losses are permitted under regulations to be used to offset future gains, it is probable that the gains so offset will not be distributed. At March 31, 1995, U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund had capital loss carryforwards of $30,763,078, $2,911,854, $13,636,808, $31,090,077 and $10,224,019, respectively, which were available to the extent provided in regulations and which will expire between 1996-2003. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed. Note 9. Capital Share Transactions Transactions in capital shares of each class of each series for the year ended March 31, 1995 and for each respective series' prior year end were as follows:
U.S. GOVERNMENT SECURITIES FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------------ FOR THE OCTOBER 1, 1993(A) FOR THE FOR THE NINE YEAR ENDED TO YEAR ENDED MONTHS ENDED MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1994(B) ------------------------ ------------------------ -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Shares sold..... 2,544,560 $ 20,825,728 4,462,031 $ 38,529,472 10,324,909 $ 84,569,618 8,952,578 $ 77,543,467 Shares issued in connection with the acquisition of SAGIP....... N/A N/A 7,553,768 65,566,703 N/A N/A N/A N/A Reinvested dividends...... 254,756 2,091,612 142,059 1,217,955 2,655,859 21,791,813 3,408,586 29,466,241 Shares redeemed. (3,015,559) (24,712,085) (3,024,695) (25,979,204) (46,389,311) (380,228,772) (50,858,102) (437,492,949) ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Net increase (decrease)..... (216,243) $ (1,794,745) 9,133,163 $ 79,334,926 (33,408,543) $(273,867,341) (38,496,938) $(330,483,241) ========== ============ ========== ============ =========== ============= =========== =============
(a) Commencement of sale of respective class of shares. (b) Shares of SAUSGF have been redesignated as Class B shares of U.S. Government Securities Fund. 35 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued)
FEDERAL SECURITIES FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B --------------------------------------------------- ----------------------------------------------------- FOR THE OCTOBER 11, 1993(A) FOR THE FOR THE YEAR ENDED TO YEAR ENDED YEAR ENDED MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1994(B) ------------------------ ------------------------- -------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Shares sold..... 859,631 $ 8,566,946 105,417 $ 1,100,201 895,438 $ 9,024,876 494,459 $ 5,283,474 Reinvested dividends...... 3,735 36,932 374 3,892 312,480 3,098,412 372,096 3,954,732 Shares redeemed. (294,336) (2,931,987) (47,874) (495,934) (2,574,743) (25,581,102) (4,122,658) (43,604,397) ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Net increase (decrease)..... 569,030 $ 5,671,891 57,917 $ 608,159 (1,366,825) $ (13,457,814) (3,256,103) $(34,366,191) ========== ============ =========== ============ =========== ============= =========== ============ (a) Commencement of sale of respective class of shares. (b) Shares of SAFSF have been redesignated as Class B shares of Federal Securities Fund. DIVERSIFIED INCOME FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B --------------------------------------------------- ----------------------------------------------------- FOR THE FOR THE FIVE FOR THE FOR THE FIVE YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1994 ------------------------ ------------------------- -------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Shares sold..... 1,911,715 $ 8,713,009 2,610,194 $ 13,104,161 13,562,550 $ 62,234,623 20,679,502 $104,260,485 Reinvested dividends...... 179,521 791,930 16,109 80,587 1,784,570 7,929,584 496,470 2,503,044 Shares redeemed. (1,294,317) (5,722,753) (143,613) (718,641) (19,804,466) (88,218,971) (5,053,725) (25,298,959) ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Net increase (decrease)..... 796,919 $ 3,782,186 2,482,690 $ 12,466,107 (4,457,346) $ (18,054,764) 16,122,247 $ 81,464,570 ========== ============ =========== ============ =========== ============= =========== ============ HIGH INCOME FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B --------------------------------------------------- ----------------------------------------------------- FOR THE FOR THE FOR THE OCTOBER 1, 1993(B) YEAR ENDED YEAR ENDED YEAR ENDED TO MARCH 31, 1995 MARCH 31, 1994(A) MARCH 31, 1995 MARCH 31, 1994 ------------------------ ------------------------- -------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Shares sold..... 4,517,500 $32,145,067 13,843,654 $ 44,331,545 18,144,837 $ 132,472,191 10,270,626 $ 85,366,881 Shares issued in connection with stock split*... N/A N/A 578,211 N/A N/A N/A N/A N/A Shares issued in connection with the acquisition of SAHIF....... N/A N/A N/A N/A N/A N/A 16,026,407 131,166,516 Reinvested dividends...... 285,804 2,048,889 222,545 1,995,474 982,211 7,057,922 445,888 3,715,009 Shares redeemed. (3,162,108) (23,140,910) (13,668,674) (42,944,507) (13,525,747) (100,373,794) (10,362,372) (86,202,428) ---------- ------------ ----------- ------------ ----------- ------------- ----------- ------------ Net increase.... 1,641,196 $11,053,046 975,736 $ 3,382,512 5,601,301 $ 39,156,319 16,380,549 $134,045,978 ========== ============ =========== ============ =========== ============= =========== ============
(a) Shares of SAHYP were redesignated as Class A shares of High Income Fund. (b) Commencement of sale of respective class of shares. * Shares reflect a 1.174107276-for-1 stock split effective October 1, 1993. 36 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued)
TAX EXEMPT INSURED FUND --------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ----------------------------------------------- FOR THE FOR THE FIVE FOR THE FOR THE FIVE YEAR ENDED MONTHS ENDED YEAR ENDED MONTHS ENDED MARCH 31, 1995 MARCH 31, 1994 MARCH 31, 1995 MARCH 31, 1994 ------------------------ ------------------------ ---------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ --------- ----------- --------- ------------ Shares sold......... 1,153,762 $ 13,706,273 881,905 $ 11,156,175 1,052,706 $12,534,448 1,432,092 $ 18,041,232 Reinvested dividends.......... 353,885 4,191,241 169,879 2,142,357 52,888 626,133 10,874 136,709 Shares redeemed..... (3,966,717) (46,779,234) (2,182,075) (27,503,059) (701,719) (8,287,841) (90,440) (1,121,691) ---------- ------------ ---------- ------------ --------- ----------- --------- ------------ Net increase (decrease)......... (2,459,070) $(28,881,720) (1,130,291) $(14,204,527) 403,875 $ 4,872,740 1,352,526 $ 17,056,250 ========== ============ ========== ============ ========= =========== ========= ============
Note 10. Commitments and Contingencies State Street Bank and Trust Company has established an uncommitted line of credit with the SunAmerica Family of Mutual Funds with interest payable at the Federal Funds rate plus 100 basis points with respect to the U.S. Government Securities Fund, and Federal Securities Fund, and Federal Funds rate plus 125 basis points with respect to the Diversified Income Fund and the High Income Fund. Effective February 1, 1995, Tax Exempt Insured Fund was removed from the existing line of credit arrangement. Borrowings under the line of credit will commence when the Fund's cash shortfall exceeds $100,000. The U.S. Government Securities Fund, Diversified Income Fund, and Tax Exempt Insured Fund periodically utilized the uncommitted line of credit and incurred interest expense of $721, $4,162 and $10,217, respectively, for the year ended March 31, 1995. During the year ended March 31, 1995, the High Income Fund had borrowings outstanding for 141 days under the line of credit and incurred $143,946 in interest charges related to these borrowings. The High Income Fund's average amount of debt under the line of credit during the year ended March 31, 1995, was $6,169,053 at a weighted average interest of 6.04%. The Funds did not have any outstanding borrowings at March 31, 1995. Note 11. Trustees Retirement Plan The Trustees (and Directors) of the SunAmerica Family of Mutual Funds have adopted the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the "Retirement Plan") effective January 1, 1993 for the unaffiliated Trustees. The Retirement Plan provides generally that if an unaffiliated Trustee who has at least 10 years of consecutive service as a Disinterested Trustee of any of the SunAmerica mutual funds (an "Eligible Trustee") retires after reaching age 60 but before age 70 or dies while a Trustee, such person will be eligible to receive a retirement or death benefit from each SunAmerica mutual fund with respect to which he or she is an Eligible Trustee. As of each birthday, prior to the 70th birthday, each Eligible Trustee will be credited with an amount equal to (i) 50% of his or her regular fees (excluding committee fees) for services as a Disinterested Trustee of each SunAmerica mutual fund for the calendar year in which such birthday occurs, plus (ii) 8.5% of any amounts credited under clause (i) during prior years. An Eligible Trustee may receive any benefits payable under the Retirement Plan, at his or her election, either in one lump sum or in up to fifteen annual installments. For the year ended March 31, 1995, the Funds had accrued and expensed $13,165, $1,119, $1,936, $2,258 and $2,486 for the U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund, respectively, for the Retirement Plan which is included in accrued expenses on the Statement of Assets and Liabilities. 37 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (continued) Note 12. Legal Matters High Income Fund Class B and U.S. Government Securities Fund Class B, as successors to SAHIF and SAUSGF series, respectively, of SunAmerica Fund Group ("Fund Group") (the successor to Equitec Siebel Fund Group), are, pursuant to Fund Group's By-Laws (and other documents executed pursuant thereto) obligated, under certain circumstances, to indemnify their officers and trustees for reasonable legal fees and expenses that such persons might incur in connection with their fund-related activities (as used in this Note 12, High Income Fund Class B and U.S. Government Securities Fund Class B shall herein after be referred to as the "Funds"). In connection therewith, and subject to certain conditions, the Funds may advance such expenses before a final determination has been made that indemnification is required, subject to recoupment if it is later determined that the indemnified party is not entitled to such indemnification by reason of conduct deemed to constitute gross negligence, willful misfeasance or reckless disregard of his or her duties as an officer or trustee; provided, however, that such advancement is secured by appropriate collateral. On November 8, 1993, the Trustees of Income Funds determined, based upon an opinion of independent counsel, that the former trustees of Fund Group were entitled to indemnification and, as such, the collateral which they had posted to secure the advancement of legal costs should be returned to them. Further, the Trustees reviewed and made a determination as to the reasonableness of the legal bills submitted by the former trustees for indemnification. They determined, based on various factors, that, in the aggregate for the three trustees, of the $691,609 claim for indemnification, $488,831 constituted a reasonable amount for legal fees and expenses, and they have authorized the Funds to pay a pro rata portion of such amount based on their net assets. Final payments were made in the amount of $231,879 and $25,450 for the U.S. Government Fund and High Income Fund, respectively, and any collateral posted by the former trustees to receive the advancement of legal fees has been returned to them. On February 11, 1994, the Trustees of Income Funds determined, based on an opinion of independent counsel, that a former officer was entitled to indemnification. Further, the Trustees reviewed and made a determination as to the reasonableness of the legal bills submitted by the former officer for indemnification. They determined, based on various factors, that the entire amount claimed for indemnification, $42,076, constituted a reasonable amount for legal fees and expenses, and they have authorized the Funds to pay a pro rata portion of such amount based on their net assets. Payment was made in the amount of $34,502 and $3,787 for the U.S. Government Securities Fund and High Income Fund, respectively. On May 20, 1994, the Trustees of Income Funds determined, based on an opinion of independent counsel, that two former officers were entitled to indemnification. Further, the Trustees reviewed and made a determination as to the reasonableness of the legal bills submitted by such former officers for indemnification. They determined, based on various factors, that the entire amount claimed for indemnification, $87,897, constituted a reasonable amount for legal fees and expenses, and they have authorized the Funds to pay a pro rata portion of such amount based on their net assets. Payment was made in the amount of $72,076 and $7,911 for the U.S. Government Securities Fund and High Income Fund, respectively. 38 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1995 -- (concluded) Pursuant to the agreements executed in connection with the acquisition transaction described in Note 3 above, certain sums relating to the purchase price were held in reserve in the event that certain specified contingencies arose after the consummation of the transaction. Fund Group has made a claim against, and received funds from, the holdback account in the amount of $686,970 relating to the indemnification of the former Fund Group trustees and officer, as described above, plus direct legal fees and expenses incurred by the Funds in the matter. The Funds have received a pro rata portion based on net assets of any monies received from this claim. Because these payments and accruals represent extraordinary legal expenses, they are not subject to the expense limitation discussed in Note 6 above. 39 SUNAMERICA INCOME FUNDS REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and Shareholders of SunAmerica Income Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund (constituting the SunAmerica Income Funds, hereafter referred to as the "Fund") at March 31, 1995, the results of each of their operations for the year then ended and the changes in each of their net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at March 31, 1995 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York May 11, 1995 SHAREHOLDER TAX INFORMATION Certain tax information regarding the SunAmerica Income Funds is required to be provided to shareholders based upon each Fund's income and distributions for the taxable periods ended March 31, 1995. The information and distributions reported herein may differ from the information and distributions taxable to the shareholders for the calendar year ending December 31, 1995. The information necessary to complete your income tax returns will be included with your Form 1099-DIV to be received under separate cover in January 1996. FOR THE YEAR ENDED MARCH 31, 1995: During the year ended March 31, 1995 Tax Exempt Insured Fund paid tax exempt interest dividends of $.62 per share to Class A shareholders and $.54 per share to Class B shareholders. For the year ended March 31, 1995, 2.3% of the dividends paid from ordinary income by High Income Fund qualified for the 70% dividends received deductions for corporations. 40 SUNAMERICA INCOME FUNDS COMPARISONS: PORTFOLIOS VS. INDICES As required by the Securities and Exchange Commission, the following graphs compare the performance of a $10,000 investment in the SunAmerica Income Funds' portfolios to a similar investment in an index. Please note that "inception" as used herein reflects the date a Fund commenced operations without regard to when a second class of shares was introduced. For comparative graphical purposes, however, we have assumed that each class of shares' historical performance began on the original inception date and runs up to the point that a new class of shares commenced operations. At such time performance between the classes differs. Each index has been chosen by the particular portfolio's manager as an appropriate comparison and is accompanied by a brief discussion from the portfolio manager about why the portfolio performed the way it did relative to the index. U.S. GOVERNMENT SECURITIES FUND
U.S. Government Securities Lehman Bros. Class A* Class B* Government Index Inception* 10000 10000 10000 6/86 10030 10030 10951 10705 10705 11402 6/88 11416 11416 12220 12173 12173 13693 6/90 13099 13099 14643 14350 14350 16129 6/92 15545 15545 18349 16400 16400 20715 16536 3/94 16923 16441 20673 3/95 17061 16974 21565
*Inception dates for Class A and Class B are 10/01/93 and 3/03/86, respectively.
U.S. Government Securities Fund Class Class Average Annual Total Returns A B 1 Year Return -1.05% -0.88% 5 Year Return N/A 5.30% Since Inception -1.15% 6.00%
Manager's Comments: U.S. Government Fund is managed to provide a relatively stable net asset value and high current income. This strategy is intended to produce better performance on a relative basis when interest rates rise. When interest rates decline, the Fund should underperform. This is due to the Fund's shorter duration than the Lehman Brothers Government Index. Over the course of the fiscal year, the Fund performed well as interest rates initially rose and the shorter duration helped reduce the net asset value volatility. However, the sharp decline in rates which began in December of 1994 and has continued into 1995 has caused the performance to slightly trail the Index. Over the last twelve months ended March 31, 1995, the Fund ranked 83 out of 151 U.S. Government Funds monitored by Lipper Analytical Services. FEDERAL SECURITIES FUND
Federal Securities Salomon Bros. Class A* Class B* GNMA Index 10000 10000 10000 3/86 11919 11919 12853 3/87 12752 12752 14232 3/88 13199 13199 15038 3/89 13683 13683 15856 3/90 15181 15181 18119 3/91 17121 17121 20686 3/92 18931 18931 23194 3/93 20457 20457 25837 20498 3/94 20764 20276 26157 3/95 21112 21049 27793
*Inception dates for Class A and Class B are 10/11/93 and 4/25/83, respectively.
Federal Securities Class Class Average Annual Total Returns A B 1 Year Return -0.77% -0.34% 5 Year Return N/A 6.23% 10 Year Return N/A 7.73% Since Inception -1.27% 8.14%
Manager's Comments: The Federal Securities Fund is currently managed as a total return GNMA Fund. The Fund performed well during most of 1994 as the duration of the Fund was shorter than the Salomon Brothers GNMA Index. However, the Fund's duration was too short entering the rally in December 1994, resulting in one year performance slightly below the average. On a pure group analysis, the Fund had a calender year-to-date rank of 37 out of 58 GNMA Funds monitored by Lipper Analytical Services. 41 SUNAMERICA INCOME FUNDS COMPARISONS: PORTFOLIOS VS. INDICES -- (continued) DIVERSIFIED INCOME FUND
Diversified Lehman Bros. Salomon Bros. Salomon Bros. Merrill Lynch Income Government High Yield World Bond High Yield Class A* Class B* Index Market Index Index Bond Index Inception 10000 10000 10000 10000 10000 10000 10/91 10340 10340 10691 11331 10872 11176 10/92 10356 10356 11795 13304 12428 13155 10/93 11692 11692 13344 15996 14688 15593 11548 3/94 10879 11398 12850 15799 14264 15699 3/95 10799 10775 13404 16824 15995 16895
*Inception dates for Class A and Class B are 10/05/93 and 4/06/91, respectively.
Diversified Income Class Class Average Annual Total Returns A B 1 Year Return -9.61% -9.24% Since Inception -7.43% 1.37%
Manager's Comments: The Diversified Income Fund's current primary investment objective is a high level of current income consistent with moderate investment risk. In the fiscal year ended March 31, 1995, the Fund underperformed its comparative indices due to poor credit selection in the yield bond allocation and exposure to Latin American bond markets, which declined substantially from December to March. Please note that the Fund's investment objective was changed at the end of 1992. Therefore, comparisons between the Fund and the respective indices for the period from inception through the end of 1992 do not reflect the implementation of the current investment objectives of the Fund. HIGH INCOME FUND
High Income Salomon Bros. High Merrill Lynch High Class A* Class B* Yield Market Index Yield Bond Index Inception* 10000 10000 10000 10000 3/87 10508 10508 11047 10900 3/88 10643 10643 11594 11373 3/89 11835 11835 12762 12506 3/90 10599 10599 12233 12503 3/91 11607 11607 13946 13877 3/92 15700 15700 17954 17677 3/93 18062 18062 21035 20627 19144 3/94 19713 19616 22773 22560 3/95 19278 18944 24251 24279
*Inception dates for Class A and Class B are 9/19/86 and 10/01/93, respectively.
High Income Class Class Average Annual Total Returns A B 1 Year Return -7.52% -7.28% 5 Year Return 11.46% N/A Since Inception 7.41% -3.36%
Manager's Comments: The High Income Fund has underperformed the Merrill Lynch High Yield Bond Index and the Salomon Brothers High Yield Market Index for the period illustrated. The Indices are unaffected by expenses typically associated with managing a fund and would outperform any fund which simply owned all of the securities that comprise the Indices. The Fund seeks maximum current income by investing primarily in high yield, high risk corporate bonds. Over the last twelve months, the Fund has underperformed the Indices due primarily to poor credit selection. Recently, however, the Fund's performance has improved, resulting in a calendar year-to- date rank of 16 out of 112 High Yield Funds as monitored by Lipper Analytical Services. 42 SUNAMERICA INCOME FUNDS COMPARISONS: PORTFOLIOS VS. INDICES -- (continued) TAX EXEMPT INSURED FUND
Tax Exempt Insured Lehman Bros. Class A* Class B* Municipal Bond Index Inception 10000 10000 10000 10/86 11160 11160 11733 10/87 10849 10849 11634 10/88 12506 12506 13327 10/89 13448 13448 14405 10/90 14292 14292 15474 10/91 15525 15525 17358 10/92 16446 16446 18816 10/93 18083 18073 21463 3/94 17250 17157 20531 3/95 18452 18236 22063
*Inception dates for Class A and Class B are 11/22/85 and 10/04/93, respectively.
Tax Exempt Insured Class Class Average Annual Total Returns A B 1 Year Return 1.89% 2.04% 5 Year Return 4.89% N/A Since Inception 6.23% -2.10%
Manager's Comments: The investment objective of the Tax Exempt Insured Fund remains designed to produce a lower price volatility relative to the Fund's Lipper Analytical Services peer group average. This is accomplished by keeping a shorter duration than the Lehman Brothers Municipal Bond Index, enabling the Fund to be less sensitive to interest rate changes. The Fund also continues to be invested in high quality municipal securities with an average maturity of 17 years. This low volatility structure allowed the Fund to outperform its Lipper peer group average over the 12 months ended March 31, 1995, and achieve a rank of 15 out of 41 Insured Municipal Funds. 43 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits. (a) Financial Statements: Set forth in Part B of Registrant's Statement of Additional Information are the financial statements for the SunAmerica Income Funds for the fiscal year ended March 31, 1995. Selected per share data and ratios are set forth in Part A of the Prospectus under the caption "Financial Highlights." No financial statements are included in Part C. All other financial statements, schedules and historical financial information are omitted because the conditions requiring their filing do not exist. (b) Exhibits: (1) Declaration of Trust, as amended (2) By-Laws, as amended (3) Inapplicable. (4) Specimen Certificates. Incorporated herein by reference to Post-Effective Amendment No. 17 to Registrant's Registration Statement on form N-1A filed on April 29, 1994. (5) Investment Advisory and Management Agreement between Registrant and SunAmerica Asset Management Corp. ("SunAmerica"). (6) (a) Distribution Agreement between Registrant and SunAmerica Capital Services, Inc. (b) Dealer Agreement. Incorporated herein by reference to Post- Effective Amendment No. 1 to Registrant's Registration Statement on form N-1A filed on August 21, 1986. (7) Directors'/Trustees' Retirement Plan. Incorporated herein by reference to Post-Effective Amendment No. 17 to Registrant's Registration Statement on form N-1A filed on April 29, 1994. (8) Custodian Agreement between Registrant and State Street Bank and Trust Company. Incorporated herein by reference to Registrant's Registration Statement on form N-1A filed on June 16, 1986. (9) (a) Transfer Agency and Service Agreement between Registrant and State Street Bank and Trust Company. Incorporated herein by reference to Registrant's Registration Statement on form N-1A filed on June 16, 1986. (b) Service Agreement between Registrant and SunAmerica Fund Services, Inc. (10) Opinion of Counsel. (11) Consent of Independent Accountants. (12) Inapplicable. (13) Inapplicable. (14) Model Retirement Plan. (15) Distribution Plans pursuant to Rule 12b-1 (Class A Shares and Class B Shares). Incorporated herein by reference to Post-Effective Amendment No. 1 to Registrant's Registration Statement on form N-1A filed on August 21, 1986. (16) Schedule of Computation of Performance Quotations. (17) Powers of Attorney. Item 25. Persons Controlled By or Under Common Control with Registrant. There are no persons controlled by or under common control with Registrant. Item 26. Number of Holders of Securities.
Class A Shares Class B Shares Number of Record Number of Record Holders as of Holders as of Title of Class July 21, 1995 July 21, 1995 - ------------------------------- ---------------- ---------------- Government Securities Fund 6,136 23,023 Shares of Beneficial Interest ($.01 par value)
C-2
Class A Shares Class B Shares Number of Record Number of Record Holders as of Holders as of Title of Class July 21, 1995 July 21, 1995 - ------------------------------- ---------------- ---------------- Federal Securities Fund 3,708 2,370 Shares of Beneficial Interest ($.01 par value) Diversified Income Fund 1,017 6,480 Shares of Beneficial Interest ($.01 par value) High Income Fund 3,145 5,627 Shares of Beneficial Interest ($.01 par value) Tax Exempt Insured Fund 4,149 652 Shares of Beneficial Interest
($.01 par value) Item 27. Indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933, (the "Act") may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such trustee, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. C-3 Item 28. Business and Other Connections of the Investment Adviser. Information concerning business and other connections of SunAmerica Asset Management Corp. ("SunAmerica") is incorporated herein by reference to SunAmerica's Form ADV (File No. 801-19813), which is currently on file with the Securities and Exchange Commission. Reference is also made to the caption "Management of the Fund" in the Prospectus constituting Part A of the Registration Statement and "Investment Adviser and Distributor" and "Trustees and Officers" constituting Part B of the Registration Statement. Item 29. Principal Underwriters. (a) The principal underwriter of the Registrant also acts as principal underwriter for: SunAmerica Equity Funds SunAmerica Money Market Funds, Inc. (b) The following persons are the officers and directors of SunAmerica Capital Services, Inc., the principal underwriter of Registrant's Shares:
Position Name and Principal Position with the Business Address With Underwriter Registrant - --------------------- ---------------- ---------- Mathew H. Lobas President and None 733 Third Avenue Director New York, NY 10017 Gary R. Croatt Executive Vice None 733 Third Avenue President New York, NY 10017 Robert M. Zakem Executive Vice Secretary 733 Third Avenue President and New York, NY 10017 Director
C-4
Position Name and Principal Position with the Business Address With Underwriter Registrant - ----------------------------------- ---------------- -------------- Peter A. Harbeck Executive Vice Executive Vice 733 Third Avenue President President New York, NY 10017 Susan L. Harris Secretary None SunAmerica Inc. 1 SunAmerica Center, Century City Los Angeles, CA 90067-6022 Stephen E. Rothstein Treasurer None 733 Third Avenue New York, NY 10017
(c) Inapplicable. Item 30. Location of Accounts and Records. SunAmerica Asset Management Corp., 733 Third Avenue, New York, NY 10017-3204, or an affiliate thereof, will maintain physical possession of each such account, book or other document of Registrant, except for those maintained by Registrant's custodian, State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, MA 02171, and its affiliate National Financial Data Services, P.O. Box 419562, Kansas City, MO 64141-6572. Item 31. Management Services. Inapplicable. Item 32. Undertakings. (c) The Registrant hereby undertakes to furnish, upon request and without charge, to each person to whom a Prospectus is delivered a copy of the Registrant's latest annual report to shareholders. C-5 SIGNATURES ---------- Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, Registrant certifies that it meets all of the requirements for effectiveness of the Post-Effective Amendment No. 20 to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and that Registrant has duly caused the Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 26th day of July, 1995. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck, President Pursuant to the requirements of the Securities Act of 1933, the Post- Effective Amendment No. 20 to Registrant's Registration Statement on Form N-1A has been signed below by the following persons in the capacities and on the dates indicated. /s/Peter A. Harbeck President (Principal July 27, 1995 Peter A. Harbeck Executive Officer) /s/ * Controller (Principal July 27, 1995 Peter C. Sutton Financial and Accounting Officer) /s/ * Trustee July 27, 1995 S. James Coppersmith /s/ * Chairman of the Board July 27, 1995 Samuel M. Eisenstat /s/ * Trustee July 27, 1995 Stephen J. Gutman /s/ * Trustee July 27, 1995 Sebastiano Sterpa /s/ * Trustee July 27, 1995 Jay S. Wintrob /s/ * Trustee July 27, 1995 Eli Broad *By:/s/Robert M. Zakem Robert M. Zakem, Attorney-in-Fact C-6 SUNAMERICA INCOME FUNDS EXHIBIT INDEX Exhibit No. Name Page No. 1 Declaration of Trust and Amendments Thereto 2 By-Laws and Amendments Thereto 5 Investment Advisory and Management Agreement 6 Distribution Agreement 9 Service Agreement 10 Opinion of Counsel 11 Consent of Independent Auditors 14 Model Retirement Plan 16 Schedule for Computation of Performance Quotations 24 Powers of Attorney EX-24 2 POWERS OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and trustees of SunAmerica Income Funds do hereby severally constitute and appoint Peter A. Harbeck, Peter C. Sutton and Robert M. Zakem or any of them, the true and lawful agents and attorneys- in-fact of the undersigned with respect to all matters arising in connection with the Registration Statement on Form N-1A and any and all amendments (including post-effective amendments) thereto, with full power and authority to execute said Registration Statement for and on behalf of the undersigned, in our names and in the capacities indicated below, and to file the same, together with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. The undersigned hereby give to said agents and attorneys-in-fact full power and authority to act in the premises, including, but not limited to, the power to appoint a substitute or substitutes to act hereunder with the same power and authority as said agents and attorneys-in fact would have if personally acting. The undersigned hereby ratify and confirm all that said agents and attorneys-in-fact, or any substitute or substitutes, may do by virtue hereof. WITNESS the due execution hereof on the date and in the capacities set forth below. Signature Title Date - --------- ----- ---- /s/Peter A. Harbeck President November 30, 1994 Peter A. Harbeck (Principal Executive Officer) /s/Peter C. Sutton Controller (Principal November 30, 1994 Peter C. Sutton Financial and Accounting Officer) /s/S. James Coppersmith Trustee November 30, 1994 S. James Coppersmith /s/Samuel M. Eisenstat Trustee November 30, 1994 Samuel M. Eisenstat /s/Stephen J. Gutman Trustee November 30, 1994 Stephen J. Gutman /s/Jay S. Wintrob Trustee November 30, 1994 Jay S. Wintrob /s/Sebastiano Sterpa Trustee November 30, 1994 Sebastiano Sterpa /s/Eli Broad Trustee November 30, 1994 Eli Broad EX-27.1A 3 FDS US GOVERNMENT A
6 021 US GOVERNMENT SECURITIES FUND CLASS A 12-MOS MAR-31-1995 APR-1-1994 MAR-31-1995 786,348,231 780,224,254 10,471,829 41,174 333 790,737,590 0 0 122,559,228 122,559,228 0 722,395,970 8,916,920 9,133,163 (1,295,646) 0 (46,797,985) 0 (6,123,977) 668,178,362 0 69,875,267 0 (16,292,213) 53,583,054 (45,098,323) 12,685,155 21,169,886 0 (40,005,060) 0 0 2,544,560 (3,015,559) 254,756 (294,497,260) (1,886,428) (14,686,874) 0 0 (5,033,634) (678,771) (16,547,745) 71,819,031 8.39 .61 (.30) (.47) 0 0 8.23 1.46 0 0 Information given pertains to the SunAmerica US Government Securities Fund as a whole. Information given pertains to the SunAmerica US Government Securities Fund as whole.
EX-27.1B 4 FDS US GOVERNMENT B
6 022 US GOVERNMENT SECURITIES FUND CLASS B 12-MOS MAR-31-1995 APR-1-1994 MAR-31-1995 786,348,231 780,224,254 10,471,829 41,174 333 790,737,590 0 0 122,559,228 122,559,228 0 722,395,970 72,221,541 105,630,084 (1,295,646) 0 (46,797,985) 0 (6,123,977) 668,178,362 0 69,875,267 0 (16,292,213) 53,583,054 (45,098,323) 12,685,155 21,169,886 0 (40,005,060) 0 0 10,324,909 (46,389,311) 2,655,859 (294,497,260) (1,886,428) (14,686,874) 0 0 (5,033,634) (678,771) (16,547,745) 708,841,873 8.39 .56 (.30) (.41) 0 0 8.24 2.15 0 0 Information given pertains to the SunAmerica US Government Securities Fund as a whole. Information given pertains to the SunAmerica US Government Securities Fund Class B.
EX-27.2A 5 FDS FEDERAL SECURITIES A
6 031 FEDERAL SECURITIES FUND CLASS A 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 81,166,857 80,830,305 1,663,041 28,889 7,287 82,529,522 0 0 10,639,254 10,639,254 0 76,410,363 626,947 57,917 (99,141) 0 (4,084,402) 0 (336,552) 71,890,268 0 6,094,155 0 1,470,776 4,623,379 (3,546,056) 1,261,503 2,338,826 0 4,265,169 0 0 859,631 (294,336) 3,735 (9,712,266) (154,916) (840,781) 0 0 365,395 21,542 1,491,730 1,666,152 10.22 .60 (.20) (.64) 0 0 9.98 1.40 0 0 Information given pertains to the SunAmerica Federal Securities Fund as a whole. Information given pertains to SunAmerica Federal Securities Fund Class A.
EX-27.2B 6 FDS FEDERAL SECURITIES B
6 032 SUNAMERICA FEDERAL SECURITIES CLASS B 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 81,166,857 80,830,305 1,663,041 28,889 7,287 82,529,522 0 0 10,639,254 10,639,254 0 76,410,363 6,559,217 7,926,042 (99,141) 0 (4,084,402) 0 (336,552) 71,890,268 0 6,094,155 0 1,470,776 4,623,379 (3,546,056) 1,261,503 2,338,826 0 4,265,169 0 0 895,438 (2,574,743) 312,480 (9,712,266) (154,916) (840,781) 0 0 365,395 21,542 1,491,730 71,199,477 10.22 .63 (.26) (.58) 0 0 10.01 2.03 0 0 Information given pertains to the SunAmerica Federal Securities Fund as a whole. Information given pertains to SunAmerica Federal Securities Fund Class B.
EX-27.3A 7 FDS DIVERSIFIED INCOME A
6 041 SUNAMERICA DIVERSIFIED INCOME - CLASS A 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 154,874,030 142,786,097 4,827,825 6,080 226 147,620,228 0 0 1,028,810 1,028,810 0 183,649,547 3,429,918 2,632,999 311,611 0 (25,281,914) 0 (12,087,846) 146,591,418 0 19,709,044 0 3,684,740 16,024,304 (24,312,399) (1,938,318) (10,226,413) 0 (15,581,504) 0 0 1,911,715 (1,294,317) 179,521 (40,080,495) (131,169) (969,515) 0 0 1,153,494 143,682 3,684,740 14,976,003 4.79 .43 (.66) (.42) 0 0 4.14 1.59 0 0 Information given pertains to the SunAmerica Diversified Income Fund as a whole. Information given pertains to the SunAmerica Diversified Income Fund Class A.
EX-27.3B 8 FDS DIVERSIFIED INCOME B
6 042 SUNAMERICA DIVERSIFIED INCOME FUND - CLASS B 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 154,874,030 142,786,097 4,827,825 6,080 226 147,620,228 0 0 1,028,810 1,028,810 0 183,649,547 31,867,128 36,324,474 311,631 0 (25,281,914) 0 (12,087,846) 146,591,418 0 19,709,044 0 3,684,470 16,024,304 (24,312,399) (1,938,318) (10,226,413) 0 (15,581,504) 0 0 13,562,550 (19,804,466) 1,784,570 (40,080,495) (131,169) (969,515) 0 0 1,153,494 143,682 3,684,740 162,485,214 4.79 .40 (.65) (.39) 0 0 4.15 2.12 0 0 Information given pertains to the SunAmerica Diversified Income Fund as a whole. Information given pertains to the SunAmerica Diversified Income Fund Class B.
EX-27.4A 9 FDS HIGH INCOME A
6 011 SUNAMERICA HIGH INCOME FUND CLASS A 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 193,550,209 189,507,721 10,192,053 12,034 230 199,712,038 4,870,455 0 1,222,815 6,093,270 0 235,945,543 5,839,531 4,198,335 146,988 0 (38,431,275) 0 (4,042,488) 193,618,768 367,063 19,395,424 0 3,268,573 16,493,914 (22,436,029) 1,186,104 (4,756,011) 0 17,272,194 0 0 4,517,500 (3,162,108) 285,804 28,181,160 661,552 (15,731,530) 0 0 1,192,998 143,908 3,370,779 31,311,083 8.03 .78 (1.03) (.83) 0 0 6.95 1.61 0 0 Information given pertaines to the SunAmerica High Income Fund as a whole. Information given pertains to SunAmerica High Income Fund Class A.
EX-27.4B 10 FDS HIGH INCOME B
6 012 SUNAMERICA HIGH INCOME FUND CLASS B 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 193,550,209 189,507,721 10,192,053 12,034 230 199,712,038 4,870,455 0 1,222,815 6,093,270 0 235,945,543 21,981,850 16,380,549 146,988 0 (38,431,275) 0 (4,042,488) 193,618,768 367,063 19,395,424 0 3,268,573 16,493,914 (22,436,029) 1,186,104 (4,756,011) 0 17,272,194 0 0 18,144,837 (13,525,747) 982,211 28,181,160 661,552 (15,731,530) 0 0 1,192,998 143,908 3,370,779 127,757,089 8.04 .73 (1.02) (.79) 0 0 6.96 2.16 0 0 Information given pertains to the SunAmerica High Income Fund as a whole. Information given pertains to SunAmerica High Income Fund Class B.
EX-27.5A 11 FDS TAX EXEMPT A
6 051 TAX EXEMPT INSURED FUND CLASS A 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 155,440,202 161,619,338 7,622,883 21,939 6,550 169,270,710 4,293,672 0 1,037,204 5,330,876 0 170,284,523 11,370,750 13,829,820 (216,286) 0 (12,307,539) 0 6,179,136 163,939,834 0 11,391,581 0 (2,263,633) 9,127,948 (9,524,226) 11,417,085 11,020,807 0 (9,052,828) 0 0 1,153,762 (3,966,717) 353,885 (22,041,001) (304,804) (3,049,347) 0 0 (874,281) (10,217) (2,324,847) 150,893,570 11.95 .63 .17 (.62) 0 0 12.13 1.2 0 0 Information given pertains to the Sunamerica Tax Exempt Insured Fund as a whole. Information given pertains to Sunamerica Tax Exempt Insured Fund Class A.
EX-27.5B 12 FDS TAX EXEMPT B
6 052 TAX EXEMPT INSURED FUND CLASS B 12-MOS MAR-31-1995 APR-01-1994 MAR-31-1995 155,440,202 161,619,338 7,622,883 21,939 6,550 169,270,710 4,293,672 0 1,037,204 5,330,876 0 170,284,523 2,141,283 1,737,408 (216,286) 0 (12,307,539) 0 6,179,136 163,939,834 0 11,391,581 0 (2,263,633) 9,127,948 (9,524,226) 11,417,085 11,020,807 0 (9,052,828) 0 0 1,052,706 (701,719) 52,888 (22,041,001) (304,804) (3,049,347) 0 0 (874,281) (10,217) (2,324,847) 23,962,615 11.95 .54 .19 (.54) 0 0 12.14 1.92 0 0 Information given pertains to the Sunamerica Tax Exempt Insured Fund as a whole. Information given pertains to the Sunamerica Tax Exempt Insured Fund Class B.
EX-99.B1 13 DECLARATION OF TRUST EXHIBIT 99.B(1) DECLARATION OF TRUST OF INTEGRATED INCOME PORTFOLIOS THE DECLARATION OF TRUST of INTEGRATED INCOME PORTFOLIOS is made the 24th day of April, 1986 by the parties signatory hereto, as trustees (such persons, so long as they shall continue in office in accordance with the terms of this Declaration of Trust, and all other persons who at the time in question have been duly elected or appointed as trustees in accordance with the provisions of this Declaration of Trust and are then in office, being hereinafter called the "Trustees"). W I T N E S S E T H: WHEREAS, the Trustees desire to form a trust fund under the laws of Massachusetts for the investment and reinvestment of funds contributed thereto; and WHEREAS, it is proposed that the beneficial interest in the trust assets be divided into transferable shares of beneficial interest as hereinafter provided; NOW, THEREFORE, the Trustees hereby declare that they will hold in trust all money and property contributed to the trust fund to manage and dispose of the same for the benefit of the holders from time to time of the shares of beneficial interest issued hereunder and subject to the provisions hereof, to wit: ARTICLE I Name and Definitions 1.1 Name. The name of the trust created hereby (the "Trust") shall be "Integrated Income Portfolios," and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever hereinafter used) shall refer to the Trustees as trustees, and not individually, and shall not refer to the officers, agents, employees or shareholders of the Trust. However, should the Trustees determine that the use of such name is not advisable, they may select such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name. Any name change shall become effective upon the execution by a majority of the then Trustees of an instrument setting forth the new name. Any such instrument shall have the status of an amendment to this Declaration. 1.2. Definitions. As used in this Declaration, the following terms shall have the following meanings: The terms "Affiliated Person," "Assignment," "Commission," "Interested Person" and "Principal Underwriter" shall have the meanings given them in the 1940 Act, as amended from time to time. "Declaration" shall mean this Declaration of Trust as amended from time to time. References in this Declaration to "Declaration," "hereof," "herein" and "hereunder" shall be deemed to refer to the Declaration rather than the article or section in which such words appear. "Fundamental Policies" shall mean the investment objectives, policies and restrictions set forth in the Prospectus or Statement of Additional Information of the Trust and designated therein as policies or restrictions which may be changed only upon a vote of Shareholders of the Trust. "Majority Shareholder Vote" means the vote of the holders of: (I) a majority of Shares represented in person or by proxy and entitled to vote at a meeting of Shareholders at which a quorum, as determined in accordance with the By-Laws, is present and (ii) a majority of Shares issued and outstanding and entitled to vote when action is taken by written consent of Shareholders. For these purposes, however, the term "majority" shall mean a "majority of the outstanding voting securities," as the phrase is defined in the 1940 Act, when any action is required by the 1940 Act by such majority as so defined. "Person" shall mean and include individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Prospectus" and "Statement of Additional Information" shall mean the currently effective Prospectus and Statement of Additional Information of the Trust under the Securities Act of 1933, as amended. "Series" means one of the separately managed components of the Trust as set forth in Section 6.1 hereof or as may be established and designated from time to time by the Trustees pursuant to that section. "Shares" shall mean the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole shares. "Shareholders" shall mean as of any particular time all holders of record of outstanding Shares at such time. "Trustees" shall mean the signatories to this Declaration of Trust, so long as they shall continue in office in accordance with the terms hereof, and all other persons who at the time in question have been duly elected or appointed and have qualified as trustees in accordance with the provisions hereof and are then in office, and reference in this Declaration of Trust to a Trustee or Trustees shall refer to such person or persons in their capacity as trustees hereunder. "Trust Property" shall mean as of any particular time any and all property, real or personal, tangible or intangible, which at such time is owned or held by or for the account of the Trust or the Trustees. The "1940 Act" refers to the Investment Company Act of 1940 and the rules and regulations promulgated thereunder, as amended from time to time. ARTICLE II Trustees 2.1. Number of Trustees. The number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three nor more than fifteen. 2.2. Election, Term. Each Trustee named herein, or elected or appointed hereafter, shall (except in the event of resignation, removal or vacancy) hold office until a successor has been elected or appointed and has qualified to serve as Trustee. Trustees shall have terms of unlimited duration, subject to the resignation and removal provisions of Section 2.3 hereof. Except as herein provided and subject to Section 16(a) of the 1940 Act, Trustees need not be elected by Shareholders, and the Trustees may elect and appoint their own successors and may, pursuant to Section 2.4 hereof, ap- point Trustees to fill vacancies. The Trustees may adopt By-Laws not inconsistent with this Declaration or any provision of law to provide for election of Trustees by Shareholders at such time or times as the Trustees shall determine to be necessary or advisable. Except for the Trustees named herein, an individual may not commence to serve as Trustee except if appointed pursuant to a written instrument signed by a majority of the Trustees then in office or unless elected by Shareholders, and any such election or appointment shall not become effective until the individual appointed or elected shall have accepted such election or appointment and agreed in writing to be bound by the terms of this Declaration of Trust. A Trustee shall be an individual at least 21 years of age who is not under a legal disability. 2.3. Resignation and Removal. Any Trustee may resign his trust (without need for prior or subsequent accounting) by an instrument in writing signed by him and delivered to the other Trustees and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument. Any of the Trustees may be removed (provided the aggregate number of Trustees after such removal shall not be less than the number required by Section 2.1 hereof) with cause, by action of two-thirds of the remaining Trustees or by the action of the Shareholders of record of not less than two-thirds of the Shares outstanding. For purposes of determining the circumstances and procedures under which such removal by the Shareholders may take place, the provisions of Section 16(c) of the 1940 Act shall be applicable to the same extent as if the Trust were subject to the provisions of that Section. Upon the resignation or removal of a Trustees, or his otherwise ceasing to be a Trustee, he shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the incapacity or death of any Trustee, his legal representative shall execute and deliver on his behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. 2.4. Vacancies. The term of office of a Trustee shall terminate and a vacancy s@all occur in the event of the death, resignation, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or removal, of a Trustee. No such vacancy shall operate to annul this Declaration of Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. In the case of a vacancy caused by reason of an increase in the number of Trustees, subject to the provisions of Section 16(a) of the 1940 Act, the remaining Trustees shall fill such vacancy by the appointment of such other person as they, in their discretion, shall see fit. An appointment of a Trustee may be made in anticipation of a vacancy to occur at a later date by reason of retirement, resignation or increase in the number of Trustees. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section 2.4, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by the Declaration. A written instrument certifying the existence of such vacancy signed by a majority of the Trustees shall be conclusive evidence of the existence of such vacancy. 2.5. Meetings. Meetings of the Trustees shall be held from time to time upon the call of the Chairman, if any, the President, the Secretary or any two Trustees of the Trust. Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees. Notice of any other meeting shall be mailed or otherwise given not less than 48 hours before the meeting but may be waived in writing by any Trustee either before or after such meeting. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. The Trustees may act with or without a meeting. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless provided otherwise in this Declaration of Trust or by applicable law, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consents of all of the Trustees. Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be a majority of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members. With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons of the Trust within the meaning of Section 1.2 hereof or otherwise interested in any action to be taken may be counted for quorum purposes under this Section and shall be entitled to vote to the extent permitted by the 1940 Act. All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and participation in a meeting pursuant to such communications systems shall constitute presence in person at such meeting. 2.6. Officers. The Trustees shall annually elect a President, a Secretary and a Treasurer and may elect a Chairman. The Trustees may elect or appoint or authorize the Chairman, if any, or President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. The Chairman and President shall be and the Secretary and Treasurer may, but need not, be a Trustee. 2.7. By-Laws. The Trustees may adopt and from time to time amend or repeal the By-Laws for the conduct of the business of the Trust. 2.8. Delegation of Power to Other Trustees. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six months at any one time to any other Trustee or Trustees; provided that in no case shall less than two Trustees personally exercise the powers granted to the Trustees under the Declaration except as herein otherwise expressly provided. ARTICLE III Powers of Trustees 3.1. General. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Declaration. The Trustees may perform such acts as in their sole discretion are proper for conducting the business of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustees may be exercised without order of or resort to any court. 3.2. Investments. The Trustees shall have power, subject to the Fundamental Policies, to: (a) conduct, operate and carry on the business of an in- vestment company; (b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute or otherwise deal in or dispose of securities and other investments and assets of whatever kind, or retain Trust assets in cash and from time to time change the investments of the assets of the Trust, and exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments and assets of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations or corporations to exercise any of said rights, powers and privileges in respect of any of said investments and assets. The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries. 3.3. Legal Title. Legal title to all Trust Property shall be vested in the Trustees as joint tenants, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each person who may hereafter become a Trustee. Upon the resignation, removal or death of a Trustee he shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. 3.4. Issuance and Repurchase of Securities. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares, including shares in fractional denominations, and, subject to the more detailed provisions set forth in Articles VIII and IX, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the Trust whether capital or surplus or otherwise, to the full extent now or hereafter permitted by the laws of the Commonwealth of Massachusetts governing business corporations. 3.5. Borrow Money; Lend Assets. Subject to the Fundamental Policies, the Trustees shall have power to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee or undertake the performance of any obligation, contract or engagement of any other Person and to lend Trust assets. 3.6. Delegation; Committees. The Trustees shall have power, consistent with their continuing exclusive authority over the management of the Trust and the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or names of the Trustees or otherwise as the Trustees may deem expedient, to the same extent as such delegation is permitted to directors of a Massachusetts business corporation and is permitted by the 1940 Act. 3.7. Collection and Payment. The Trustees shall have power to collect all property due to the Trust; and to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments. 3.8. Expenses. The Trustees shall have power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration of Trust, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees. The Trustees may pay themselves such compensation for special services, including legal, underwriting, syndicating and brokerage services, as they in good faith may deem reasonable and reimbursement for expenses reasonably incurred by themselves on behalf of the Trust. 3.9. Miscellaneous Powers. The Trustees shall have the power to: (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust and terminate such employees or contractual relationships as they consider appropriate; (b) enter into joint ventures, partnerships and any other combinations or associations; (c) remove Trustees or fill vacancies in or add to their number, elect and remove such officers and appoint and terminate such agents or employees as they consider appropriate, and appoint from their own number, and terminate, any one or more committees which may exercise some or all of the power and authority of the Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust Property, insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers, distributors, selected dealers or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust would have the power to indemnify such Person against such liability; (e) establish pension, profit-sharing, share purchase and other retirement, incentive and benefit plans for any Trustees, officers, employees and agents of the Trust; (f) make donations, irrespective of benefit to the Trust, for charitable, religious, educational, scientific, civic or similar purposes; (g) to the extent permitted by law, indemnify any Person with whom the Trust has dealings, including the investment adviser, distributor, transfer agent and selected dealers, to such extent as the Trustees shall determine; (h) guarantee indebtedness or contractual obligations of others; (I) determine and change the fiscal year of the Trust and the method in which its accounts shall be kept; (j) adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust; and (k) call for meetings of Shareholders as may be necessary or appropriate. 3.10. Further Powers. The Trustees shall have power to conduct the business of the trust and carry on its operations in any and all of its branches and maintain offices both within and without the Commonwealth of Massachusetts, in any and all states of the United States of America, in the District of Columbia, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with the Trust Property. 3.11. Principal Transactions. Except in transactions permitted by the 1940 Act or any rule or regulation thereunder, or any order of exemption issued by the Commission, or effected to implement the provisions of any agreement to which the Trust is a party, the Trustees shall not knowingly, on behalf of the Trust, buy any securities (other than Shares) from or sell any securities (other than Shares) to, or lend any assets of the Trust to, any Trustee or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with any investment adviser, distributor or transfer agent or with any Affiliated Person of such Person; but the Trust may employ any such Person, or firm or company in which such Person is an Interested Person, as broker, legal counsel, registrar, transfer agent, dividend disbursing agent or custodian upon customary terms. 3.12. Litigation. The Trustees shall have the power to engage in and to prosecute, defend, compromise, abandon, or adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes, claims and demands relating to the Trust, and out of the assets of the Trust to pay or to satisfy any debts, claims or expenses incurred in connection therewith, including those of litigation, and such power shall include without limitation the power of the Trustees or any appropriate committee thereof, in the exercise of their or its good faith business judgment, to dismiss any action, suit, proceeding, dispute, claim or demand, derivative or otherwise, brought by any person, including a Shareholder in its own name or the name of the Trust, whether or not the Trust or any of the Trustees may be named individually therein or the subject matter arises by reason of business for or on behalf of the Trust. ARTICLE IV Management and Distribution Arrangements 4.1. Management Arrangements. Subject to approval by a Majority Shareholder Vote, the Trustees may in their discretion from time to time enter into advisory, administration or management contracts whereby the other party to such contract shall undertake to furnish such advisory, administrative, management, accounting, legal, statistical and research facilities and services, promotional or marketing activities, and such other facilities and services, if any, as the Trustees shall from time to time consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any provisions of this Declaration of Trust, the Trustees may authorize any adviser, administrator or manager (subject to such general or specific instructions as the Trustees may from time to time adopt) to effect purchases, sales, loans or exchanges of portfolio securities of the Trust on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of any such adviser, administrator or manager (all without further action by the Trustees). Any such purchases, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may, in their sole discretion, call a meeting of Shareholders in order to submit to a vote of Shareholders at such meeting the approval or continuance of any such investment advisory, management or other contract. 4.2. Administrative Services. The Trustees may in their discretion from time to time contract for administrative personnel and services whereby the other party shall agree to provide to the Trustees or the Trust administrative personnel and services to operate the Trust on a daily or other basis on such terms and conditions as the Trustees may in their discretion determine. Such services may be provided by one or more persons or entities. 4.3. Distribution Arrangements. The Trustees may in their discretion from time to time enter into a contract, providing for the sale of the Shares of the Trust to net the Trust not less than the par value per share, whereby the Trust may either agree to sell the Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article IV or the By-Laws; and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust and may provide that such other party may enter into selected dealer agreements with registered securities dealers to further the purpose of the distribution or repurchase of the Shares. 4.4. Parties to Contract. Any contract of the character described in Sections 4.1, 4.2 or 4.3 of this Article IV or in Article VI or VII hereof may be entered into with any corporation, firm, trust or association, although one or more of the Trustees or officers of the Trust may be an officer, director, Trustee, shareholder, employee or member of such other party to the contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same person (including a firm, corporation, trust or association) may be the other party to contracts entered into pursuant to Sections 4.1, 4.2 or 4.3 above or Article VI or VII, and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.4. 4.5. Provisions and Amendments. Any contract entered into pursuant to Sections 4.1, 4.2 or 4.3 of this Article IV shall be consistent with and subject to all applicable requirements of the 1940 Act with respect to its adoption, continuance, termination and the method of authorization and approval of such contract or renewal thereof, and no amendment to any contract entered into pursuant to such sections shall be effective unless entered into in accordance with applicable provisions of the 1940 Act. ARTICLE V Limitations of Liability of Shareholders, Trustees and Others 5.1. No Personal Liability of Shareholders, Trustees, etc. No Shareholder, as such, shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability, he shall not on account thereof be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expen- ses reasonably incurred by him in connection with any such claim or liability. The rights accruing to a Shareholder under this Section 5.1 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. 5.2. Non-Liability of Trustees, etc. No Trustee, officer, em- ployee or agent of the Trust shall be liable to the Trust, its Shareholders or to any Shareholder, Trustee, officer, employee or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. 5.3. Indemnification. The Trustees shall provide for indemnification by the Trust of any person who is, or has been a Trustee, officer, employee or agent of the Trust against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee, officer, employee or agent and against amounts paid or incurred by him in the settlement thereof, in such manner as the Trustees may provide from time to time in the By-Laws. The words "claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. 5.4. No Bond Required of Trustees. No Trustee, as such, shall be obligated to give any bond or surety or other security for the performance of any of his duties hereunder. 5.5. No Duty of Investigation; Notice in Trust, Instruments, etc. No purchaser, tender, transfer agent or other person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, loaned or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obliga- tion, contract, instrument 9 certificate, Share, other security of the Trust or undertaking, and every other act or thing whatsoever executed in connection with the Trust shall be conclusively taken to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration of Trust or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate, Share, other security of the Trust or undertaking made or issued by the Trustees or by any officers, employees or agents of the Trust, in their capacity as such, shall contain an appropriate recital to the effect that the Shareholders, Trustees, officers, employees and agents of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had t their private property for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to the Declaration of Trust, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, Shareholders, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, its Shareholders, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable. 5.6. Reliance on Experts, etc. Each Trustee and officer or employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by any investment adviser, distributor, transfer agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee. ARTICLE VI Shares of Beneficial Interest 6.1. Beneficial Interest. The interest of the beneficiaries hereunder shall be divided into transferable shares of beneficial interest, with par value $.01 per share. The number of such shares of beneficial interest authorized hereunder is unlimited. The Trustees may initially issue whole and fractional shares of a single class, each of which shall represent an equal proportionate share in the Trust with each other Share. As provided by the provisions of Section 6.9 hereof, the Trustees may authorize the creation of series of shares (the proceeds of which may be invested in separate, independently managed portfolios) and additional classes of shares within any series. All Shares issued hereunder including, without limitation, Shares issued in connection with a dividend in Shares or a split of Shares, shall be fully paid and nonassessable. 6.2. Rights of Shareholders. The ownership of the Trust Property of every description and the right to conduct any business hereinbefore described are vested exclusively in the Trustees, and the Shareholders shall have no interest therein other than the beneficial interest conferred by their Shares, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust nor can they be called upon to share or assume any losses of the Trust or suffer an assessment of any kind by virtue of their ownership of Shares. The Shares shall be personal property giving only the rights in this Declaration specifically set forth. The Shares shall not entitle the holder to preference, preemptive, appraisal, conversion or exchange rights (except for rights of appraisal specified in Section 11.4 and as the Trustees may determine with respect to any series or class of Shares). 6.3. Trust Only. It is the intention of the Trustees to create only the relationship of Trustee and beneficiary between the Trustees and each Shareholder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a trust. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. 6.4. Issuance of Shares. The Trustees, in their discretion, may from time to time without a vote of the Shareholders issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such party or parties and for such amount not less than par value and type of consideration, including cash or property, at such time or times, and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. 6.5. Register of Shares. A register shall be kept at the Trust or a transfer agent duly appointed by the Trustees under the direction of the Trustees which shall contain the names and addresses of the Shareholders and the number of Shares held by them respectively and a record of all transfers thereof. Such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled to receive payment of any dividend or distribution, nor to have notice given to him as herein provided, until he has given his address to a transfer agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. It is not required that certificates be issued for the Shares; however, the Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use. 6.6. Transfer Agent and Registrar. The Trustee shall have power to employ a transfer agent or transfer agents, and a registrar or registrars. The transfer agent or transfer agents may keep the said register and record therein the original issues and transfers, if any, of the said Shares. Any such transfer agent and registrars shall perform the duties usually performed by transfer agents and registrars of certificates of stock in a corporation, except as modified by the Trustees. 6.7. Transfer of Shares. Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereto duly authorized in writing, upon delivery to the Trustees or a transfer agent of the Trust of a duly executed instrument of transfer, together with such evidence of the genuineness of each such execution and authorization and of other matters as may reasonably be required. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer. Any person becoming entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the register of Shares as the holder of such Shares upon production of the proper evidence thereof to the Trustees or a transfer agent of the Trust, but until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof and neither the Trustees nor any transfer agent or registrar nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law. 6.8. Treasury Shares. Shares held in the treasury shall, until reissued, not confer any voting rights on the Trustees, nor shall such Shares be entitled to any dividends or other distributions declared with respect to the Shares. 6.9. Series Designation. The Trustees, in their discretion, may authorize the division of Shares into two or more series or two or more classes, and the different series or classes shall be established and designated, and the variations in the relative rights and preferences as between the different series or classes shall be fixed and determined, by the Trustees; provided, that all Shares shall be identical except that there may be variations so fixed and determined between different series or classes as to investment objective, purchase price, right of redemption, special and relative rights as to dividends and on liquidation and conver- sion rights, and the several series or classes shall have separate voting rights, as set forth in Section 10.1 of this Declaration. All references to Shares in this Declaration shall be deemed to be shares of any or all series and classes as the context may require. If the Trustees shall divide the Shares of the Trust into two or more series or two or more classes, the following provisions shall be applicable: (a) The number of authorized Shares and the number of Shares of each series or of each class that may be issued shall be unlimited. The Trustees may classify or reclassify any unissued Shares or any Shares previously issued and reacquired of any series or class into one or more series or one or more classes that may be established and designated from time to time. The Trustees may hold as treasury shares (of the same or some other series or class), reissue for such consideration and on such terms as they may determine, or cancel any Shares of any series or any class reacquired by the Trust at their discretion from time to time. (b) The power of the Trustees to invest and reinvest the Trust Property shall be governed by Section 3.2 of this Declaration with respect to any one or more series which represents the interests in the assets of the Trust immediately prior to the establishment of two or more series and the power of the Trustees to invest and reinvest assets applicable to any other series shall be the same, except as otherwise set forth in the instrument of the Trustees establishing such series which is hereinafter described. (c) All consideration received by the Trust for the issue or sale of Shares of a particular series or class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that series or class for all purposes, subject only to the rights of creditors and except as may otherwise be required by applicable tax laws, and shall be so recorded upon the books of account of the Trust. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular series or class, the Trustees shall allocate them among any one or more of the series or classes established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all series or classes for all purposes. (d) The assets belonging to each particular series shall be charged with the liabilities of the Trust in respect of that series and all expenses, costs, charges and reserves attributable to that series, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular series shall be allocated and charged by the Trustees to and among any one or more of the series established and designated and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the holders of all series for all purposes. The Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items are capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders. (e) The power of the Trustees to pay dividends and make distributions shall be governed by Section 9.2 of this Declaration with respect to any one or more series or classes which represents the interests in the assets of the Trust immediately prior to the establishment of two or more series or classes. With respect to any other series or class, dividends and distributions on Shares of a particular series or class may be paid with such frequency as the Trustees may determine, which may be daily or otherwise, pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine, to the holders of Shares of that series or class, from such of the income and capital gains, accrued or realized, from the assets belonging to that series or class, as the Trustees may determine, after providing for actual and accrued liabilities belonging to that series or class. All dividends and distributions on Shares of a particular series or class shall be distributed pro rata to the holders of that series or class in proportion to the number of Shares of that series or class held by such holders at the date and time of record established for the payment of such dividends or distributions. (f) Subject to the requirements of the 1940 Act, particularly Section 18(f) and Rule 18f-2, the Trustees shall have the power to determine the designations, preferences, privileges, limitations and rights of each class and series of Shares. (g) The establishment and designation of any series or class of Shares shall be effective upon the execution by a majority of the then Trustees of an instrument setting forth such establishment and designation and the relative rights and preferences of such series or class, or as otherwise provided in such instrument. At any time that there are no Shares outstanding of any particular series or class previously established and designated, the Trustees may by an instrument executed by a majority of their number abolish that series or class ind the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment to this Declaration. 6.10. Notices. Any and all notices to which any Shareholder hereunder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Shareholder of record at his last known address as recorded on the register of the Trust. ARTICLE VII Custodian 7.1. Appointment and Duties. The Trustees shall at all times employ-a custodian or custodians, meeting the qualifications for custodians contained in the 1940 Act, as custodian with authority as its agent, but subject to such restrictions, limitations and other requirements, if any, as may be contained in the By-Laws of the Trust and the 1940 Act, for purposes of maintaining custody of the Trust's securities and similar investments. 7.2. Central Certificate System. Subject to applicable rules, regulations and orders, the Trustees may direct the custodian to deposit all or any part of the securities and similar investments owned by the Trust in a system for the central handling of securities pursuant to which all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities. ARTICLE VIII Redemption 8.1. Redemptions. All outstanding Shares may be redeemed at the option of the holders thereof, upon and subject to the terms and conditions provided in this Article VIII. The Trust shall, upon application of any Shareholder or pursuant to authorization from any Shareholder, redeem or repurchase from such Shareholder for cash or in kind outstanding Shares for an amount per share determined by the application of a formula adopted for such purpose by resolution of the Trustees (which formula shall be consistent with applicable provisions of the 1940 Act); provided that (a) such amount per Share shall not exceed the cash equivalent of the proportionate interest of each Share in the assets of the Trust at the time of the purchase or redemption and (b) if so authorized by the Trustees, the Trust may, at any time and from time to time, charge fees for effecting such redemption, at such rates as the Trustees may establish, as and to the extent permitted under the 1940 Act, and may, at any time and from time to time, pursuant to such Act or an order thereunder, suspend such right of redemption. The procedures for effecting redemption shall be as set forth in the Prospectus and the Statement of Additional Information, as amended from time to time. 8.2. Redemption of Shares; Disclosure of Holding. If the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of Shares or other securities of the Trust has or may become concentrated in any person to an extent which would disqualify the Trust as a regulated investment company under the Internal Revenue Code, then the Trustees shall have the power by lot or other means deemed equitable by them (I) to call for redemption a number, or principal amount, of Shares or other securities of the Trust sufficient, in the opinion of the Trustees, to maintain or bring the direct or indirect ownership of Shares or other securities of the Trust into conformity with the requirements of such qualification and (ii) to refuse to transfer or issue Shares or other securities of the Trust to any Person whose acquisition of the Shares or other securities of the Trust in question would in the opinion of the Trustees result in such disqualification. The redemption shall be effected at a redemption price determined in accordance with Section 8.1. The holders of Shares or other securities of the Trust shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares or other securities of the Trust as the Trustees deem necessary to comply with the provisions of the Internal Revenue Code, or to comply with the requirements of any other taxing authority. 8.3. Redemptions of Account of Less than $500. The Trustees shall have the power to redeem shares at a redemption price determined in accordance with Section 8.1 if at any time the total investment in a Shareholder account does not have a value of at least $500 (or such lesser amount as the Trustees may determine); provided, however, that the Trustees may not exercise such power with respect to Shares if the Prospectus does not describe such power (and applicable amount). In the event the Trustees determine to exercise their power to redeem Shares provided in this Section 8.3., shareholders shall be notified that the value of their account is less than $500 (or such lesser amount as determined above) and allowed a reasonable period of time to make an additional investment before the redemption is effected. ARTICLE IX Determination of Net Asset Value, Net Income and Distributions 9.1. Net Asset Value. The net asset value of each outstanding Share of the Trust shall be determined in such manner and at such time or times on such days as the Trustees may determine, in accordance with applicable provisions of the 1940 Act, as described from time to time in the Trust's currently effective Prospectus and Statement of Additional Information. The power and duty to make the daily calculations may be delegated by the Trustees to the adviser, administrator, manager, custodian, transfer agent or such other person as the Trustees may determine. The Trustees may suspend the daily determination of net asset value to the extent permitted by the 1940 Act. 9.2. Distributions to Shareholders. The Trustees shall from time to time distribute ratably among the Shareholders such proportion of the net profits, including net income, surplus (including paid-in surplus), capital or assets held by the Trustees as they may deem proper. Such distribution shall be made in cash or Shares, and the Trustees may distribute ratably among the Shareholders additional Shares issuable hereunder in such manner, at such times, and on such terms as the Trustees may deem proper. Such distributions may be among the Shareholders of record at the time of declaring a distribution or among the Shareholders of record at such later date as the Trustees shall determine. The Trustees may always retain from the net profits such amount as they may deem necessary to pay the debts or expenses of the Trust or to meet obligations of the Trust, or as they may deem desirable to use in the conduct of its affairs or to retain for future requirements or extensions of the business. The Trustees may adopt and offer to Shareholders such dividend reinvestment plan, cash dividend payout plans or related plans as the Trustees shall deem appropriate. Inasmuch as the computation of net income and gains for federal income tax purposes may vary from the computation thereof on the books of the Trust, the above provisions shall be interpreted to give the Trustees the power in their discretion to distribute for any fiscal year as ordinary dividends and as capital gains distributions, respectively, additional amounts sufficient to enable the Trust to avoid or reduce liability for taxes. ARTICLE X Shareholders Voting and Reports 10.1. Voting. The Shareholders shall have power to vote only (I) for the election of Trustees as provided in Article II hereof, (ii) with respect to any investment advisory, management or other contract as provided in Section 4.1, (iii) with respect to termination of the Trust as provided in Section 11.2, (iv) with respect to any amendment of the Declaration to the extent and as provided in Section 11.3, (v) with respect to any merger, consolidation or sale of assets as provided in Section 11.4, (vi) with respect to incorporation of the Trust to the extent and as provided in Section 11.5, (vii) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or Shareholders, and (viii) with respect to such additional matters relating to the Trust as may be required by law, the Declaration, the By-Laws or any registration statement of the Trust filed with any federal or state regulatory authority, or as and when the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote, except that Shares held in the treasury of the Trust as of the record date, as determined in accordance with the By-Laws, shall not be voted. A Majority Shareholder Vote shall be sufficient to take or authorize action upon any matter except as otherwise provided herein. There shall be no cumulative voting in the election of Trustees. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, the Declaration or the By- Laws to be taken by Shareholders. In the event of the establishment of series or classes as contemplated by Section 6.9, Shareholders of each such series or class shall, with respect to those matters upon which Shareholders are entitled to vote, be entitled to vote only on matters affecting such series or class, and voting shall be by series or class and require a Majority Shareholder Vote of each series or class that would be affected by such matter, except that all Shares (regardless of series or class) shall be voted as a single voting class, or a Majority Shareholder Vote of each series or class shall be necessary, where required by applicable law. Except as otherwise required by law, any action required or permitted to be taken at any meeting of Shareholders may be taken without a meeting if Shareholders constituting a Majority Shareholder Vote consent to the action in writing and such consents are filed with the records of the Trust. Such consents shall be treated for all purposes as votes taken at a meeting of Shareholders. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters not inconsistent with the Declaration. 10.2. Reports. The Trustees shall transmit to Shareholders such written financial reports of the operations of the Trust, including financial statements certified by independent public accountants, as may be required under applicable law. ARTICLE XI Duration; Termination of Trust; Amendment; Mergers, Etc. 11.1. Duration. Subject to possible termination in accordance with the provisions of Section 11.2 hereof, the Trust created hereby shall continue without limitation of time. 11.2. Termination of Trust. (a) The Trust may be terminated (I) by a Majority Shareholder Vote at any meeting of Shareholders, (ii) by an instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by holders constituting a Majority Shareholder Vote or (iii) by the Trustees by written notice to the Shareholders. Upon the termination of the Trust, (I) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all the Trust Property shall require approval as set forth in Section 11.4. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among Shareholders according to their respective rights. (b) After termination of the Trust and distribution to Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Shareholders shall thereupon cease. 11.3. Amendment Procedure. (a) This Declaration may be amended by vote of the Shareholders. The Trustees may also amend this Declaration without the vote or consent of Shareholders to change the name of the Trust, to supply any omission, to cure, correct or supplement any ambiguous, defective or inconsistent provision hereof, or if they deem it necessary or desirable to conform this Declaration to the requirements of applicable federal or state laws or regulations or the requirements of the regulated investment company provisions of the Internal Revenue Code, but the Trustees shall not be liable for failing so to do. (b) No amendment may be made, under Section 11.3(a) above, which would change any rights with respect to any Shares of the Trust by reducing the amount payable thereon upon liquidation of the Trust or by diminishing or eliminating any voting rights pertaining thereto, except with the vote or consent of affected Shareholders. Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of the Shareholders, Trustees, officers, employees and agents of the Trust or to permit assessments upon Shareholders. (c) A certification in recordable form signed by a majority of the Trustees or by the Secretary or any Assistant Secretary of the Trust, setting forth an amendment and reciting that it was duly adopted by the Shareholders or by the Trustees as aforesaid or a copy of the Declaration, as amended, in recordable form, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. 11.4. Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of the Trust Property, including its good will, upon such terms and conditions and for such consideration when and as authorized by a Majority Shareholder Vote, and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to the statutes of the Commonwealth of Massachusetts. In respect of any such merger, consolidation, sale or exchange of assets, any Shareholder shall be entitled to rights of appraisal of his Shares to the same extent as a shareholder of a Massachusetts business corporation in respect of a merger, consolidation, sale or exchange of assets of a Massachusetts business corporation, and such rights shall be his exclusive remedy in respect of his dissent from any such action. 11.5. Incorporation. Upon a Majority Shareholder Vote, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, association or organization in exchange for shares or securities thereof or otherwise, and to lend money to, subscribe for shares or securities of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire shares or any other interest. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law. Nothing contained herein shall be construed as requiring approval of Shareholders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities. ARTICLE XII Miscellaneous 12.1. Filing. This Declaration and all amendments hereto shall be filed in the office of the Secretary of the Commonwealth of Massachusetts and in such other places as may be required under the laws of Massachusetts and may also be filed or recorded in such other places as the Trustees deem appropriate. Each amendment so filed shall be accompanied by a certificate signed and acknowledged by a Trustee stating that such action was duly taken in a manner provided herein, and unless such amendment or such certificate sets forth some later time for the effectiveness of such amendment, such amendment shall be effective upon its filing. A restated Declaration, containing the original Declaration and all amendments theretofore made, may be executed from time to time by a majority of the Trustees and shall, upon filing with the Secretary of the Commonwealth of Massachusetts, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments thereto. 12.2. Resident Agent. The Trust hereby appoints CT Corporation System as its resident agent in the Commonwealth of Massachusetts, whose post office address is 2 Oliver Street, Boston, Massachusetts 02109. 12.3. Governing Law. This Declaration is executed by the Trustees and delivered in the Commonwealth of Massachusetts and with reference to the laws thereof, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to the laws of said State and reference shall be specifically made to the business corporation law of the Commonwealth of Massachusetts as to the construction of matters not specifically covered herein or as to which an ambiguity exists. 12.4. Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 12.5. Reliance by Third Parties. Any certificate executed by an individual who, according to the records of the Trust, or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, certifying to: (a) the number or identity of Trustees or Shareholders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or Shareholders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trustees and their successors. 12.6. Provisions in Conflict With Law or Regulations. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration; provided, how- ever, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. 733 Third Avenue - New York, NY 10017 as Trustee 733 Third Avenue New York, NY 10017 as Trustee One Federal Street Boston, MA 02110 as Trustee COMMONWEALTH OF MASSACHUSETTS ) COUNTRY OF SUFFOLK ) ss.: ) On this 24th day of April, 1986, before me personally appeared David M. Elwood, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/Judith B. Bonaffini Notary Public Judith B. Bonaffini, Notary Public My Commission Expires Oct. 1, 1987 [Seal] COMMONWEALTH OF MASSACHUSETTS ) COUNTRY OF SUFFOLK ) ss.: ) On this 18th day of April, 1986, before me personally appeared Dorothy A. Berry and Geoffrey H. Bobroff, to me known to be the person described in and who executed the foregoing instrument, and acknowledged that he executed the same as his free act and deed. /s/Doreen Cameron Notary Public Doreen Cameron Notary Public, State of New York\ No. 31-4788020 Qualified in New York County Commission Expires March 30, 1987 [Seal] INTEGRATED INCOME PORTFOLIOS Amendment to Declaration of Trust dated April 24, 1986 The undersigned, being all of the Trustees of INTEGRATED INCOME PORTFOLIO, a Massachusetts business trust, hereby amend the Declaration of Trust as follows: "The name of the Trust shall be SUNAMERICA INCOME PORTFOLIOS." WITNESS the due execution hereof this 19th day of January, 1990. /s/S. James Coppersmith /s/Samuel M. Eisenstat S. James Coppersmith Samuel M. Eisenstat /s/Harvey P. Eisen /s/Stephen J Gutman Harvey P. Eisen Stephen J. Gutman INTEGRATED INCOME PORTFOLIOS Establishment and Designation of Shares of Beneficial Interest, with $.01 Par Valur Per Share The undersigned, being a majority of the Trustees of Integrated Income Portfolios, a Massachusetts business trust (the "Trust"), acting pursuant to Section 6.9 of the Declaration of Trust dated April 24, 1986 (the "Declaration of Trust"), hereby establish two series of the Trust's unissued shares of beneficial interest, $.01 par value, to have all the rights and preferences described in the Declaration of Trust, to be designated as follows: Convertible Securities Portfolio Government Securities Plus Portfolio The actions contained herein shall be effective as of May 14, 1986. /s/Geoffrey H. Bobroff Geoffrey H. Bobroff, Trustee /s/Harvey P. Eisen Harvey P. Eisen, Trustee /s/Samuel M. Eisenstat Samuel M. Eisenstat, Trustee /s/Stephen J. Gutman Stephen J. Gutman, Trustee INTEGRATED INCOME PORTFOLIOS Establishment and Designation of Shares of Beneficial Interest, with $.01 Par Valur Per Share The undersigned, being a majority of the Trustees of Integrated Income Portfolios, a Massachusetts business trust (the "Trust"), acting pursuant to Section 6.9 of the Declaration of Trust dated April 24, 1986 (the "Declaration of Trust"), hereby establish a series of the Trust's unissued shares of beneficial interest, $.01 par value, to have all the rights and preferences described in the Declaration of Trust, to be designated as follows: Bond Allocation Portfolio The actions contained herein shall be effective as of September 14, 1987. /s/Geoffrey H. Bobroff Geoffrey H. Bobroff, Trustee /s/ Jay D. Chazanoff Jay D. Chazanoff, Trustee /s/S. James Coppersmith S. James Coppersmith, Trustee /s/Harvey P. Eisen Harvey P. Eisen, Trustee /s/Samuel M. Eisenstat Samuel M. Eisenstat, Trustee /s/Stephen J. Gutman Stephen J. Gutman, Trustee SUNAMERICA INCOME PORTFOLIOS CERTIFICATE OF AMENDMENT TO DECLARATION OF TRUST I, Robert M. Zakem, the duly elected Secretary of SunAmerica Income Portfolios (the "Trust"), a Massachusetts business trust, hereby certify as follows: 1. That the Trust was organized as a Massachusetts business trust under a Declaration of Trust dated April 24, 1986, as amended on January 19, 1990 (hereinafter, as so amended, referred to as the "Declaration of Trust"); 2. That the following amendment to the Declaration of Trust has been duly adopted by a majority of the Board of Trustees of the Trust at a special meeting of the Board of Trustees held on March 31, 1993: RESOLVED: That Section 1.1 of the Declaration of Trust be, and it hereby is amended as follows: Section 1.1 Name. The name of the Trust shall be SunAmerica Income Funds. IN WITNESS WHEREOF, I have hereunto set my hand this 1st day of October, 1993. By: /s/Robert M. Zakem Robert M. Zakem, Secretary SunAmerica Income Portfolios A C K N O W L E D G E M E N T STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) October 1, 1993 Then personally appeared before me the above named Robert M. Zakem and acknowledged the foregoing instrument to be his free act and deed. /s/ Jennifer Muzzey Notary Public State of New York No.31-4966522 Qualified in New York County My Commission Expires May 7, 1994 SUNAMERICA INCOME FUNDS (Formerly SunAmerica Income Portfolios) Establishment and Designation of Shares The undersigned, being the Secretary of SunAmerica Income Funds (hereinafter referred to as the "Trust"), a trust with transferable shares of the type commonly called a Massachusetts business trust, DOES HEREBY CERTIFY that, pursuant to the authority conferred upon the Trustees of the Trust by Sections 1.1, 6.9 and/or 11.3 of the Declaration of Trust, dated April 24, 1986, as amended on January 10, 1990 and October 1, 1993, respectively (hereinafter, as so amended, referred to as the "Declaration of Trust"), and by the affirmative vote of a majority of the Board of Trustees of the Trust at a special meeting duly called and held on March 31, 1993, the Declaration of Trust is amended as follows: (1) That three series of the Trust's unissued shares of beneficial interest, $.01 par value, are hereby established to have all the rights and preferences described in the Declaration of Trust, to be designated as follows: SunAmerica Federal Securities Fund SunAmerica Diversified Income Fund SunAmerica Tax Exempt Insured Fund (2) That SunAmerica Government Income Portfolio shall be renamed "SunAmerica U.S. Government Securities Fund". (3) That SunAmerica High Yield Portfolio shall be renamed "SunAmerica High Income Fund". The SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica Tax Exempt Insured Fund, SunAmerica U.S. Government Securities Fund and SunAmerica High Income Fund are hereinafter referred to individually as a "Fund" and collectively as the "Funds". (4) That the shares of beneficial interest of the Trust, $.01 par value, of each Fund are hereby further classified as three classes of shares, which are designated Class A, Class B and Class C shares. (5) That the Class A, Class B and Class C shares of each particular Fund shall represent identical interests in the Trust and have identical voting (except with respect to those matters affecting a particular class of shares), dividend, liquidation and other rights, as set forth in the Declaration of Trust; provided, however, that notwithstanding anything in the Declaration of Trust to the contrary: (a) the Class A, Class B and Class C shares may be issued and sold subject to such different front-end sales loads, contingent deferred sales charges, or front-end sales loads and contingent deferred sales charges as the Board of Trustees shall from time to time determine; (b) expenses related solely to a particular class (including, without limitation, distribution expenses under a Rule 12b-1 plan and administrative expenses under an administration or service agreement, plan or other arrangement, however designated) shall be borne by that class and shall be appropriately reflected (in the manner determined by the Board of Trustees) in the net asset value of, or the dividends and distributions on, the shares of that class; (c) except as otherwise provided, on the first business day of the month following the seventh anniversary of the issuance of Class B shares to a holder thereof, such Class B shares (as well as a pro rata portion of any Class B shares purchased through the reinvestment of dividends and other distributions paid in respect of all Class B shares held by such holder) shall automatically convert to Class A shares of the same Fund on the basis of the respective current net asset values per share of the Class B shares and the Class A shares of that Fund on the conversion date; provided, however, that any conversion of Class B shares shall be subject to the continuing availability of an opinion of counsel to the effect that (i) the assessment of higher distribution fees or transfer agency costs with respect to Class B shares does not result in the Trust's dividends or distributions constituting "preferred dividends" under the Internal Revenue Code of 1986, as amended, and (ii) such conversion does not constitute a taxable event under federal income tax law, and the Board of Trustees in its sole discretion, may suspend the conversion of Class B shares if such opinion is no longer available. The actions contained herein shall be effective as of October 1, 1993. By: /s/Robert M. Zakem Robert M. Zakem, Secretary SunAmerica Income Funds A C K N O W L E D G E M E N T STATE OF NEW YORK ) ) ss: COUNTY OF NEW YORK ) October 1, 1993 Then personally appeared before me the above named Robert M. Zakem and acknowledged the foregoing instrument to be his free act and deed. /s/ Jennifer Muzzey Notary Public State of New York No.31-4966522 Qualified in New York County My Commission Expires May 7, 1994 EX-99.B2 14 BY-LAWS AS AMENDED EXHIBIT 99.B(2) BY-LAWS OF INTEGRATED INCOME PORTFOLIOS ARTICLE I Definitions ----------- The terms "Commission," "Declaration," "Majority Shareholder Vote," "1940 Act," "Shareholders," "Shares," "Trust," "Trust Property" and "Trustees" have the respective meanings given them in the Declaration of Trust of Integrated Income Portfolios dated April 24, 1986, as amended from time to time. ARTICLE II Offices ------- 2.1 Principal Office. Until changed by the Trustees, ---------------- the principal office of the Trust in the Commonwealth of Massachusetts shall be in the City of Boston, County of Suffolk. 2.2 Other Offices. In addition to its principal office ------------- in the Commonwealth of Massachusetts, the Trust may have an office or offices in the State of New York, and at such other places within and without the Commonwealth as the Trustees may from time to time designate or the business of the Trust may require. ARTICLE III Shareholders' Meetings ---------------------- 3.1 Place of Meetings. Meetings of Shareholders shall ----------------- be held at such place, within or without the Commonwealth of Massachusetts, as may be designated from time to time by the Trustees. 3.2 Meetings. Meetings of Shareholders of the Trust, -------- as a whole or by series or class, shall be held whenever called by a majority of the Trustees or the President of the Trust and as a whole whenever election of a Trustee or Trustees by Shareholders is required by the provisions of Section 16 of the 1940 Act for that purpose. Meetings of Shareholders, as a whole or by series or class, as the case may be, shall also be called by the Secretary upon the written request, which request shall state the purpose or purposes of such meeting and the matters proposed to be acted on thereat, of the holders of Shares entitled to vote not less than twenty five percent (25%) of all the votes entitled to be cast at such meeting, provided, however, that pursuant to Section 16(c) of the 1940 Act, that a meeting requested exclusively for the stated purpose of removing a Trustee shall be called by the Secretary upon the written request of the holders of Shares entitled to vote not less than ten percent (10%) of all the votes entitled to be cast at such meeting as to the matter be acted on thereat. The Secretary shall inform such Shareholders of the reasonable estimated cost of preparing and mailing such notice of the meeting, and upon payment to the Trust of such costs, the Secretary shall give notice stating the purposeor purposes of the meeting to all entitled to vote at such meeting. Except as otherwise required by law, no meeting need be called upon the request of the holders of Shares entitled to cast less than a majority of all votes entitled to be cast at such meeting, to consider any matter which is substantially the same as a matter voted upon at any meeting of the same Shareholders held during the preceding twelve months. 3.3 Notice of Meetings; Waiver. Written or printed -------------------------- notice of every Shareholders' meeting stating the place, date and purpose or purposes thereof, shall be given by the Secretary not less than seven (7) nor more than ninety (90) days before such meeting to each Shareholder entitled to vote at such meeting, either by mail or by presenting it to him personally, or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Shareholder at his address as it appears on the records of the Trust. Any such notice may be waived by any person or persons entitled to such notice, by a notice signed by such person or persons and filed with the records of the meeting, whether before or after the holding thereof, or by actual attendance at the meeting, in person or by proxy, except where the Shareholder attends a meeting for the express purpose of objecting to the transaction of business on the grounds that the meeting has not been lawfully called or convened. 3.4 Quorum and Adjournment of Meetings. Except as ---------------------------------- otherwise provided by law, by the Declaration or by these By-Laws, at all meetings of Shareholders the holders of a majority of the Shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum for the transaction of business. In the absence of a quorum, the Shareholders present or represented by proxy and entitled to vote thereat shall have power to adjourn the meeting from time to time. Any adjourned meeting may be held as adjourned without further notice. At any adjourned meeting at which a quorum shall be present, any business may be transacted as if the meeting had been held as originally called. 3.5 Voting Rights, Proxies. At each meeting of ---------------------- Shareholders, each holder of record of Shares entitled to vote thereat shall be entitled to one vote in person or by proxy, executed in writing by the Shareholder or his duly authorized attorney-in-fact, for each Share of beneficial interest of the Trust and for the fractional portion of one vote for each fractional Share entitled to vote so registered in his name on the records of the Trust on the date fixed as the record date for the determination of Shareholders entitled to vote at such meeting. No proxy shall be valid after six months from its date, unless otherwise provided in the proxy, and no proxy shall be valid as to such a meeting, if executed after the final adjournment of such a meeting. At all meetings of Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the chairman of the meeting. Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or Officers of the Trust. 3.6 Vote Required. Except as otherwise provided by ------------- law, by the Declaration of Trust, or by these By-Laws, at each meeting of Shareholders at which a quorum is present, all matters shall be decided by Majority Shareholder Vote. 3.7 Inspectors of Election. In advance of any meeting ---------------------- of Shareholders, the Trustees may appoint Inspectors of Election to act at the meeting or any adjournment thereof. If Inspectors of Election are not so appointed, the chairman of any meeting of Shareholders may, and on the request of any Shareholder or his proxy shall, appoint Inspectors of Election of the meeting. In case any person appointed as Inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting or at the meeting by the person acting as chairman. The Inspectors of Election shall determine the number of Shares outstanding, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes or consents, determine the results, and do such other acts as may be proper to conduct the election or vote with fairness to all Shareholders. On request of the chairman of the meeting or of any Shareholder or his proxy, the Inspectors of Election shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any facts found by them. 3.8 Inspection of Books and Records. Shareholders ------------------------------- shall have such rights and procedures of inspection of the books and records of the Trust as are granted to Shareholders under the Massachusetts Business Corporation Law. 3.9 Action by Shareholders Without Meeting. Except -------------------------------------- as otherwise provided by law, the provisions of these By-Laws relating to notices and meetings to the contrary notwithstanding, any action required or permitted to be taken at any meeting of Shareholders may be taken without a meeting if a majority of the Shareholders entitled to vote upon the action consent to the action in writing and such consents are filed with the records of the Trust. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. No such consent shall be valid for longer than six months from this date of execution. ARTICLE IV Trustees -------- 4.1 Meetings of the Trustees. The Trustees may in their ------------------------ discretion provide for regular or special meetings of the Trustees to be held at such time and place as shall be determined from time to time by the Trustees without further notice. 4.2 Notice of Special Meetings. Written notice of special -------------------------- meetings of the Trustees, stating the place, date and time thereof, shall be given to each Trustee personally, by telegram, by mail or by leaving such notice at his place of residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the Trustee at his address as it appears on the records of the Trust. 4.3 Quorum and Adjournment of Meetings. If at any ---------------------------------- meeting of the Trustees there be less than a quorum present, the Trustees present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall have been obtained. 4.4 Action by Trustees Without Meeting. All written ---------------------------------- consents of Trustees evidencing action taken by the Trustees without a meeting shall set forth such action, shall be signed by all of the Trustees entitled to vote upon such action and shall be filed with the minutes of proceedings of the Trustees. 4.5 Expenses and Fees. Each Trustee may be allowed ----------------- expenses, if any, for attendance at each regular or special meeting of the Trustees, and each Trustee shall receive for services rendered as a Trustee of the Trust such compensation as may be fixed by the Trustees. Nothing herein contained shall be construed to preclude any Trustee from serving the Trust in any other capacity and receiving compensation therefor. ARTICLE V Indemnification --------------- 5.1 Indemnification of Trustees, Officers, Employees ------------------------------------------------ and Agents. (a) The Trust shall indemnify any person who was or - ---------- is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust or any of its shareholders) by reason of the fact that he is or was a Trustee, officer, employee or agent of the Trust. The indemnification shall be against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him in connection with the action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Trust shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or on behalf of the Trust or any of its shareholders to obtain a judgment or decree in its favor by reason of the fact that he is or was a Trustee, officer, employee or agent of the Trust. The indemnification shall be against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of the action or suit, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust; except that such indemnification shall preclude payment upon any liability, whether or not there is an adjudication of liability, arising by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties as described in section 17(h) and (i) of the Investment Company Act of 1940. (c) To the extent that a Trustee, officer, employee or agent of the Trust has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) or (b) or in defense of any claim, issue or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. (d) (1) Unless a court orders otherwise, any indemnification under subsections (a) or (b) of this section may be made by the Trust only as authorized in the specific case after a determination that indemnification of the Trustee, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) or (b). (2) The determination shall be made: (i) by the Trustees, by a majority vote of a quorum which consists of Trustees who were not parties to the action, suit or proceeding; or (ii) if the required quorum is not obtainable, or if a quorum of disinterested Trustees so directs, by independent legal counsel in a written opinion; or (iii) by the Shareholders. (3) Notwithstanding the provisions of this Section 5.1, no person shall be entitled to indemnification for any liability, whether or not there is an adjudication of liability, arising by reason of willful malfeasance bad faith, gross negligence or reckless disregard of duties as described in Sections 17(h) and (i) of the Investment Company Act of 1940 ("Disabling Conduct"). A person shall be deemed not liable by reason of Disabling Conduct if, either: (i) a final decision on the merits is made by a court or other body before whom the proceeding was brought that the person to be indemnified ("Indemnitee") was not liable by reason of Disabling Conduct; or (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the Indemnitee was not liable by reason of Disabling Conduct, is made by either - (A) a majority of a quorum of Trustees who are neither "interested persons" of the Trust, as defined in section 2(a)(19) of the Investment Company Act of 1940, nor parties to the action, suit or proceeding; or (B) an independent legal counsel in a written opinion. (e) Expenses, including attorneys' fees, incurred by a Trustee, officer, employee or agent of the Trust in defending a civil or criminal action, suit or proceeding may be paid by the Trust in advance of the final disposition thereof if: (1) authorized in the specific case by the Trustees; and (2) the Trust receives an undertaking by or on behalf of the Trustee, officer, employee or agent of the Trust to repay the advance if it is not ultimately determined that such person is entitled to be indemnified by the Trust; and (3) either, (i) such person provides a security for his undertaking; or (ii) the Trust is insured against losses by reason of any lawful advances; or (iii) a determination, based on a review of readily available facts, that there is reason to believe that such person ultimately will be found entitled to indemnification, is made by either - (A) A majority of a quorum which consists of Trustees who are neither "interested persons" of the Trust, as defined in section 2(a)(19) of the Investment Company Act of 1940, nor parties to the action, suit or proceeding; or (B) an independent legal counsel in a written opinion. (f) The indemnification provided by this Section shall not be deemed exclusive of any other rights to which a person may be entitled under any by-law, agreement, vote of Shareholders or disinterested Trustees or otherwise, both as to action in his official capacity and as to action in another capacity while holding office, and shall continue as to a person who has ceased to be a Trustee, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of such person; provided that no person may satisfy any right of indemnity or reimbursement granted herein or to which he may be otherwise entitled except out of the property of the Trust, and no Shareholder, as such, shall be personally liable with respect to any claim for indemnity or reimbursement or otherwise. (g) The Trust may purchase and maintain insurance on behalf of any person who is or was a Trustee, officer, employee or agent of the Trust, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such. However, in no event will the Trust pay that portion of insurance premiums, if any, attributable to coverage which would indemnify any officer of Trustee against liability for Disabling Conduct. (h) Nothing contained in this Section shall be construed to protect any Trustee or officer of the Trust against any liability to the Trust or to its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. ARTICLE VI Committees ---------- 6.1 Executive and Other Committees. The ------------------------------ Trustees, by resolution adopted by a majority of the Trustees, may designate an Executive Committee and/or other committees, each committee to consist of two (2) or more of the Trustees of the Trust and may delegate to such committees, in the intervals between meetings of the Trustees, any or all of the powers of the Trustees in the management of the business and affairs of the Trust, except those powers which by law, the Declaration or these By-Laws they are prohibited from delegating. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a Trustee to act in place of such absent member. The Executive Committee and any other committee shall fix its own rules or procedure. Each such committee shall keep a record of its proceedings. All actions of the Executive Committee shall be reported to the Trustees at the meeting thereof next succeeding to the taking of such action. 6.2 Advisory Committee. The Trustees may appoint ------------------ an advisory committee which shall be composed of persons who do not serve the Trust in any other capacity and which shall have advisory functions with respect to the investments of the Trust but which shall have no power to determine that any security or other investment shall be purchased, sold or otherwise disposed of by the Trust. The number of persons constituting any such advisory committee shall be determined from time to time by the Trustees. The members of any such advisory committee may receive compensation for their services and may be allowed such fees and expenses for the attendance at meetings as the Trustees may from time to time determine to be appropriate. 6.3 Committee Action Without Meeting. All writ- -------------------------------- ten consents of the committee members evidencing action taken by such committee without a meeting shall set forth such action, shall be signed by the required number of committee members and shall be filed with the records of the proceedings of such committee. ARTICLE VII Officers -------- 7.1 Executive Officers. In addition to the offi- ------------------ cers required or permitted by the Declaration, the Trustees may also elect one or more Vice Presidents, Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers and may elect, or may delegate to the President the power to appoint, such other officers and agents as the Trustees shall at any time or from time to time deem advisable. Two or more offices, except those of President and Vice President, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. The executive officers of the Trust shall be elected annually by the Trustees and each executive officer so elected shall hold office until his successor is elected and is qualified. 7.2 Execution of Instruments and Documents and ------------------------------------------ Signing of Checks and Other Obligations and Transfers. All ----------------------------------------------------- instruments, documents and other papers shall be executed in the name and on behalf of the trust and all checks, notes, drafts and other obligations for the payment of money by the Trust shall be signed, and all transfers of securities standing in the name of the Trust shall be executed, by the President, any Vice President or the Treasurer, or by anyone or more officers or agents of the Trust as may be designated by vote of the Trustees. 7.3 Term and Removal and Vacancies. Each ------------------------------ Officer of the Trust shall hold office until his successor is elected and is qualified. Any officer or agent of the Trust may be removed by the Trustees whenever, in their judgment, the best interests of the Trust will be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. 7.4 Compensation of Officers. The compensation ------------------------ of officers and agents of the Trust shall be fixed by the Trustees, or by the President to the extent provided by the Trustees with respect to officers appointed by the President. 7.5 Power and Duties. All officers and agents of ---------------- the Trust, as between themselves and the Trust, shall have such authority and perform such duties in the management of the Trust as may be provided in or pursuant to these By-Laws, or to the extent not so provided, as may be prescribed by the Trustees; provided, that no rights of any third party shall be affected or impaired by any such By-Laws or resolution of the Trustees unless he has knowledge thereof. 7.6 The Chairman. The Chairman, if any, or in ------------ his absence the President, shall preside at all meetings of the Shareholders and of the Trustees, shall be a signatory on all Annual and Semi-Annual Reports as may be sent to Shareholders, and he shall perform such other duties as the Trustees may from time to time prescribe. 7.7 The President. The President shall be the ------------- chief executive officer of the Trust, he shall have general and active management of the business of the Trust, shall see that all orders and resolutions of the Trustees are carried into effect, and, in connection therewith, shall be authorized to delegate to one or more Vice Presidents such of his powers and duties at such times and in such manner as he may deem advisable. Subject to the control of the Trustees and to the control of any committees of the Trustees, within their respective spheres, as provided by the Trustees, he shall at all times exercise a general supervision and direction over the affairs of the Trust. He shall have the power to employ attorneys and counsel for the Trust and to employ such subordinate officers, agents, clerks and employees as he may find necessary to transact the business of the Trust. He shall also have the power to grant, issue, execute or sign such powers of attorney, proxies or other documents as may be deemed advisable or necessary in furtherance of the interests of the Trust. The President shall have such other powers and conferred upon or assigned duties as from time to time may be conferred upon or assigned to him by the Trustees. 7.8 The Vice Presidents. The Vice Presidents ------------------- shall be of such number and shall have such titles as may be determined from time to time by the Trustees. The Vice President, or if there be more than one, the Vice Presidents in the order of their seniority as may be determined from time to time by the Trustees or the President, shall, in the absence or disability of the President, exercise the powers and perform the duties of the President; and he or they shall perform such other duties as the Trustees or the President may from time to time prescribe. 7.9 The Assistant Vice Presidents. The ----------------------------- Assistant Vice President, or, if there be more than one, the Assistant Vice Presidents, shall perform such duties and have such powers as may be assigned them from time to time by the Trustees or the President. 7.10 The Secretary. The Secretary shall ------------- attend all meetings of the Trustees and all meetings of the Shareholders and record all the proceedings of the meetings of the Shareholders and Trustees in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the Shareholders and special meeting of the Trustees, and shall perform such other duties and have such powers as the Trustees, or the President, may from time to time prescribe. He shall keep in safe custody the seal of the Trust and affix or cause the same to be affixed to any instrument requiring it, and, when so affixed, it shall be attested by his signature or by the signature of an Assistant Secretary. 7.11 The Assistant Secretaries. The Assistant ------------------------- Secretary, or if there shall be more than one, the Assistant Secretaries, in the order determined by the Trustees or the President, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Trustees, or the President, may from time to time prescribe. 7.12 The Treasurer. The Treasurer shall be ------------- the chief financial office of the Trust. He shall keep or cause to be kept full and accurate accounts or receipts and disbursements in books belonging to the Trust, and he shall render to the Trustees and the President whenever any of them require it, an account of his transactions as Treasurer and of the financial condition of the Trust; and he shall perform such other duties as the Trustee, or the President, may from time to time prescribe. 7.13 The Assistant Treasurers. The Assistant ------------------------ Treasurer, or, if there shall be more than one, the Assistant Treasurers in the order determined by the Trustees or the President, shall, in the absence or the disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Trustee, or the President, may from time to time prescribe. ARTICLE VIII Custodian --------- The custodian of the Trust shall be appointed, among other things: (1) to receive and hold the securities owned by the Trust and deliver the same upon written order; (2) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; (3) to disburse such funds upon orders or vouchers; (4) to keep the books and accounts of the Trust and furnish clerical and accounting services; (5) to compute the net income of the Trust and the net asset value of the Trust and its shares; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. If so directed by a Majority Shareholder Vote, the custodian shall deliver and pay over all property of the Trust held by it as specified in such vote. The Trustees may also authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees. ARTICLE IX Miscellaneous ------------- 9.1 Location of Books and Records. The books and ----------------------------- records of the Trust may be kept outside the Commonwealth of Massachusetts at such place or places as the Trustees may from time to time determine, except as otherwise required by law. 9.2 Record Date. The Trustees may fix in advance ----------- a date as the record date for the purpose of determining Shareholders entitled to notice of, or to vote at, any meet- ing of Shareholders, or Shareholders entitled to receive payment of any dividend or the allotment of any rights, or in order to make a determination of Shareholders for any other proper purpose. Such date, in any case shall be not more than sixty (60) days, and in case of a meeting of Shareholders not less than ten (10) days prior to the date on which particular action requiring such determination of Shareholders is to be taken. In lieu of fixing a record date, the Trustees may provide that the transfer books shall be closed for a stated period but not to exceed, in any case, twenty (20) days. If the transfer books are closed for the purpose of determining Shareholders entitled to notice of a vote at a meeting of Shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. 9.3 Seal. The Trustees shall adopt a seal, which ---- shall be in such form and shall have such inscription there- on as the Trustees may from time to time provide. The seal of the Trust may be affixed to any document, and the seal and its attestation may be lithographed, engraved or otherwise printed on any document with the same force and effect as if it had been imprinted and attested manually in the same manner and with the same effect as if done by a Massachusetts business corporation under Massachusetts law. 9.4 Fiscal Year. The fiscal year of the Trust ----------- shall end on such dates as the Trustees may by resolution specify, and the Trustees may by resolution change such date for future fiscal years at any time and from time to time. 9.5 Orders for Payment of Money. All orders or --------------------------- instructions for the payment of money of the Trust, and all notes or other evidences of indebtedness issued in the name of the Trust, shall be signed by such officer or officers or such other person or persons as the Trustees may from time to time designate, or as may be specified in or pursuant to the agreement between the Trust and the bank or trust company appointed as Custodian of the securities and funds of the Trust. ARTICLE X Compliance with Federal Regulations ----------------------------------- The Trustees are hereby empowered to take such action as they may deem to be necessary, desirable or appro- priate so that the Trust is or shall be in compliance with any federal or state statute, rule or regulation with which compliance by the Trust is required. ARTICLE XI Amendments ---------- These By-Laws may be amended, altered, or repealed, or new By-Laws may be adopted, (a) by a Majority Shareholder Vote, or (b) by the Trustees; provided, however, that no such amendment, adoption or repeal requires, pursuant to law, the Declaration or these By-Laws, a vote of the Shareholders. The Trustees shall in no event adopt By-Laws which are in conflict with the Declaration, and any apparent inconsistency shall be construed in favor of the related provision in the Declaration. ARTICLE XII Declaration of Trust -------------------- The Declaration establishing Integrated Income Portfolios, a copy of which, together with all amendments hereto, is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name Integrated Income Portfolios refers to the Trustees under the Declaration collectively as Trustees, but not as individuals or personally; and no Trustee, Shareholder, officer, employee or agent of Integrated Income Portfolios shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise, in connection with the affairs of said Integrated Income Portfolios, but the Trust Property only shall be liable. SUNAMERICA INCOME FUNDS AMENDMENT NO. 1 TO THE BY-LAWS The By-Laws of the SunAmerica Income Funds, formerly SunAmerica Income Portfolios, (the "Trust") shall be amended in the following respects: 1. The name of the Trust shall be SunAmerica Income Funds. 2. The following supplements the provisions of Article VII, paragraph 7.6 of the Trust's By-Laws: If the elected Chairman is deemed to be an independent trustee, as defined in the Investment Company Act of 1940, as amended, then such Chairman shall not be an officer of the Trust under the provisions of this Article VII. The duties of such Chairman shall be limited to presiding over all meetings of the Board of Trustees, and may include such other duties that may be prescribed by the Trustees which shall not otherwise be in conflict with his or her role as an independent trustee. IN WITNESS WHEREOF, I have hereunto set my hand this 10th day of February, 1994. By:/s/Robert M. Zakem ----------------------------- Robert M. Zakem, Secretary SunAmerica Income Funds EX-99.B5 15 INVESTMENT ADVISORY & MANAGEMENT AGREEMENT EXHIBIT 99.B(5) SUNAMERICA INCOME FUNDS INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT This INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT is dated as of September 23, 1993 by and between SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), and SUNAMERICA ASSET MANAGEMENT CORP., a Delaware corporation (the "Adviser"). W I T N E S S E T H: WHEREAS, the Trust is registered under the Investment Company Act of 1940, as amended (the "Act"), as an open-end management investment company and may issue shares of beneficial interest, par value $.01 per share, in separately designated series representing separate funds with their own investment objectives, policies and purposes (each, a "Fund" and collectively, the "Funds"); and WHEREAS, the Adviser is engaged in the business of rendering investment management, advisory and administrative services and is registered as an investment adviser under the Investment Advisers Act of 1940; and WHEREAS, the Trust desires to retain the Adviser to furnish investment management, advisory and administrative services to the Trust and the Funds and the Adviser is willing to furnish such services; NOW, THEREFORE, it is hereby agreed between the parties hereto as follows: 1. Duties of the Adviser. The Adviser shall manage the --------------------- affairs of the Funds including, but not limited to, continuously providing the Funds with investment management, including investment research, advice and supervision, determining which securities shall be purchased or sold by the Funds, making purchases and sales of securities on behalf of the Funds and determining how voting and other rights with respect to securities owned by the Funds shall be exercised, subject in each case to the control of the Board of Trustees of the Trust (the "Trustees") and in accordance with the objectives, policies and principles set forth in Trust's Registration Statement and the Funds' current Prospectus and Statement of Additional Information, as amended from time to time, the requirements of the Act and other applicable law. In performing such duties, the Adviser (i) shall provide such office space, such bookkeeping, accounting, clerical, secretarial and administrative services (exclusive of, and in addition to, any such service provided by any others retained by the Funds or Trust on behalf of the Funds) and such executive and other personnel as shall be necessary for the operations of the Funds, (ii) shall be responsible for the financial and accounting records required to be maintained by the Funds (including those maintained by Trust's custodian) and (iii) shall oversee the performance of services provided to the Funds by others, including the custodian, transfer and shareholder servicing agent. The Trust understands that the Adviser also acts as the manager of other investment companies. Subject to Section 36 of the Act, the Adviser shall not be liable to the Funds or Trust for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the management of the Funds and the performance of its duties under this Agreement except for willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of reckless disregard of its obligations and duties under this Agreement. 2. Retention by Adviser of Sub-Advisers, etc. In carrying ----------------------------------------- out its responsibilities hereunder, the Adviser may employ, retain or otherwise avail itself of the services of other persons or entities including, without limitation, affiliates of the Adviser, on such terms as the Adviser shall determine to be necessary, desirable or appropriate. Without limiting the generality of the foregoing, and subject to the requirements of Section 15 of the Act, the Adviser may retain one or more sub-advisers to manage all or a portion of the investment portfolio of a Fund, at the Adviser's own cost and expense. Retention of one or more sub- advisers, or the employment or retention of other persons or entities to perform services, shall in no way reduce the responsibilities or obligations of the Adviser under this Agreement and the Adviser shall be responsible for all acts and omissions of such sub-advisers, or other persons or entities, in connection with the performance of the Adviser's duties hereunder. 3. Expenses. The Adviser shall pay all of its expenses -------- arising from the performance of its obligations under Section 1 and shall pay any salaries, fees and expenses of the Trust's Trustees and Officers who are employees of the Adviser. The Adviser shall not be required to pay any other expenses of the Funds, including, but not limited to, direct charges relating to the purchase and sale of portfolio securities, interest charges, fees and expenses of independent attorneys and auditors, taxes and governmental fees, cost of share certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares, expenses of registering and qualifying shares for sale, expenses of printing and distributing reports, notices and proxy materials to shareholders, expenses of data processing and related services, shareholder recordkeeping and shareholder account service, expenses of printing and filing reports and other documents filed with governmental agencies, expenses of printing and distributing prospectuses, expenses of annual and special - 2 - shareholders meetings, fees and disbursements of transfer agents and custodians, expenses of disbursing dividends and distributions, fees and expenses of Trustees who are not employees of the Adviser or its affiliates, membership dues in the Investment Company Institute, insurance premiums and extraordinary expenses such as litigation expenses. 4. Compensation of the Adviser. (a) As full compensation --------------------------- for the services rendered, facilities furnished and expenses paid by the Adviser under this Agreement, the Trust agrees to pay to the Adviser a fee at the annual rates set forth in Schedule A hereto with respect to each Fund indicated thereon. Such fee shall be accrued daily and paid monthly as soon as practicable after the end of each month (i.e., the applicable annual fee rate divided by 365 is applied to each prior days' net assets in order to calculate the daily accrual). For purposes of calculating the Adviser's fee with respect to any Fund, the average daily net asset value of a Fund shall be determined by taking an average of all determinations of such net asset value during the month. If the Adviser shall serve for less than the whole of any month the foregoing compensation shall be prorated. (b) The Adviser agrees that if total expenses of a Fund for any fiscal year of the Trust exceed the permissible limits applicable to that Fund in any state in which shares of that Fund are then qualified for sale, the compensation due the Adviser for such fiscal year shall be reduced by the amount of such excess by a reduction or refund thereof at the time such compensation is payable after the end of each calendar month, subject to readjustment during such fiscal year. In no event shall the amount of such reduction or refund exceed the amount of the fee payable to the Adviser with respect to such Fund. 5. Purchase and Sale of Securities; Broker-Dealer Selection. -------------------------------------------------------- The Adviser is responsible for decisions to buy or sell securities and other investments for each Fund, broker-dealer and futures commission merchants' selection, and negotiation of brokerage commission and futures commission merchants' rates. As a general matter, in executing portfolio transactions, the Adviser may employ or deal with such broker-dealers or futures commission merchants as may, in the Adviser's best judgment, provide prompt and reliable execution of the transactions at favorable prices and reasonable commission rates. In selecting such broker-dealers or futures commission merchants, the Adviser shall consider all relevant factors, including price (including the applicable brokerage commission, dealer spread or futures commission merchant rate), the size of the order, the nature of the market for the security or other investment, the timing of the transaction, the reputation, experience and financial stability of the broker-dealer or futures commission merchant involved, the quality of the service, the difficulty of execution, and the execution capabilities and - 3 - operational facilities of the firm involved, and, in the case of securities, the firm's risk in positioning a block of securities. Subject to such policies as the Trustees may determine and consistent with Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of the Adviser's having caused a Fund to pay a member of an exchange, broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of an exchange, broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such member of an exchange, broker or dealer viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to such Fund and to the other clients as to which the Adviser exercises investment discretion. In accordance with Section 11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to any other applicable laws and regulations including Section 17(e) of the Act and Rule 17e-1 thereunder, the Adviser may engage its affiliates, or any sub-adviser to the Trust and its respective affiliates, as broker-dealers or futures commission merchants to effect portfolio transactions in securities and other investments for a Fund. 6. Term of Agreement. This agreement shall continue in full ----------------- force and effect for two years from the date hereof, and shall continue in full force and effect from year to year thereafter if such continuance is approved in the manner required by the Act and the Adviser has not notified the Trust in writing at least 60 days prior to the anniversary date of the previous continuance that it does not desire such continuance. With respect to each Fund, this Agreement may be terminated at any time, without payment of penalty by the Fund or the Trust, on 60 days written notice to the Adviser, by vote of the Trustees, or by vote of a majority of the outstanding voting securities (as defined by the Act) of the Fund, voting separately from any other series of the Trust. The termination of this Agreement with respect to any Fund or the addition of any Fund to Schedule A hereto (in the manner required by the Act) shall not affect the continued effectiveness of this Agreement with respect to each other Fund subject hereto. This Agreement shall automatically terminate in the event of its assignment (as defined by the Act). The Trust hereby agrees that if (i) the Adviser ceases to act as investment manager and adviser to the Trust and (ii) the continued use of the Trust's present name would create confusion in the context of the Adviser's business, then the Trust will use its best efforts to change its name in order to delete the word "SunAmerica" from its name. - 4 - 7. Liability of the Adviser. In the absence of willful ------------------------ misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties ("disabling conduct") hereunder on the part of the Adviser (and its officers, directors, agents, employees, controlling persons, shareholders and any other person or entity affiliated with the Adviser) the Adviser shall not be subject to liability to the Trust or to any shareholder of the Trust for any act or omission in the course of, or connected with, rendering services hereunder, including without limitation, any error of judgment or mistake of law or for any loss suffered by any of them in connection with the matters to which this Agreement relates, except to the extent specified in Section 36(b) of the Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. Except for such disabling conduct, the Trust shall indemnify the Adviser (and its officers, directors, partners, agents, employees, controlling persons, shareholders and any other person or entity affiliated with the Adviser) (collectively, the "Indemnified Parties") from any liability arising from the Adviser's conduct under this Agreement. Indemnification to the Adviser or any of its personnel or affiliates shall be made when (i) a final decision on the merits rendered, by a court or other body before whom the proceeding was brought, that the person to be indemnified was not liable by reason of disabling conduct or, (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct, by (a) the vote of a majority of a quorum of the Trustees who are neither "interested persons" of the Trust as defined in section 2(a)(19) of the Act nor parties to the proceeding ("disinterested, non-party Trustees") or (b) an independent legal counsel in a written opinion. The Trust may, by vote of a majority of the disinterested, non-party Trustees advance attorneys' fees or other expenses incurred by an Indemnified Party in defending a proceeding upon the undertaking by or on behalf of the Indemnified Party to repay the advance unless it is ultimately determined that he is entitled to indemnification. Such advance shall be subject to at least one of the following: (1) the person to be indemnified shall provide a security for his undertaking, (2) the Trust shall be insured against losses arising by reason of any lawful advances, or (3) a majority of a quorum of the disinterested, non-party Trustees or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts, that there is reason to believe that the person to be indemnified ultimately will be found entitled to indemnification. 8. Non-Exclusivity. Nothing in this Agreement shall limit --------------- or restrict the right of any director, officer or employee of the Adviser who may also be a Trustee, officer or employee of the Trust to engage in any other business or devote his or her time and - 5 - attention in part to the management or other aspects of any business, whether of a similar or dissimilar nature, nor limit or restrict the right of the Adviser to engage in any other business or to render services of any kind to any other corporation, firm, individual or association. 9. Amendments. This Agreement may be amended by mutual ---------- consent in writing, but the consent of the Trust must be obtained in conformity with the requirements of the Act. 10. Governing Law. This Agreement shall be construed in ------------- accordance with the laws of the State of New York and the applicable provisions of the Act. To the extent the applicable laws of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Act, the latter shall apply. 11. Personal Liability. The Declaration of Trust ------------------ establishing the Trust, dated April 24, 1986, a copy of which, together with all amendments thereto (the "Declaration"), is on file in the office of the Secretary of the Commonwealth of Massachusetts, provides that the name "SunAmerica Income Funds" refers to the Trustees under the Declaration collectively as trustees, but not as individuals or personally, and no Trustee, shareholder, officer, employee or agent of the Trust shall be held to any personal liability, nor shall resort be had to their private property for satisfaction of any obligation or claim or otherwise in connection with the affairs of the Trust, but the "Trust Property" only shall be liable. 12. Separate Series. Pursuant to the provisions of the --------------- Declaration, each Fund is a separate series of the Trust, and all - 6 - debts, liabilities, obligations and expenses of a particular Fund shall be enforceable only against the assets of that Fund and not against the assets of any other Fund or of the Trust as a whole. IN WITNESS WHEREOF, the Trust and the Adviser have caused this Agreement to be executed by their duly authorized officers as of the date first above written. SUNAMERICA INCOME FUNDS By: /s/Peter A. Harbeck ------------------------------- Name: Peter A. Harbeck Title: Executive Vice President SUNAMERICA ASSET MANAGEMENT CORP. By: /s/Robert M. Zakem ------------------------------- Name: Robert M. Zakem Title: Senior Vice President - 7 - SCHEDULE A FEE RATE (as a % of average FUND daily net asset value) ---------------------- SunAmerica Federal Securities Fund .55% to $25MM .50% next $25MM .45% over $50MM SunAmerica U.S. Govt Securities Fund .75% to $200MM .72% next $200MM .55% over $400MM SunAmerica High Income Fund .75% to $200MM .72% next $200MM .55% over $400MM SunAmerica Diversified Income Fund .65% to $350MM .60% over $350MM SunAmerica Tax Exempt Insured Fund .50% to $350MM .45% over $350MM EX-99.B9 16 SERVICE AGREEMENT EXHIBIT 99.B(9) SUNAMERICA INCOME FUNDS SERVICE AGREEMENT This AGREEMENT made as of this 23 day of September, 1993 by and between SunAmerica Income Funds, a Massachusetts business trust having its principal place of business at 733 Third Avenue, New York, New York 10017 (hereinafter called the "Trust") and SunAmerica Fund Services, Inc., a Delaware corporation, having its principal place of business at 733 Third Avenue, New York, New York 10017 (hereinafter called "Fund Services"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Trust desires to appoint Fund Services as its agent in connection with certain shareholder servicing activities, and Fund Services desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Terms of Appointment; Duties of Fund Services --------------------------------------------- A. Subject to the terms and conditions set forth in this Agreement, the Trust hereby employs and appoints Fund Services to act, and Fund Services agrees to act, as servicing agent to assist State Street Bank and Trust Company and its affiliates, the Trust's transfer agent (the "Transfer Agent") for the authorized and issued shares of beneficial interest, $.01 par value of the Trust (the "Shares"), in connection with certain services offered to the shareholders of the Trust (the "Shareholders") as set out in the current prospectus of the Trust, as may be amended from time to time, as on file with the Securities and Exchange Commission. B. Fund Services agrees that it will perform the following services: (a) In accordance with procedures established from time to time between the Trust, the Transfer Agent and Fund Services, Fund Services shall: (i) receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation therefor to the custodian of the Trust authorized pursuant to the Declaration of Trust of the Trust (the "Custodian"): (ii) pursuant to purchase orders, assist the Transfer Agent to issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; (iii) receive for acceptance, redemption requests and redemption directions and deliver the appropriate documentation therefor to the Custodian; (iv) the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders; (v) assist the Transfer Agent to effect transfers of Shares by the registered owners thereof upon receipt of appropriate documentation; (vi) assist the Transfer Agent to prepare and transmit payments for dividends and distributions declared by the Trust; and (vii) assist the Transfer Agent to maintain records of account for the Trust and its Shareholders as to the foregoing. 2. Services with Respect to the Registration of Shares. ---------------------------------------------------- On each day on which an issuance or redemption of Shares occurs, Fund Services shall assist the Transfer Agent to prepare for the Trust account records opening, crediting, debiting and closing affected Shareholders' accounts as necessary to reflect the issuances or redemptions occurring on that day. All credits to Shareholders' accounts shall be for the price of the Shares at the time of purchase, determined in accordance with the Trust's current prospectus. 3. Share Price for Purchase and Redemption --------------------------------------- A. Fund Services shall assist the Transfer Agent to identify all share transactions which involve purchase and redemption orders that are processed at a time other than the time of the computation of net asset value per share next computed after receipt of such orders, and shall compute the net effect upon the Trust of such transactions so identified on a daily and cumulative basis. B. Fund Services shall supply to the Trust monthly reports summarizing the transactions identified pursuant to paragraph A. above, and the daily and cumulative net effects of such transactions, and shall advise the Trust at the end of each month of the net cumulative effect at such time. 4. Books and Records ----------------- Fund Services shall prepare for the Trust and assist the Transfer Agent in maintaining records showing for each Shareholder's account the following: 2 A. The name, address and tax identification number of such Shareholder; B. The number of Shares held by such Shareholder; C. Historical information including dividends paid and date and price for all transactions; D. Any stop or restraining order placed against such account; E. Information with respect to the withholding of any portion of income dividends or capital gains distributions; F. Any dividend or distribution reinvestment election, withdrawal plan application, and correspondence relating to the current maintenance of the account; G. The certificate numbers and denominations of any share certificates issued to such Shareholder; and H. Any additional information required by Fund Services to perform the services contemplated by this Agreement. Any such records required to be maintained by the Trust pursuant to Rule 31a-1 under the Investment Company Act of 1940, as amended (the "Act") or any successor rule shall be preserved by the Transfer Agent or Fund Services for the periods prescribed by Rule 31a-2 under the Act or any successor rule. Such record retention shall be at the expense of the Trust. Fund Services may, at its option at any time, turn over to the Trust and cease to retain records created and maintained by Fund Services pursuant to this Agreement which are no longer required by Fund Services to perform the services contemplated by this Agreement. If not turned over to the Trust, such records shall be preserved by Fund Services for six years from the year of creation, during the first two of which years such records shall be in readily accessible form. At the conclusion of such six-year period, such records shall either be turned over to the Trust or destroyed in accordance with the Trust's authorization. 5. Information To Be Furnished To The Trust ---------------------------------------- Fund Services shall assist the Transfer Agent to furnish to the Trust periodically as agreed upon between the Trust, Fund Services and the Transfer Agent the following information: A. Copies of the daily transaction register for each business day of the Trust; 3 B. Copies of all dividend, distribution and reinvestment blotters; C. Schedules of the quantities of Shares distributed in each state for purposes of any state's laws or regulations as specified in instructions given to Fund Services from time to time by the Trust or its agents; D. Reports on transactions described in Paragraph 3 of this Agreement. E. Such other information, including Shareholder lists, and statistical information as may be requested by the Trust from time to time. 6. Confirmations and Statements of Account --------------------------------------- Fund Services shall assist the Transfer Agent to prepare and mail to each Shareholder at his address as set forth on the transfer books of the Trust such confirmations of the Trust for each purchase or sale of Shares by each Shareholder and periodic statements of such Shareholder's account with the Trust as may be specified from time to time by the Trust. 7. Correspondence -------------- Fund Services shall respond to correspondence from Shareholders relating to their accounts with the Trust and such other correspondence as may from time to time be mutually agreed upon by the Trust, the Transfer Agent and Fund Services. 8. Proxies ------- Fund Services shall assist the Transfer Agent to mail to Shareholders notices of meetings, proxy statements, forms of proxy and other material supplied to it by the Trust in connection with Shareholder meetings of the Trust and shall receive, examine and tabulate returned proxies and certify such tabulations to the Trust in such written form as the Trust may require. 9. Fees And Charges ---------------- A. For the services rendered by Fund Services as described above, subject to the conditions described below, the Trust shall pay to Fund Services a fee calculated and payable monthly based upon the annual rate of.22% of average daily net assets. Fund Services shall also be reimbursed for the cost of forms used by it in communicating with Shareholders of the Trust or specially prepared for use in connection with its services hereunder, as well as the cost of postage, telephone and telegraph (or similar electronic media) used in communicating with Shareholders of the 4 Trust. It is agreed in this regard that Fund Services, prior to ordering any form shall obtain the written consent of the Trust. All forms for which Fund Services has received reimbursement from the Trust shall be the property of the Trust. Such fees and out- of-pocket expenses and advances described herein may be changed from time to time subject to mutual written agreement between the Trust and Fund Services. B. No fee shall be payable to Fund Services pursuant to this Agreement in the event that the Board of Trustees of the Trust (the "Trustees") determines that Fund Services did not provide the services required by this Agreement or provided services which were inadequate as determined by the Trustees, in its sole discretion. 10. Compliance With Government Rules And Regulations ------------------------------------------------ The Trust understands and agrees that it shall be solely responsible for ensuring that each prospectus of the Trust complies with all applicable provisions of, or regulations adopted pursuant to, the Securities Act of 1933, as amended (the "Securities Act"), the Act, and any other laws, rules and regulations of Federal, state or foreign governmental authorities having jurisdiction in connection with the offering or sale of Shares. 11. Representations and Warranties of Fund Services ----------------------------------------------- Fund Services represents and warrants to the Trust that: A. It is a corporation duly organized and existing and in good standing under the laws of the State of Delaware. B. It is empowered under applicable laws and by its charter and by-laws to enter into and perform this Agreement. C. All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. D. It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 12. Representations and Warranties of the Trust ------------------------------------------- The Trust represents and warrants to Fund Services that: A. It is a business trust duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts. B. It is empowered under applicable laws and by its Declaration of Trust and By-Laws to enter into and perform this Agreement. 5 C. All proceedings required by said Declaration of Trust and By-Laws have been taken to authorize it to enter into and perform this Agreement. D. It is an investment company registered under the Act. E. A registration statement under the Securities Act is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Trust being offered for sale; information to the contrary will result in immediate notification to Fund Services. 13. Indemnification --------------- A. Fund Services shall not be responsible for, and the Trust shall indemnify and hold Fund Services harmless from and against, any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of Fund Services or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct. (b) The Trust's refusal or failure to comply with the terms of this Agreement, or which arise out of the Trust's lack of good faith, negligence or willful misconduct which arise out of the breach of any representation or warranty of the Trust hereunder. (c) The reliance on or use by Fund Services or its agents or subcontractors of information, records and documents which (i) are received by Fund Services or its agents or subcontractors and furnished to it by or on behalf of the Trust, and (ii) have been prepared or maintained by the Trust. (d) The reliance on, or the carrying out by Fund Services or its agents or subcontractors of any instructions or requests of the Trust representative. (e) The offer or sale of Shares in violation of any requirement under the Federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any Federal agency or any state with respect to the offer or sale of such Shares in such state. B. Fund Services shall indemnify and hold the Trust harmless from Fund Services refusal or failure to comply with the terms of this Agreement, or which arise out of Fund Services lack of good 6 faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of Fund Services or its agents or subcontractors hereunder. C. At any time Fund Services may apply to any officer of the Trust for instructions, and may consult with outside legal counsel with respect to any matter arising in connection with the services to be performed by Fund Services under this Agreement, and Fund Services and its agents or subcontractors shall not be liable and shall be indemnified by the Trust for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. Fund Services, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Trust, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided Fund Services or its agents or subcontractors by telephone, in person, machine readable input, telex, CRT data entry or other similar means authorized by the Trust, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust. Fund Services, its agents and subcontractors shall also be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signatures of the appropriate officer or officers of the Trust, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar. D. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. E. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any act or failure to act hereunder. F. In order that the indemnification provisions contained in this Paragraph 13 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other 7 party may be required to indemnify it except with the other party's prior written consent. 14. Further Actions --------------- Each party agrees to perform such further acts and execute and deliver such further documents as are necessary to effectuate the purposes hereof. 15. Amendment, Termination and Delegation of Obligations ---------------------------------------------------- Upon its approval by the Trustees and appropriate execution, this Agreement shall remain in effect for two years and thereafter automatically for successive one-year periods, provided that such continuance is specifically approved at least annually by a vote of a majority of the Trustees and by a majority of the members who are not parties to this Agreement or interested persons, as defined in the Act, of any such party. The Trustees shall approve and renew this Agreement upon determining that the fees provided by Paragraph 9 of this Agreement are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. This Agreement may be modified or amended from time to time by written agreement between the parties hereto. This Agreement may be terminated at any time by one hundred twenty (120) days' written notice given by one party to the other. Upon termination hereof, the Trust shall pay to Fund Services such compensation as may be due as of the date of such termination, and shall likewise reimburse Fund Services in accordance herewith for its costs, expenses and disbursements. 16. Assignment ---------- A. Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. B. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 17. New York Law to Apply --------------------- This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. 8 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written. ATTEST: SUNAMERICA INCOME FUNDS /s/Robert M. Zakem By: /s/Peter A. Harbeck - ------------------ ------------------------ Peter A. Harbeck, Executive Vice President ATTEST: SUNAMERICA FUND SERVICES, INC. /s/Robert M. Zakem By: /s/Peter A. Harbeck - ------------------ --------------------------- Peter A. Harbeck, President 9 EX-99.B10 17 OPINION OF SUNAMERICA EXHIBIT 99.B.10 SUNAMERICA ASSET MANAGEMENT CORP. 733 Third Avenue, Third Floor New York, NY 10017 800.858.8850 July 25, 1995 SunAmerica Income Funds 733 Third Avenue New York, NY 10017-3204 Ladies and Gentlemen: This opinion is being furnished in connection with the filing by SunAmerica Income Funds (the "Trust"), a Massachusetts business trust, of Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (the "Amendment") which definitely registers 39,838,592 shares of beneficial interest, $.01 par value (the "Shares"). I am familiar with the proceedings taken by the Trust in connection with the authorization, issuance and sale of the Shares. In addition, I have examined the Trust's Declaration of Trust, its By-Laws and such other documents that have been deemed relevant to the matters referred to in this opinion. Based upon the foregoing, I am of the opinion that the Shares registered by the Amendment are legally issued, fully paid and nonassessable shares of beneficial interest of the Trust. I hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Amendment of the Trust, and to the filing of this opinion under the securities laws of any state. Very truly yours, SunAmerica Asset Management Corp. By:/s/Robert M. Zakem Robert M. Zakem Senior Vice President and General Counsel EX-99.B11 18 CONSENT OF INDEPENDENT ACCOUNTANTS EX-99.B11 Consent of Independent Accountants We hereby consent to the use in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 20 to the registration statement on Form N-1A (the "Registration Statement") of our report dated May 11, 1995, relating to the March 31, 1995 financial statements and financial highlights of SunAmerica Income Funds, which appears in such Statement of Additional Information, and to the incorporation by reference of our report into the Prospectus which constitutes part of this Registration Statement. We also consent to the reference to us under the heading "Independent Accountants and Legal Counsel" in such Statement of Additional Information and to the reference to us under the heading "Financial Highlights" in such Prospectus. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York July 25, 1995 EX-99.B14 19 MODEL RETIREMENT PLAN EXHIBIT 99.B14 SUNAMERICA MUTUAL FUND SARSEP PLAN [ART] Salary Reduction Employee Pension Plan [LOGO] SUNAMERICA ASSET MANAGEMENT THE SUNAMERICA MUTUAL FUND SARSEP PLAN - -------------------------------------------------------------------------------- INTRODUCTION SARSEP - Salary Reduction SEP, is a low-cost, easily manageable, retirement plan that the small business owner can establish for employees. Employees contribute their own income into the plan, on a pretax basis, up to $9,240 (for 1995) in deferred compensation. To establish a SARSEP, the employer must have 25 or fewer employees and at least half of the company's eligible employees must elect to defer part of their compensation into the plan. Other advantages of a SARSEP Plan include: . MINIMAL ADMINISTRATIVE COSTS - Reporting and disclosure requirements are few as opposed to complicated and costly qualified retirement plans. . CONTRIBUTION FLEXIBILITY - Employee contributions may vary. Employers can terminate the plan at any time. . PARTICIPANT DIRECTED INVESTMENTS - Employees control the investment allocation of their account. Having a choice of mutual funds yields investment flexibility and increases the likelihood of realizing your individual investment goals. . LOWER TAXES - The SARSEP is a salary reduction plan which reduces the taxable wage base for the employee. Both income taxes and FICA taxes are reduced by contributions to the Plan. . TAX-DEFERRED ACCUMULATION - Earnings and return on earnings accumulate on a tax-deferred basis until withdrawn. . EMPLOYER CONTRIBUTIONS - A combination of employer contributions and the employee elective deferral cannot exceed the lesser of 15% or $22,500 (for 1995). Please read on for more details. 1 QUESTIONS AND ANSWERS ABOUT SARSEPS - -------------------------------------------------------------------------------- Q. Who may establish a SARSEP? A. This SARSEP may be established by an incorporated or unincorporated business provided: a) The business is not a state or local government or a tax-exempt organization. b) The business has no more than 25 employees eligible to participate in the SARSEP. c) The business has at least one employee who is not highly compensated. Q. How does a SARSEP work? A. SARSEP contributions are deducted from the employees paycheck and are deposited by the employer into the employee's Individual Retirement Account. They are not included in the employee's income and therefore are not reported or deducted by the employee on his or her tax return. Salary reduction contributions are not subject to federal or state (except Pennsylvania) income tax withholding, however, they are subject to FICA withholding. Q. Which employees are eligible to participate in the SARSEP? A. The plan must include non-union employees who meet all of the following requirements: . Are at least 21 years old. . Have worked for the employer for any part of any three of the preceding five plan years. . Have earned at least $396 for 1994 or $400 for 1995 (indexed for inflation) during the year for which the contribution is made. Less restrictive eligibility requirements may be imposed in lieu of the above requirements. At least 50% of the employees eligible to participate must elect to make salary reduction contributions in order for the SARSEP to be qualified. Q. How much can an employee elect to contribute to the SARSEP? A. The maximum amount that an employee can elect to contribute to the SARSEP for a calendar year is 15% of his or her compensation, not to exceed $9,240 (indexed for 1995). Q. What happens when an employee leaves before retirement? A. All SARSEP contributions made by an employee, or by the employer, belong to that employee as soon as they are made. Should an employee terminate employment before retirement, his or her entire account may then go directly to the employee. In most instances, the employee will maintain the account on an individual basis so that it would continue to accumulate on a tax- deferred basis until withdrawn at retirement, or some later date. Q. When may withdrawals be made? A. Contributions and earnings on contributions will ordinarily remain in the plan until age 59 1/2. After that, they may be withdrawn at any time without penalty and will be taxed as ordinary income. Distributions taken before age 59 1/2 are taxed as ordinary income and are subject to a 10% federal penalty tax. In the event of death or disability, payments may begin immediately without penalty. Payments from the SARSEP Plan must begin no later than April 1st of the year following the year in which the participant reaches age 70 1/2. Further contributions may be made to the participant's account after age 70 1/2 as long as the participant is still an employee. 2 Q. What are the nondiscrimination requirements for a SARSEP? A. In no case may contributions, or the manner of making contributions, discriminate in favor of any highly compensated employee. Therefore, the SARSEP must meet the requirements for top-heavy defined contribution plans. A plan is considered "top-heavy" if 60% or more of the assets were in the accounts of key employees on the last day of the preceding plan year (the last day of the first plan year for new plans). Employers establishing a SARSEP may elect to have the top-heavy test based upon 60% of the aggregate plan contributions. This service is not provided by SunAmerica. Also, the Actual Deferral Percentage (ADP) of each highly compensated employee cannot be greater than 1.25 times the average deferral of all non- highly compensated employees. The ADP is calculated by dividing the employee's elective deferral for any year by his or her compensation for the year. Q. What are "key employees" and "highly compensated employees"? A. I. A "key employee" is defined as: a) an officer who earned $45,000 or more. b) a more than 5% owner of the business. c) a 1% or more owner in the business having annual compensation of more than $150,000. d) an employee who is one of the ten largest owners and makes more than $30,000 annual compensation. II. A "highly compensated employee" is defined as: a) a 5% owner of the business. b) received more than $75,000 in annual compensation. c) received more than $50,000 in compensation and was in the top-paid 20% of the employees, ranked by compensation. d) was an officer of the employer's business and received more than $45,000 in annual compensation. 3 PRIME COMPARISONS: SEP-IRA vs. PROFIT SHARING SARSEP vs. 401(k) - -------------------------------------------------------------------------------- The chart below compares the features of SEP-IRA, Profit Sharing, SARSEP and 401(k) Plans. SEP-IRA/PROFIT SHARING PLAN SIMILARITIES . Employer sponsored and funded . Employer contributions cannot exceed 15% of compensation or $22,500, whichever is less . Contributions can be discretionary; employer does not need to fund in a year in which there are no profits
DIFFERENCES SEP-IRA Profit Sharing --------------------- ----------------------- Plan Establishment Requires IRS Form Requires adoption 5305-SEP or Prototype agreement Administration Not required Required Vesting 100% immediate 5 year cliff/3-7 year graded Set up Tax Filing Deadline Calendar year or fiscal year end
SARSEP/401(k) PLAN SIMILARITIES . Salary reduction contributions are made at the request of the employees . Employee elective deferrals are limited to 15% or $9,240 (for 1995), whichever is less . Actual deferral percentage testing is required to comply with non- discrimination testing DIFFERENCES
SARSEP 401(k) ---------------------- ----------------------- Plan Establishment Requires IRS Form Requires adoption 5305A-SEP or Prototype agreement Administration Not required Required Vesting 100% immediate 5 year cliff/3-7 year graded Set up Tax Filing Deadline Calendar year or fiscal year end Eligibility Firms with 25 or fewer No limit on number of employees and at participants, but need least 50% participation 56% participation
4 HOW TO ESTABLISH A SARSEP - -------------------------------------------------------------------------------- 1) The SunAmerica SARSEP Kit contains the following pieces: . Adoption Agreement -- the agreement completed by the employer specifying the terms of the SARSEP (page 9). . Salary Reduction Agreement -- an extension of the adoption agreement allowing employees to make contributions to the SARSEP (page 11). . Salary Reduction Election -- an election by each employee to participate in the SARSEP and indicating deferral percentages for contributions (page 13). . SARSEP Disclosure Statement -- the definition of a SARSEP and how it works, including how an employer makes contributions and how the Code treats contributions for tax purposes (page 15). 2) To establish the plan, read the Plan Document and complete the Adoption Agreement. 3) A Salary Reduction Agreement and an Individual Retirement Account application (if not previously prepared) must be completed and signed by each employee to allow for the plan elective deferrals. 4) A Salary Reduction Election must be completed and signed by each employee to indicate allocation instructions for contributions. 5) Conduct the nondiscrimination test and monitor participation to determine if your plan is likely to unfairly benefit certain employees and to make sure that 50% of eligible employees will be participating. In performing this test, it is recommended that you project the numbers to the end of the year. This would give you a meaningful indication of whether or not you will pass the test. Your tax advisor should review this test with you. 6) The Actual Deferral Percentage (ADP) test must be completed annually, showing the contribution formula for the year and how contributions will be allocated. 7) Group investment lists can be provided to a plan administrator for allocation of employee deferrals (page 14). 8) Employer mails the following items to SunAmerica Fund Services Attn: Retirement Plans Department, 733 Third Avenue, 3rd floor, New York, NY 10017-3204: . Signed Adoption Agreement including Salary Reduction Agreement (employer must keep a file copy) . Check for the first contributions, made payable to the Trustee, Resources Trust Company . Salary Reduction Election (allocation instructions for each employee) . Employee IRA application (if applicable) 5 INSTRUCTIONS FOR COMPLETING THE SEP ADOPTION AGREEMENTS - -------------------------------------------------------------------------------- ARTICLE I DEFINITIONS 1.01 Plan. Fill in the name of the employer. 1.04 Employee. The employer should complete this section of the adoption agreement by checking the appropriate exclusions, if any. If the definition of "employee" is to be all inclusive, the employer should check Option (a) indicating no exclusions. 1.06 Compensation. Options (a) and (b) represent two alternative safe harbor definitions of compensation which satisfy Code Section 408(k)(7)(B). Both definitions are very similar and contain only minor differences. For example, both definitions include basic compensation items such as salary, overtime, bonuses and commissions. Since the definitions are very similar, the determining factor for the employer should be administrative convenience. Options (c) and (d) represent safe harbor modifications to compensation as permitted under Treas. Reg. Section 1.414(s)-1(c). By checking Option (c), the plan "grosses up" the compensation definition for certain elective amounts (e.g., SARSEP deferrals). The gross up will apply to whichever definition the employer elects (i.e., (a) or (b)). By checking Option (d), the plan excludes certain extraordinary forms of compensation (e.g., fringe benefits) from the definition of compensation elected under (a) or (b). 1.09 Effective Date. If the employer is adopting a new plan, it must specify the effective date in the first sentence. In general, the effective date would be the first day of the plan year for which the employer adopts the SEP Plan (e.g., January 1, 1993) unless the employer started its business during the calendar year. If the employer is amending an existing SEP Plan, the employer must specify the restated effective date in the first blank and the original plan execution date (e.g., "April 13, 1986") or effective date (e.g., "as of January 1, 1986") in the second blank. If the employer is restating the SEP for TRA, the restated effective date should be the later of (1) the first day of the first plan year beginning after December 31, 1988, or (2) the first day of the first plan year for which the SEP was effective. 1.11 Plan Year. The plan year of the SEP may be the calendar year or the employer's taxable year. No other measuring period is acceptable. If the employer elects a calendar plan year and the employer's taxable year is not the calendar year, the employer must determine its deduction limitation on the basis of the calendar year ending within the employer's taxable year. The employee's gross income exclusion limitation also applies on a plan year basis. ARTICLE II ELIGIBILITY TO PARTICIPATE IN EMPLOYER CONTRIBUTIONS 2.01 Participation. (a) Insert the age desired. If the employer does not wish to condition eligibility upon age, do not check (a), or complete (a) with "N/A." (b) (1) Insert the number of prior years of service required as an eligibility condition. (2) Check Option (b)(2) if service in a prior year is not an eligibility condition; for example, in the case of a new business established during the plan year. ARTICLE III EMPLOYER CONTRIBUTIONS 3.01 Amount. The only contribution formula the plan provides is a discretionary contributions formula. Options (a) and (b) relate to the allocation of the employer's discretionary contribution to the participant's IRA. Option (a) is a "nonintegrated formula" which allocates employer contributions pro rata on the basis of compensation (as defined in Section 1.06). Option (b) is an "integrated" formula which incorporates the Code Section 401(l) safe harbor permitted disparity rules. If the employer elects an integrated formula, it also must define excess compensation by completing the blank spaces in Option (b). Excess compensation is simply the employee's compensation in excess of a 6 specified integration level. The amount of the integration level also will affect the "applicable percentage" portion of the integrated formula. The "applicable percentage" in the integrated portion of the formula can be 5.7%, 5.4% or 4.3%, depending on the integration level. Option (b) provides for a "floating" integration level. This approach permits the employer to select a percentage of the taxable wage base for purposes of the "float." Please note the maximum floating integration level for a plan year is the taxable wage base in effect at the beginning of that plan year. If the employer wishes to "float" the integration level with the full taxable wage base, the employer should insert "100%" in the first space provided in Option (b) and insert an "N/A" in the second space. The taxable wage base for 1993 is $57,600. For many highly compensated employees, experience has shown an "applicable percentage" of 5.4% is the most advantageous. To use 5.4%, the integration level must exceed 80% of the taxable wage base. For example, the employer may specify 80% in the first space in Option (b) rounded to the next "$1,000." By rounding to the next $1,000, the plan ensures the integration level is greater than 80% of the taxable wage base (permitting use of the 5.4% applicable percentage) and at the same time provides a rounded number for simpler administration. The integrated contribution formula under Option (b) is a two-tiered formula. Under the first tier, the employer contributes a uniform percentage of compensation to each eligible participant. The second tier is the integrated contribution. However, to ensure the plan is in compliance with the top-heavy rules, the employer may not contribute under the second tier unless the first tier contribution percentage is at least 3%. Under the second tier, the employer contributes a uniform percentage of excess compensation which may not exceed the lesser of (1) the percentage contributed under the fast tier, or (2) the percentage determined in the maximum disparity table. 7.01 Salary Reduction Contribution. If the employer is not establishing a SEP with a salary reduction agreement, the employer should elect Option (a) and complete the "Execution" section. If the employer wishes to permit employees to make salary reduction contributions to the plan, the employer must elect Option (b) and complete Appendix A of the agreement. Actual deferral percentage test. Section 7.06 of the basic plan document describes the actual deferral percentage ("ADP") test each highly compensated employee must satisfy. Please note the ADP test is on a plan year basis, whereas the annual deferral limitation under Code Section 402(g) is on a calendar year basis. The maximum ADP each highly compensated employee may have depends on the average ADP of the non highly compensated employees. Section 7.06(C) of the basic plan document satisfies Code Section 408(k)(6), under which the plan may distribute excess contributions which cause the plan to fail to satisfy the ADP test. Under a SEP, the excess contributions are part of the highly compensated employee's IRA to which the employer makes the contributions. Accordingly, it is the sponsor of the highly compensated employee's IRA that will need to distribute the excess contributions adjusted for allocable income or loss. The plan directs the employer to notify the IRA sponsor of the amount of the excess contribution. However, the highly compensated employee should request the necessary withdrawal from his IRA. The highly compensated employee must receive the distribution of excess contributions, as adjusted for allocable income or loss, by the last day of the following plan year for the elective deferral arrangement to continue to qualify. However, the employer is liable for a 10% excise tax on the excess contributions not distributed by the 15th day of the third month of the following plan year. The highly compensated employee must include in his gross income the excess contribution (plus allocable income, if any) distributed from his IRA. However, the taxable year in which the highly compensated employee includes this amount in income depends on the timing of the distribution from the IRA. The disclosure statement explains the income tax consequences to the highly compensated employee. Coordination with discretionary contributions. If the employees make elective deferrals for a plan year, the employer should not make its discretionary contribution until after the close of that plan year. The law requires a SEP to allocate discretionary contributions on the basis of a uniform percentage of compensation, subject to the integration option. Therefore, if the employer elects a nonintegrated allocation for the discretionary contribution, all eligible employees must receive the same percentage of compensation as an allocation of discretionary contributions. If the employer elects an integrated allocation for the discretionary contribution, all eligible employees must receive the same percentage of excess compensation, under the integrated portion of the allocation formula, plus the same percentage of compensation under the nonintegrated portion of the allocation formula. The employer cannot determine the maximum uniform percentage it can contribute for the eligible employees until it determines the highest elective deferral rate elected by an employee. In addition, the employer cannot determine the maximum percentage until after the employer has reduced the employee's compensation for his salary reduction contributions. An employer's SEP contribution will not be includible in the employee's gross income to the extent the contribution does not exceed the lesser of (1) 15% of the employer compensation for the year, or (2) a specified dollar amount (currently $30,000). In applying the 15% limit, the Code determines compensation after the reduction for the salary reduction contributions. 7 For example, assume after the close of the plan year the employer determines eligible employee A had the highest deferral rate. A's compensation is $70,000, and he deferred $7,000 of that amount. Accordingly, A's compensation for 15% allocation limit is $63,000. A's maximum SEP contribution is 15% of $63,000, or $9,450. Therefore, A's allocation of employer discretionary contributions cannot exceed $2,450 [$9,450 - $7,000]. If the employer elected a nonintegrated allocation formula, the maximum discretionary contribution is 3.88%, which is the maximum percentage A may receive and, thus, all participants may receive. If the employer elected an integrated allocation formula, the computation becomes more complicated because the employer must factor in not only the uniform rate of contribution requirement and the contribution limits but also the permitted disparity rules. For example, assume the same facts as in the example above except the employer elected an integrated contribution formula. Assume further the employer elects an integration level of 80% of the taxable wage base rounded to the next $1,000 ($47,000 for 1993) to maximize the permitted disparity contribution. As with the nonintegrated contribution formula, A's contribution may not exceed $2,450. Therefore, the maximum integrated contribution A may receive and thus, the maximum all participants may receive is: 3.1% of total compensation [3.1% x $63,000 = $1,953] plus 3.1% of excess compensation [3.1% x 16,000 = $497]. Appendix A of Adoption Agreement Complete Appendix A only if the employer checked Section 7.01(b). Appendix A includes three Sections: 7.02, 8.01 and 8.04. 7.02 Salary reduction agreements. Option (a) provides limitations on the employees' salary reduction contributions. It is not necessary to prescribe the Code 402(g) limitations (see Section 7.04 of the basic plan document) nor the Code Section 415 limitation (see Section 3.02 of the basic plan document). The employer should complete Option (a) to provide a lesser limitation (e.g., 10% of compensation for the plan year). A lesser limitation may minimize the chance of an employee's elective deferrals causing a Code Section 415 violation or a chance of exceeding the deduction limitation of Code Section 404. Options (b) and (c) set parameters on the frequency of changing the salary reduction agreement. Option (b) addresses the complete revocation of the salary reduction agreement and the execution of a new agreement following revocation. Option (c) addresses increases or decreases in the level of salary reduction contributions. 8.01 Top-heavy requirements. If the plan permits salary reduction contributions to the plan, the employer must specify whether the plan will operate as a "deemed top-heavy plan" or as a "not deemed top-heavy plan". If the employer elects Option (a), the employer will not need to make a determination as to whether the plan is top-heavy. However, the plan will require the employer to make a top-heavy minimum contribution for each plan year, even if the plan is not top-heavy. If the employer elects Option (b), the employer will need to make a top-heavy minimum contribution only in plan years in which the plan is top- heavy. The top-heavy minimum contribution is the lesser of 3% of the participant's compensation for the plan year or the highest contribution rate for a key employee for the plan year. A key employee's contribution rate is the sum of the employer contributions and salary reduction contributions, divided by the key employee's compensation for the plan year. The following example demonstrates the effect of the top-heavy election. Assume for the 1993 plan year, employer X adopts a SEP with a salary reduction feature. Assume further the plan is not top-heavy for the 1993 plan year. For the 1993 plan year, X makes no contribution other than the participant's elective deferrals. The elective deferral contributions for the two key employees are 6% and 4% respectively, while the elective deferral contributions for the four nonkey employees are 4%, 3%, 2% and 0% respectively. If the employer elects Option (a) under Section 8.01, the employer will need to make a 3% top-heavy minimum contribution to each nonkey employee because the plan is operating as a deemed top-heavy plan. However, if the employer elects Option (b), the employer will not need to make a top-heavy minimum contribution for the 1993 plan year because the plan is not top-heavy. 8.04 Top-heavy minimum allocation. The employer may complete Section 8.04 to specify a different plan to satisfy the top-heavy minimum benefit requirement. For example, if the employer is adopting both a SEP and a profit sharing plan, the employer might specify the profit sharing plan as the plan which guarantees the top-heavy minimum allocation. If the employer maintains only one plan, it never would complete Section 8.04. Execution On page 10, the Employer must complete the date of execution. The employer then must execute the adoption agreement and complete the employer informational items. There is no provision within the adoption agreement for the designation of a plan administrator. Therefore, the employer is the plan administrator. The employer's acting as plan administrator avoids the necessity of a separate EIN for an individual plan administrator. However, the employer must designate the person (by name or title) who will provide additional information to participants regarding the SEP. 8 ADOPTION AGREEMENT PROTOTYPE SIMPLIFIED EMPLOYEE PENSION PLAN - -------------------------------------------------------------------------------- The undersigned Employer establishes a Simplified Employee Pension Plan under Resources Trust Company Prototype Simplified Employee Pension Plan which the undersigned incorporates within this Adoption Agreement by this reference. The undersigned Employer makes the following elections granted under the Plan: 1.01 PLAN. The name of the Plan as adopted by the Employer is Simplified Employee Pension Plan.______________________________________________________ (Name of Company) 1.04 EMPLOYEE. The following Employees are not eligible to participate in the Plan: (Choose (a) or at least one of (b) or (c)) _____ (a) No exclusions. _____ (b) Collective bargaining employees. [Note: If the Employer excludes union employees from the Plan, the Employer must be able to provide evidence that retirement benefits were the subject of good faith bargaining.] _____ (c) Nonresident aliens who do not receive any earned income (as defined in Code Section 911(d)(2)) from the Employer which constitutes United States source income (as defined in Code Section 861(a)(3)). 1.06 COMPENSATION. Definition of Compensation (see Section 1.06 of the Plan). Compensation means: (Choose (a) or (b); (c) and (d) are available only as additional selections.) _____ (a) Federal income tax wages. _____ (b) W-2 wages. _____ (c) The Plan increases Compensation by the amount of elective contributions made by the Employer on the Employee's behalf. (d) The Plan excludes reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. 1.09 EFFECTIVE DATE. The effective date of the Plan as adopted by the Employer is __________________________________________. This Plan replaces a simplified employee pension plan adopted ________________________________________________. 1.11 PLAN YEAR. Plan Year means: (Choose (a) or (b)) _____ (a) The calendar year. _____ (b) The Employer's taxable year, ending every _________________________. 2.01 PARTICIPATION. For each Plan Year on account of which the Employer makes a contribution under the Plan, the Employer will contribute on behalf of each Employee who: (Choose (a) or (b) or both) _____ (a) Has attained age ______________________ (may not exceed age 21), and _____ (b) Has performed any service for the Employer: _____ (1) During at least _____________ (may not exceed 3) of the 5 Plan Years immediately preceding the Plan Year. _____ (2) During the Plan Year. 9 3.01 AMOUNT. The Employer will make its discretionary contribution under the following formula: (Choose (a) or (b)). _____ (a) Uniform contribution allocation formula. _____ (b) Permitted disparity contribution formula. For purposes of this formula, "Excess Compensation" means Compensation in excess of the following Integration Level: ______% (not exceeding 100%) of the taxable wage base, as determined under Section 230 of the Social Security Act, in effect on the first day of the Plan Year rounded to the next $_______________ (but not exceeding the taxable formula. For purposes of this wage base). 7.01 SALARY REDUCTION CONTRIBUTIONS. The Plan: (Choose (a) or (b)) _____ (a) Does not permit Participant Salary Reduction Contributions. _____ (b) Permits Participant Salary Reduction Contributions (If the Employer elects (b), the Employer must complete Appendix A.) IN WITNESS WHEREOF, the Employer has executed this Adoption Agreement, in duplicate, each constituting an original Adoption Agreement, on this __________ ________________ day of _________, 199__. By: _______________________________ "EMPLOYER" The name or title of the individual the Employer has designated to provide additional information to Participants concerning this SEP is _________________ ___________________________________________________________________. [Name or Title] _________________________________________ ______________________________________ Street Address City State ZIP _________________________________________ ______________________________________ Telephone Number Federal Employer Identification Number For inquiries regarding the SEP, please contact the Sponsor at the following address and telephone number: SunAmerica Fund Services Retirement Plans Department 733 Third Avenue 3rd Floor New York, NY 10017-3204 212/551-5134 800/858-8850 extension 5134 10 APPENDIX A SALARY REDUCTION AGREEMENT - -------------------------------------------------------------------------------- [Note: Complete this Appendix A only if the Employer elected Adoption Agreement Section 7.01(b). Leave this page blank if the Employer elected Adoption Agreement Section 7.01(a).] 7.02 SALARY REDUCTION AGREEMENTS. The following rules and restrictions apply to an Employee's salary reduction agreement: (Choose the applicable elections). _____ (a) Limitation on amount. The Employee's salary reduction contributions are subject to the following limitations: __________________________. _____________________________________________________________________ _____________________________________________________________________ [Note: If the Employer does not elect Option (a), the salary reduction contributions are not subject to any limitations other than the 15% limitation described in Section 3.02 of the Plan and the 402(g) limitation described in Section 7.02 of the Plan.] _____ (b) Revocation. An Employee, on a prospective basis, may revoke a salary reduction agreement or may file a new agreement following a prior revocation: (Choose one) _____ (1) As of any Plan Entry Date. _____ (2) As of the first day of each Plan Year quarter. _____ (3) (Specify at least once per Plan Year) ___________________ ________________________________________________________. _____ (c) Modifying elections. An Employee, on a prospective basis, may increase or may decrease his salary reduction percentage or dollar amount: (Choose one) _____ (1) As of the beginning of each payroll period. _____ (2) As of the first day of each Plan Year quarter. _____ (3) As of any Plan Entry Date. _____ (4) (Specify at least once per Plan Year) ____________________ _________________________________________________________. 8.01 TOP-HEAVY REQUIREMENTS. For purposes of the top-heavy requirements, the Employer will treat this Plan as a: _____ (a) Deemed Top-Heavy Plan. _____ (b) Not Deemed Top-Heavy Plan. 8.04 TOP-HEAVY MINIMUM ALLOCATION. The Employer will satisfy the top heavy minimum allocation under the following plan it maintains: ______________________ ________________________________________________________________________________ _______________________________________________________________________________. 11 (This page left intentionally blank.) 12 SUNAMERICA SIMPLIFIED EMPLOYEE PENSION PLAN [LOGO] SUN AMERICA SALARY REDUCTION ELECTION ASSET MANAGEMENT - -------------------------------------------------------------------------------- Complete this form to indicate the amount of money to be deferred from your salary and contributed to your account each pay period. Both you and your Employer must sign where indicated. This form should be retained by the Employer; you should keep a copy for your records and send a copy to SunAmerica Fund Services. Participant Information _______________________________________ Name _______________________________________ Address _______________________________________ Social Security Number [_] New Enrollment [_] Change Election to Participate in a Salary Reduction SEP [_] I DO WISH to participate in the Company's SARSEP. Subject to the requirements of the Company's SARSEP, I authorize the following amount or percentage of my Compensation to be withheld from each paycheck and contributed to my SEP-IRA: [_] _________% of my Compensation (not in excess of 15%); or [_] $_______________ (not in excess of $9,240 (as adjusted)) Subject to the requirements of the Company's SARSEP, I authorize the following amount to be contributed to my SEP-IRA, rather than paid to me in cash: [_] Cash Bonus Deferral: $_________ (not in excess of $ $9,240 (as adjusted)). I understand that the total amount I defer in any calendar year to this SEP may not exceed the lesser of 15% of my Compensation (determined without including any SEP IRA contributions) or $9,240 (adjusted annually for inflation). This deferral election shall remain in effect until, in writing, I either terminate or change it. I may make future contribution changes and may stop my pay deductions at any time. I further understand that I should not withdraw or transfer any amounts from my SEP that are attributable to elective deferrals and income on elective deferrals for a particular plan year (except for excess elective deferrals) until 2 1/2 months after the end of the plan year, or if sooner, when my employer notifies me that the deferral percentage limitation test for that plan year has been completed. Any such amounts that I withdraw or transfer before this time will be included in income for purposes of sections 72(t) and 408(d)91 of the Code. 13 [_] I DO NOT WISH to participate in the Company's SARSEP, subject to the provisions of the plan regarding such election. I release and hold harmless the Company from and against any and all claims the undersigned may have or hereafter claim to have against said Company with respect to my election to not participate in the SARSEP. I understand that the Company shall not be responsible or liable for any loss or expense which may arise or result from compliance with this election. This designation shall remain in effect until such time as I specifically revoke it by delivering such revocation, in writing, to the Company. Signatures --------------------------------------- --------------------------- Employee Signature Date --------------------------------------- --------------------------- Company Signature (Employer) Date Investment Instructions Class A Class B Growth and Income Fund (24) [_] (524) [_] $________ or ________% Balanced Assets Fund (51) [_] (551) [_] $________ or ________% Global Balanced Fund (23) [_] (523) [_] $________ or ________% Blue Chip Growth Fund (522) [_] (22) [_] $________ or ________% Mid-Cap Growth Fund (71) [_] (571) [_] $________ or ________% Small Company Growth Fund (36) [_] (536) [_] $________ or ________% U.S. Gov't Securities Fund (70) [_] (570) [_] $________ or ________% Federal Securities Fund (534) [_] (34) [_] $________ or ________% Tax Exempt Insured Fund (33) [_] (533) [_] $________ or ________% Diversified Income Fund (580) [_] (80) [_] $________ or ________% High Income Fund (28) [_] (228) [_] $________ or ________% Money Market Fund (35) [_] (535) [_] $________ or ________% Total amount enclosed $___________
[_] Check here to receive a monthly Group Investment List SEND monthly transmittal forms for employee contributions to: Company's Name: ____________________________________________________________ Company's Address: _________________________________________________________ ____________________________________________________________________________ Contact: ___________________________________________________________________ Telephone #: (______________) ______________________________________________ Instructions for the above Salary Reduction Election . Sign as employee . Employer should keep original copy on file . Send in copy to SunAmerica 14 Prototype Simplified Employee Pension Plan - -------------------------------------------------------------------------------- Resources Trust Company hereby provides a prototype simplified employee pension which an employer may adopt by completing and executing the complementary adoption agreement. ARTICLE I DEFINITIONS 1.01 "Plan" means the simplified employee pension established by the Employer in the form of this document, including the Employer's Adoption Agreement. The Employer will designate the name of the Plan in its Adoption Agreement. The Employer must use this Plan only in conjunction with an individual retirement account or individual retirement annuity for which the Internal Revenue Service has issued a favorable opinion or ruling letter or in conjunction with model individual retirement accounts issued by the Internal Revenue Service. 1.02 "Employer" means each employer who adopts this Plan by executing an Adoption Agreement, and any other employer which is a member with the Employer of the same controlled group of corporations as defined in Code Section 414(b), which is a trade or business (whether or not incorporated) under the same common control as defined in Code Section 414(c) or which is a member of an affiliated service group within the meaning of Code Section 414(m) or Code Section 414(o). 1.03 "Custodian" means Resources Trust Company. 1.04 "Employee" means any employee of the Employer, including a self-employed individual who is an employee of the Employer by reason of Code Section 401(c)(1), except as otherwise provided in the Employer's Adoption Agreement. Employee also means any individual (who otherwise is not an Employee of the Employer) who is the Employer's leased employee under Code Section 414(n). 1.05 "Participant" means an eligible Employee for whose benefit the Employer makes a contribution to an Account. 1.06 "Compensation" means Compensation as defined in the Employer's Adoption Agreement. For a Self-Employed Individual, Compensation means Earned Income. Any reference in this Plan to Compensation is a reference to the definition in this Section 1.06, unless the Plan reference specifies a modification to this definition. The Plan will take into account only Compensation actually paid, or Compensation which the Employee had the right to receive, for the relevant period. A Compensation payment includes Compensation paid by the Employer through another person under the common paymaster provisions in Code Sections 3121 and 3306. (A) Definitions. For purposes of the Compensation definition elections in the Adoption Agreement, the following definitions apply: (1) "Federal income tax wages" definition of Compensation. All wages for federal income tax withholding purposes, as defined under Code Section 3401(a) (for purposes of income tax withholding at the source), disregarding any rules limiting the remuneration included as wages based on the nature or location of the employment or the services performed. (2) "W-2 wages" definition of Compensation. All wages as described in the "federal income tax wages" definition, and all other payments to an Employee in the course of the Employer's trade or business, for which the Employer must furnish the Employee a written statement under Code Sections 6041(d) and 6051(a)(3). As long as the instructions to Form W- 2, Box 10, remain consistent with the instructions for the 1990 or 1991 Form W-2, the Employer may treat the amount reported in Box 10 as satisfying this definition. (3) "Elective contributions." Elective contributions are amounts excludible from the Employee's gross income under Code Sections 125, 402(a)(8), 402(h) or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a Simplified Employee Pension, cafeteria plan or tax-sheltered annuity. Elective contributions also include Compensation deferred under a Code Section 457 plan maintained by the Employer and Employee contributions "picked up" by a governmental entity and, pursuant to Code Section 414(h)(2), treated as Employer contributions. The definitions of Compensation in paragraphs (1) and (2) do not include elective contributions, unless otherwise specified in the Plan or in the Adoption Agreement. (B) Compensation dollar limitation. The Plan must take into account only the first $200,000 (or such larger amount as the Commissioner of Internal Revenue may prescribe) of any Participant's Compensation. This dollar limitation applies on a prorated basis to any measuring period less than 12 months. 1.07 "Highly Compensated Employee" means an Employee who, during the Plan Year or during the preceding 12-month period: (a) is more than 5% owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); (b) has Compensation in excess of $75,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year); (c) has Compensation in excess of $50,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and is part of the top-paid 20% group of employees (based on Compensation for the relevant year); or (d) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer. If the Employee satisfies the definition in clause (b), (c) or (d) in the Plan Year but does not satisfy clause (b), (c) or (d) during the preceding 12-month period and does not satisfy clause (a) in either period, the Employee is a Highly Compensated Employee only if he is one of the 100 most highly compensated Employees for the Plan Year. The number of officers taken into account under clause (d) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. If no Employee satisfies the Compensation requirement in clause (d) for the relevant year, the Employer will treat the highest paid officer as satisfying clause (d) for that year. For purposes of applying this definition, compensation must include elective contributions and the Employer will disregard any exclusions elected in Adoption Agreement Section 1.06. The Employer must make the determination of who is a Highly Compensated Employee, including the determinations of the number of identity of the top paid 20% group, the top 100 paid Employees, the number of officers includible in clause (d) and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. A calendar year election must apply to all plans and arrangements of the Employer. For purposes of applying any nondiscrimination test, the Employer will treat a Highly Compensated Employee and all family members (a spouse, a lineal ascendant or descendant, or a spouse of a lineal ascendant or descendant) as a single Highly Compensated Employee, but only if the Highly Compensated Employee is more 15 than 5% owner or is one of the 10 Highly Compensated Employees with the greatest Compensation for the Plan Year. This aggregation rule applies to a family member even if that family member is a Highly Compensated Employee without family aggregation. This family aggregation rule will apply only for Plan Years in which Code Section 414(q) requires its application. 1.08 "Account" means the IRA account or annuity contract established and maintained by a Participant to which the Employer makes contributions pursuant to the Plan. 1.09 "Nonforfeitable" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Account. 1.10 "Effective Date" of this Plan is the date specified by the Employer in its Adoption Agreement. 1.11 "Code" means the Internal Revenue Code of 1986, as amended. 1.12 "Plan Year" means the fiscal year of the Plan, as specified in the Employer's Adoption Agreement. ARTICLE II ELIGIBILITY TO PARTICIPATE IN EMPLOYER CONTRIBUTIONS 2.01 PARTICIPATION. The Employer will specify in its Adoption Agreement the conditions for eligibility to participate in the Plan. 2.02 PARTICIPANTS' RIGHT TO EMPLOYMENT. Nothing contained in this Plan, or in the establishment of a Participant's Account, or any modification or amendment to the Plan or a Participant's Account, or in the creation of any Account, or the payment of any benefit, shall give any Employee, even if he is a Participant, or any Beneficiary, any right to continue employment, any legal or equitable right against the Employer or any officer, or employee of the Employer, except as expressly provided by the Plan. ARTICLE III EMPLOYER CONTRIBUTIONS 3.01 AMOUNT. In the Adoption Agreement, the Employer will elect to contribute under a uniform contribution formula or under a permitted disparity contribution formula. For each Plan Year, the Employer will contribute to each Participant's Account, the lesser of the amount determined under this Section 3.01 or the maximum amount permitted under Section 3.02. (A) Uniform contribution formula. For each Plan Year, the Employer will contribute to each Participant's Account a uniform percentage of Compensation, as determined in the Employer's sole discretion. (B) Permitted disparity contribution formula. For each Plan Year the Employer will contribute the following amount to each Participant's Account: (1) A uniform percentage of Compensation, as determined in the Employer's sole discretion; plus (2) A uniform percentage of Excess Compensation, as determined in the Employer's sole discretion. The percentage described in (2) may not exceed the lesser of the percentage determined in (1) or the percentage determined in the Maximum Disparity Table in the next paragraph. Furthermore, the Employer may not contribute an amount described in (2) unless the contribution percentage under (1) is at least 3%. If at any time during the Plan Year, the Employer maintains a qualified plan or another SEP that also uses a permitted disparity formula (or imputes permitted disparity to satisfy the nondiscrimination requirements), the Employer may not contribute an amount described in (2).
Maximum Disparity Table Integration Level (as percentage Applicable of taxable wage base). Percentages - -------------------------------- ----------- 100% 5.7% More than 80% but less than 100% 5.4% More than 20% (but at least more than $10,000) and no more than 80% 4.3% 20% (or $10,000, if greater) or less 5.7%
(C) Other Requirements. Employment by a Participant on the last day of the Plan Year is not a condition to an allocation of an Employer contribution under the Plan for that Plan Year. However, the Employer will not make a contribution for the Plan Year for any Participant whose Compensation is less than $300 (or the adjusted dollar amount determined by the Internal Revenue Service). For this purpose, a Participant's compensation must include elective contributions and the Employer will disregard any exclusions elected in Adoption Agreement Section 1.06. (D) Deduction. Contributions to the SEP are deductible by the Employer for the taxable year with or within which the Plan Year of the SEP ends. The Code treats contributions made for a particular taxable year and contributed by the due date of the Employer's income tax return, including extensions, as made during that taxable year. 3.02 CONTRIBUTION LIMITATION. The total of the Employer contributions (as determined under Sections 3.01 and 7.01) allocated to a Participant's Account for any Plan Year may not exceed the lesser of 15% of the Participant's Compensation or $30,000 (or, if greater, one fourth of the defined benefit dollar limitation under Code Section 415(b)(1)(A)). 3.03 EMPLOYER CONTRIBUTIONS NOT CONDITIONAL. The Employer does not condition any contribution made under the Plan on behalf of a Participant upon the retention by the Participant of the contribution within the Participant's Account. Furthermore, the Employer does not impose any restriction on a Participant's withdrawal of any amount from the Participant's Account. ARTICLE IV PARTICIPANT'S SIMPLIFIED EMPLOYEE PENSION IRA 4.01 ESTABLISHMENT OF ACCOUNT. Each Participant must establish in his own name an individual retirement account with the Custodian or with any bank or other institution maintaining individual retirement accounts or individual retirement annuities. The Employer may establish an Account with the Custodian for the benefit of an eligible Employee if the Employee is unable or unwilling to execute the necessary documents to establish an Account or if the Employer is unable to locate the Employee. 4.02 NONFORFEITABLE ACCOUNT. The interest of any Participant in the balance of his Account is at all times 100% Nonforfeitable. 4.03 EXCLUSIVE BENEFIT. The Employer will have no beneficial interest in any asset of a Participant's Account and no part of any asset in a Participant's Account will revert to or be repaid to the Employer, either directly or indirectly; nor will any part of the corpus or income of a Participant's Account, or any asset of a Participant's Account, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participant or his Beneficiaries. 4.04 ADMINISTRATION OF ACCOUNT. The provisions of the document under which a Participant maintains his Account will determine the administration, distribution and investment of the Employer's and the Employee's, if any, contribution(s) to a Participant's Account. The Employer does not in any way guarantee a Participant's Account from loss or depreciation. 4.05 PARTICIPANT CONTRIBUTIONS. Nothing in the Plan prohibits a Participant from making IRA contributions (deductible or nondeductible) to his Account, as permitted by Code Sections 219 and 408. 16 ARTICLE V MISCELLANEOUS 5.01 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan and their respective heirs and legal representatives. 5.02 WORD USAGE AND TITLES. Words used in the masculine will apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes as the singular and the singular includes the plural. Article and Section titles are for reference only. 5.03 STATE LAW. Except to the extent superseded by Federal statute, the law of the state of the Employer's principal place of business will determine all questions arising with respect to the provisions of this Plan. 5.04 PARTICIPATION IN PROTOTYPE. If the Employer ever maintained a defined benefit plan which is now terminated or, subsequent to the adoption of this Plan, terminates a defined benefit plan, the Employer can no longer be a participating Employer in this Prototype. If the Employer currently maintains a defined benefit plan, the Employer may not elect under Adoption Agreement Section 7.01 to permit Employees to make salary reduction contributions. An Employer which is not a participating Employer in this Prototype cannot rely on the Sponsor's opinion letter issued by the Revenue Service and must treat this Plan as an individually designed plan. ARTICLE VI AMENDMENT AND TERMINATION 6.01 AMENDMENT. The Employer has the right at any time and from time to time: (a) To amend this Plan and its Adoption Agreement, without any Participant's consent, in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan under the provisions of Code Section 408(k); and (b) To amend this Plan and its Adoption Agreement in any other manner. However, no amendment may authorize or permit any portion of an Account to be used for or diverted to purposes other than for the exclusive benefit of the Participant, his Beneficiaries or their estates. If the Employer amends this Plan and its Adoption Agreement, other than by changing its elections in the Adoption Agreement, the Employer no longer can participate in this Prototype. See Section 5.04. 6.02 NOTICE OF AMENDMENT. The Sponsor will inform the Employer of any amendments to the prototype SEP or if the Sponsor has discontinued sponsorship of this prototype SEP. 6.03 DISCONTINUANCE. The Employer has the right to suspend or discontinue its contributions under the Plan, and to terminate this Plan, at any time. ARTICLE VII ELECTIVE DEFERRAL ARRANGEMENT 7.01 APPLICATION. This Article VII applies to an Employer's Plan only if the Employer elects in Section 7.01 of the Adoption Agreement to permit Employees to make salary reduction contributions to the Plan. The Sponsor intends for this arrangement to qualify as a salary reduction simplified employee pension ("SARSEP") under Code Section 408(k)(6) and the applicable regulations. 7.02 ELECTIVE DEFERRALS. The Employer will contribute to each Participant's Account the elective deferrals the Participant has elected the Employer to withhold from his Compensation under his salary reduction agreement on file with the Employer. The salary reduction agreement will not apply to Compensation actually paid before its effective date. The effective date of the salary reduction agreement may not be earlier than its execution date. The salary reduction agreement will apply to subsequent increases in the Participant's Compensation unless the Participant revokes or modifies the salary reduction agreement. The Employer only may contribute elective deferrals for a Plan Year to any Participant's Account if: (a) At least 50% of Employer's eligible Employees have salary reduction agreements in effect for at least part of that Plan Year; and (b) The Employer has no more than 25 Employees eligible to participate in the Plan at any time during the prior Plan Year. (A) Disallowed deferrals. If the Plan does not satisfy the 50% requirement at any time during the Plan Year, the Plan will consider all elective deferrals made by Employees for that Plan Year as "disallowed deferrals." Disallowed deferrals are IRA contributions which are not SEP-IRA contributions. If the Employer determines the Plan has made contributions to Participants' IRAs which are disallowed deferrals, the Plan must notify each affected Employee the Code Section no longer considers the deferrals as SEP-IRA contributions. The Employer must provide the notification within 2 1/2 months following the end of the Plan Year to which the disallowed deferrals relate. (B) Notification Procedure. The notification must specify (1) the amount of the disallowed deferrals (2) that the disallowed deferrals are includible in the Employee's gross income for the calendar year or years in which the amounts deferred would have been received by the Employee in cash had he not made an election to defer and that the income allocable to the disallowed deferrals is includible in the year withdrawn from the IRA; and (3) that the Employee must withdraw the disallowed deferrals (and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the Employer. The Code will subject disallowed deferrals not withdrawn by April 15 following the year of notification to the IRA contribution limitations of Code Sections 219 and 408. The Code will consider disallowed deferrals in excess of the limitations as excess IRA contributions and subject to the 6% excise tax on excess contributions under Code Section 4973. If income allocable to a disallowed deferral is not withdrawn by April 15 following the year of notification by the Employer, the income may be subject to the 10% tax on early distributions under Code Section 72(t) when withdrawn. The Employer will report disallowed deferrals in the same manner as excess SEP contributions. 7.03 PARTICIPATION. To the extent prohibited by law, an Employer which is a state or local government or a tax-exempt organization may not permit Participant salary reduction contributions. In addition, an Employer with leased employees as defined under Code Section 414(n)(2) may not permit Participant salary reduction contributions. 7.04 ANNUAL ELECTIVE DEFERRAL LIMITATIONS. A Participant's elective deferrals may not exceed the lesser of 15% of the Participant's Compensation, or 402(g) limitation. The 402(g) limitation is the greater of $7,000 or the adjusted amount determined by the Secretary of the Treasury. If, pursuant to a salary reduction agreement, the Employer determines the Participant's elective deferrals to the Plan for a calendar year would exceed the 402(g) limitation, the Employer will suspend the employee's salary reduction agreement, if any, until the following January 1 and refund any elective deferrals in excess of the 402(g) limitation which the Employer has not contributed to the Participant's Account. The Employer will make all refunds no later than April 15 of the following calendar year. 7.05 DEFINITIONS. For purposes of this Article VII: (a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.07 of the Plan. Family members aggregated as a single Employee under Section 1.07 constitute a single Highly Compensated Employee, whether a particular family member is a Highly Compensated Employee or a Nonhighly Compensated Employee without the application of family aggregation. (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a Highly Compensated Employee and who is not a family member treated as a Highly Compensated Employee. 17 (c) "Eligible Employee" means an Employee who is eligible to enter into a salary reduction agreement for the Plan Year, regardless of whether he actually enters into such an agreement. (d) "Nonhighly Compensated Group" means the group of Eligible Employees who are Nonhighly Compensated Employees for the Plan Year. (e) "Compensation" means any definition of Compensation which is permissible under Adoption Agreement Section 1.06, regardless of the actual elections made by the Employer in the Adoption Agreement. The definition used by the Employer for a Plan Year must apply uniformly to all Eligible Employees. 7.06 ACTUAL DEFERRAL PERCENTAGE TEST. For each Plan Year, the Employer must determine whether the elective deferrals for each Highly Compensated Employee satisfy the actual deferral percentage ("ADP") test. A Highly Compensated Employee satisfies the ADP test if his ADP does not exceed 1.25 times the average ADP of the Nonhighly Compensated Group. (A) Calculation Of ADP. The average ADP for the Nonhighly Compensated group is the average of the separate ADPs calculated for each Eligible Employee who is a member of that group. An Eligible employee's ADP for a Plan Year is the ratio of the Eligible Employee's deferral contributions for the Plan Year to the Employee's Compensation for the Plan Year. In calculating the average ADP, the percentage for an eligible Nonhighly Compensated Employee who does not make deferral contributions for the Plan Year is 0%. For aggregated family members treated as a single Highly Compensated Employee, the ADP of the family unit is the ADP determined by combining the deferral contributions and Compensation of all aggregated family members. A Nonhighly Compensated Employee's ADP does not include elective deferrals made to this Plan or to any other Plan maintained by the Employer, to the extent such elective deferrals exceed the 402(g) limitation described in this Section. (B) Excess SEP Contributions. If the Employer determines a Highly Compensated Employee fails to satisfy the ADP test for a Plan Year, the Employer must notify the affected employee of the excess contribution and tax consequences of the excess contribution during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of the excess SEP contribution if the Employer does not notify the Employee during the first 2 1/2 months of that next Plan Year. The excess SEP contributions are that amount if deferral contributions made by a Highly Compensated Employee which exceeds 1.25 times the average ADP of the Nonhighly Compensated Group. An Excess SEP contribution is includible in an Employee's gross income on the earliest date any elective deferral made by an Employee during the Plan Year would have been received by the Employee had he originally elected to receive the amounts in cash. However, if the excess SEP contribution (not including allocable income) totals less than $100, then the excess contribution is includible in the Employee's gross income in the year of notification. Income allocable to the excess SEP contribution is includible in the year of withdrawal from the IRA. (C) Notification Procedure. The Employer's notification to each affected Highly Compensated Employee of the excess SEP contributions must state specifically, in a manner calculated to be understood by the average Participant: (1) the amount of the excess contribution attributable to that Employee's elective deferrals; (2) the calendar year for which the excess SEP contribution is includible in the employee's gross income; (3) that the employee must withdraw the excess SEP contribution (and allocable income) from the SEP-IRA by April 15 following the year of notification by the Employer. Excess SEP contributions not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of Code Sections 219 and 408 for the preceding calendar year. The Code will consider contributions in excess of the limitations as excess IRA contributions and subject to the 6% excise tax on excess contributions under Code Section 4973. If income allocable to an excess SEP contribution is not withdrawn by April 15 following the year of notification by the Employer, the income when withdrawn may be subject to the 10% tax on early distributions under Code Section 72(t). If the Employer fails to notify Employees by the end of the Plan Year following the Plan Year in which the Employees made the excess SEP contribution, the Revenue Service will no longer consider the SEP to meet the requirements of Code Sections 408(k)(6). If the SEP no longer meets the requirements of Code Section 408(k)(6), any contribution to an Employee's IRA will be subject to the contribution limitations of Code Section 219 and 408. The Code will consider contributions in excess of the limitations as excess IRA contributions. (D) Withdrawal Restrictions. For each Eligible Employee who makes an elective deferral to a SEP-IRA, the Employer will provide a notice explaining the IRA distribution rules of Code Section 408(d)(1) and the penalty tax provisions of Code Section 72(t) will apply to the transfer or distribution from a SEP-IRA of any elective deferrals prior to the earlier of (1) 2 1/2 months after the close of the Plan Year or (2) the determination of whether the SEP satisfies the ADP test. ARTICLE VIII TOP HEAVY REQUIREMENTS 8.01 DEEMED TOP HEAVY PLAN ELECTION. If the Employer does not permit Participant salary reduction contributions, the Plan must operate the SEP as a Deemed Top Heavy Plan. If the Employer permits salary reduction contributions, the Employer must specify in its Adoption Agreement whether the Plan will operate as a Deemed Top Heavy Plan or as a Not Deemed Top Heavy Plan. (A) Deemed Top Heavy Plan. If the Employer elects in the Adoption Agreement to treat the Plan as a Deemed Top Heavy Plan, the top heavy minimum allocation requirement applies in all Plan Years even if the Plan is not top heavy. (B) Not Deemed Top Heavy Plan. The top heavy minimum allocation requirement applies to a Not Deemed Top Heavy Plan only in Plan Years for which the Plan is top heavy. 8.02 DETERMINATION OF TOP HEAVY STATUS. The Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the Employer contributions (including election deferrals, if any) made to the Accounts of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The Plan must calculate the top heavy ratio by disregarding the Employer Contributions of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Employer Contributions of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Plan must calculate the top heavy ratio in accordance with Code Section 416 and the regulations under that Code section. Under a Deemed Top Heavy Plan, the Plan need not determine whether the Plan actually is top heavy. If the Employer maintains (or maintained within the prior 5 years) any other SEP or qualified plan in which a key employee participates or participated, the Employer must aggregate contributions, accrued benefits or account balances (whichever is applicable), with contributions made to this SEP to determine top heavy status. 8.03 DEFINITIONS. For purposes of applying the top heavy provisions: (1) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for any Plan Year in the Determination Period: (i) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code Section 415(c)(1)(A) and is one of the Employees owning the ten largest interests in the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the Employer and has Compensation of more than $150,000. The constructive ownership rules of Code Section 318 (or the principles of that section, in the case of an unincorporated Employer,) will apply to determine ownership in the 18 Employer. The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. The Plan will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the regulations under that Code Section. (2) "Non-Key Employee" means an Employee who does not meet the definition of Key Employee. (3) The Plan defines "Hour of Service" in accordance with the rules of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full. (4) "Determination Date" for any Plan Year is the last day of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the last day of that Plan Year. The "Determination Period" is the 5 year period ending on the Determination Date. (5) "Participant" includes any Employee otherwise eligible to participate in the Plan but who is not a Participant because of his failure to make elective deferrals under the salary reduction arrangement. (6) "Compensation" The Employer will determine Compensation by excluding elective contributions (even if included under Adoption Agreement Section 1.06) and by disregarding any exclusion from compensation elected in Adoption Agreement Section 1.06. 8.04 TOP HEAVY MINIMUM ALLOCATION. Unless the Employer designates in the Adoption Agreement another plan to satisfy the top heavy minimum requirements, the Employer will make a minimum contribution each year to the Account of each Non-Key Employee eligible to participate in this Plan. The top heavy minimum contribution is the lesser of 3% of the Participant's Compensation for the Plan Year or the highest Key Employee contribution rate for the Plan Year. A Key Employee's contribution is the sum of the Employer contributions made to the Key Employee's Account under Sections 3.01 and 7.01, divided by the Key Employee's Compensation. A Non-Key Employee's contribution rate is the Employer's contributions made to the Non-Key Employee's Account, exclusive of the elective deferrals, divided by the Non-Key Employee's Compensation. 19 SEP Disclosure Statement - -------------------------------------------------------------------------------- A Simplified Employee Pension, or SEP, is a written arrangement through which an employer can make a contribution toward its employees' retirement income without becoming involved in more complex retirement plans. Under a SEP, an employer makes contributions directly to each employee's Individual Retirement Account or Annuity ("IRA"). The IRA to which the employer contributes is referred to as a SEP-IRA. An employer who signs a SEP agreement is not statutorily required to make any contribution to the SEP-IRAs of eligible employees. However, if the employer makes any contribution, the SEP must allocate the contribution in accordance with a written formula which does not discriminate in favor of highly compensated employees. The employer does not report SEP contributions made on behalf of participants as gross income on Form W-2, unless the contribution exceeds certain limits. For more specific instructions regarding the income tax exclusion for SEP contributions, see Question 4. If an eligible employee makes less than $300 in the year for which the employer makes a contribution, the employer need not make a SEP contribution for that employee. The Revenue Service will increase the $300 amount, on an annual basis, by a cost of living adjustment factor ($400 for 1995). The employer may impose participation requirements which may not be more restrictive than the Internal Revenue Code ("Code") permits, but they may be less restrictive. Under the Code, all employees who have attained age 21 and have worked for the employer for some period of time (however short) in any three of the immediately preceding five plan years, are eligible to receive the employer's SEP contribution (if any). The plan year of the SEP must be either the calendar year or the employer's taxable year. The SEP document defines the plan year. The employer also may exclude from participation certain nonresident aliens and certain union employees who already have negotiated with respect to retirement benefits. This information and the following "Questions and Answers" should provide a basic understanding of what a SEP is, how an employer makes its contribution, and how the Code treats the contribution for tax purposes. An employee who has unresolved questions concerning SEPs should call the Federal tax information number, or the toll free number, shown in the white pages of the local telephone directory. (1) What is a Simplified Employee Pension, or SEP? A SEP is a retirement income arrangement under which your employer may contribute any amount each year up to the lesser of $22,500 or 15% of your compensation into your own IRA. Your employer will provide you with a copy of the agreement containing participation requirements and a description of the method under which the SEP allocates its employer contribution to your IRA. All amounts contributed to your IRA by your employer belong to you, even after you separate from service with the employer. (2) Must my employer contribute to my IRA under the SEP? Whether or not your employer makes a contribution to the SEP is entirely within the employer's discretion. If a contribution is made under the SEP, an employer makes a contribution under the SEP, the SEP agreement, must provide a method for allocating the contribution to all eligible employees. (3) How much may my employer contribute to my SEP-IRA in any year? Under a SEP, your employer will determine each year the amount of contribution it wishes to make to your IRA. However, the contribution for any year may not exceed the lesser of $22,500 or 15% of your compensation for that year. The compensation used to determine this limit does not include any amount which the employer contributed to your IRA under the SEP. The agreement does not require an employer to maintain a particular level of contributions. It is possible the employer may not make a contribution for a particular year. Also see Question 5. (4) How do I treat my employer's SEP contributions for my taxes? The amount your employer contributes is excludible from your gross income subject to certain limitations (see Question 1) and is not includible as taxable wages on your Form W-2. (5) May I also contribute to an IRA if I am a participant in a SEP? Yes. You may still contribute the lesser of $2,000 or 100% of your compensation to an IRA. However, the amount which is deductible is subject to various limitations. Also see Question 11. (6) Are there any restrictions on the IRA I select to deposit my SEP contributions in? Under the SEP which is approved by the IRS, contributions must be made to either a Model IRA which is executed on an IRS form or a master or prototype IRA for which the IRS has issued a favorable opinion letter. (7) What if I don't want a SEP-IRA? Your employer may require you become a participant in such an arrangement as a condition of employment. If the employer does not require all eligible employees to become participants and an eligible employee elects not to participate, the Code would prohibit the employer from contributing to the SEP-IRAs of all other employees of the same employer. If one or more eligible employees do not participate and the employer attempts to establish a SEP-IRA agreement with the remaining employees, the resulting arrangement may result in adverse tax consequences to the participating employees. (8) Can I move funds from my SEP-IRA to another tax-sheltered IRA ? Yes, it is permissible for you to withdraw, or receive, funds from your SEP-IRA, and no more than 60 days later, place such funds in another IRA, or SEP-IRA. The Code refers to this as a "rollover" and you may not make more than one rollover per IRA during a one-year interval. However, there are no restrictions on the number of times you may make "transfers" if you arrange to have your IRA funds transferred between the trustees, so you never have possession of the funds. (9) What happens if I withdraw my employer's contribution from my IRA? If you do not want to leave the employer's contribution in your IRA, you may withdraw it at any time, but any amount withdrawn is includible in your income. Also, if withdrawals occur before attainment of age 59 1/2, and not on account of death or disability, you may be subject to a penalty tax. (10) May I participate in a SEP even though I'm covered by another plan? Yes. You can participate in a SEP (other than the IRS Model SEP) even though you participate in another plan of the same employer. However, the Code imposes combined contribution limits. Also, if you work for several employers, one employer may cover you under a SEP and the other employer may cover you under a pension or profit sharing plan. (11) What happens if an employer contributes too much to my SEP-IRA in one year? You may withdraw any contribution which exceeds the yearly limitations without penalty by the due date (plus extensions) for filing your tax return (normally April 15th). The withdrawn contribution is includible in your gross income. Excess contributions left in your SEP-IRA account after the prescribed time for withdrawal may have adverse tax consequences. Withdrawals of the excess contributions may be subject to the premature distribution penalty tax withdrawals. 20 (12) Do I need to file any additional forms with the IRS because I participate in a SEP? No. (13) Is my employer required to provide me with information about SEP-IRAs and the SEP agreement? Yes. In addition to the SEP Disclosure Information contained in this document, your employer must provide you with the following information: (a) At the time you become eligible to participate in the SEP your employer must inform you in writing it has adopted a SEP agreement and state which employees may participate, how the SEP allocates employer contributions, and who can provide you with additional information. (b) Your employer must inform you in writing of all employer contributions to your SEP-IRA (the employer must supply this information by January 31st of the year following the year for which the employer makes the contribution, or 30 days after the employer makes the contribution, whichever is later). (c) If your employer amends the SEP, or replaces it with another SEP, the employer must furnish a copy of the amendment or new SEP (with a clear written explanation of its terms and effects) to each participant within 30 days of the date the SEP or amendment becomes effective. (d) If your employer selects or recommends the IRAs into which it will deposit the SEP contribution (or substantially influences you or other employees to choose them), your employer must ensure a clear written explanation of the terms of those IRAs is provided at the time each employee becomes eligible to participate. The explanation must include information about the terms of those IRAs, such as rates of return and any restrictions on a Participant's ability to "rollover," transfer, or withdraw funds from the IRAs (including restrictions which allow rollovers or withdrawals but reduce earnings of the IRAs or impose other penalties). (e) If your employer selects, recommends, or substantially influences you to choose a specific IRA and the IRA prohibits the withdrawal of funds, the Department of Labor may require your employer to provide you additional information. (14) Is the financial institution where I establish my IRA also required to provide me with information? Yes, it must provide you with a disclosure statement which contains the following items of information in plain, nontechnical language: (1) the statutory requirements which relate to your IRA; (2) the tax consequences which follow the exercise of various options and what those options are; (3) participation eligibility rules, and rules on the deductibility and nondeductibility of retirement savings; (4) the circumstances and procedures under which you may revoke your IRA, including the name, address and telephone number of the person designated to receive notice of revocation (this explanation must be prominently displayed at the beginning of the disclosure statement); (5) explanations of when penalties may be assessed against you because of specified prohibited or penalized activities concerning your IRA; and (6) financial disclosure information which: (a) either projects value growth rates of your IRA under various contribution and retirement schedules, or describes the method of computing and allocating the annual earnings and charges which the financial institution may assess; (b) describes whether, and for what period, the financial institution guarantees growth projections for the plan, or a statement describing the basis of earnings rate projections; (c) states the sales commission the financial institution will charge in each year expressed as a percentage of $1,000; and (d) states the proportional amount of any nondeductible life insurance which may be a feature of your IRA. (15) Can SEP contributions be reduced by employer contributions to Social Security? Although employer contributions under the SEP agreement must bear a uniform relationship to employees' compensation, your employer may take into consideration certain amounts it already has paid on your account as Social Security taxes. This is called "integration" and is permissible only if the employer satisfies certain statutory requirements. If your employer chooses an integration formula, the SEP allocation information your employer provides you must clearly show the integration formula. See Publication 590 available at most IRS offices, for a more complete explanation of disclosure requirements. In addition to this disclosure statement, the financial institution must provide you with a financial statement each year. It may be necessary to retain and refer to statements for more than one year to evaluate the investment performance of the IRA and in order that you will know how to report IRA distributions for tax purposes. 21 Disclosure Statement Addendum Elective Deferral Arrangement - -------------------------------------------------------------------------------- The SEP your employer has adopted includes an elective deferral arrangement. Under a SEP elective deferral arrangement, you may elect to reduce your compensation (usually by a payroll deduction agreement) by an amount you wish the employer to contribute to your SEP-IRA. The SEP refers to these amounts you elect to have the Employer contribute from your compensation as "elective deferrals." (16) What is a SEP elective deferral arrangement? A SEP elective deferral arrangement is a SEP which permits you to defer compensation to your own IRA. You may elect to defer from your regular salary or on a bonus. This type of elective SEP is available only to an employer with 25 or fewer eligible employees. Your Employer will provide you with a copy of the agreement containing eligibility requirements and a description of the method for making elective deferral contributions to your IRA. All amounts contributed to your IRA belong to you, even after you separate from service with the employer. (17) Must I make elective deferrals to an IRA? No. However, if more than half of the eligible employees choose not to make elective deferrals in a particular year, then no employee may participate in an elective SEP of that employer for the year. (18) How much may I elect to defer to my SEP-IRA in a particular year? For any year, the amount which you may defer to this SEP may not exceed the lesser of: (1) 15% of compensation; or (2) $7,000 (as adjusted for increases in the cost of living.) If your employer also makes non-elective contributions to the SEP, the total contributions on your behalf to the SEP (non-elective contributions and elective contributions) may not exceed the lesser of $22,500 or 15% of your compensation. The $7,000 is an overall cap on the maximum amount you may defer in each calendar year to all elective SEPs and cash-or-deferred arrangements under Code 401(k), even if maintained by unrelated employers. If you participate in two arrangements which permit elective deferrals, you are responsible for determining whether you exceed this limit for any calendar year. If you are a highly compensated employee, the Code imposes a further limit on the amount you may contribute to a SEP-IRA for a particular year. The employer calculates this limit on the basis of a mathematical formula which limits the percentage of pay that highly compensated employees may elect to defer to a SEP- IRA. As discussed below, your employer will notify you if you have exceeded the ADP limits. (19) How do I treat elective deferrals for tax purposes? The amount you elect to defer to your SEP-IRA is excludable from your gross income, subject to the limitations discussed above, and is not includible as taxable wages on your Form W-2. However, elective deferrals are subject to FICA taxes. (20) How will I know if the employer contributes too much to my SEP-IRA in one year? There are two different ways in which you may contribute too much to your SEP- IRA. One way is to make elective deferrals in excess of the $7,000 limitation described above ("excess elective deferrals"). The second way is to make elective deferrals which violate the ADP test ("excess SEP contributions"). You are responsible for calculating whether or not you have exceeded the $7,000 limitation. Your employer is responsible for determining whether you have made any excess SEP contributions. The Code requires your employer to notify you by March 15 if you have made any excess SEP contributions for the preceding calendar year. Your employer will notify you of an excess SEP contribution by providing you with any required form for the preceding calendar year. (21) What must I do about excess deferrals to avoid adverse tax consequences? Excess deferrals are includible in your gross income in the year of the deferral. You should withdraw excess deferrals under this SEP and any income allocable to the excess deferrals from your SEP-IRA by April 15. You may not transfer or rollover excess deferrals to another SEP-IRA. If you fail to withdraw your excess deferrals and any income allocable to the excess deferrals by April 15 of the following year, your excess deferrals will be subject to a 6% excise tax for each year they remain in the SEP-IRA. If you have both excess deferrals and excess SEP contributions (as described in 21a below), the amount of excess deferrals you withdraw by April 15 will reduce your excess SEP contributions. (21a) What must I do about excess SEP contributions to avoid adverse tax consequences? Excess SEP contributions are includible in your gross income in the year of the deferral. You should withdraw excess SEP contributions for a calendar year and any income allocable to the excess SEP contributions by the due date (including extensions) for filing your income tax return for the year. You may not transfer or rollover excess SEP contributions to another SEP-IRA. If you fail to withdraw your excess SEP contributions and income allocable to the excess SEP contributions by the due date (including extensions) for filing your income tax return, your excess SEP contributions will be subject to a 6% excise tax for each year they remain in the SEP-IRA. (22) Can I reduce excess elective deferrals or excess SEP contributions by rolling over or transferring amounts from my SEP-IRA to another IRA? No. You may reduce excess elective deferrals or excess SEP contributions only by a distribution to you. Excess amounts rolled over or transferred to another IRA will be includible in income and subject to the penalties discussed above. (23) How do I know how much income is allocable to my excess elective deferrals or any excess SEP contributions? The rules for determining and allocating income to excess elective deferrals or SEP contributions are the same as those governing regular IRA contributions. The trustee or custodian of your SEP-IRA may be able to inform you of the amount of income allocable to your excess amounts. (24) What happens if I withdraw my elective deferrals to my SEP-IRA? If you don't want to leave the money in the IRA, you may withdraw it at any time, but any amount withdrawn is includible in your income. Also, if withdrawals occur before you are 59 1/2, and not on account of death or disability, you may be subject to a 10% penalty tax. (As discussed above, different rules apply to the removal of excess amounts contributed to your SEP- IRA.) (25) What happens if I transfer or distribute contributions from my SEP before the ADP test described in Question 3 has been satisfied? If you make a transfer or a distribution from your SEP before the Employer satisfies the nondiscrimination test, the distribution will be subject to regular income tax and the additional 10% tax on early distributions. 22 [LOGO] SUN AMERICA ASSET MANAGEMENT To order additional brochures or prospectuses relating to the shares of SunAmerica's funds call: 800/858-8850, extension 5134. Please read the prospectuses carefully before investing. SunAmerica Fund Services Retirement Plans Department 733 Third Avenue New York, NY 10017-3204 EX-99.B16 20 PERFORMANCE QUOTATIONS Exhibit 99.B.16 PERFORMANCE CALCULATIONS FOR THE FIVE SERIES OF SUNAMERICA INCOME FUNDS Exhibit 99.B.(16)(a) SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS A PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0105) to the power of 1 = ERV = 989.50 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + (.0115)) to the power of 18 divided by 12 =ERV = 997.75 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{ 448,602.65 - 63,065.61 +1 } to the power of 6 - 1] = 6.04% ----------------------- 8,983,205.801 x 8.64 Exhibit 99.B.(16)(b) SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS B PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + (.0088)) to the power of 1 = ERV = 991.20 five-year = P(1 + .0530) to the power of 5 = ERV = 1,294.62 since inception = P(1 + .0600)to the power of 109 divided by 12 = ERV = 1,697.70 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [ 3,648,608.03 - 853,642.40 +1 } to the power of 6 - 1] = 5.64% -------------------------- 73,071,635.899 x 8.24 Exhibit 99.B.(16)(c) SUNAMERICA FEDERAL SECURITIES FUND CLASS A PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0077) to the power of 1 = ERV = 992.30 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + (.0127))to the power of 18 divided by 12 = ERV = 981.01 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{39,603.82 - 4,777.83 +1 } to the power of 6 - 1] = 6.48% -------------------- 623,845.353 x 10.48 Exhibit 99.B.(16)(d) SUNAMERICA FEDERAL SECURITIES FUND CLASS B PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + (.0034)) to the power of 1 = ERV = 996.60 five-year = P(1 + .0632) to the power of 5 = ERV = 1,358.55 ten-year = P(1 + .0773) to the power of 10 = ERV = 2,105.56 since inception = P(1 + .0814)to the power of 143 divided by 12 = ERV = 2,541.00 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{420,825.82 - 90,009.72 +1 } to the power of 6 - 1] = 6.07% ---------------------- 6,619,267.095 x 10.01 Exhibit 99.B.(16)(e) SUNAMERICA DIVERSIFIED INCOME FUND CLASS A PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0961) to the power of 1 = ERV = 903.90 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + (.0743)) to the power of 18 divided by 12 = ERV = 890.65 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{146,164.66 - 18,035.89 +1 } to the power of 6 - 1] = 10.39% ---------------------- 3,475,508.032 x 4.35 Exhibit 99.B.(16)(f) SUNAMERICA DIVERSIFIED INCOME FUND CLASS B PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + (.0924)) to the power of 1 = ERV = 907.60 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + .0137) to the power of 48 divided by 12 = ERV = 1,055.94 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{1,366,604.54 - 197,445.12 +1 } to the power of 6 - 1] = 10.65% ------------------------- 32,439,528.828 x 4.15 Exhibit 99.B.(16)(g) SUNAMERICA HIGH INCOME FUND CLASS A PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0752) to the power of 1 = ERV = 924.80 five-year = P(1 + .1146) to the power of 5 = ERV = 1,720.26 since inception = P(1 + .0741)to the power of 102 divided by 12 = ERV = 1,836.03 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{380,834.31 - 36,305.34 +1 } to the power of 6 - 1] = 9.99% ---------------------- 5,785,238.146 x 7.30 Exhibit 99.B.(16)(h) SUNAMERICA HIGH INCOME FUND CLASS B PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0728) to the power of 1 = ERV = 927.20 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + .0336) to the power of 18 divided by 12 = ERV = 950.03 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{1,436,670.20 - 207,501.29 +1 } to the power of 6 - 1] = 9.93% ------------------------- 21,784,333.259 x 6.96 Exhibit 99.B.(16)(i) SUNAMERICA TAX EXEMPT INSURED FUND CLASS A PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + (.0189)) to the power of 1 = ERV = 1,018.90 five-year = P(1 + .0489) to the power of 5 = ERV = 1,269.61 since inception = P(1 + .0623)to the power of 112 divided by 12 = ERV = 1,757.82 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{ 715,484.74 - 100,714.68 +1 } to the power of 6 - 1] = 5.10% ----------------------- 11,485,841.589 x 12.73 Exhibit 99.B.(16)(j) SUNAMERICA TAX EXEMPT INSURED FUND CLASS B PERFORMANCE CALCULATIONS FOR THE FISCAL PERIOD ENDED MARCH 31, 1995 Average Annual Total Return: P(1 + T) to the power of n = ERV Where: P = A hypothetical initial payment of $1000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) one-year = P(1 + .0204) to the power of 1 = ERV = 1,020.40 five-year = P(1 + T) to the power of 5 = ERV = N/A since inception = P(1 + (.0210)) to the power of 18 divided by 12 = ERV = 968.67 Yield: YIELD = 2 [{a - b +1 } to the power of 6 - 1] ----- cd Where: a = dividends and interest earned during the period b = expenses accrued for the period (net of reimbursements) c = the average daily number of shares outstanding during the period that were entitled to receive dividends d = the maximum offering price per share on the last day of the period YIELD = 2 [{ 131,248.94 - 31,874.74 +1 } to the power of 6 - 1] = 4.73% ---------------------- 2,098,870.376 x 12.14 -----END PRIVACY-ENHANCED MESSAGE-----